Washington, D.C. 20549
MUELLER WATER PRODUCTS, INC.
1200 Abernathy Road N.E.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
PART I
| |
Item 1. | FINANCIAL STATEMENTS |
Item 1. FINANCIAL STATEMENTS MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | | | | | | | | | |
| December 31, | | September 30, |
| 2022 | | 2022 |
| (in millions, except share amounts) |
Assets: | | | |
Cash and cash equivalents | $ | 125.6 | | | $ | 146.5 | |
Receivables, net of allowance for credit losses of $6.1 million and $5.6 million | 201.9 | | | 228.0 | |
Inventories, net | 314.0 | | | 278.7 | |
Other current assets | 30.4 | | | 26.8 | |
Total current assets | 671.9 | | | 680.0 | |
Property, plant and equipment, net | 302.9 | | | 301.6 | |
Intangible assets, net | 355.6 | | | 361.2 | |
Goodwill | 100.0 | | | 98.6 | |
Other noncurrent assets | 56.2 | | | 56.7 | |
Total assets | $ | 1,486.6 | | | $ | 1,498.1 | |
| | | |
Liabilities and stockholders’ equity: | | | |
Current portion of long-term debt | $ | 0.9 | | | $ | 0.8 | |
Accounts payable | 103.5 | | | 122.8 | |
Other current liabilities | 109.2 | | | 117.4 | |
Total current liabilities | 213.6 | | | 241.0 | |
Long-term debt | 446.1 | | | 446.1 | |
Deferred income taxes | 85.8 | | | 86.3 | |
Other noncurrent liabilities | 53.3 | | | 55.4 | |
Total liabilities | 798.8 | | | 828.8 | |
| | | |
Commitments and contingencies (Note 10.) | | | |
| | | |
Common stock: 600,000,000 shares authorized; 156,208,077 and 155,844,138 shares outstanding at December 31, 2022, and September 30, 2022, respectively | 1.6 | | | 1.6 | |
Additional paid-in capital | 1,271.0 | | | 1,279.6 | |
Accumulated deficit | (544.8) | | | (567.3) | |
Accumulated other comprehensive loss | (40.0) | | | (44.6) | |
Total stockholders’ equity | 687.8 | | | 669.3 | |
Total liabilities and stockholders’ equity | $ | 1,486.6 | | | $ | 1,498.1 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | |
| December 31, | | September 30, |
| 2017 | | 2017 |
| (in millions, except share amounts) |
Assets: | | | |
Cash and cash equivalents | $ | 348.3 |
| | $ | 361.7 |
|
Receivables, net | 107.4 |
| | 145.3 |
|
Inventories | 155.2 |
| | 138.9 |
|
Other current assets | 26.5 |
| | 24.4 |
|
Total current assets | 637.4 |
| | 670.3 |
|
Property, plant and equipment, net | 122.3 |
| | 122.3 |
|
Intangible assets | 434.6 |
| | 439.3 |
|
Other noncurrent assets | 25.9 |
| | 26.4 |
|
Total assets | $ | 1,220.2 |
| | $ | 1,258.3 |
|
| | | |
Liabilities and equity: | | | |
Current portion of long-term debt | $ | 5.6 |
| | $ | 5.6 |
|
Accounts payable | 51.3 |
| | 82.5 |
|
Other current liabilities | 46.1 |
| | 53.5 |
|
Total current liabilities | 103.0 |
| | 141.6 |
|
Long-term debt | 474.3 |
| | 475.0 |
|
Deferred income taxes | 76.2 |
| | 115.1 |
|
Other noncurrent liabilities | 32.4 |
| | 37.1 |
|
Total liabilities | 685.9 |
| | 768.8 |
|
| | | |
Commitments and contingencies (Note 11) | | | |
| | | |
Common stock: 600,000,000 shares authorized; 158,539,376 and 158,590,383 shares outstanding at December 31, 2017 and September 30, 2017, respectively | 1.6 |
| | 1.6 |
|
Additional paid-in capital | 1,482.4 |
| | 1,494.2 |
|
Accumulated deficit | (900.5 | ) | | (955.6 | ) |
Accumulated other comprehensive loss | (50.2 | ) | | (51.8 | ) |
Total Company stockholders’ equity | 533.3 |
| | 488.4 |
|
Noncontrolling interest | 1.0 |
| | 1.1 |
|
Total equity | 534.3 |
| | 489.5 |
|
Total liabilities and equity | $ | 1,220.2 |
| | $ | 1,258.3 |
|
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | | | | | | | | | | | | |
| | | Three months ended |
| | | December 31, |
| | | | | 2022 | | 2021 |
| | | | | | | |
| | | | | (in millions, except per share amounts) |
Net sales | | | | | $ | 314.8 | | | $ | 272.3 | |
Cost of sales | | | | | 221.6 | | | 184.7 | |
Gross profit | | | | | 93.2 | | | 87.6 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | | | | | 62.9 | | | 56.3 | |
Strategic reorganization and other (benefits) charges | | | | | (3.7) | | | 2.4 | |
Total operating expenses | | | | | 59.2 | | | 58.7 | |
Operating income | | | | | 34.0 | | | 28.9 | |
Other expenses (income): | | | | | | | |
Pension expense (benefit) other than service | | | | | 0.9 | | | (1.0) | |
Interest expense, net | | | | | 3.7 | | | 4.3 | |
Net other expenses | | | | | 4.6 | | | 3.3 | |
Income before income taxes | | | | | 29.4 | | | 25.6 | |
Income tax expense | | | | | 6.9 | | | 6.2 | |
Net income | | | | | $ | 22.5 | | | $ | 19.4 | |
| | | | | | | |
Net income per share: | | | | | | | |
Basic | | | | | $ | 0.14 | | | $ | 0.12 | |
Diluted | | | | | $ | 0.14 | | | $ | 0.12 | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | | | | | 156.4 | | | 158.0 | |
Diluted | | | | | 157.0 | | | 158.9 | |
| | | | | | | |
Dividends declared per share | | | | | $ | 0.061 | | | $ | 0.058 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) |
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions, except per share amounts) |
Net sales | $ | 178.3 |
| | $ | 167.2 |
|
Cost of sales | 122.9 |
| | 115.4 |
|
Gross profit | 55.4 |
| | 51.8 |
|
Operating expenses: | | | |
Selling, general and administrative | 39.8 |
| | 36.3 |
|
Gain on sale of idle property | (9.0 | ) | | — |
|
Strategic reorganization and other charges | 3.9 |
| | 1.3 |
|
Total operating expenses | 34.7 |
| | 37.6 |
|
Operating income | 20.7 |
| | 14.2 |
|
Pension costs other than service | 0.2 |
| | 0.3 |
|
Interest expense, net | 5.2 |
| | 6.4 |
|
Income before income taxes | 15.3 |
| | 7.5 |
|
Income tax expense (benefit) | (39.8 | ) | | 2.1 |
|
Income from continuing operations | 55.1 |
| | 5.4 |
|
Income from discontinued operations | — |
| | 1.3 |
|
Net income | $ | 55.1 |
| | $ | 6.7 |
|
| | | |
Income per basic share: | | | |
Continuing operations | $ | 0.35 |
| | $ | 0.03 |
|
Discontinued operations | — |
| | 0.01 |
|
Net income | $ | 0.35 |
| | $ | 0.04 |
|
| | | |
Income per diluted share: | | | |
Continuing operations | $ | 0.34 |
| | $ | 0.03 |
|
Discontinued operations | — |
| | 0.01 |
|
Net income | $ | 0.34 |
| | $ | 0.04 |
|
| | | |
Weighted average shares outstanding: | | | |
Basic | 158.5 |
| | 161.8 |
|
Diluted | 160.0 |
| | 164.6 |
|
| | | |
Dividends declared per share | $ | 0.04 |
| | $ | 0.03 |
|
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| | | | | | | | | | | | | | | |
| | | Three months ended |
| | | December 31, |
| | | | | 2022 | | 2021 |
| | | | | | | |
| | | | | (in millions) |
Net income | | | | | $ | 22.5 | | | $ | 19.4 | |
Other comprehensive income (loss) : | | | | | | | |
Pension benefit adjustments | | | | | 0.9 | | | 0.4 | |
Income tax effects | | | | | (0.3) | | | (0.1) | |
Foreign currency translation | | | | | 4.0 | | | 5.7 | |
Total other comprehensive income, net | | | | | 4.6 | | | 6.0 | |
Comprehensive income | | | | | $ | 27.1 | | | $ | 25.4 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) |
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Net income | $ | 55.1 |
| | $ | 6.7 |
|
Other comprehensive income (loss): | | | |
Pension | 0.8 |
| | 1.0 |
|
Income tax effects | (0.3 | ) | | (0.4 | ) |
Foreign currency translation | 0.1 |
| | (1.5 | ) |
Derivative fair value change | 1.6 |
| | 4.7 |
|
Income tax effects | (0.6 | ) | | (1.8 | ) |
| 1.6 |
| | 2.0 |
|
Comprehensive income | $ | 56.7 |
| | $ | 8.7 |
|
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | Additional paid-in capital | | Accumulated deficit | | Accumulated other comprehensive (loss) income | | | | Total |
| (in millions) |
Balance at September 30, 2022 | $ | 1.6 | | | $ | 1,279.6 | | | $ | (567.3) | | | $ | (44.6) | | | | | $ | 669.3 | |
Net income | — | | | — | | | 22.5 | | | — | | | | | 22.5 | |
Dividends declared | — | | | (9.5) | | | — | | | — | | | | | (9.5) | |
Stock-based compensation | — | | | 1.8 | | | — | | | — | | | | | 1.8 | |
Shares retained for employee taxes | — | | | (1.5) | | | — | | | — | | | | | (1.5) | |
Common stock issued | — | | | 0.6 | | | — | | | — | | | | | 0.6 | |
| | | | | | | | | | | |
Other comprehensive income, net of tax | — | | | — | | | — | | | 4.6 | | | | | 4.6 | |
Balance at December 31, 2022 | $ | 1.6 | | | $ | 1,271.0 | | | $ | (544.8) | | | $ | (40.0) | | | | | $ | 687.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | Additional paid-in capital | | Accumulated deficit | | Accumulated other comprehensive (loss) income | | | | Total |
| (in millions) |
Balance at September 30, 2021 | $ | 1.6 | | | $ | 1,342.2 | | | $ | (643.9) | | | $ | (5.0) | | | | | $ | 694.9 | |
Net income | — | | | — | | | 19.4 | | | — | | | | | 19.4 | |
Dividends declared | — | | | (9.2) | | | — | | | — | | | | | (9.2) | |
Stock-based compensation | — | | | 2.0 | | | — | | | — | | | | | 2.0 | |
Shares retained for employee taxes | — | | | (1.9) | | | — | | | — | | | | | (1.9) | |
Stock repurchased under buyback program | | | (20.0) | | | — | | | — | | | | | (20.0) | |
Common stock issued | — | | | 0.7 | | | — | | | — | | | | | 0.7 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | 6.0 | | | | | 6.0 | |
Balance at December 31, 2021 | $ | 1.6 | | | $ | 1,313.8 | | | $ | (624.5) | | | $ | 1.0 | | | | | $ | 691.9 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF EQUITY THREE MONTHS ENDED DECEMBER 31, 2017 (UNAUDITED) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | | Additional paid-in capital | | Accumulated deficit | | Accumulated other comprehensive loss | | Non-controlling interest | | Total |
| (in millions) |
Balance at September 30, 2017 | $ | 1.6 |
| | $ | 1,494.2 |
| | $ | (955.6 | ) | | $ | (51.8 | ) | | $ | 1.1 |
| | $ | 489.5 |
|
Net income (loss) | — |
| | — |
| | 55.1 |
| | — |
| | (0.1 | ) | | 55.0 |
|
Dividends declared | — |
| | (6.3 | ) | | — |
| | — |
| | — |
| | (6.3 | ) |
Stock repurchased under buyback program | — |
| | (10.0 | ) | | — |
| | — |
| | — |
| | (10.0 | ) |
Shares retained for employee taxes | — |
| | (1.8 | ) | | — |
| | — |
| | — |
| | (1.8 | ) |
Stock-based compensation | — |
| | 2.0 |
| | — |
| | — |
| | — |
| | 2.0 |
|
Common stock issued | — |
| | 4.3 |
| | — |
| | — |
| | — |
| | 4.3 |
|
Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 1.6 |
| | — |
| | 1.6 |
|
Balance at December 31, 2017 | $ | 1.6 |
| | $ | 1,482.4 |
| | $ | (900.5 | ) | | $ | (50.2 | ) | | $ | 1.0 |
| | $ | 534.3 |
|
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | | | | | | | | |
| Three months ended |
| December 31, |
| 2022 | | 2021 |
| | | |
| (in millions) |
Operating activities: | | | |
Net income | $ | 22.5 | | | $ | 19.4 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of acquisition: | | | |
Depreciation | 7.8 | | | 8.0 | |
Amortization | 7.0 | | | 7.2 | |
Gain on sale of assets | (4.0) | | | — | |
Stock-based compensation | 1.8 | | | 2.0 | |
Pension expense (benefit) | 1.1 | | | (0.7) | |
Deferred income taxes | (0.9) | | | 3.6 | |
Inventory reserves provision | 1.2 | | | 3.5 | |
Other, net | 0.5 | | | 1.0 | |
Changes in assets and liabilities, net of acquisition: | | | |
Receivables, net | 26.4 | | | 31.9 | |
Inventories | (36.1) | | | (28.3) | |
Other assets | (3.6) | | | (0.8) | |
Accounts payable | (19.6) | | | (8.4) | |
Other current liabilities | (8.4) | | | (12.8) | |
Other noncurrent liabilities | (2.2) | | | (5.8) | |
Net cash (used in) provided by operating activities | (6.5) | | | 19.8 | |
Investing activities: | | | |
Capital expenditures | (9.9) | | | (11.0) | |
Acquisition, net of cash acquired | — | | | 0.2 | |
Proceeds from sale of assets | 5.1 | | | — | |
Net cash used in investing activities | (4.8) | | | (10.8) | |
Financing activities: | | | |
| | | |
| | | |
Dividends paid | (9.5) | | | (9.2) | |
Employee taxes related to stock-based compensation | (1.5) | | | (1.9) | |
Common stock issued | 0.6 | | | 0.7 | |
| | | |
Common stock repurchased under buyback program | — | | | (20.0) | |
| | | |
Financing leases | (0.1) | | | (0.1) | |
Net cash used in financing activities | (10.5) | | | (30.5) | |
Effect of currency exchange rate changes on cash | 0.9 | | | 1.3 | |
Net change in cash and cash equivalents | (20.9) | | | (20.2) | |
Cash and cash equivalents at beginning of period | 146.5 | | | 227.5 | |
Cash and cash equivalents at end of period | $ | 125.6 | | | $ | 207.3 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Operating activities: | | | |
Net income | $ | 55.1 |
| | $ | 6.7 |
|
Less income from discontinued operations | — |
| | 1.3 |
|
Income from continuing operations | 55.1 |
| | 5.4 |
|
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: | | | |
Depreciation | 4.9 |
| | 4.9 |
|
Amortization | 5.7 |
| | 5.4 |
|
Stock-based compensation | 2.0 |
| | 1.8 |
|
Retirement plans | 0.7 |
| | 0.8 |
|
Deferred income taxes | (39.7 | ) | | (2.1 | ) |
Gain on sale of idle property | (9.0 | ) | | — |
|
Other, net | 0.7 |
| | 0.3 |
|
Changes in assets and liabilities: | | | |
Receivables | 38.4 |
| | 27.4 |
|
Inventories | (16.3 | ) | | (12.2 | ) |
Other assets | (0.8 | ) | | (0.8 | ) |
Liabilities | (41.2 | ) | | (50.8 | ) |
Net cash provided by (used in) operating activities of continuing operations | 0.5 |
| | (19.9 | ) |
Investing activities: | | | |
Capital expenditures | (6.4 | ) | | (4.2 | ) |
Proceeds from sales of assets | 7.4 |
| | — |
|
Net cash provided by (used in) investing activities of continuing operations | 1.0 |
| | (4.2 | ) |
Financing activities: | | | |
Dividends | (6.3 | ) | | (4.8 | ) |
Employee taxes related to stock-based compensation | (1.8 | ) | | (2.5 | ) |
Repayments of debt | (1.2 | ) | | (1.3 | ) |
Common stock issued | 4.3 |
| | 0.4 |
|
Stock repurchased under buyback program | (10.0 | ) | | — |
|
Other | — |
| | 0.1 |
|
Net cash used in financing activities of continuing operations | (15.0 | ) | | (8.1 | ) |
Net cash flows from discontinued operations: | | | |
Operating activities | — |
| | 12.4 |
|
Investing activities | — |
| | (2.1 | ) |
Financing activities | — |
| | (0.1 | ) |
Net cash provided by discontinued operations | — |
| | 10.2 |
|
Effect of currency exchange rate changes on cash | 0.1 |
| | (0.7 | ) |
Net change in cash and cash equivalents | (13.4 | ) | | (22.7 | ) |
Cash and cash equivalents at beginning of period | 361.7 |
| | 195.0 |
|
Cash and cash equivalents at end of period | $ | 348.3 |
| | $ | 172.3 |
|
| | | | | | | | | | | |
| Three months ended |
| December 31, |
| 2022 | | 2021 |
| | | |
| (in millions) |
Supplemental cash flow information: | | | |
Cash paid for interest, net | $ | 8.6 | | | $ | 10.0 | |
Cash paid for income taxes, net | $ | 0.2 | | | $ | 0.4 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
8
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 20172022
| |
Note 1. | OrganizationNote 1.Organization and Basis of Presentation |
Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in two business segments: InfrastructureWater Flow Solutions and Technologies. Infrastructure manufactures valves for water and gas systems, including butterfly,Water Management Solutions. These segments are based on a management reorganization that became effective October 1, 2021. Water Flow Solutions’ product portfolio includes iron gate tapping, check, knife, plugvalves, specialty valves and ball valves, as well as dry-barrelservice brass products. Water Management Solutions’ product and wet-barrelservice portfolio includes fire hydrants. Technologies offershydrants, repair and installation, natural gas, metering, systems, leak detection, pipe condition assessmentpressure control and other related products and services.software products. The “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries. With regard to the Company’s segments, “we,” “us” or “our” may also refer to the segment being discussed.
On January 6, 2017,June 14, 2021, we sold our former Anvil segment. Amounts applicableacquired all the outstanding capital stock of i2O Water Ltd (“i2O”), a provider of pressure management solutions to Anvil have been classified as discontinued operations.more than 100 water companies in 45 countries. During the three months ended December 31, 2021, we recorded a purchase price adjustment of $0.2 million, resulting in a final purchase price of $19.5 million.
Infrastructure owns a 49% ownership interest in an industrial valve joint venture. Due to substantive control features in the operating agreement, all of the joint venture's assets, liabilities and results of operations are included in our consolidated financial statements. The net loss attributable to noncontrolling interest is included in selling, general and administrative expenses. Noncontrolling interest is recorded at its carrying value, which approximates fair value.
Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year.
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make certain estimates and assumptions that affect the reported amounts ofin recording assets, liabilities, sales and expenses andas well as in the disclosure of contingent assets and liabilities for the reporting periods.liabilities. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2017.2022. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. Certain reclassifications have been made to previously reported amounts to conform to the current presentation. The condensed consolidated balance sheet data at September 30, 20172022 was derived from our audited financial statements, but it does not include all disclosures required by GAAP.
On October 1, 2017, we adopted Financial Accountings Standards Board Accounting Standards Update No. 2017-07, which requires us to exclude fromOur business is seasonal as a result of the impact of cold weather conditions. Net sales and operating income the components of net periodic benefit cost other than service cost. Accordingly,historically have been lowest in the Condensed Consolidated Statement of Operations for the three months endedmonth periods ending December 31 2016,and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.
Unless the context indicates otherwise, whenever we have reclassified $0.2 million from selling, general and administrative expenses and $0.1 million from cost of salesrefer to pension costs other than service.a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year.
On February 15, 2017, we acquired Singer Valve. Singer had net sales of $3.7 million in the quarter ended December 31, 2017 and is included in Infrastructure.
HR-1, formerly referred to as the Tax Cuts and Jobs Act, was enacted on December 22, 2017 and made significant revisions to federal income tax laws, including lowering the corporate income tax rate to 21% from 35%, effective January 1, 2018. The effects of these revisions are discussed in Note 3.Recently Adopted Accounting Pronouncements
In May 2014,December 2022, the Financial Accounting Standards Board (“FASB”) issued newAccounting Standards Update (“ASU”) No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” (“ASU 2022-06”). ASU 2022-06 defers the sunset date for applying the reference rate reform relief in ASC 848 to December 31, 2024 from December 31, 2022. ASU 2022-06 became effective immediately upon issuance. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective from March 12, 2020, but may be adopted prospectively from a date within an interim period subsequent to March 12, 2020. We evaluated our contracts and the optional expedients provided by ASU 2020-04. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of revenue and requiring additional financial statement disclosures. We plan to adopt this guidance usingfranchise tax, the modified retrospective transition method beginningevaluation of a step up in the first quartertax basis of fiscal 2019. We have completed our initial scopinggoodwill, and are implementing a project plan to evaluate revenue recognition practices for each revenue stream against the new requirements, to consider changes to the terms of our sales contracts, and to design and implement processes to quantify the effects of necessary changes. This workenacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. ASU 2019-12 was effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.
Restructuring
Between November 2019 and March 2021, we announced the purchase and closure of several facilities. We purchased a new facility in Kimball, Tennessee to support and enhance our investment in our Chattanooga, Tennessee large casting foundry and closed our facilities in Hammond, Indiana, Woodland, Washington and Surrey, British Columbia, Canada. We also completed the closure of our facility in Aurora, Illinois during our fiscal year 2022. The majority of the activities from these plants were transferred to our Kimball, Tennessee facility. In connection with these reorganizations, we recognized certain restructuring costs. During the three months ended December 31, 2022, we recorded a $4.0 million gain, before tax, on the sale of the Aurora, Illinois facility. The restructuring accrual amounts as of December 31, 2022 and December 31, 2021 were immaterial.
New Markets Tax Credit Program
On December 22, 2020, we entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (“Wells Fargo”) related to our brass foundry construction project in Decatur, Illinois under a qualified New Markets Tax Credit program (“NMTC”). The NMTC is ongoing, but at this time,a federal program intended to encourage capital investment in qualified lower income communities. Under the NMTC, investors claim federal income tax credits over a period of seven years in connection with qualified investments in the equity of community development entities (“CDE”s), which are privately managed investment institutions that are certified to make qualified low-income community investments, such as in our foundry project.
Under the NMTC, Wells Fargo contributed capital of $4.8 million to an investment fund and we loaned $12.2 million to the fund. Wells Fargo is entitled to the associated tax credits, which are subject to 100% recapture if we do not expectcomply with various regulations and contractual provisions surrounding the new guidance to materially impact our stockholders' equity, net sales or operating income.
On September 7, 2017, we announced a strategic reorganization plan designed to accelerate our product innovation and revenue growth.foundry project. We have adoptedindemnified Wells Fargo for any loss or recapture of tax credits related to the transaction until the seven-year period elapses. We do not anticipate any credit recaptures will be required in connection with this arrangement.
The investment fund contributed $16.5 million cash for a matrix management structure, where business teams have line and cross-functional responsibility for managing distinct product portfolios, and engineering, operations, sales and marketing and other functions are centralized99.99% stake in a joint venture (“Sub-CDE”) with a CDE. The Sub-CDE then loaned $16.2 million to better alignus, with business needs and generate greater efficiencies. Costs and expensesthe use of the loan proceeds restricted to foundry project expenditures. This transaction also includes a put/call provision under which we may be obligated or entitled to repurchase Wells Fargo’s interest in the quarter endedinvestment fund. We believe that Wells Fargo will exercise its put option in December 31, 20172027 for this plan,nominal consideration, resulting in our becoming the sole owner of the investment fund, cancelling the related loans, and recognizing an estimated gain of $3.9 million.
We determined that the investment fund and the Sub-CDE are variable interest entities (“VIEs”) and that we are the primary beneficiary of the VIEs. The ongoing activities of the VIEs, namely collecting and remitting interest and fees and administering NMTC compliance, were contemplated in the initial design of the transaction and are not expected to significantly affect economic performance throughout the life of the VIEs. Additionally, we are obligated to deliver tax benefits and provide various other guarantees to Wells Fargo and to absorb the losses of the VIEs. Wells Fargo does not have a material interest in the underlying economics of the project. Consequently, we have included the financial statements of the VIEs in strategic reorganizationour consolidated financial statements.
Intercompany transactions between us and other charges,the VIEs have been eliminated in consolidation. Wells Fargo’s contribution to the investment fund is consolidated in our financial statements within Other noncurrent liabilities as a result of its redemption features.
Direct costs associated with Wells Fargo’s capital contribution were primarily personnel-related.netted against the recorded proceeds, resulting in a net cash contribution of $3.9 million. Other direct costs associated with the transaction were capitalized and are being recognized as interest expense over the seven-year tax credit period. Incremental costs to maintain the structure during the compliance period are expensed as incurred.
Note 2. Revenue from Contracts with Customers
We recognize revenue when control of promised products or services is transferred to our customers, in amounts that reflect the consideration to which we expect to be entitled in exchange for those products or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer.
Disaggregation of Revenue
Activity in accrued restructuring, reported as partRefer to Note 8. for disaggregation of other current liabilities, is presented below.
|
| | | |
| Three months ended |
| December 31, 2017 |
| (in millions) |
Beginning balance | $ | 3.3 |
|
Expense | 2.3 |
|
Payments | (1.4 | ) |
Ending balance | $ | 4.2 |
|
| |
Note 2. | Discontinued Operations and Divestitures |
On December 4, 2017, we sold an idle property in Burlington, New Jersey that had previously been a plant in our former U.S. Piperevenues from contracts with customers by reportable segment and recorded a gainby geographical region, which we believe best depicts how the nature, amount, timing and uncertainty of $9.0 million on our Corporate segment. We received $7.4 million inrevenue and cash recorded net current assets of $0.8 million and conveyed plant, property and equipment with a net carrying value of $0.4 million, andflows are affected by economic factors. Geographical region represents the buyer assumed related environmental liabilities with a carrying value of $1.2 million.
On January 6, 2017, we sold our former Anvil segment to affiliates of One Equity Partners. The table below presents a summarylocation of the operating results forcustomer.
Contract Asset and Liability Balances
Differences in the Anvil discontinued operations duringtiming of revenue recognition, billing and cash collection result in customer receivables, advance payments and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers as well as unbilled amounts (i.e., contract assets). Amounts are billed in accordance with contractual terms and unbilled amounts arise when the quarter ended December 31, 2016. These operating results do not reflect what they would have been had Anvil not been sold.timing of billing differs from the timing of revenue recognized.
|
| | | |
| Three months ended |
| December 31, 2016 |
| (in millions) |
Net sales | $ | 83.1 |
|
Cost of sales | 62.8 |
|
Gross profit | 20.3 |
|
Operating expenses: | |
Selling, general and administrative | 18.3 |
|
Other charges | 0.2 |
|
Total operating expenses | 18.5 |
|
Operating income | 1.8 |
|
Income tax expense | 0.5 |
|
Income from discontinued operations | $ | 1.3 |
|
On December 22, 2017, HR-1, formerly referred toAdvance payments and billings in excess of revenue are recognized and recorded as deferred revenue, the Tax Cuts and Jobs Act (“Act”), was enacted,majority of which made significant revisions to federal income tax laws, including loweringis classified as current based on the corporate income tax rate to 21% from 35% effective January 1, 2018, overhauling the taxation of income earned outside the United States and eliminating or limiting certain deductions.
Our deferred tax assets and liabilities are provided at the enacted tax rates in effecttiming when we expect to recognize revenue. We include current deferred revenue within Other current liabilities in the accompanying consolidated balance sheets. Deferred revenue represents contract liabilities and is recorded when customers remit cash payments in advance of our satisfaction of performance obligations under contractual arrangements. Contract liabilities are reversed when the performance obligation is satisfied and revenue is recognized.
The table below represents the balances of our customer receivables and deferred revenue.
| | | | | | | | | | | |
| December 31, | | September 30, |
| 2022 | | 2022 |
| | | |
| (in millions) |
Billed receivables | $ | 203.5 | | | $ | 230.5 | |
Unbilled receivables | 4.5 | | | 3.1 | |
Gross customer receivables | 208.0 | | | 233.6 | |
Allowance for credit losses | (6.1) | | | (5.6) | |
Receivables, net | $ | 201.9 | | | $ | 228.0 | |
| | | |
Deferred revenue | $ | 8.4 | | | $ | 8.1 | |
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Our performance obligations are satisfied at a point in time for sales of equipment or over time for our software hosting and leak detection monitoring services. Performance obligations are supported by customer contracts, which provide frameworks for the nature of the distinct products or services. The transaction price is adjusted for our estimate of variable consideration which may include discounts and rebates. To estimate variable consideration, we apply the expected value or the most likely amount method, based on whichever method most appropriately predicts the amount of consideration we expect to receive. The method applied is typically based on historical experience and known trends. We constrain the amounts of variable consideration that are included in the transaction price, to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when uncertainties around the variable consideration are resolved.
We exclude from the measurement of the transaction price all taxes assessed by a governmental authority.
We have elected to use the practical expedient to not adjust the transaction price of a contract for the effects of a significant financing component if, at the inception of the contract, we expect that the period between when we transfer a product or service to a customer and when a customer remits payment will be one year or less.
Revenue for the sale of our products is recognized when the obligations of the terms of our contract are satisfied, which is when the customer is able to direct the use of and obtain substantially all of the benefits from the product, which generally occurs upon shipment when control of the product transfers to the customer.
We offer warranties to our customers which provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. These warranties cannot be purchased separately from us.
Costs to Obtain or Fulfill a Contract
Shipping and handling costs associated with freight activities after the customer has obtained control of a product are included in cost of sales at the time the related tax expensesrevenue is recognized.
We incur certain incremental costs to obtain a contract, which primarily relate to incremental sales commissions. Our sales commissions are paid based on a combination of orders and shipments, and we reserve the right to claw back any commissions in case of product returns, cancellations or benefits. The averagelost collections. As the expected benefit associated with these incremental costs is generally one year or less based on the nature of these rates varies slightly from year to year but historically has been approximately 39%. With the legislation changing enacted rates taking place in the current quarter,product sold and benefits received, we have remeasured our deferred tax items at an average rate of approximately 25%. This resulted inapplied a provisional income tax benefit of $42.6 million, which is subject to change, if necessary, as we continue to analyze certain aspects of the Actpractical expedient and refine our calculations. Wetherefore do not expect changes to this amount to be material.capitalize the related costs and expense them as incurred.
The Act also imposes a one-time transition tax on the undistributed, non-previously taxed, post-1986 foreign “earnings and profits” (as defined by the IRS) of certain U.S.-owned corporations. Determination of our transition tax liability requires us to calculate foreign earnings and profits going back to 1992, which in many cases requires information that is not readily available, and then to assess our historical overall foreign loss position and the applicability of certain foreign tax credits. We are gathering this information and completing these calculations, but we are unable at this time to reasonably estimate our transition tax liability, and therefore we have not recorded any amount for this tax at December 31, 2017.
In addition to the deferred tax remeasurement item discussed above, our income tax benefit includes federal income tax expense on our current period earnings at a full-year blended rate of 24.5%, since the rate reduction in the Act is effective on January 1, 2018. Note 3. Income Taxes
The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.
| | | Three months ended | | | Three months ended |
| December 31, | | | December 31, |
| 2017 | | 2016 | | | 2022 | | 2021 |
U.S. federal statutory income tax rate | 24.5 | % | | 35.0 | % | U.S. federal statutory income tax rate | | 21.0 | % | | 21.0 | % |
Adjustments to reconcile to the effective tax rate: | | | | Adjustments to reconcile to the effective tax rate: | | |
State income taxes, net of federal benefit | 4.3 |
| | 3.9 |
| State income taxes, net of federal benefit | | 3.4 | | | 3.9 | |
Valuation allowance adjustment related to stock compensation | (5.7 | ) | | — |
| |
Excess tax benefits related to stock compensation | (2.8 | ) | | (7.6 | ) | |
Domestic production activities deduction | (1.6 | ) | | (3.3 | ) | |
Excess tax benefits related to stock-based compensation | | Excess tax benefits related to stock-based compensation | | 0.7 | | | (1.0) | |
Tax credits | (0.9 | ) | | (0.8 | ) | Tax credits | | (1.6) | | | (1.2) | |
Global Intangible Low-Taxed Income | | Global Intangible Low-Taxed Income | | 0.8 | | | 0.3 | |
Foreign income tax rate differential | | Foreign income tax rate differential | | (1.6) | | | (0.7) | |
Nondeductible compensation | | Nondeductible compensation | | 0.5 | | | — | |
Valuation allowances | | Valuation allowances | | (0.2) | | | 1.4 | |
Other | 0.5 |
| | 0.8 |
| Other | | 0.5 | | | 0.5 | |
| 18.3 | % | | 28.0 | % | |
Remeasurement of deferred taxes for change in rates | (278.4 | ) | | — |
| |
Effective income tax rate | (260.1 | )% | | 28.0 | % | Effective income tax rate | | 23.5 | % | | 24.2 | % |
At December 31, 20172022 and September 30, 2017,2022, the gross liabilities for unrecognized income tax benefits were $3.1$4.8 million and $3.0$4.7 million, respectively.respectively, and are included in Other noncurrent liabilities.
| |
Note 4. | Borrowing ArrangementsNote 4. Borrowing Arrangements
|
The components of our long-term debt are presented below.as follows:
| | | | | | | | | | | |
| December 31, | | September 30, |
| 2022 | | 2022 |
| | | |
| (in millions) |
4.0% Senior Notes | $ | 450.0 | | | $ | 450.0 | |
Finance leases | 1.4 | | | 1.6 | |
Total borrowings | 451.4 | | | 451.6 | |
Less: deferred financing costs | (4.4) | | | (4.7) | |
Less: current portion | (0.9) | | | (0.8) | |
Long-term debt | $ | 446.1 | | | $ | 446.1 | |
|
| | | | | | | |
| December 31, | | September 30, |
| 2017 | | 2017 |
| (in millions) |
ABL Agreement | $ | — |
| | $ | — |
|
Term Loan | 483.7 |
| | 484.8 |
|
Other | 1.7 |
| | 1.7 |
|
| 485.4 |
| | 486.5 |
|
Less deferred financing costs | 5.5 |
| | 5.9 |
|
Less current portion | 5.6 |
| | 5.6 |
|
Long-term debt | $ | 474.3 |
| | $ | 475.0 |
|
ABL Agreement. At December 31, 2017, our asset basedAgreement. Our asset-based lending agreement, as amended, (“ABL Agreement”ABL”) consistedis provided by a consortium of banking institutions and consists of a revolving credit facility for up to $225$175.0 million in borrowing that expires on July 29, 2025. The ABL allows up to $25.0 million of revolving credit borrowings, swing line loans and up to $60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150$150.0 million in certain circumstances subject to adequate borrowing base availability. We may borrow up to $25 million through swing line loans and may have up to $60 million
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR plus aan applicable margin ranging from 125range of 200 to 150225 basis points, or a base rate, as defined in the ABL, Agreement, plus aan applicable margin rangingrange of from 25100 to 50125 basis points. At December 31, 2017,2022 the applicable margin for LIBOR based loans was 200 basis points and for base rate loans was LIBOR plus 125100 basis points.
The ABL Agreement terminates on July 13, 2021. We pay a commitment fee for any unused borrowing capacityis subject to mandatory prepayments if total outstanding borrowings under the ABL Agreementare greater than the aggregate commitments under the revolving credit facility or if we dispose of 25 basis points per annum.overdue accounts receivable in certain circumstances. The borrowing base under the ABL is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less certain reserves. Prepayments can be made at any time without penalty.
Substantially all of our United States subsidiaries are borrowers under the ABL and are jointly and severally liable for outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. receivables and inventories,United States inventory, accounts receivable, certain cash balances and other supporting obligations.assets.
The ABL includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap as defined in the ABL Agreement.ABL. Excess availability based on December 31, 20172022 data was $162.4 million, as reduced by $12.4 million of outstanding letters of credit swap contract liabilities and $0.2 million of accrued fees and expensesexpenses.
4.0% Senior Unsecured Notes. On May 28, 2021, we privately issued $450.0 million of $19.84.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0%, paid semi-annually in June and December. We capitalized $5.5 million was $96.3 million.
Term Loan. On November 25, 2014, we entered into a $500.0 million senior securedof financing costs which are being amortized over the term loan (“Term Loan”). The proceedsof the 4.0% Senior Notes using the effective interest method. Proceeds from the Term Loan,4.0% Senior Notes, along with other cash on hand, were used to prepayredeem our 7.375%previously existing 5.5% Senior Subordinated Notes and 8.75% Senior Unsecured Notes and to satisfy and discharge our obligations under the respective indentures.
The Term Loan accrues interest at a floating rate equal to LIBOR, subject to a floor of 0.75%, plus 250 basis points. At December 31, 2017, the weighted-average effective interest rate was 4.60%. We may voluntarily repay amounts borrowed under the Term Loan at any time. The principal amount of the Term Loan is required to be repaid in quarterly installments of $1.225 million, with any remaining principal due on November 25, 2021. The Term Loan is guaranteed by substantiallyNotes. Substantially all of our U.S.United States subsidiaries and is secured by essentially all ofguarantee the 4.0% Senior Notes, which are subordinate to borrowings under our assets, although the ABL Agreement has a senior claim on certain collateral securing borrowings thereunder. The Term Loan is reported net of unamortized discount, which was $1.4 million at December 31, 2017.ABL. Based on quoted market prices, which is a Level 1 measurement, the outstanding Term Loan4.0% Senior Notes had a fair value of $490$395.8 million at December 31, 2017.2022.
The Term Loan
An indenture securing the 4.0% Senior Notes (“Indenture”) contains affirmativecustomary covenants and negative operatingevents of default, including covenants applicablethat limit our ability to usincur certain debt and our restricted subsidiaries.liens. There are no financial maintenance covenants associated with the Indenture. We believe we were compliantin compliance with these covenants at December 31, 20172022.
As set forth in the Indenture, we may redeem some or all of the 4.0% Senior Notes at any time prior to June 15, 2024 at certain “make-whole” redemption prices and expecton or after June 15, 2024 at specified redemption prices. Additionally, we may redeem up to remain in compliance through December 31, 2018.
| |
Note 5. | Derivative Financial Instruments
|
We are exposed to interest rate risk that we manage to some extent using derivative instruments. Under our April 2015 interest rate swap contracts, we receive interest calculated using 3-month LIBOR, subject to a floor40% of 0.75%, and pay fixed interest at 2.341%, on anthe aggregate notionalprincipal amount of $150.0 million. These swap contracts effectively fix the cash interest rate on $150.0 million4.0% Senior Notes at any time prior to June 15, 2024 with the net proceeds of our borrowings underspecified equity offerings at specified redemption prices. Upon a change of control, we would be required to offer to purchase the Term Loan4.0% Senior Notes at 4.841% from September 30, 2016 through September 30, 2021.
We have designated our interest rate swap contracts as cash flow hedges of our future interest payments and electeda price equal to apply the “shortcut” method of assessing hedge effectiveness. As a result, the gains and losses on the swap contracts are reported as a component of other comprehensive loss and are reclassified into interest expense as the related interest payments are made. During the quarters ended December 31, 2017 and December 31, 2016, we included $0.4 million and $0.6 million of such interest expense in income from continuing operations, respectively.
The fair values101% of the swap contracts are presented below.outstanding principal amount.
Note 5. Retirement Plans
|
| | | | | | | |
| December 31, | | September 30, |
| 2017 | | 2017 |
| (in millions) |
Interest rate swap contracts, designated as cash flow hedges: | | | |
Other current liabilities | $ | 0.7 |
| | $ | 1.2 |
|
Other noncurrent liabilities | 0.2 |
| | 1.3 |
|
| $ | 0.9 |
| | $ | 2.5 |
|
| | | |
Currency swap contracts, not designated as hedges: | | | |
Other noncurrent liabilities | $ | 1.3 |
| | $ | 1.3 |
|
The fair values and the classification of the fair values between current and noncurrent portions are based on calculated cash flows using publicly available interest rate forward rate yield curve information, but amounts due at the actual settlement dates are dependent on actual rates in effect at the settlement dates and may differ significantly from amounts shown above.
The components of net periodic benefit cost for our pension plans are presented below.
| | | Three months ended | | | Three months ended |
| December 31, | | | December 31, |
| 2017 | | 2016 | | | 2022 | | 2021 |
| (in millions) | | | (in millions) |
Service cost | $ | 0.5 |
| | $ | 0.5 |
| Service cost | | $ | 0.2 | | | $ | 0.3 | |
Pension costs other than service: | | | | |
Pension costs (benefits) other than service: | | Pension costs (benefits) other than service: | | | | |
Interest cost | 3.6 |
| | 3.6 |
| Interest cost | | 3.5 | | | 2.4 | |
Expected return on plan assets | (4.2 | ) | | (4.3 | ) | Expected return on plan assets | | (3.5) | | | (3.8) | |
Amortization of actuarial net loss | 0.8 |
| | 1.0 |
| Amortization of actuarial net loss | | 0.9 | | | 0.4 | |
| 0.2 |
| | 0.3 |
| |
Net periodic benefit cost | $ | 0.7 |
| | $ | 0.8 |
| |
Pension costs (benefits) other than service | | Pension costs (benefits) other than service | | 0.9 | | | (1.0) | |
Net periodic costs (benefits) | | Net periodic costs (benefits) | | $ | 1.1 | | | $ | (0.7) | |
The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive loss.income (loss).
| |
Note 7. | Stock-based Compensation Plans
Note 6. Stock-based Compensation Plans
|
We have grantedgrant various forms of stock-based compensation, including stock options,market-based restricted stock units (“MRSUs”), restricted stock units, stock options and both cash-settled and stock-settled performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”)., Phantom Plan instruments under our Mueller Water Products, Inc. 2012 Phantom Plan, and Employee stock purchase plan instruments under our 2006 Employee Stock Purchase Plan. Grants issued during the three months ended December 31, 2022 are as follows:
A PRSU
| | | | | | | | | | | | | | | | | |
| Number granted | | Weighted average grant date fair value per instrument | | Total grant date fair value (in millions) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Quarter ended December 31, 2022 | | | | | |
MRSUs | 166,284 | | | $ | 15.08 | | | $ | 2.5 | |
PRSUs | 166,284 | | | $ | 11.41 | | | $ | 1.9 | |
Restricted stock units | 228,692 | | | $ | 11.39 | | | $ | 2.6 | |
Phantom Plan instruments | 267,093 | | | $ | 11.41 | | | $ | 3.0 | |
Non-qualified stock options | 573,279 | | | $ | 3.31 | | | $ | 1.9 | |
Employee stock purchase plan instruments | 47,463 | | | $ | 2.56 | | | $ | 0.1 | |
| | | | | $ | 12.0 | |
An MRSU award represents a target number of units that may be paid out at the end of a multi-yearthree-year award cycle consistingbased on a calculation of our relative total shareholder return (“TSR”) performance as compared with the TSR of a seriesselected peer group. Settlements, in our common shares, will range from zero to two times the number of annualMRSUs granted, depending on our TSR performance periods coinciding with our fiscal years. After werelative to that of the peer group.
Compensation expense attributed to MRSUs is based on the fair value of the awards on their respective grant dates, as determined using a Monte Carlo model. The assumptions used to determine the financial performance targets relatedgrant date fair value are indicated below.
| | | | | | | | |
| | November 29, 2022 |
Variables used in determining grant date fair value: | | |
Dividend yield | | 2.20 | % |
Risk-free rate | | 4.20 | % |
Expected term (in years) | | 2.8 |
The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to PRSUs for a given performancethe expected term. The expected term represents the average period typically duringof time the first quarter of that fiscal year, we consider that portion of a PRSU awardunits are expected to be granted. Thus,outstanding.
At December 31, 2022, the outstanding Phantom Plan instruments had a fair value of $10.76 per instrument and our liability for Phantom Plan instruments was $1.4 million and is included within Other current and Other noncurrent liabilities.
Stock options generally vest ratably over three years on each anniversary date. Compensation expense attributed to stock options is based on the fair value of the awards on their respective grant dates, using a Black-Scholes model. The assumptions used to determine the grant date fair value are indicated below.
| | | | | |
| November 29, 2022 |
Dividend yield | 1.80 | % |
Risk-free rate | 3.89 | % |
Expected term (in years) | 6.00 |
The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the options are expected to be outstanding.
A PRSU award consists of a granttarget number of units that may be paid out at the end of a three-year award cycle. Settlements, in the year of award and grants in the designated following years. Settlementour common shares, will range from zero to two times the number of PRSUs granted, depending on our financial performance againstrelative to the targets. As determined at the date of award, PRSUs may settle in cash-value equivalent of, or directly in, shares of our common stock.
We awarded 171,288 stock-settled PRSUs in the quarter ended December 31, 2017 scheduled to settle in three years.
We issued 146,061 shares and 263,410282,472 shares of common stock during the quarters ended December 31, 2017 and 2016, respectively, to settle PRSUs.
In addition to the PRSU activity, 213,532 restricted stock unitsPRSUs vested during the quarter ended December 31, 2017.
We have granted cash-settled Phantom Plan instruments under the Mueller Water Products, Inc. Phantom Plan (“Phantom Plan”). At December 31, 2017, the outstanding Phantom Plan instruments had a fair value of $12.53 per instrument and our liability for Phantom Plan instruments was $1.2 million.
We granted stock-based compensation awards under the 2006 Stock Plan, the Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan and the Phantom Plan during the three months ended December 31, 2017 as follows.
|
| | | | | | | | | | | |
| | Number granted | | Weighted average grant date fair value per instrument | | Total grant date fair value (in millions) |
Restricted stock units | | 171,288 |
| | $ | 12.41 |
| | $ | 2.1 |
|
Employee stock purchase plan instruments | | 35,099 |
| | 2.28 |
| | 0.1 |
|
Phantom Plan awards | | 160,672 |
| | 12.41 |
| | 2.0 |
|
PRSUs: 2018 award | | 57,092 |
| | 12.41 |
| | 0.7 |
|
2017 award | | 71,070 |
| | 12.41 |
| | 0.9 |
|
2016 award | | 71,072 |
| | 12.41 |
| | 0.9 |
|
| | | | | | $ | 6.7 |
|
Income from continuing operations included stock-based compensation expense2022. Additionally, we issued 128,048 and 37,734 shares of $2.4 millioncommon stock to settle restricted stock units vested and $2.7 million stock options exercised, respectively, during the three months ended December 31, 20172022. Additionally, 131,670 shares of common stock were surrendered to us to pay the withholding obligations of equity award participants.
Operating income included stock-based compensation expense of $2.7 million and 2016,$2.6 million during the three months ended December 31, 2022 and 2021, respectively. At December 31, 2017,2022, there was approximately $8.9$15.8 million of unrecognized compensation expense related to stock-based compensation arrangements, and 185,270 PRSUs that have been awarded for the 2019 and 2020 performance periods, forarrangements, which performance goals have not been set.will be expensed through December 2025.
We excluded 70,9961,274,371 and 323,010 of 277,344 stock-based compensation instruments from the calculations of diluted earnings per share forin the quartersthree months ended December 31, 20172022 and 2016,2021, respectively, since their inclusion would have been antidilutive.
| |
Note 8. | Note 7. Supplemental Balance Sheet Information |
Selected supplemental balance sheetasset information is presented below.
| | | | | | | | | | | |
| December 31, | | September 30, |
| 2022 | | 2022 |
| | | |
| (in millions) |
Inventories: | | | |
Purchased components and raw materials | $ | 200.2 | | | $ | 181.8 | |
Work in process, net | 56.0 | | | 56.8 | |
Finished goods, net | 57.8 | | | 40.1 | |
Total inventories | $ | 314.0 | | | $ | 278.7 | |
| | | |
Other current assets: | | | |
Prepaid expenses | $ | 18.1 | | | $ | 14.6 | |
Non-trade receivables | 2.3 | | | 1.6 | |
Maintenance and repair supplies and tooling | 3.2 | | | 2.8 | |
Income taxes | 0.8 | | | 0.8 | |
Workers’ compensation reimbursement receivable | 2.5 | | | 2.6 | |
Other current assets | 3.5 | | | 4.4 | |
Total other current assets | $ | 30.4 | | | $ | 26.8 | |
| | | |
Property, plant and equipment: | | | |
Land | $ | 5.7 | | | $ | 5.7 | |
Buildings | 86.5 | | | 87.6 | |
Machinery and equipment | 453.4 | | | 456.0 | |
Construction in progress | 110.1 | | | 104.7 | |
Total property, plant and equipment | 655.7 | | | 654.0 | |
Accumulated depreciation | (352.8) | | | (352.4) | |
Property, plant and equipment, net | $ | 302.9 | | | $ | 301.6 | |
| | | |
Other noncurrent assets: | | | |
Operating lease right-of-use assets | $ | 25.1 | | | $ | 26.0 | |
Maintenance and repair supplies and tooling | 20.4 | | | 20.4 | |
Workers’ compensation reimbursement receivable | 3.6 | | | 3.6 | |
Pension asset | 0.4 | | | 0.6 | |
Note receivable | 1.8 | | | 1.7 | |
Deferred financing fees | 0.9 | | | 1.0 | |
Other noncurrent assets | 4.0 | | | 3.4 | |
Total other noncurrent assets | $ | 56.2 | | | $ | 56.7 | |
Selected supplemental liability information is presented below.
|
| | | | | | | |
| December 31, | | September 30, |
| 2017 | | 2017 |
| (in millions) |
Inventories: | | | |
Purchased components and raw material | $ | 74.3 |
| | $ | 67.7 |
|
Work in process | 37.8 |
| | 35.6 |
|
Finished goods | 43.1 |
| | 35.6 |
|
| $ | 155.2 |
| | $ | 138.9 |
|
| | | |
Other current assets: | | | |
Maintenance and repair tooling | $ | 3.2 |
| | $ | 3.3 |
|
Income taxes | 11.9 |
| | 10.9 |
|
Other | 11.4 |
| | 10.2 |
|
| $ | 26.5 |
| | $ | 24.4 |
|
| | | |
Property, plant and equipment: | | | |
Land | $ | 5.5 |
| | $ | 5.6 |
|
Buildings | 51.4 |
| | 53.4 |
|
Machinery and equipment | 270.0 |
| | 266.7 |
|
Construction in progress | 25.2 |
| | 24.7 |
|
| 352.1 |
| | 350.4 |
|
Accumulated depreciation | (229.8 | ) | | (228.1 | ) |
| $ | 122.3 |
| | $ | 122.3 |
|
Other current liabilities: | | | |
Compensation and benefits | $ | 18.2 |
| | $ | 26.9 |
|
Customer rebates | 8.1 |
| | 6.5 |
|
Taxes other than income taxes | 2.4 |
| | 3.2 |
|
Warranty | 3.7 |
| | 3.5 |
|
Income taxes | 0.8 |
| | 0.9 |
|
Environmental | 1.2 |
| | 1.3 |
|
Interest | 0.7 |
| | 0.6 |
|
Restructuring | 4.2 |
| | 3.3 |
|
Other | 6.8 |
| | 7.3 |
|
| $ | 46.1 |
| | $ | 53.5 |
|
| | | | | | | | | | | |
| December 31, | | September 30, |
| 2022 | | 2022 |
| | | |
| (in millions) |
Other current liabilities: | | | |
Compensation and benefits | $ | 27.1 | | | $ | 40.2 | |
Customer rebates | 21.3 | | | 16.2 | |
Income taxes payable | 15.1 | | | 7.5 | |
Warranty accrual | 6.5 | | | 6.5 | |
Deferred revenue | 8.4 | | | 8.1 | |
Refund liability | 4.5 | | | 4.2 | |
Taxes other than income taxes | 3.6 | | | 4.4 | |
Operating lease liabilities | 4.7 | | | 4.4 | |
Workers’ compensation accrual | 4.8 | | | 4.6 | |
CARES Act payroll tax liabilities | — | | | 4.4 | |
Restructuring liabilities | 0.7 | | | 3.3 | |
Environmental liabilities | 0.7 | | | 0.7 | |
Interest payable | 0.8 | | | 5.3 | |
Other current liabilities | 11.0 | | | 7.6�� | |
Total other current liabilities | $ | 109.2 | | | $ | 117.4 | |
| | | |
Other noncurrent liabilities: | | | |
Operating lease liabilities | $ | 21.6 | | | $ | 22.4 | |
Warranty accrual | 3.4 | | | 4.2 | |
Transition tax liability | 4.1 | | | 4.1 | |
Uncertain tax position liability | 4.8 | | | 4.7 | |
NMTC liability | 3.9 | | | 3.9 | |
Workers’ compensation accrual | 6.5 | | | 6.5 | |
Asset retirement obligation | 3.6 | | | 3.6 | |
| | | |
Deferred development grant | 2.5 | | | 2.5 | |
Other noncurrent liabilities | 2.9 | | | 3.5 | |
Total other noncurrent liabilities | $ | 53.3 | | | $ | 55.4 | |
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis each September 1st and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
The following table summarizes information concerning our goodwill, all of which is within our Water Management Solutions segment, during the three months ended December 31, 2022, in millions.
| | | | | |
Note 9.Balance at September 30, 2022: | Segment Information
|
Goodwill | $ | 822.7 | |
Accumulated impairment | (724.1) | |
Net goodwill | 98.6 | |
Activity during the three months ended December 31, 2022: | |
Change in foreign currency exchange rates | 1.4 | |
Balance at December 31, 2022 | $ | 100.0 | |
Note 8. Segment Information
We have two reportable segments, Water Flow Solutions and Water Management Solutions. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Summarized financial information for our segments is presented below.
| | | | | | | | | | | | | | | |
| | | Three months ended |
| | | December 31, |
| | | | | 2022 | | 2021 |
| | | | | | | |
| | | | | (in millions) |
Net sales, excluding intercompany: | | | | | | | |
Water Flow Solutions | | | | | $ | 165.6 | | | $ | 154.9 | |
Water Management Solutions | | | | | 149.2 | | | 117.4 | |
| | | | | $ | 314.8 | | | $ | 272.3 | |
Operating income (loss): | | | | | | | |
Water Flow Solutions | | | | | $ | 24.2 | | | $ | 31.3 | |
Water Management Solutions | | | | | 19.6 | | | 11.4 | |
Corporate | | | | | (9.8) | | | (13.8) | |
| | | | | $ | 34.0 | | | $ | 28.9 | |
Depreciation and amortization: | | | | | | | |
Water Flow Solutions | | | | | $ | 7.7 | | | $ | 7.4 | |
Water Management Solutions | | | | | 7.0 | | | 7.7 | |
Corporate | | | | | 0.1 | | | 0.1 | |
| | | | | $ | 14.8 | | | $ | 15.2 | |
Strategic reorganization and other (benefits) charges: | | | | | | | |
Water Flow Solutions | | | | | $ | — | | | $ | — | |
Water Management Solutions | | | | | — | | | 0.1 | |
Corporate | | | | | (3.7) | | | 2.3 | |
| | | | | $ | (3.7) | | | $ | 2.4 | |
Capital expenditures: | | | | | | | |
Water Flow Solutions | | | | | $ | 7.8 | | | $ | 9.4 | |
Water Management Solutions | | | | | 2.1 | | | 1.6 | |
Corporate | | | | | — | | | — | |
| | | | | $ | 9.9 | | | $ | 11.0 | |
Water Flow Solutions disaggregated net revenue: | | | | | | | |
Central | | | | | $ | 44.0 | | | $ | 40.5 | |
Northeast | | | | | 31.3 | | | 30.0 | |
Southeast | | | | | 33.4 | | | 37.3 | |
West | | | | | 49.2 | | | 38.1 | |
United States | | | | | 157.9 | | | 145.9 | |
Canada | | | | | 4.4 | | | 7.9 | |
Other international locations | | | | | 3.3 | | | 1.1 | |
| | | | | $ | 165.6 | | | $ | 154.9 | |
Water Management Solutions disaggregated net revenue: | | | | | | | |
Central | | | | | $ | 41.5 | | | $ | 28.8 | |
Northeast | | | | | 31.2 | | | 24.3 | |
Southeast | | | | | 33.3 | | | 25.5 | |
West | | | | | 29.1 | | | 24.7 | |
United States | | | | | 135.1 | | | 103.3 | |
Canada | | | | | 7.3 | | | 7.6 | |
Other international locations | | | | | 6.8 | | | 6.5 | |
| | | | | $ | 149.2 | | | $ | 117.4 | |
|
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Net sales, excluding intercompany: | | | |
Infrastructure | $ | 160.1 |
| | $ | 146.3 |
|
Technologies | 18.2 |
| | 20.9 |
|
| $ | 178.3 |
| | $ | 167.2 |
|
Intercompany sales: | | | |
Infrastructure | $ | — |
| | $ | 1.1 |
|
Technologies | — |
| | — |
|
| $ | — |
| | $ | 1.1 |
|
Operating income (loss): | | | |
Infrastructure | $ | 28.1 |
| | $ | 26.2 |
|
Technologies | (4.7 | ) | | (2.2 | ) |
Corporate | (2.7 | ) | | (9.8 | ) |
| $ | 20.7 |
| | $ | 14.2 |
|
Depreciation and amortization: | | | |
Infrastructure | $ | 9.1 |
| | $ | 9.0 |
|
Technologies | 1.4 |
| | 1.2 |
|
Corporate | 0.1 |
| | 0.1 |
|
| $ | 10.6 |
| | $ | 10.3 |
|
Strategic reorganization and other charges: | | | |
Infrastructure | $ | — |
| | $ | 0.1 |
|
Technologies | 0.1 |
| | — |
|
Corporate | 3.8 |
| | 1.2 |
|
| $ | 3.9 |
| | $ | 1.3 |
|
Capital expenditures: | | | |
Infrastructure | $ | 4.8 |
| | $ | 3.0 |
|
Technologies | 1.5 |
| | 1.1 |
|
Corporate | 0.1 |
| | 0.1 |
|
| $ | 6.4 |
| | $ | 4.2 |
|
| |
Note 10. | Accumulated Other Comprehensive LossNote 9. Accumulated Other Comprehensive Income (Loss) |
Accumulated other comprehensive lossincome (loss) is presented below.as follows:
| | | | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Total |
| | | | | |
| (in millions) |
Balance at September 30, 2022 | $ | (36.3) | | | $ | (8.3) | | | $ | (44.6) | |
Current period other comprehensive income | 0.6 | | | 4.0 | | | 4.6 | |
Balance at December 31, 2022 | $ | (35.7) | | | $ | (4.3) | | | $ | (40.0) | |
Note 10. Commitments and Contingencies
|
| | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Derivative instruments, net of tax | | Total |
| |
Balance at September 30, 2017 | $ | (47.0 | ) | | $ | (3.3 | ) | | $ | (1.5 | ) | | $ | (51.8 | ) |
Current period other comprehensive income (loss) | 0.5 |
| | 0.1 |
| | 1.0 |
| | 1.6 |
|
Balance at December 31, 2017 | $ | (46.5 | ) | | $ | (3.2 | ) | | $ | (0.5 | ) | | $ | (50.2 | ) |
| |
Note 11. | Commitments and Contingencies
|
We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Legal and administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. Other than the litigation described below, we do not believe that any of our outstanding litigation would have a materialmaterially adverse effect on our businessfinancial position, results of operations, cash flows or prospects.liquidity.
Environmental. We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the operations at many of our properties and with respect to remediating environmental conditions that may exist at our own or other properties. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.
In the acquisition agreement pursuant to which a predecessor to Tyco International plc, now Johnson Controls International plc (“Tyco”), sold our businesses to a previous owner in August 1999, Tyco agreed to indemnify us and our affiliates, among other things, for all “Excluded Liabilities.” Excluded Liabilities include, among other things, substantially all liabilities relating to the time prior to August 1999, including environmental liabilities. The indemnity survives indefinitely. Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. Since 2007, Tyco has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the Tyco indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such Tyco indemnitors has changed. Should any of these Tyco indemnitors become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.
On July 13, 2010, Rohcan Investments Limited, the former owner of property leased by Mueller Canada Ltd. and located in Milton, Ontario, filed suita lawsuit against Mueller Canada Ltd. and its directors seeking C$10.0 million in damages arising from the defendants’ alleged environmental contamination of the property and breach of lease. On November 15, 2022, Mueller Canada Ltd. leasedagreed to pay Rohcan Investments Limited C$1.5 million in settlement of all liability, damages and other claims related to the property from 1988 through 2008.lawsuit. We have paid the settlement amount, and are pursuing indemnification from a former owner for certain potential liabilities that are alleged in this lawsuit, and we have accrued for other liabilities not covered by indemnification. On December 7, 2011, the Court denied the plaintiff’s motion for summary judgment.lawsuit.
The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a proposed Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of EPA’sthe Environmental Protection Agency’s remediation costs, the number and financial viability of the other PRPs (there are four other PRPs currently) and the determination of the final allocation of the costs among the PRPs. Accordingly, becauseSince the amountamounts of such costs cannot be reasonably estimated at this time, no amounts hadhave been accrued for this matter at December 31, 2017.2022.
Walter Energy. Each member
The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the Walter Energy consolidated group, which included us through December 14, 2006, is jointlyU.S. and severally liable forglobal economies. We have taken action and continue to counter such disruption, and work to protect the federal income tax liability of each other member of the consolidated group for any year in which it is a member of the group at any time during such year. Accordingly, we could be liable in the event any such federal income tax liability is incurred, and not discharged, by any other member of the Walter Energy consolidated group for any period during which we were included in the Walter Energy consolidated group.
Walter Energy effectively controlled allsafety of our tax decisions for periods duringemployees. While the extent to which we were a member of the Walter Energy consolidated group for federal income tax purposes and certain combined, consolidated or unitary state and local income tax groups. Underpandemic continues to affect our results will depend on future developments, the terms of an income tax allocation agreement between us and Walter Energy, dated May 26, 2006, we generally compute our tax liability on a stand-alone basis, but Walter Energy has sole authority to respond to and conduct all tax proceedings (including tax audits) relatingpandemic could result in material effects to our federal income and combined state tax returns, to file all such tax returns on our behalf and to determine the amount of our liability to (or entitlement to payment from) Walter Energy for such previous periods.
As described further below, the IRS is currently alleging that Walter Energy owes substantial amounts for prior taxable periods (specifically, 1983-1994, 2000-2002 and 2005). As a matter of law, we are jointly and severally liable for any final tax determination, which means we would be liable in the event Walter Energy is unable to pay any amounts owed.
In July 2015, Walter Energy filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code before the Bankruptcy Court for the Northern District of Alabama (“Chapter 11 Case”). During the pendency of the Chapter 11 Case, we monitored the proceeding to determine whether we could be liable for all or a portion of this federal income tax liability if it is incurred, and not discharged, for any period during which we were included in the Walter Energy consolidated group. On January 11, 2016, the IRS filed a proof of claim in the Chapter 11 Case, alleging that Walter Energy owes taxes, interest and penalties for the years 1983-1994, 2000-2002 and 2005 in an aggregate amount of $554.3 million ($229.1 million of which the IRS claims is entitled to priority status in the Chapter 11 Case). The IRS asserts that its claim is based on an alleged settlement of Walter Energy’s tax liability for the 1983-1995 taxable periods in connection with Walter Energy’s prior bankruptcy proceeding in the United States Bankruptcy Court for the Middle District of Florida. In the proof of claim, the IRS included an alternative calculation in the event the alleged settlement of the prior bankruptcy court is found to be non-binding, which provides for a claim by the IRS in an aggregate amount of $860.4 million ($535.3 million of which the IRS claims is entitled to priority status in the Chapter 11 Case).
According to a quarterly report on Form 10-Q filed by Walter Energy with the SEC on November 5, 2015 (“Walter November 2015 Filing”), at September 30, 2015, Walter Energy had $33.0 million of accruals for unrecognized tax benefits in connection with the matters subject to the IRS claims. In the Walter November 2015 Filing, Walter Energy stated it believed it had sufficient accruals to address any claims, including interest and penalties, and did not believe that any potential difference between any final settlements and amounts accrued would have a material effect on Walter Energy’sfuture financial position, but such potential difference could be material to its results of operations, cash flows and liquidity.
Mass Shooting Event at our Mueller Co. Facility in Albertville, Alabama. On June 15, 2021, we experienced a future reporting period.
Accordingmass shooting event at our Mueller Co. facility in Albertville, Alabama. Various claims arising from the event have been filed to a Form 8-K filed by Walter Energy with the SEC on April 1, 2016 (“Walter April 2016 Filing”), on March 31, 2016, Walter Energy closed on the sale of substantially all of Walter Energy’s Alabama assets pursuant to the provisions of Sections 105, 363date, and 365 of the Bankruptcy Code. The Walter April 2016 Filing further statedwe anticipate that Walter Energy would have no further material business operations after April 1, 2016additional claims may be made and Walter Energy was evaluating its options with respect to the wind down of its remaining assets. The asset sale did not impact the IRS’ proof of claim filed in the bankruptcy cases and the proof of claim, as well as the alleged taxthat liability thereunder, remain unresolved.
On February 2, 2017, at the request of Walter Energy, the Bankruptcy Court for the Northern District of Alabama signed an order converting the Chapter 11 Case to a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code, pursuant to which Walter Energy will be wound-down and liquidated (“Chapter 7 Case”). In its objection contesting such conversion, the IRS indicated its intent to pursue collection of amounts included in the Proof of Claim from former members of the Walter Energy consolidated group.
We cannot predict whether or to what extent we may become liable for the tax-related amounts of the Walter Energy consolidated group asserted in the IRS’ proof of claim filed in the bankruptcy cases, in part, because: (i) the amounts owed by the Walter Energy consolidated group for certain of the taxable periods from 1980 through 2006 remain unresolved; (ii) it is unclear what priority,claims, if any, the IRS will receive in the Chapter 7 Case with respectis not expected to its claims against Walter Energy, and whether and to what extent funds will be available in the Chapter 7 Case to pay priority tax claims. We also intend to vigorously assert any and all available defenses against any liability we may have as a member of the Walter Energy consolidated group. However, we cannot currently estimate our liability, if any, relating to the tax-related liabilities of Walter Energy’s consolidated tax group for tax years prior to 2007, and such liability could have a material adverse effect on our business, financial condition, liquidity or results of operations.operations or cash flows. However, the outcome of these claims, or legal proceedings, and related effects arising from this event cannot be predicted with certainty.
Indemnifications
Indemnification. We are a party to contracts in which it is common for us to agree to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct. We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities.
Additionally, in connection with the sale of assets and the divestiture of businesses, such as the divestitures of U.S. Pipe and Anvil, we may agree to indemnify buyers and related parties for certain losses or liabilities incurred by these parties with respect to: (i) the representations and warranties made by us to these parties in connection with the sale and (ii) liabilities related to the pre-closing operations of the assets or business sold. Indemnities related to pre-closing operations generally include certain environmental and tax liabilities and other liabilities not assumed by these parties in the transaction.
Indemnities related to the pre-closing operations of sold assets or businesses normally do not represent additional liabilities to us, but simply serve to protect these parties from potential liability associated with our obligations existing at the time of the sale. As with any liability, we have accrued for those pre-closing obligations that are considered probable and reasonably estimable. Should circumstances change, increasing the likelihood of payments related to a specific indemnity, we will accrue a liability when future payment is probable and the amount is reasonably estimable.
Other Matters. We monitor and analyze our warranty experience and costs periodically and may revise our accruals as necessary. Critical factors in our analyses include warranty terms, specific claim situations, general incurred and projected failure rates, the nature of product failures, product and labor costs, and general business conditions.
We are party to a number of lawsuits arising in the ordinary course of business, including product liability cases for products manufactured by us or third parties. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our future financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such other litigation is not likely to have a materially adverse effect on our businessfinancial position, results of operations, cash flows or prospects.liquidity.
| |
Note 12. | Subsequent Events
|
Note 11. Subsequent Events
On January 24, 2018,25, 2023, our boardBoard of directorsDirectors declared a dividend of $0.05$0.061 per share on our common stock, payable on or about February 20, 201821, 2023 to stockholders of record at the close of business on February 9, 2018.10, 2023.
A new collective bargaining agreement with the International Association of Machinists and Aerospace Workers at our Chattanooga, Tennessee facility was successfully negotiated and signed in January, 2023. The agreement expires January 14, 2027.
| |
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this report. This report contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. federal securities laws. All statements that address activities, events or developments that we intend, expect, plan, project, believethe Company intends, expects, plans, projects, believes or anticipateanticipates will or may occur in the future are forward-looking statements.statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, environmental/sustainability plans, go-to-market strategies, operational excellence, acceleration of new product development, financial or operating performance, litigation outcomes, capital allocation and growth strategy plans, restructuring efficiencies and projected warranty charges. Forward-looking statements are based on certain assumptions and assessments made by usthe Company in light of ourthe Company’s experience and perception of historical trends, current conditions and expected future developments.
Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including regional, nationalthe continued impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including the collection of receivables); logistical challenges and supply chain disruptions, geopolitical conditions, or global political, economic, business, competitive, marketother events; an inability to realize the anticipated benefits from our operational initiatives, including our large capital investments in Chattanooga and Kimball, Tennessee, and Decatur, Illinois, plant closures, and our reorganization and related strategic realignment activities; an inability to attract or retain a skilled and diverse workforce, increased competition related to the workforce and labor markets; an inability to protect the Company’s information systems against service interruption, misappropriation of data or breaches of security; failure to comply with personal data protection and privacy laws; cyclical and changing demand in core markets such as municipal spending, residential construction, and natural gas distribution; government monetary or fiscal policies; the impact of adverse weather conditions; the impact of manufacturing and product performance; the impact of wage, commodity and materials price inflation; the impact of warranty claims; an inability to successfully resolve significant legal proceedings or government investigations; compliance with environmental, trade and anti-corruption laws and regulations; climate change and legal or regulatory conditionsresponses thereto; changing regulatory, trade and tariff conditions; the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures; an inability to achieve some or all of our Environmental, Social and Governance goals; and other factors that are described underin the section entitled “RISK FACTORS” in Item 1A.1A of our annual reportthe Company’s most recent Annual Report on Form 10-K forand later filings on Form 10-Q, as applicable.
Forward-looking statements do not guarantee future performance and are only as of the year ended September 30, 2017 (“Annual Report”).date they are made. The Company undertakes no duty to update its forward-looking statements except as required by law. Undue reliance should not be placed on any forward-looking statements. TheYou are advised to review any further disclosures the Company does not have any intention or obligation to update forward-looking statements, except as required by law.makes on related subjects in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S. Securities and Exchange Commission.
Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year. We manage our businesses and report operations through two business segments, Infrastructure and Technologies, based largely on the products sold and the customers served.
Overview
Organization
On October 3, 2005, Walter Energy acquired all outstanding shares of capital stock representing the Mueller Co. and Anvil businesses and contributed them to its U.S. Pipe business to form the Company. In June 2006, we completed an initial public offering of 28,750,000 shares of Series A common stock and in December 2006, Walter Energy distributed to its shareholders all of its equity interests in the Company, consisting of all of the Company’s outstanding shares of Series B common stock. On January 28, 2009, each share of Series B common stock was converted into one share of Series A common stock and the Series A designation was discontinued.
On January 6, 2017, we sold our former Anvil segment. Amounts applicable to Anvil have been classified as discontinued operations.
Business
We expectApproximately 60% to 65% of our two primary end markets, repair and replacement of water infrastructure driven by municipal spending and new water infrastructure installation driven by residential construction to grow in 2018. We expect the residential construction market to grow faster than municipal spending.
Infrastructure
We estimate approximately 60% of Infrastructure’s 20172022 net sales were forassociated with repair and replacement directly related to municipal water infrastructure spending, approximately 25% to 30% were related to residential construction activity and approximatelyless than 10% were related to natural gas utilities.utilities spending.
Infrastructure announced price increasesWe expect the operating environment during fiscal year 2023 to be very challenging as a result of the ongoing inflationary pressures, labor challenges and potential recession. We anticipate healthy demand in the municipal repair and replacement market due to favorable budgets, especially at larger municipalities. While demand from the new residential construction end market was at healthy levels during the fiscal year 2022, especially for lot and land development activity, we anticipate that activity levels will slow in 2023 based on valves, hydrants and gas products effectivehigher interest rates leading to a decrease in February 2018demand for its U.S. and Canadian markets. We believe that some customers may accelerate orders priornew residential housing. In January 2023, Blue Chip Economic Indicators forecasted a 17.3% decrease in housing starts for the calendar year 2023 as compared to the effective date ofcalendar year 2022.
We have continued to incur additional costs to address the price increases.
Technologies
The municipal market ispandemic as discussed herein, including costs associated with unfavorable manufacturing variances, and labor shortages at our facilities. We expect to continue to incur such costs that may be significant as we continue to respond to the key end market for Technologies. These businesses are project-oriented and depend on customer adoption of their technology-basedpandemic. In addition to the pandemic, the war in Ukraine has caused supply chain disruptions that have resulted in higher costs to manufacture our products and services. Mueller Systems is benefiting from its recent introductionin our capital expenditures. We expect these conditions to persist in the near term.
We have two reportable segments: Water Flow Solutions and Water Management Solutions. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Flow Solutions represented 57% of our fiscal 2022 net sales. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Water Management Solutions represented 43% of our fiscal 2022 net sales.
In January 2023, the International Association of Machinists and Aerospace Workers (“IAM”) in our Chattanooga, Tennessee facility, which consists of approximately 100 members, went on strike for five regularly scheduled workdays. The effect of this event was immaterial to our operations. A new longer-range radio capabilities,collective bargaining agreement was successfully negotiated and its growth strategy is focusedsigned with the IAM in our Chattanooga, Tennessee facility in January, 2023. The agreement expires on the AMI segment of the market. Mueller Systems’ 2018 first quarter AMI backlog was lower at December 31, 2017 than at December 31, 2016. Echologics had a greater number of projects under contract at at December 31, 2017 than at December 31, 2016.January 14, 2027.
Results of Operations
Three Months Ended December 31, 20172022 Compared to Three Months Ended December 31, 20162021
| | | | | | | | | | | | | | | | | | Three months ended December 31, 2022 |
| Three months ended December 31, 2017 | | Water Flow Solutions | | Water Management Solutions | | Corporate | | Total |
| Infrastructure | | Technologies | | Corporate | | Total | | | | | | | | |
| (in millions) | | (in millions) |
Net sales | $ | 160.1 |
| | $ | 18.2 |
| | $ | — |
| | $ | 178.3 |
| Net sales | $ | 165.6 | | | $ | 149.2 | | | $ | — | | | $ | 314.8 | |
Gross profit | $ | 52.5 |
| | $ | 2.9 |
| | $ | — |
| | $ | 55.4 |
| Gross profit | $ | 46.6 | | | $ | 46.6 | | | $ | — | | | $ | 93.2 | |
Operating expenses: | | | | | | | | Operating expenses: | | | | | | | |
Selling, general and administrative | 24.4 |
| | 7.5 |
| | 7.9 |
| | 39.8 |
| Selling, general and administrative | 22.4 | | | 27.0 | | | 13.5 | | | 62.9 | |
Gain on sale of idle property | — |
| | — |
| | (9.0 | ) | | (9.0 | ) | |
Strategic reorganization and other charges | — |
| | 0.1 |
| | 3.8 |
| | 3.9 |
| |
| 24.4 |
| | 7.6 |
| | 2.7 |
| | 34.7 |
| |
Strategic reorganization and other benefits | | Strategic reorganization and other benefits | — | | | — | | | (3.7) | | | (3.7) | |
Total operating expenses | | Total operating expenses | 22.4 | | | 27.0 | | | 9.8 | | | 59.2 | |
Operating income (loss) | $ | 28.1 |
| | $ | (4.7 | ) | | $ | (2.7 | ) | | 20.7 |
| Operating income (loss) | $ | 24.2 | | | $ | 19.6 | | | $ | (9.8) | | | 34.0 | |
Pension costs other than service | | | | | | | 0.2 |
| |
Non-operating expenses: | | Non-operating expenses: | | | | | | |
Pension expense other than service | | Pension expense other than service | | 0.9 | |
Interest expense, net | | | | | | | 5.2 |
| Interest expense, net | | 3.7 | |
Income before income taxes | | | | | | | 15.3 |
| Income before income taxes | | 29.4 | |
Income tax benefit | | | | | | | (39.8 | ) | |
Income from continuing operations | | | | | | | $ | 55.1 |
| |
Income tax expense | | Income tax expense | | 6.9 | |
Net income | | Net income | | $ | 22.5 | |
| | | | | | | | | | Three months ended December 31, 2021 |
| Three months ended December 31, 2016 | | Water Flow Solutions | | Water Management Solutions | | Corporate | | Total |
| Infrastructure | | Technologies | | Corporate | | Total | | | | | | | | |
| (in millions) | | (in millions) |
Net sales | $ | 146.3 |
| | $ | 20.9 |
| | $ | — |
| | $ | 167.2 |
| Net sales | $ | 154.9 | | | $ | 117.4 | | | $ | — | | | $ | 272.3 | |
Gross profit | $ | 47.6 |
| | $ | 4.2 |
| | $ | — |
| | $ | 51.8 |
| Gross profit | $ | 52.1 | | | $ | 35.5 | | | $ | — | | | $ | 87.6 | |
Operating expenses: | | | | | | | | Operating expenses: | | | | | | | |
Selling, general and administrative | 21.3 |
| | 6.4 |
| | 8.6 |
| | 36.3 |
| Selling, general and administrative | 20.8 | | | 24.0 | | | 11.5 | | | 56.3 | |
Other charges | 0.1 |
| | — |
| | 1.2 |
| | 1.3 |
| |
Strategic reorganization and other charges | | Strategic reorganization and other charges | — | | | 0.1 | | | 2.3 | | | 2.4 | |
Total operating expenses | | Total operating expenses | 20.8 | | | 24.1 | | | 13.8 | | | 58.7 | |
Operating income (loss) | | Operating income (loss) | $ | 31.3 | | | $ | 11.4 | | | $ | (13.8) | | | 28.9 | |
Non-operating expenses: | | Non-operating expenses: | | | | | | |
| 21.4 |
| | 6.4 |
| | 9.8 |
| | 37.6 |
| |
Operating income (loss) | $ | 26.2 |
| | $ | (2.2 | ) | | $ | (9.8 | ) | | 14.2 |
| |
Pension costs other than service | | | | | | | 0.3 |
| |
Pension benefit other than service | | Pension benefit other than service | | (1.0) | |
Interest expense, net | | | | | | | 6.4 |
| Interest expense, net | | 4.3 | |
Income before income taxes | | | | | | | 7.5 |
| Income before income taxes | | 25.6 | |
Income tax expense | | | | | | | 2.1 |
| Income tax expense | | 6.2 | |
Income from continuing operations | | | | | | | $ | 5.4 |
| |
Net income | | Net income | | $ | 19.4 | |
Consolidated Analysis
Net sales forin the quarterthree months ended December 31, 20172022 increased $11.1$42.5 million or 15.6% to $178.3$314.8 million from $167.2as compared with $272.3 million duein the prior year period primarily to increased shipment volumes, including the additionas a result of Singer Valve, and improvedhigher pricing at Infrastructure,across most of our product lines in both segments, which werewas partially offset by volume decline at Technologies.lower volumes on certain products.
Gross profit forin the quarterthree months ended December 31, 20172022 increased $3.6$5.6 million or 6.4% to $55.4$93.2 million from $51.8$87.6 million in the prior year period, primarily as a result of higher pricing across most of our product lines, which was partially offset by higher cost of sales and lower volumes on certain products. The higher cost of sales was primarily a result of unfavorable manufacturing performance and inflation. Unfavorable manufacturing performance was a result of outsourcing,
machine downtime, supply chain disruptions and labor productivity mainly in our foundry operations. Gross margin was 29.6% in the three months ended December 31, 2022 as compared with 32.2% in the prior year period.
Selling, general and administrative expenses (“SG&A”) in the three months ended December 31, 2022 increased $6.6 million or 11.7% to $62.9 million from $56.3 million in the prior year period primarily due to higher personnel costs and sales commissions, investments in technology, inflation and increased shipment volumes, improved pricingtravel and Infrastructure's improved operating efficiencies and other manufacturing cost savings,trade show expenditures, partially offset by increased material costs. Gross margin increased to 31.1% for the quarter ended December 31, 2017 compared to 31.0% in the prior year period.
Selling, general and administrative expenses (“SG&A”) for the quarter ended December 31, 2017 increased to $39.8 million from $36.3 million in the prior year period due primarily to the acquisition of Singer Valve during the second quarter of last year and higher personnel-related expenses.foreign exchange gains. SG&A as a percentage of net sales was 22.3% in20.0% and 20.7% for the quarterthree months ended December 31, 20172022 and 21.7%December 31, 2021, respectively.
Strategic reorganization and other charges in the three months ended December 31, 2022 was a benefit of $3.7 million which primarily consisted of a $4.0 million gain, before tax, on the sale of the Aurora, Illinois facility, which was partially offset by certain transaction-related expenses. Strategic reorganization and other charges for the three months ended December 31, 2021 were $2.4 million, which primarily consisted of expenses associated with the Albertville tragedy, as well as termination benefits associated with the closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada.
Net interest expense in the three months ended December 31, 2022 declined $0.6 million or 14.0% to $3.7 million as compared with $4.3 million in the prior year period.
Interest expense, net declined $1.2 million in the quarter ended December 31, 2017 comparedperiod primarily due to the prior year period.higher interest income received as a result of rising interest rates. The components of net interest expense net are provided below.
| | | | | | | | | | | |
| Three months ended |
| December 31, |
| 2022 | | 2021 |
| | | |
| (in millions) |
4.0% Senior Notes | 4.5 | | | 4.5 | |
Deferred financing costs amortization | 0.3 | | | 0.2 | |
ABL Agreement | 0.2 | | | 0.2 | |
Capitalized interest | (0.7) | | | (0.6) | |
Other interest cost | 0.1 | | | 0.1 | |
Total interest expense | 4.4 | | | 4.4 | |
Interest income | (0.7) | | | (0.1) | |
Interest expense, net | $ | 3.7 | | | $ | 4.3 | |
|
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Term Loan | $ | 4.8 |
| | $ | 5.1 |
|
Interest rate swap contracts | 0.4 |
| | 0.6 |
|
Deferred financing costs amortization | 0.5 |
| | 0.4 |
|
ABL Agreement | 0.2 |
| | 0.2 |
|
Other interest expense | 0.1 |
| | 0.2 |
|
| 6.0 |
| | 6.5 |
|
Interest income | (0.8 | ) | | (0.1 | ) |
| $ | 5.2 |
| | $ | 6.4 |
|
On December 22, 2017, tax legislation was enacted that made significant revisions to federal income tax laws, including lowering the corporate income tax rate to 21 percent from 35 percent, overhauling the taxation of income earned outside the United States and eliminating or limiting certain deductions. Since the effective date of the tax rate change was January 1, 2018, we are subject to a blended federal statutory tax rate of 24.5 percent throughout fiscal 2018.
For the quarter ended December 31, 2017, we reported a net income tax benefit of $39.8 million, which was driven by a benefit of $42.6 million related to remeasurement of our net deferred income tax liabilities using the enacted tax rates in effect when we expect to recognize the related tax expenses or benefits. Other than this remeasurement benefit, income tax expense was $2.8 million, or 18.3 percent of income before income taxes. For the 2017 first quarter, income tax expense was 28.0 percent of income before income taxes. The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.
| | | Three months ended | | Three months ended |
| December 31, | | December 31, |
| 2017 | | 2016 | | 2022 | | 2021 |
U.S. federal statutory income tax rate | 24.5 | % | | 35.0 | % | U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % |
Adjustments to reconcile to the effective tax rate: | | | | Adjustments to reconcile to the effective tax rate: | |
State income taxes, net of federal benefit | 4.3 |
| | 3.9 |
| State income taxes, net of federal benefit | 3.4 | | | 3.9 | |
Valuation allowance adjustment related to stock compensation | (5.7 | ) | | — |
| |
Excess tax benefits related to stock compensation | (2.8 | ) | | (7.6 | ) | |
Domestic production activities deduction | (1.6 | ) | | (3.3 | ) | |
Excess tax benefits related to stock-based compensation | | Excess tax benefits related to stock-based compensation | 0.7 | | | (1.0) | |
Tax credits | (0.9 | ) | | (0.8 | ) | Tax credits | (1.6) | | | (1.2) | |
Global Intangible Low-taxed Income | | Global Intangible Low-taxed Income | 0.8 | | | 0.3 | |
Foreign income tax rate differential | | Foreign income tax rate differential | (1.6) | | | (0.7) | |
| Nondeductible compensation | | Nondeductible compensation | 0.5 | | | — | |
Valuation allowances | | Valuation allowances | (0.2) | | | 1.4 | |
Other | 0.5 |
| | 0.8 |
| Other | 0.5 | | | 0.5 | |
| 18.3 | % | | 28.0 | % | |
Remeasurement of deferred taxes for change in rates | (278.4 | )% | | — | % | |
Effective income tax rate | (260.1 | )% | | 28.0 | % | Effective income tax rate | 23.5 | % | | 24.2 | % |
Also under this legislation, we are subject to a one-time transition tax on undistributed foreign earnings, but the amount of this tax is not reasonably estimable at this time. Accordingly, no provision for this tax has been recorded, but will be recorded later in 2018.
Segment Analysis
Infrastructure
Water Flow Solutions
Net sales forin the quarterthree months ended December 31, 20172022 increased 9.4%$10.7 million or 6.9% to $160.1$165.6 million as compared with $154.9 million in the prior year period primarily as a result of higher pricing across most of the segment’s product lines partially offset by lower volumes.
Gross profit in the three months ended December 31, 2022 decreased $5.5 million or 10.6% to $146.3$46.6 million from $52.1 million in the prior year period primarily as a result of lower volumes and higher cost of sales associated with unfavorable manufacturing performance, and inflation which were partially offset by higher pricing. Gross margin was 28.1% in the three months ended December 31, 2022 and 33.6% in the prior year period.
SG&A in the three months ended December 31, 2022 increased $1.6 million to $22.4 million from $20.8 million in the prior year period primarily due to higher shipment volumes,personnel costs and sales commissions, investments in technology, inflation and increased travel and trade show expenditures. SG&A as a percentage of net sales was 13.5% and 13.4% in the addition of Singer Valve and favorable pricing.
Gross profit for the quarterthree months ended December 31, 20172022 and 2021, respectively.
Water Management Solutions
Net sales in the three months ended December 31, 2022 increased $31.8 million or 27.1% to $52.5$149.2 million from $47.6as compared with $117.4 million in the prior year period, due toprimarily as a result of higher pricing across most of the segment’s product lines as well as increased shipment volumes, improved operating efficiencies and other manufacturing cost savings. volumes.
Gross margin increased to 32.8% forprofit in the quarterthree months ended December 31, 20172022 was $46.6 million as compared to 32.5% in the prior year period.
SG&A for the quarter ended December 31, 2017 increased to $24.4 million from $21.3with $35.5 million in the prior year period. SG&A was 15.2% and 14.6% of net sales forGross margin increased to 31.2% in the quartersthree months ended December 31, 2017 and 2016, respectively. These increases in SG&A were primarily due to higher personnel-related expenses and the additional SG&A of Singer Valve.
Technologies
Net sales2022 as compared with 30.2% in the quarterprior year period primarily as a result of higher pricing and increased volumes, partially offset by unfavorable manufacturing performance and inflation.
SG&A in the three months ended December 31, 2017 declined2022 increased $3.0 million to $18.2$27.0 million from $20.9$24.0 million in the prior year period primarily due to lower AMI shipment volumes,higher personnel costs and sales commissions, and outside services, partially offset by increased leak detection sales.
Gross profitforeign exchange gains. SG&A as a percentage of net sales was 18.1% and 20.4% in the quarterthree months ended December 31, 2017 was $2.92022 and 2021, respectively.
Corporate
SG&A increased $2.0 million compared to $4.2$13.5 million in the prior year period. Gross margin declined to 15.9% in the quarterthree months ended December 31, 20172022 as compared to 20.1% in the prior year period. These declines were primarily due to lower shipment volumes.
SG&A increased to $7.5with $11.5 million in the quarterthree months ended December 31, 2017 compared to $6.4 million in the prior year period due to personnel-related expenses. SG&A2021 primarily as a result of increased to 41.2% of net sales for the quarter ended December 31, 2017 from 30.6% of net sales in the prior year period.personnel costs and inflation.
Corporate
SG&A was $7.9 million in the quarter ended December 31, 2017 compared to $8.6 million in the prior year period.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $348.3$125.6 million at December 31, 20172022 and $96.3$162.4 million of additional borrowing capacity under our ABL Agreement based on December 31, 2017 data, which, along with cash generated by operations, would be our source of incremental liquidity.2022 data. Undistributed earnings from our subsidiaries in Israel, Canada, and China are considered to be permanently invested outside the United States. At December 31, 2017,2022, cash and cash equivalents included $12.1included $48.3 million, $7.2 million, and $7.2$10.7 million in Israel, Canada, and China, respectively.
We expect the recently enacted tax law changesdeclared a quarterly dividend of $0.061 per share on January 25, 2023, payable on or about February 21, 2023 to benefit our liquidity through reductionholders of record as of February 10, 2023, which will result in overall income tax liability and through provisions allowing immediate deductibility for capital assets placed in service in the next five years. This benefit will be partially offset by payment of the transition tax discussed above. However, the transition tax may be paid over eight years, and we doan estimated $9.5 million cash outlay.
We did not expectrepurchase any payments to have a material liquidity impact in any particular year.
We repurchased shares of our outstanding common stock for $10 million during the quarterthree months ended December 31, 2017,2022 and we had $180$100.0 million remaining onof our share repurchase authorization at that date.authorization.
The ABL Agreement and Term Loan4.0% Senior Notes contain customary representations and warranties, covenants and provisions governing an event of default. The covenants restrict our ability to engage in certain specified activities, including but not limited to the payment of dividends and the redemption of our common stock.
Cash flows fromNet cash used in operating activities of continuing operations are categorized below.
|
| | | | | | | |
| Three months ended |
| December 31, |
| 2017 | | 2016 |
| (in millions) |
Collections from customers | $ | 216.1 |
| | $ | 194.6 |
|
Disbursements, other than interest and income taxes | (211.3 | ) | | (203.5 | ) |
Interest payments, net | (4.4 | ) | | (5.6 | ) |
Income tax refunds (payments), net | 0.1 |
| | (5.4 | ) |
Cash provided by (used in) operating activities | $ | 0.5 |
| | $ | (19.9 | ) |
Collections from customers were higher duringwas $6.5 million during the three months ended December 31, 20172022 as compared towith net cash provided by operating activities of $19.8 million in the prior year period primarily due to the timing of cash receipts and net sales growth.
Increased disbursements, other than interest and income taxes,period. Inventory purchases increased during the three months ended December 31, 2017 reflect higher purchasing activity, higher costs for raw materials, and differences in the timing of expenditures.
Income tax payments were lower during2022 as compared with the three months ended December 31, 2017 compared to2021 as a result of supply chain management and inflation. Additionally, the prior year period because we begandecline in cash as a result of operating activities during the comparable periods included: a deferred tax increase of $4.5 million, a pension expense increase of $1.8 million, and a $1.2 million increase in inventory reserves. Other current year quarter with U.S. federal income taxes prepaid.liabilities and other noncurrent liabilities decreased primarily as a result of the timing of payroll payments, the repayment of the CARES Act employer payroll tax deferral, interest payments, and the payment of restructuring expenses.
Capital expenditures were $6.4$9.9 million in the three months ended December 31, 20172022 as compared to $4.2with $11.0 million in the prior year period. We estimate 2018Capital expenditures decreased primarily as a result of lower expenditures associated with the new Decatur foundry as compared with the prior year period. For fiscal year 2023, we have provided guidance that our capital expenditures willare expected to be between $40$70.0 million and $48 million, although we are also evaluating possibilities for additional capital expenditures in 2018.$80.0 million.
We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, income tax payments, capital expenditures and debt service obligations as they become due through December 31, 2018.2023. However, our ability to make these payments will depend partly uponlargely on our future operating performance, which willmay be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.
ABL Agreement
AtAs of December 31, 2017, the2022, our ABL Agreement consistedis provided by a consortium of banking institutions and consists of a revolving credit facility for up to $225$175.0 million in borrowings that expires on July 28, 2025. Included in the ABL is the ability to borrow up to $25.0 million of revolving credit borrowings, swing line loans and up to $60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150$150.0 million in certain circumstances subject to adequate borrowing base availability. We may borrow up to $25 million through swing line loans and may have up to $60 million of letters of credit outstanding.
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR plus aan applicable margin ranging from 125200 to 150225 basis points, or a base rate, as defined in the ABL, Agreement, plus aan applicable margin rangingrange from 25100 to 50125 basis points. At December 31, 2017,2022, the applicable LIBOR-based margin was 125200 basis points.points for LIBOR-based loans, and 100 basis points for base rate loans.
The ABL Agreement terminates on July 13, 2021. We pay a commitment fee for any unused borrowing capacity under the ABL Agreement of 25 basis points per annum.
The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances. The borrowing base under the ABL Agreement is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible inventories or (ii) 85% of the net orderly liquidation value of the value of eligible inventories,inventory, less certain reserves. Prepayments can be made at any time with no penalty.
Substantially all of our U.S. subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. inventories, accounts receivable, certain cash and other supporting obligations.related assets.
The ABL includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap underas defined in the ABL Agreement.
Term Loan
We had $485.1 million face value outstanding under the Term Loan atABL. Excess availability based on December 31, 2017. Term Loan borrowings accrue2022 data was $162.4 million, as reduced by $12.4 million of outstanding letters of credit and $0.2 million of accrued fees and expenses.
4.0% Senior Unsecured Notes
On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at a floating rate equal to LIBOR, subject to a floor4.0%, paid semi-annually in June and December. We capitalized $5.5 million of 0.75%, plus 250 basis points. We may voluntarily repay amounts borrowed underfinancing costs, which are being amortized over the Term Loan at any time. The principal amountterm of the Term Loan is required4.0% Senior Notes using the effective interest method. Proceeds from the 4.0% Senior Notes, along with cash on hand, were used to be repaid in quarterly installments of $1.225 million. The Term Loan matures on November 25, 2021. The Term Loan is guaranteed by substantiallyredeem previously existing 5.5% Senior Notes. Substantially all of our U.S. subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL. Based on quoted market prices, which is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $395.8 million at December 31, 2022.
An indenture securing the 4.0% Senior Notes (“Indenture”) contains customary covenants and secured by essentiallyevents of default, including covenants that limit our ability to incur certain debt and liens. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at December 31, 2022.
As set forth in the Indenture, we may redeem some or all of our assets, although the ABL Agreement has4.0% Senior Notes at any time prior to June 15, 2024 at certain “make-whole” redemption prices and on or after June 15, 2024 at specified redemption prices. Additionally, we may redeem up to 40% of the aggregate principal amount of the 4.0% Senior Notes at any time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices. Upon a senior claim on certain collateral securing borrowings thereunder.change in control, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount.
Our corporate credit rating and the credit rating for our debt are presented below. These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agencies.
| | | Moody’s | | Standard & Poor's | | Moody’s | | Standard & Poor’s |
| December 31, | | September 30, | | December 31, | | September 30, | | December 31, | | September 30, | | December 31, | | September 30, |
| 2017 | | 2017 | | 2017 | | 2017 | | 2022 | | 2022 | | 2022 | | 2022 |
Corporate credit rating | Ba3 | | Ba3 | | BB- | | BB- | Corporate credit rating | Ba1 | | Ba1 | | BB | | BB |
ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated | ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
Term Loan | Ba3 | | Ba3 | | BB | | BB | |
4.0% Senior Notes | | 4.0% Senior Notes | Ba1 | | Ba1 | | BB | | BB |
Outlook | Stable | | Stable | | Stable | | Stable | Outlook | Stable | | Stable | | Stable | | Stable |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
Our Chief Executive Officer and our Chief Financial Officer have concluded, based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, that such disclosure controls and procedures were effective as of the end of the period covered by this report.