UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
 QUARTERLY REPORT PURSUANT TO SECTION 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 20182019
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-32892
MUELLER WATER PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware20-3547095
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
1200 Abernathy Road N.E.N.E
Suite 1200
Atlanta, GA 30328
(Address of principal executive offices)
(770) 206-4200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
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:
Large accelerated filer  x    Accelerated filer   o  
Non-accelerated filer   o   Smaller reporting company  o 
(Do not check if a smaller reporting company)Emerging growth company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
There were 158,211,464158,035,863 shares of $0.01 par value common stock of the registrant outstanding at January 31, 2019.
2020, which trade under the ticker symbol MWA on the New York Stock Exchange.





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,
 20192019
 (in millions, except share amounts)
Assets:
Cash and cash equivalents$136.8  $176.7  
Receivables, net132.1  172.8  
Inventories212.9  191.4  
Other current assets25.7  26.0  
Total current assets507.5  566.9  
Property, plant and equipment, net224.5  217.1  
Goodwill97.5  95.7  
Intangible assets428.0  433.7  
Other noncurrent assets51.5  23.9  
Total assets$1,309.0  $1,337.3  
Liabilities and equity:
Current portion of long-term debt$0.9  $0.9  
Accounts payable58.6  84.6  
Other current liabilities63.9  93.0  
Total current liabilities123.4  178.5  
Long-term debt445.5  445.4  
Deferred income taxes89.5  87.9  
Other noncurrent liabilities55.6  33.2  
Total liabilities714.0  745.0  
Commitments and contingencies (Note 13.)
Common stock: 600,000,000 shares authorized; 157,889,045 and 157,462,140 shares outstanding at December 31, 2019 and September 30, 2019, respectively1.6  1.6  
Additional paid-in capital1,401.3  1,410.7  
Accumulated deficit(775.9) (786.2) 
Accumulated other comprehensive loss(32.0) (36.0) 
Total Company stockholders’ equity595.0  590.1  
Noncontrolling interest—  2.2  
Total equity595.0  592.3  
Total liabilities and equity$1,309.0  $1,337.3  

The accompanying notes are an integral part of the condensed consolidated financial statements.
1


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 December 31, September 30,
 2018 2018
 (in millions, except share amounts)
Assets:   
Cash and cash equivalents$198.8
 $347.1
Receivables, net115.1
 164.3
Inventories194.9
 156.6
Other current assets20.9
 17.5
Total current assets529.7
 685.5
Property, plant and equipment, net168.1
 150.9
Goodwill113.5
 12.1
Intangible assets412.6
 408.1
Other noncurrent assets35.2
 35.3
Total assets$1,259.1
 $1,291.9
    
Liabilities and equity:   
Current portion of long-term debt$0.8
 $0.7
Accounts payable63.5
 90.0
Other current liabilities104.2
 76.4
Total current liabilities168.5
 167.1
Long-term debt444.8
 444.3
Deferred income taxes78.4
 79.2
Other noncurrent liabilities28.5
 36.5
Total liabilities720.2
 727.1
    
Commitments and contingencies (Note 12)   
    
Common stock: 600,000,000 shares authorized; 158,081,200 and 157,332,121 shares outstanding at December 31, 2018 and September 30, 2018, respectively1.6
 1.6
Additional paid-in capital1,440.2
 1,444.5
Accumulated deficit(871.0) (850.0)
Accumulated other comprehensive loss(33.6) (32.8)
Total Company stockholders’ equity537.2
 563.3
Noncontrolling interest1.7
 1.5
Total equity538.9
 564.8
Total liabilities and equity$1,259.1
 $1,291.9
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months ended
December 31,
 20192018
(in millions, except per share amounts)
Net sales$212.6  $192.8  
Cost of sales140.0  132.7  
Gross profit72.6  60.1  
Operating expenses:
Selling, general and administrative49.9  41.0  
Strategic reorganization and other charges2.4  3.2  
Total operating expenses52.3  44.2  
Operating income20.3  15.9  
Other expenses (income):
Pension costs (benefits) other than service(0.7) (0.1) 
Interest expense, net7.4  5.5  
Walter Energy Accrual0.2  37.4  
Net other expense6.9  42.8  
Income (loss) before income taxes13.4  (26.9) 
Income tax expense (benefit)3.1  (5.9) 
Net income (loss)$10.3  $(21.0) 
Net income (loss) per share:
Basic$0.07  $(0.13) 
Diluted$0.06  $(0.13) 
Weighted average shares outstanding:
Basic157.7  157.7  
Diluted158.7  158.8  
Dividends declared per share$0.0525  $0.0500  

The accompanying notes are an integral part of the condensed consolidated financial statements.
2


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 Three months ended
December 31,
20192018
 (in millions)
Net income (loss)$10.3  $(21.0) 
Other comprehensive income (loss):
Pension0.7  0.5  
Income tax effects(0.2) (0.1) 
Foreign currency translation3.5  (1.2) 
4.0  (0.8) 
Comprehensive income (loss)$14.3  $(21.8) 

The accompanying notes are an integral part of the condensed consolidated financial statements.
3


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months ended
 December 31,
 2018 2017
 (in millions, except per share amounts)
Net sales$192.8
 $178.3
Cost of sales132.7
 122.9
Gross profit60.1
 55.4
Operating expenses:   
Selling, general and administrative41.0
 39.8
Gain on sale of idle property
 (9.0)
Strategic reorganization and other charges3.2
 3.9
Total operating expenses44.2
 34.7
Operating income15.9
 20.7
Other expenses (income):   
Pension costs other than service(0.1) 0.2
Interest expense, net5.5
 5.2
Walter Energy accrual37.4
 
Net other expenses42.8
 5.4
Income (loss) before income taxes(26.9) 15.3
Income tax benefit(5.9) (39.8)
Net income (loss)$(21.0) $55.1
    
Net income (loss) per share:   
Basic$(0.13) $0.35
Diluted$(0.13) $0.34
    
Weighted average shares outstanding:   
Basic157.7
 158.5
Diluted158.8
 160.0
    
Dividends declared per share$0.05
 $0.04
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY 
(UNAUDITED)
Three months ended
December 31,
20192018
(in millions)
Common stock
Balance, beginning of period$1.6  $1.6  
Change in common stock at par value—  —  
Balance, end of period1.6  1.6  
Additional paid-in-capital
Balance, beginning of period1,410.7  1,444.5  
Dividends declared(8.3) (7.9) 
Buyout of noncontrolling interest(3.2) —  
Shares retained for employee taxes(0.7) (1.2) 
Stock-based compensation1.3  1.7  
Stock issued under stock compensation plan1.4  3.1  
Balance, end of period1,401.3  1,440.2  
Accumulated deficit
Balance, beginning of period(786.2) (850.0) 
Net income (loss)10.3  (21.0) 
Balance, end of period(775.9) (871.0) 
Accumulated other comprehensive income (loss)
Balance, beginning of period(36.0) (32.8) 
Other comprehensive income (loss)4.0  (0.8) 
Balance, end of period(32.0) (33.6) 
Noncontrolling interest
Balance, beginning of period2.2  1.5  
Acquisition of joint venture partner’s interest(2.2) —  
Net income—  0.2  
Balance, end of period—  1.7  
Total stockholders' equity$595.0  $538.9  

The accompanying notes are an integral part of the condensed consolidated financial statements.
4


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 Three months ended
 December 31,
 2018 2017
 (in millions)
Net income (loss)$(21.0) $55.1
Other comprehensive income (loss):   
Pension0.5
 0.8
Income tax effects(0.1) (0.3)
Foreign currency translation(1.2) 0.1
Derivative fair value change
 1.6
Income tax effects
 (0.6)
 (0.8) 1.6
Comprehensive income (loss)$(21.8) $56.7
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three months ended
December 31,
 20192018
 (in millions)
Operating activities:
Net income (loss)$10.3  $(21.0) 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation7.0  6.1  
Amortization7.0  6.0  
Stock-based compensation1.3  1.7  
Retirement plans0.7  0.3  
Deferred income taxes1.0  (2.2) 
Other, net(0.4) 1.2  
Changes in assets and liabilities:
Receivables41.0  57.7  
Inventories(21.0) (21.9) 
Other assets3.6  (3.5) 
Accounts payable(26.0) (32.0) 
Walter Energy Accrual(22.0) 37.4  
Other current liabilities(12.8) (12.2) 
Long-term liabilities(2.1) (7.7) 
Net cash (used in) provided by operating activities(12.4) 9.9  
Investing activities:
Business acquisitions, net of cash received—  (123.0) 
Capital expenditures(15.2) (15.9) 
Proceeds from sales of assets0.1  —  
Net cash used in investing activities(15.1) (138.9) 
Financing activities:
Dividends(8.3) (7.9) 
Repayment of Krausz debt—  (13.2) 
Acquisition of joint venture partner’s interest(5.2) —  
Employee taxes related to stock-based compensation(0.7) (1.2) 
Common stock issued1.4  3.1  
Other—  0.4  
Net cash used in financing activities(12.8) (18.8) 
Effect of currency exchange rate changes on cash0.4  (0.5) 
Net change in cash and cash equivalents(39.9) (148.3) 
Cash and cash equivalents at beginning of period176.7  347.1  
Cash and cash equivalents at end of period$136.8  $198.8  

The accompanying notes are an integral part of the condensed consolidated financial statements.
5
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY 
THREE MONTHS ENDED DECEMBER 31, 2018
(UNAUDITED)
 
  Common  
stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
loss
 Non-controlling interest Total    
 (in millions)
Balance at September 30, 2018$1.6
 $1,444.5
 $(850.0) $(32.8) $1.5
 $564.8
Net income (loss)
 
 (21.0) 
 0.2
 (20.8)
Dividends declared
 (7.9) 
 
 
 (7.9)
Shares retained for employee taxes
 (1.2) 
 
 
 (1.2)
Stock-based compensation
 1.7
 
 
 
 1.7
Common stock issued
 3.1
 
 
 
 3.1
Other comprehensive income (loss), net of tax
 
 
 (0.8) 
 (0.8)
Balance at December 31, 2018$1.6
 $1,440.2
 $(871.0) $(33.6) $1.7
 $538.9




MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three months ended
 December 31,
 2018 2017
 (in millions)
Operating activities:   
Net income (loss)$(21.0) $55.1
Adjustments to reconcile income to net cash provided by (used in) operating activities:   
Depreciation6.1
 4.9
Amortization6.0
 5.7
Stock-based compensation1.7
 2.0
Retirement plans0.3
 0.7
Deferred income taxes(2.2) (39.7)
Gain on sale of idle property
 (9.0)
Other, net1.2
 0.7
Changes in assets and liabilities:   
Receivables57.7
 38.4
Inventories(21.9) (16.3)
Other assets(3.5) (0.8)
Walter Energy accrual37.4
 
Liabilities(51.9) (41.2)
Net cash provided by (used in) operating activities9.9
 0.5
Investing activities:   
Capital expenditures(15.9) (6.4)
Proceeds from sales of assets
 7.4
Acquisition, net of cash received(123.0) 
Net cash provided by (used in) investing activities(138.9) 1.0
Financing activities:   
Repayment of Krausz debt(13.2) 
Dividends(7.9) (6.3)
Employee taxes related to stock-based compensation(1.2) (1.8)
Repayment of debt
 (1.2)
Common stock issued3.1
 4.3
Stock repurchased under buyback program
 (10.0)
Other0.4
 
Net cash used in financing activities(18.8) (15.0)
Effect of currency exchange rate changes on cash(0.5) 0.1
Net change in cash and cash equivalents(148.3) (13.4)
Cash and cash equivalents at beginning of period347.1
 361.7
Cash and cash equivalents at end of period$198.8
 $348.3

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 20182019
Note 1.Organization
Note 1.
Organization
Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in two business segments: Infrastructure and Technologies. Infrastructure manufactures valves for water and gas systems, including butterfly, iron gate, tapping, check, knife, plug and ball valves, as well as dry-barrel and wet-barrel fire hydrants and a broad line of pipe connection and repair products, such as clamps and couplings used to repair leaks. Technologies offers metering systems, leak detection, pipe condition assessment and other related smart-enabled products and services. 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.
In July 2014, Infrastructure ownsacquired a 49% ownership interest in an industrial valve joint venture.venture for $1.7 million. Due to substantive control features in the operating agreement, all of the joint venture’s assets, liabilities and results of operations arewere included in our consolidated financial statements. The netWe included an adjustment for the income or loss attributable to the noncontrolling interest is included in selling, general and administrative expenses. NoncontrollingInfrastructure acquired the remaining 51% interest is recorded at its carrying value, which approximates fair value.in the business on October 3, 2019.
UnlessOn December 3, 2018, we completed our acquisition of Krausz Development Ltd. and subsidiaries (“Krausz”). We include the context indicates otherwise, whenever we referfinancial statements of Krausz in our consolidated financial statements on a one-month lag. For the quarter ended December 31, 2018, the consolidated statements of operations and of cash flows exclude the results of Krausz’s operations. Refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year.Note 2. for additional disclosures related to the acquisition.
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 of assets, liabilities, sales and expenses and the disclosure of contingent assets and liabilities for the reporting periods. 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, 2018.2019. 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, 20182019 was derived from audited financial statements, but it does not include all disclosures required by GAAP.
On December 3, 2018,Unless the context indicates otherwise, whenever we completedrefer to a particular year, we mean our acquisition of Krausz Industries Ltd. (“Krausz”). The operating results of Krausz are reported on a one-month lag beginningfiscal year ended or ending September 30 in the quarter ended December 31, 2018. For the quarter ended December 31, 2018, the consolidated balance sheet includes an estimated opening balance sheet for Krausz, but the consolidated statements of operations and of cash flows exclude the results of Krausz’s operations. Refer to Note 2 for additional disclosures related to the acquisition.that particular calendar year.
HR-1, commonly 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 4.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance for the recognition of revenue and requiring additional financial statement disclosures.  On October 1, 2018, we adopted the new guidance related to revenue recognition from contracts with customers. The new guidance was adoptedcustomers using the modified retrospective approach and no transition adjustment was required. See Note 33. for more information regarding our adoption of ASC 606 this guidance- Revenue from Contracts with Customers..
DuringIn 2016, FASB issued Accounting Standards Update 2016-02 Leases, which will require us to recognizenew guidance for the recognition of lease assets and lease liabilities for those leases currently referred to as operating leases. We will adopt thisleases and requiring additional financial statement disclosures. On October 1, 2019, we adopted the new guidance related to leases using the modified retrospective transition method beginning in the first quarter of fiscal 2020. We are currently assessingmethod. See Note 4. for more information regarding our specific implementation approach and finalizing our estimate of the impactadoption of this Update, which we do not believe will be material to our consolidated financial statements as a whole.guidance.
6




In 2017, we announced a strategic reorganization plan designed to accelerate our product innovation and revenue growth, through the adoption of 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 centralized to better align with business needs and generate greater efficiencies, which was essentially completed in 2018. In October 2018, we announced the move of our Middleborough, Massachusetts research and development facility to Atlanta to consolidate our resources and accelerate product innovation through creation of a research and development center of excellence for software and electronics. Costs and expensesIn November 2019, we announced the planned move of our manufacturing facility in the quarters ended December 31, 2018 and 2017Hammond, Indiana to our new facility in Kimball, Tennessee. Expenses incurred for these plans,moves were primarily personnel-related and are included in strategic reorganization and other charges were primarily personnel-related.in the Condensed Consolidated Statements of Operations.
Activity in accrued restructuring, reported as part of other current liabilities, is presented below.
Three months ended
December 31,
20192018
(in millions)
Beginning balance$1.7  $0.9  
Expense accrued0.4  2.4  
Amounts paid(0.5) (1.1) 
Ending balance$1.6  $2.2  
 Three months ended
 December 31,
 2018 2017
 (in millions)
Beginning balance$0.9
 $3.3
Expense2.4
 2.3
Payments(1.1) (1.4)
Ending balance$2.2
 $4.2

Note 2.Acquisitions and Divestitures
Divestiture of Burlington plant
On December 4, 2017, we sold an idle property in Burlington, New Jersey that had previously been a plant in our former U.S. Pipe segment and recorded a gain of $9.0 million on our Corporate segment. We received $7.4 million in cash, recorded net current assets of $0.8 million and conveyed plant, property and equipment with a net carrying value of $0.4 million, and the buyer assumed related environmental liabilities with a carrying value of $1.2 million.Note 2.  Business Combinations
Acquisition of Krausz Industries
On December 3, 2018, we completed our acquisition of Krausz, a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for $136.2$140.7 million, net of cash acquired, including the assumption and simultaneous repayment of certain debt of $13.2 million. The purchase agreement provides for customary final adjustments, including a net working capital adjustment, which we expect to occur in 2019. Annual sales foracquisition of Krausz in 2017 were approximately $43.0 million.was financed with cash on hand.
We have recognized the assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of the consideration transferredpurchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for the business combination is based on currently available information and is considered preliminary. We have retained a third party valuation specialist to assist in our estimate offinal. During the fair value of acquired intangible assets andquarter, we have not yet received a preliminary valuation report and therefore have not yet completed that estimate. We expect the fair value of total intangibles acquired may be significantly more than our estimate for certain intellectual property intangibles, which is included below. In addition, we are gathering information about income taxes and deferred income tax assets and liabilities, accounts receivables, inventories,reduced property, plant and equipment other current assets and current liabilities based on facts that existed asby $0.3 million, which resulted in an increase in goodwill of the date of the acquisition. The final accounting for the business combination may differ materially from that presented in these unaudited consolidated statements.

$0.3 million.
The following is a summary of the preliminary estimated fair values of the net assets acquired (in millions):
Assets acquired, net of cash:  
  Receivables $8.8
  Inventories 17.0
  Other current assets 0.2
  Property, plant and equipment 8.4
  Intangible assets 9.9
  Goodwill 101.5
Liabilities assumed (1):
  
  Accounts payable (5.5)
  Other current liabilities (2.8)
  Deferred income taxes (1.3)
Consideration paid $136.2
   
(1) Excludes certain debt assumed and immediately repaid of $13.2 million.
  

Assets, net of cash:
Receivables$6.9 
Inventories17.0 
Other current assets0.2 
Property, plant and equipment8.1 
Identified intangible assets:
  Patents32.1 
  Customer relationships8.7 
  Tradenames4.6 
  Favorable leasehold interests2.3 
  Goodwill74.7 
Liabilities:
Accounts payable(5.5)
Other current liabilities(2.9)
Deferred income taxes(5.5)
Fair value of assets acquired, net of liabilities assumed140.7 
Repayment of Krausz debt(13.2)
Consideration paid to seller$127.5 
The preliminary estimated goodwill above is attributable to the strategic opportunities and synergies that we expect to arise from the acquisition of Krausz and the workforcevalue of the acquired businesses.its workforce. The goodwill is nondeductible for income tax purposes. The intangible assets of $47.7 million consist of indefinite-lived tradenames and patents, customer relationships and favorable leasehold interests with an estimated weighted average useful life of approximately 12 years. We determined the values of the intangible assets using discounted cash flow methods.
7


Note 3. Revenue from Contracts with Customers
We recognize revenue in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products or providing those services, when control of the promised products or services is transferred to our customers.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
We disaggregate our revenuerevenues from contracts with customers by reporting unit, which are the same as our reportable segmentssegment (Note 10),11.) and further by geographical region as we believe itthis best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Geographical region represents the location of the customer.
Contract Asset and Liability Balances
The timing of revenue recognition, billings and cash collections results in customer receivables, advance payments and billings in excess of revenue recognized. Customer receivables includesinclude amounts billed and currently due from customers as well as unbilled amounts (contract assets). Amounts are billed in accordance with contractual terms and unbilled amounts arise when the timing of billing differs from the timing of revenue recognized. Customer receivables are recorded at face amounts less an allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses as a result of customers’ inability to make required payments. We evaluate the aging of the customer receivable balances, the financial condition of our customers, historical trends and the time outstanding of specific balances to estimate the amount of customer receivables that may not be collected in the future and record the appropriate provision.
Advance payments and billings in excess of revenue are recognized and recorded as deferred revenue, the majority of which is classified as current based on the timing when we expect to recognize revenue. We include current deferred revenue as part of our accrued expenses. Deferred revenues represent contract liabilities and are recorded when customers remit contractual cash payments in advance of us satisfying performance obligations under contractual arrangements. Contract liabilities are reversed when revenue is recognized and the performance obligation is satisfied.

satisfied and revenue is recognized.
The table below represents the balances of our customer receivables and deferred revenues.
 December 31, September 30,
 2018 2018
 (in millions)
Billed receivables$112.4
 $165.3
Unbilled receivables5.0
 2.4
     Total customer receivables$117.4
 $167.7
    
    
Deferred revenue$3.9
 $3.3

December 31,September 30,
20192019
(in millions)
Billed receivables$129.2  $171.0  
Unbilled receivables5.2  4.5  
Total customer receivables$134.4  $175.5  
Deferred revenues$4.4  $4.7  
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 as related to sales of equipment or over time as related to our software hosting and leak detection monitoring services. Performance obligations are supported by customer contracts, with customers thatwhich provide a frameworkframeworks for the nature of the distinct products or services. We allocate the transaction price of each contract to the performance obligations on the basis of standalone selling price and recognize revenue when, or as, control of the performance obligation transfers to the customers.
We have elected to use the practical expedient to not adjust the transaction price forof 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.
RevenueRevenues from products and services transferred to customers at a point in time represented 98% of our revenuerevenues in the first three months of fiscal year 2019.ended December 31, 2019 and 2018. The revenuerevenues recognized at a point in time relatesrelated to the sale of the majority of our products and iswas recognized when the obligations of the terms of our contract arewere satisfied, which generally occurs upon shipment, when control of the product transfers to the customer.
RevenueRevenues from products and services transferred to customers over time represented 2% of our revenuerevenues in the first three months of fiscal year 2019.ended December 31, 2019 and 2018.
8


We offer warranties to our customers in the form of assurance-type warranties, which provide assurance that the related productproducts provided will function as intended and comply with any agreed-upon specifications. These cannot be purchased separately. There iswas no change to our warranty accounting as a result of the implementation of the new revenue standard and we will continue to use our current cost accrual method in accordance with GAAP.
Costs to Obtain or Fulfill a Contract
We incur certain incremental costs to obtain a contract, which primarily relate to incremental sales commissions. Our commissions are paid based on shipment rather than on orderorders and shipments and we reserve the right to claw back any commissions in case of product returns or lost collections. As the expected benefit associated with these incremental costs is one year or less based on the nature of the product sold and benefits received, we have applied thea practical expedient and therefore willdo not capitalize the related costs and will expense them as incurred, consistent with our currentprevious accounting treatment.
Note 4.Income Taxes Leases
On December 22, 2017, HR-1, commonly referredWe adopted the new leasing standard utilizing the modified retrospective approach on October 1, 2019. Adoption of the new standard resulted in an increase to as the Tax Cuts and Jobs Act (“Act”), was enacted, which made significant revisions to federal income tax laws, including lowering 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 taxtotal assets and liabilities due to the recording of lease right-of-use assets (“ROU”) and lease liabilities related to our operating lease portfolio.
We elected the package of three practical expedients for transition, which include the carry forward of our leases without reassessing whether any contracts are recordedleases or contain leases, lease classification and initial direct costs and applying hindsight when determining the lease term and when assessing impairment of right-of-use assets at the enacted tax ratesadoption date. This allows us to update our assessments according to new information and changes in effectfacts and circumstances that have occurred since lease inception.
Presentation of Leases
The Company leases certain office, warehouse, manufacturing, distribution, and research and development facilities and equipment under operating leases.
Our leases have remaining lease terms of 1 year to 14 years. The terms and conditions of our leases may include options to extend or terminate the lease which are considered and included in the lease term when these options are reasonably certain of exercise.
We determine if a contract is (or contains) a lease at inception by evaluating whether the contract conveys the right to control the use of an identified asset. For all classes of leased assets, we expecthave elected the practical expedient to recognizeaccount for any non-lease components in the contract together with the related tax expenses or benefits. These rates vary slightly from year to year but historically had been approximately 39%. With the legislation changing enacted rates taking placelease component in the quarter ended December 31, 2017, we remeasuredsame unit of account.
ROU assets and lease liabilities are recognized in our deferred tax itemscondensed consolidated balance sheets at an average rate of approximately 25% and recorded an income tax benefit of $42.5 million.

The Act also imposed a one-time transition taxthe commencement date based on the undistributed, non-previously taxed, post-1986 foreign “earningspresent value of remaining lease payments over the lease term. Additionally, ROU assets include any lease payments made at or before the commencement date, as well as any initial direct costs incurred, and profits” (as definedare reduced by the IRS) of certain U.S.-owned corporations. Determinationany lease incentives received. As most of our transition tax liability required usoperating leases do not provide an implicit rate, we apply our incremental borrowing rate to calculate foreign earnings and profits going back to 1992 and then to assess our historical overall foreign loss position anddetermine the applicabilitypresent value of certain foreign tax credits. Forremaining lease payments. Our incremental borrowing rate is determined based on information available at the quarter ended March 31, 2018, we recorded a provisional transaction tax of $7.5 million for the one-time deemed repatriation tax on accumulated foreign earnings of our foreign subsidiaries. Upon further analysescommencement date of the Actlease.
Operating leases are included in other noncurrent assets, other current liabilities and Noticesnoncurrent liabilities in our condensed consolidated balance sheets. Finance leases are included in property, plant and regulations issuedequipment, current portion of long-term debt and proposed bylong-term debt in our condensed consolidated balance sheets.
For all classes of leased assets, we have applied an accounting policy election to exclude short-term leases from recognition in our condensed consolidated balance sheets. A short-term lease has a lease term of 12 months or less at the U.S. Departmentcommencement date and does not include a purchase option that is reasonably certain of exercise. We recognize short-term lease expense in our condensed consolidated income statements on a straight-line basis over the Treasury and the IRS,lease term.
Our short-term lease expense for the quarter ended December 31, 2018, we finalized our calculations of the transition tax liability, which reduced our initial provision by $0.6 million,2019 and is included as a component of income tax expenseshort-term lease commitments at December 31, 2019 are immaterial.
We have certain lease contracts with terms and conditions that provide for variability in the quarter. Aspayment amount based on changes in facts or circumstances occurring after the commencement date. These variable lease payments are recognized in our condensed consolidated income statements as the obligation is incurred.
9


At December 31, 2019, we had no material, legally-binding minimum lease payments for operating leases signed but not yet commenced. We did not have material subleases, leases that imposed significant restrictions or covenants, material related party leases or sale-leaseback arrangements.
The components of lease cost for the three months ended December 31, 2019 are presented below, in millions.
Operating lease cost$1.6 
Finance lease cost0.3 
Total lease expense$1.9 
Supplemental information related to leases for the three months ended December 31, 2019 is presented below, in millions.
Cash Flow Information:
Operating cash flows from operating leases$1.4 
Financing cash flows from finance leases$0.3 
Supplemental information related to leases as of December 31, 2018, the remaining balance2019 is presented below, in millions.
Balance Sheet Information:
Right of use assetsBalance Sheet Caption
Operating leasesOther noncurrent assets$27.2 
Finance leasesPlant, property and equipment2.0 
Total right of use assets$29.2 
Lease liabilitiesBalance Sheet Caption
Operating leases - currentOther current liabilities$4.4 
Operating leases - noncurrentOther noncurrent liabilities24.5
Finance leases - currentCurrent portion of long-term debt0.9
Finance leases - noncurrentLong-term debt1.1
Total lease liabilities$30.9 
Additional supplemental information related to leases as of our transition obligationDecember 31, 2019 is $6.9 million, which wepresented below.
Lease term and discount rate:
Weighted-average remaining lease term (years):
Operating leases8.41
Finance leases2.63
Weighted-average interest rate:
Operating leases5.78 %
Finance leases5.37 %
Total lease liabilities at December 31, 2019 have elected to pay will be paid over the next eight years,scheduled maturities as provided in the Act.follows:
Operating Leases  Finance Leases  
(in millions)
2020$4.5  $0.9  
20215.1  0.9  
20224.3  0.6  
20233.9  0.2  
20243.7  —  
Thereafter16.1  —  
Total lease payments37.6  2.6  
Less: imputed interest8.7  0.6  
Present value of lease liabilities$28.9  $2.0  

10


Note 5. Income Taxes
The reconciliation between the U.S. federal statutory income tax rate and the effective tax rate is presented below.
 Three months ended
 December 31,
 2018 2017
U.S. federal statutory income tax rate21.0 % 24.5 %
Adjustments to reconcile to the effective tax rate:   
State income taxes, net of federal benefit3.3
 4.3
Valuation allowance adjustment related to stock compensation
 (5.7)
Excess tax benefits related to stock compensation1.3
 (2.8)
Domestic production activities deduction
 (1.6)
Tax credits0.4
 (0.9)
Global Intangible Low-taxed Income(0.1) 
Other(0.3) 0.5
 25.6 % 18.3 %
Walter Energy accrual(5.8) 
Remeasurement related to tax law changes2.1
 (278.4)
Effective income tax rate21.9 % (260.1)%

 Three months ended
December 31,
20192018
U.S. federal statutory income tax rate21.0 %21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit4.5  3.3  
Excess tax (benefits) related to stock compensation(1.5) 1.3  
Tax credits(1.1) 0.4  
Global Intangible Low-taxed Income0.1  (0.1) 
Foreign income taxes(0.7) —  
Valuation allowances(0.7) —  
Other1.5  (0.3) 
23.1 %25.6 %
Walter Energy Accrual(0.3) (5.8) 
Remeasurement related to tax law changes—  2.1  
Effective income tax rate22.8 %21.9 %
At December 31, 20182019 and September 30, 2018,2019, the gross liabilities for unrecognized income tax benefits were $3.4$3.5 million and $3.3 million, respectively.
Note 5.
Note 6. Borrowing Arrangements
The components of our long-term debt are presented below.
 December 31, September 30,
 2018 2018
 (in millions)
5.5% Senior Notes$450.0
 $450.0
ABL Agreement
 
Other2.0
 1.6
 452.0

451.6
Less deferred financing costs6.4
 6.6
Less current portion0.8
 0.7
Long-term debt$444.8
 $444.3

 December 31,September 30,
 20192019
 (in millions)
5.5% Senior Notes$450.0  $450.0  
ABL Agreement—  —  
Finance leases2.0  2.1  
452.0  452.1  
Less deferred financing costs5.6  5.8  
Less current portion0.9  0.9  
Long-term debt$445.5  $445.4  
5.5% Senior Unsecured Notes. On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Unsecured Notes (“Notes”), which mature in 2026 and bear interest at 5.5%. We capitalized $6.6 million of financing costs, which are being amortized over the term of the Notes using the effective interest method. Proceeds from the Notes, along with other cash, were used to repay our Term Loan. Substantially all of our U.S. Subsidiariessubsidiaries guarantee the Notes, which are subordinate to borrowings under the ABL. Based on quoted market prices, the outstanding Notes had a fair value of $436.5$473.6 million at December 31, 2018.2019.

ABL Agreement. At December 31, 2018,2019, our asset based lending agreement (“ABL Agreement”) consisted of a revolving credit facility for up to $175 million of revolving credit borrowings, swing line loans and letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150 million in certain circumstances subject to adequate borrowing base availability. We may borrow up to $25 million through swing line loans and we are permitted to issue up to $60 million of letters of credit.
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR, plus a margin ranging from 125 to 150 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 25 to 50 basis points. At December 31, 2018,2019, the applicable rate was LIBOR plus 125 basis points.
11


The ABL Agreement terminates on July 13, 2021.2021. We pay a commitment fee for any unused borrowing capacity under the ABL Agreement of 25 basis points per annum. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. receivables and inventories, certain cash and other supporting obligations. 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. Excess availability based on December 31, 20182019 data, as reduced by outstanding letters of credit and accrued fees and expenses of $16.1$14.5 million, was $93.8$122.0 million.
Note 6.
Note 7. Derivative Financial Instruments
In connection with the acquisition of Singer Valve in 2017, we loaned funds to one of our Canadian subsidiaries. Although this intercompany loan has no direct effect on our consolidated financial statements, it creates exposure to currency risk for the Canadian subsidiary. To reduce this exposure, we entered into a U.S. dollar-Canadian dollar swap contract with the Canadian subsidiary and an offsetting Canadian dollar-U.S. dollar swap with a domestic bank. We have not designated these swaps as hedges and the changes in their fair valuevalues are included in earnings, where they offset the currency gains and losses associated with the intercompany loan. The values of our currency swap contracts were an assetliabilities of $46 thousand$0.6 million and a liability of $0.9$0.3 million as of December 31, 20182019 and September 30, 2018,2019, respectively, and are included in other noncurrent assets and other noncurrent liabilities respectively, in our Condensed Consolidated Balance Sheets.
Note 7.
Note 8. Retirement Plans
The components of net periodic benefit cost for our pension plans are presented below.
 Three months ended
 December 31,
 2018 2017
 (in millions)
Service cost$0.4
 $0.5
Pension costs (benefits) other than service:   
Interest cost3.5
 3.6
Expected return on plan assets(4.1) (4.2)
Amortization of actuarial net loss0.5
 0.8
Pension costs (benefits) other than service(0.1) 0.2
Net periodic benefit cost$0.3
 $0.7

Three months ended
December 31,
 20192018
 (in millions)
Service cost$0.4  $0.4  
Pension costs (benefits) other than service:
Interest cost2.8  3.5  
Expected return on plan assets(4.2) (4.1) 
Amortization of actuarial net loss0.7  0.5  
Pension costs (benefits) other than service(0.7) (0.1) 
Net periodic (benefit) cost$(0.3) $0.3  
The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive loss.
Note 8.
Note 9. Stock-based Compensation Plans
We have granted various forms of stock-based compensation, including stock options, restricted stock units, and performance-based restricted stock units (“PRSUs”) and market-based restricted stock units (“MRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”).
A PRSU award representsconsists of a target number of units that may be paid out at the end of a multi-year award cycle consisting of a series of annual performance periods coinciding with our fiscal years. After we determineestablish the financial performance targets related to PRSUs for a given performance period, typically during the first quarter of that fiscal year, we consider that portion of a PRSU award to be granted. Thus, each award consists of a grant in the year of award and grants in the designated following years. Settlements, in our common shares, will range from zero0 to two2 times the number of PRSUs granted, depending on our financial performance against the targets.

A MRSU award represents a target number of units that may be paid out at the end of a three year award cycle based on a calculation of the Company's relative total shareholder return (“TSR”) performance as compared with a selected peer group's total shareholder return. Settlements, in our common shares, will range from 0 to 2 times the number of MRSUs granted, depending on our TSR performance versus the peer group.
12


The per-unit fair value of the MRSU award was $14.94, as determined using a Monte Carlo simulation with the following inputs:
December 31, 2019
Dividend yield 1.87 %
Risk-free rate 1.53 %
Expected term (in years)2.83
We awarded 332,875196,284 stock-settled PRSUs and 147,213 MRSUs in the quarterthree months ended December 31, 2018, which2019 that are scheduled to settle in 3 years.
We issued 181,06593,647 shares and 146,061181,065 shares of common stock during the quartersthree months ended December 31, 20182019 and 2017,2018, respectively, to settle PRSUs.PRSUs that vested during the periods.
In addition to the PRSU activity, 143,809132,303 restricted stock units vested during the quarterthree months ended December 31, 2018.2019, respectively.
We have granted cash-settled Phantom Plan instruments under the Mueller Water Products, Inc. Phantom Plan (“Phantom Plan”). At December 31, 2018,2019, the outstanding Phantom Plan instruments had a fair value of $9.10$11.98 per instrument and our liability for Phantom Plan instruments was $0.6$1.0 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, 20182019 as follows.
  Number granted Weighted average grant date fair value per instrument 
Total grant date fair value
(in millions)
Restricted stock units 147,409
 $10.53
 $1.6
Employee stock purchase plan instruments 45,464
 2.30
 0.1
Phantom Plan awards 168,380
 10.53
 1.8
PRSUs: 2019 award 110,595
 10.53
 1.2
2018 award 49,236
 10.53
 0.5
2017 award 31,229
 10.53
 0.3
      $5.5

Number grantedWeighted average grant date fair value per instrumentTotal grant date fair value
(in millions)
Restricted stock units  162,433  $11.26  $1.8  
Employee stock purchase plan instruments  39,492  1.97  0.1  
Phantom Plan awards  188,973  11.26  2.1  
PRSUs: 2020 award  58,040  11.26  0.7  
2019 award  102,203  11.26  1.2  
2018 award  44,451  11.26  0.5  
MRSUs  147,213  14.94  2.2  
$8.6  
Operating income included stock-based compensation expense of $1.7$1.9 million and $2.4$1.7 million during the three months ended December 31, 20182019 and 2017,2018, respectively. At December 31, 2018,2019, there was approximately $9.2$11.8 million of unrecognized compensation expense related to stock-based compensation arrangements and there were 279,024218,292 PRSUs that have been awarded for the 20202021 and 20212022 performance periods for which performance goals have not been set.
We excluded 165,467108,976 and 70,996165,467 of stock-based compensation instruments from the calculations of diluted earnings per share for the quarters ended December 31, 20182019 and 2017,2018, respectively, since their inclusion would have been antidilutive.
13


Note 9.
Note 10. Supplemental Balance Sheet Information
Selected supplemental balance sheet information is presented below.
 December 31,September 30,
 20192019
 (in millions)
Inventories:
Purchased components and raw material$100.2  $95.2  
Work in process44.1  43.7  
Finished goods68.6  52.5  
$212.9  $191.4  
Other current assets:
Maintenance and repair tooling$4.2  $4.2  
Income taxes3.1  4.7  
Other18.4  17.1  
$25.7  $26.0  
Property, plant and equipment:
Land$5.2  $5.2  
Buildings68.8  68.9  
Machinery and equipment368.8  362.9  
Construction in progress57.0  48.0  
499.8  485.0  
Accumulated depreciation(275.3) (267.9) 
$224.5  $217.1  
Other current liabilities:
Compensation and benefits$20.1  $28.5  
Customer rebates10.6  8.7  
Taxes other than income taxes3.1  3.3  
Warranty6.8  6.5  
Income taxes—  0.6  
Environmental1.2  1.2  
Interest1.1  7.3  
Restructuring1.6  1.7  
Walter Energy Accrual—  22.0  
Other19.4  13.2  
$63.9  $93.0  
 December 31, September 30,
 2018 2018
 (in millions)
Inventories:   
Purchased components and raw material$90.4
 $81.6
Work in process44.7
 37.8
Finished goods59.8
 37.2
 $194.9
 $156.6
    
Other current assets:   
Maintenance and repair tooling$3.7
 $3.5
Income taxes1.7
 1.6
Other15.5
 12.4
 $20.9
 $17.5
    
Property, plant and equipment:   
Land$5.4
 $5.4
Buildings58.4
 55.9
Machinery and equipment326.2
 311.4
Construction in progress32.2
 22.2
 422.2
 394.9
Accumulated depreciation(254.1) (244.0)
 $168.1
 $150.9
Other current liabilities:   
Compensation and benefits$21.4
 $31.7
Customer rebates10.8
 9.7
Taxes other than income taxes2.8
 3.3
Warranty9.1
 6.0
Income taxes4.0
 7.6
Environmental1.2
 1.2
Interest1.7
 8.0
Restructuring2.2
 0.9
Walter Energy accrual37.4
 
Other13.6
 8.0
 $104.2
 $76.4

14


Note 10.
Note 11. Segment Information
Summarized financial information for our segments is presented below.
Three months ended
December 31,
20192018
 (in millions)
Net sales, excluding intercompany:
Infrastructure$192.8  $172.0  
Technologies19.8  20.8  
$212.6  $192.8  
Operating income (loss):
Infrastructure$35.7  $30.9  
Technologies(2.0) (3.7) 
Corporate(13.4) (11.3) 
$20.3  $15.9  
Depreciation and amortization:
Infrastructure$12.0  $10.1  
Technologies2.0  2.0  
Corporate—  —  
$14.0  $12.1  
Strategic reorganization and other charges:
Infrastructure$—  $—  
Technologies—  —  
Corporate2.4  3.2  
$2.4  $3.2  
Capital expenditures:
Infrastructure$14.5  $14.8  
Technologies0.6  1.1  
Corporate0.1  —  
$15.2  $15.9  
Infrastructure disaggregated net revenues:
Central$46.5  $40.3  
Northeast41.9  37.9  
Southeast39.6  34.7  
West46.0  44.8  
United States174.0  157.7  
Canada11.6  9.9  
Other international locations7.2  4.4  
$192.8  $172.0  
Technologies disaggregated net revenues:
Central$4.7  $6.5  
Northeast6.1  3.4  
Southeast5.8  6.8  
West2.0  2.7  
United States18.6  19.4  
Canada0.6  0.2  
Other international locations0.6  1.2  
$19.8  $20.8  
 Three months ended
 December 31,
 2018 2017
 (in millions)
Net sales, excluding intercompany:   
Infrastructure$172.0
 $160.1
Technologies20.8
 18.2
 $192.8
 $178.3
Operating income (loss):   
Infrastructure$30.9
 $28.1
Technologies(3.7) (4.7)
Corporate(11.3) (2.7)
 $15.9
 $20.7
Depreciation and amortization:   
Infrastructure$10.1
 $9.1
Technologies2.0
 1.4
Corporate
 0.1
 $12.1
 $10.6
Strategic reorganization and other charges:   
Infrastructure$
 $
Technologies
 0.1
Corporate3.2
 3.8
 $3.2
 $3.9
Capital expenditures:   
Infrastructure$14.8
 $4.8
Technologies1.1
 1.5
Corporate
 0.1
 $15.9
 $6.4
Infrastructure disaggregated net revenues:   
Central$40.3
 $39.4
Northeast37.9
 37.7
Southeast34.7
 28.9
West44.8
 39.9
United States157.7
 145.9
Canada9.9
 11.0
Other international locations4.4
 3.2
 $172.0
 $160.1
Technologies disaggregated net revenues:   
Central6.5
 3.5
Northeast3.4
 4.0
Southeast6.8
 7.5
West$2.7
 $1.9
United States19.4
 16.9
Canada0.2
 0.1
Other international locations1.2
 1.2
 $20.8
 $18.2

15



Note 11.
Note 12. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is presented below.
  Pension, net of taxForeign currency translationTotal
(in millions)
Balance at September 30, 2019$(36.0) $—  $(36.0) 
Current period other comprehensive income0.5  3.5  $4.0  
Balance at December 31, 2019$(35.5) $3.5  $(32.0) 
   Pension, net of tax Foreign currency translation Total
 (in millions)
Balance at September 30, 2018$(26.5) $(6.3) $(32.8)
Current period other comprehensive income (loss)0.4
 (1.2) (0.8)
Balance at December 31, 2018$(26.1) $(7.5) $(33.6)

Note 12.
Note 13. 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. 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 material adverse effect on our business or prospects.
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 suit 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. Mueller Canada Ltd. leased the property from 1988 through 2008. We 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.
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’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, because the amount of such costs cannot be reasonably estimated at this time, no amounts hadhave been accrued for this matter at December 31, 2018.2019.

16


Walter Energy. We were a member of the Walter Energy, Inc (“Walter Energy”) federal tax consolidated group through December 14, 2006, at which time the companyCompany was spun-off from Walter Energy. Until our spin-off from Walter Energy, we joined in the filing of Walter Energy’s consolidated federal income tax return for each taxable year during which we were a member of the consolidated group. As a result, we arewere jointly and severally liable for the federal income tax liability, if any, of the consolidated group for each of those years. 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 that consolidated group.
In July 2015, Walter Energy filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the Northern District of Alabama (“Chapter 11Bankruptcy Case”). In February 2017, the Chapter 11 case was converted to a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code, pursuant to which Walter Energy is now in the process of being wound down and liquidated.
The IRS has assertedInternal Revenue Service (“IRS”) alleged that Walter Energy owesowed substantial amounts for prior taxable periods in which we were a member of the (“Walter Energy tax consolidated group (specifically, 1983-1994, 2000-2002Tax Liability”), and 2005). Onon January 11, 2016, the IRS filed a proof of claim (“IRS Claim”) in the Chapter 11Bankruptcy Case, alleging that Walter Energy owesowed 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 Claim was based on IRS estimates of Walter Energy’s tax liability for years 1983 through 1994, which Walter Energy disputed.million. In the IRSproof of claim, the IRS included an alternative calculation in an aggregate amount of $860.4 million, which it asserted wouldmillion.
On November 5, 2019, we agreed to be appropriatebound by a settlement agreement between the bankruptcy trustee in the event the alleged settlement is determined to be non-binding ($535.3 million of whichBankruptcy Case and the IRS claims is entitled to priority statusresolve the Walter Tax Liability. On November 18, 2019, the settlement agreement was approved by the U.S. Bankruptcy Court in the ChapterNorthern District of Alabama. Under the terms of the settlement agreement, we contributed approximately $22.2 million to the settlement. All appeal periods have expired, and our liabilities with respect to the Walter Tax Liability have been fully resolved.
Chapman v. Mueller Water Products, et al. In 2017, our warranty analyses identified that certain Technologies radio products produced prior to 2017 and installed in particularly harsh environments had been failing at higher than expected rates. During the quarter ended March 31, 2017, we conducted additional testing of these products and revised our estimates of warranty expenses. As a result, we recorded additional warranty expense of $9.8 million in the second quarter of 2017. During the quarter ended June 30, 2018, we completed a similar analysis and determined, based on this new information, that certain other Technologies products had been failing at higher-than-expected rates as well and that the average cost to repair or replace certain products under warranty was higher than previously estimated. As a result, in the third quarter of 2018, we recorded additional warranty expense of $14.1 million associated with such products. Related to the above warranty expenses, on April 11, Case)2019, an alleged stockholder filed a putative class action lawsuit against Mueller Water Products, Inc. and certain of our former and current officers (collectively, the “Defendants”) in the U.S. District Court for the Southern District of New York. The proposed class consists of all persons and entities that acquired our securities between May 9, 2016 and August 6, 2018 (the “Class Period”). The IRS has indicatedcomplaint alleges violations of the federal securities laws, including, among other things, that we made materially false and/or misleading statements and failed to disclose material adverse facts about our business, operations, and prospects during the proposed Class Period. The plaintiff seeks compensatory damages and attorneys’ fees and costs but does not specify the amount. Accordingly, we cannot reasonably estimate the amount of any cost or liabilities related to this matter and therefore no amounts have been accrued related to this matter as of December 31, 2019. Defendants filed their motion to dismiss on November 1, 2019 and second motion to dismiss (in response to the second amended complaint filed on December 24, 2019) on January 31, 2020. We believe the allegations are without merit and intend to vigorously defend against the claims. However, the outcome of this legal proceeding cannot be predicted with certainty.
City of Jackson, MS v. Siemens Industry, Inc., et al.On or about August 22, 2013, Mueller Systems, LLC (“Mueller Systems”) entered into an agreement with Siemens Industries, Inc (“Siemens”) to provide automated meter infrastructure (“AMI”) products and services to Siemens as part of Siemens’ project for the City of Jackson, MS (the “City”). This project included products and services for the City’s water treatment plants, sewer lines and billing system, which were provided by parties other than Mueller Systems (the “Project”).On June 11, 2018, the City filed a lawsuit against Siemens and several of its intentcontractors (excluding Mueller Systems) for multiple claims related to pursue collectionthe Project, including claims for fraud, negligence, breach of amounts includedimplied warranty of good workmanship, negligent representation, civil conspiracy, unjust enrichment, breach of contract and breach of covenant of good faith and fair dealing (“Siemens Lawsuit”). In the Siemens Lawsuit, the City alleged damages in excess of $450.0 million.On November 12, 2019, the City filed an amended complaint, adding Mueller Systems as a defendant in the proofs of claim from former membersSiemens Lawsuit.Mueller Systems is reviewing the claims to determine the portion, if any, of the Walter Energy tax consolidated group. These liabilities are potentially significantCity’s alleged damages that may be related to Mueller Systems’ AMI products and services. However, there remains a high degree of uncertainty around these claims, as well as their potential effect on Mueller Systems’ future operations, earnings, cash flows and financial condition. Accordingly, at this time, it is not practicable to estimate the magnitude and timing of any possible obligations or payments.
Mass Shooting Event at our Henry Pratt Facility in Aurora, Illinois. On February 15, 2019, we experienced a mass shooting event at our Henry Pratt facility in Aurora, Illinois, in which five employees were killed and one employee and six law enforcement officers were injured. Various workers’ compensation claims arising from the event have been made to date, and we anticipate that additional claims may be made, and that liability under such claims, if any, is not concluded favorably, couldexpected to have a material adverse effect on our business, financial condition, liquidity or results of operations.operations or cash flows. However, the possibility of other legal proceedings, and any related effects, arising from this event cannot be predicted with certainty.
After extensive work and discussions with the IRS, the Department of Justice, the Walter Energy bankruptcy trustee, and other involved parties and experts, the IRS has provided us with a $37.4 million calculation of the tax liability emanating from the activities of certain businesses of our former parent, Walter Energy (“Walter Tax Liability”; also see Item 3 - Legal Proceedings and Item 1A - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 for additional details regarding the issues associated with the Walter Tax Liability). The IRS calculation includes interest amounts calculated through January 31, 2019 and these interest amounts will continue to accrue until the matter is finalized. Accordingly, for the quarter ended December 31, 2018, we recorded a $37.4 million accrual (“Walter Energy Accrual”) related to the Walter Tax Liability. The Walter Energy Accrual consists of approximately $7.4 million in unpaid taxes and $30.0 million of related interest.
17

While our previous activities and tax positions were not the source of the Walter Tax Liability, since we were a member of the Walter Energy consolidated tax group in certain historic periods, under federal law, each member of a consolidated group for U.S. federal income tax purposes can be severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it was a member of the consolidated tax group. Thus, we are recording the Walter Energy Accrual due to the operation of several liability under federal law. We are continuing to work with the other parties involved in this matter in an effort to negotiate a settlement with respect to the Walter Tax Liability, but there can be no assurance that we will be able to reach a resolution with the parties involved in this matter.

Indemnifications. 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 reservesaccruals as necessary. Critical factors in our reserve 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.
In 2017 our warranty analyses identified certain Technologies radio products produced prior to 2017 and installed in particularly harsh environments had been failing at higher than expected rates. During the quarter ended March 31, 2017 we conducted additional testing of these products and revised our estimates of warranty expenses. As a result, we recorded an additional warranty expense of $9.8 million in the second quarter of 2017.
During the quarter ended June 30, 2018, we completed a similar analysis and determined, based on this new information, that certain other Technologies products had been failing at higher-than-expected rates as well, and that the average cost to repair or replace certain products under warranty was higher than previously estimated. As a result, in the third quarter of 2018, we recorded an additional warranty expense of $14.1 million associated with such products.
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 business or prospects.
Note 13.
Note 14. Subsequent Events
Subsequent Events
On January 22, 2019,30, 2020, our board of directors declared a dividend of $0.05$0.0525 per share on our common stock, payable on or about February 20, 20192020 to stockholders of record at the close of business on February 8, 201910, 2020.
18

.

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. All statements that address activities, events or developments that we intend, expect, plan, project, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements are based on certain assumptions and assessments made by us in light of our 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, national or global political, economic, business, competitive, market and regulatory conditions and the other factors described under the section entitled “RISK FACTORS” in Item 1A. of our Annual Report on Form 10-K for the year ended September 30, 2018.2019 and in this Quarterly Report on Form 10-Q. Undue reliance should not be placed on any forward-looking statements. The Company does not have any intention or obligation to update forward-looking statements, except as required by law.
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, Inc (“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 Mueller Water Products, Inc. (“Mueller” or 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 Mueller, completing our spin-off. We subsequently sold our U.S. Pipe and Anvil businesses in 2012 and 2017, respectively.
Business
We estimate approximately 60%60-65% of our 20182019 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 30%25-30% were related to residential construction activity and less than 10% were related to natural gas utilities.
We expect 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 2019.the low single digits during 2020. In January 2019,2020, Blue Chip Economic Indicators forecasted a 1%4% increase in housing starts for calendar 20192020 compared to the prior year.
Infrastructure
Infrastructure announcedOn December 3, 2018, we completed our acquisition of Krausz Development Ltd. and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for $140.7 million, net of cash acquired, including the assumption and simultaneous repayment of certain debt of $13.2 million. We include financial results of Krausz in our consolidated financial statements on a one-month lag. For the quarter ended December 31, 2018, the consolidated statements of operations and of cash flows exclude the results of Krausz’s operations.
On October 3, 2019, we acquired the noncontrolling interest of our previously existing joint venture operation for a negotiated purchase price increases on valves, hydrants and gas products effective in January and February 2019 for its Canadian and U.S. markets. respectively. We believe that some customers may accelerate orders prior to the effective date of the price increases.$5.4 million.
Technologies
The municipal market is the key end market for Technologies. The businesses in Technologies are project-oriented and depend on customer adoption of their technology-based products and services. Mueller Systems is benefiting from its growth strategy focused on the AMI segment of the market.
19


Results of Operations
Three Months Ended December 31, 20182019 Compared to Three Months Ended December 31, 20172018
Three months ended December 31, 2018 Three months ended December 31, 2019
Infrastructure Technologies Corporate   Total     InfrastructureTechnologiesCorporate  Total    
(in millions) (in millions)
Net sales$172.0
 $20.8
 $
 $192.8
Net sales$192.8  $19.8  $—  $212.6  
Gross profit$56.8
 $3.3
 $
 $60.1
Gross profit$68.2  $4.4  $—  $72.6  
Operating expenses:       Operating expenses:
Selling, general and administrative25.9
 7.0
 8.1
 41.0
Selling, general and administrative32.5  6.4  11.0  49.9  
Strategic reorganization and other charges
 
 3.2
 3.2
Strategic reorganization and other charges—  —  2.4  2.4  
25.9
 7.0
 11.3
 44.2
32.5  6.4  13.4  52.3  
Operating income (loss)$30.9
 $(3.7) $(11.3) 15.9
Operating income (loss)$35.7  $(2.0) $(13.4) 20.3  
Non-operating expenses:       Non-operating expenses:
Pension costs other than service      (0.1)
Pension costs (benefits) other than servicePension costs (benefits) other than service(0.7) 
Interest expense, net      5.5
Interest expense, net7.4  
Walter Energy accrual      37.4
Loss before income taxes      (26.9)
Walter Energy AccrualWalter Energy Accrual0.2  
Income before income taxesIncome before income taxes13.4  
Income tax expense      (5.9)Income tax expense3.1  
Net loss      $(21.0)
Net incomeNet income$10.3  
       
Three months ended December 31, 2017 Three months ended December 31, 2018
Infrastructure Technologies Corporate Total InfrastructureTechnologiesCorporateTotal
(in millions) (in millions)
Net sales$160.1
 $18.2
 $
 $178.3
Net sales$172.0  $20.8  $—  $192.8  
Gross profit$52.5
 $2.9
 $
 $55.4
Gross profit$56.8  $3.3  $—  $60.1  
Operating expenses:       Operating expenses:
Selling, general and administrative24.4
 7.5
 7.9
 39.8
Selling, general and administrative25.9  7.0  8.1  41.0  
Gain on sale of idle property
 
 (9.0) (9.0)
Strategic reorganization and other charges
 0.1
 3.8
 3.9
Strategic reorganization and other charges—  —  3.2  3.2  
24.4
 7.6
 2.7
 34.7
25.9  7.0  11.3  44.2  
Operating income (loss)$28.1
 $(4.7) $(2.7) 20.7
Operating income (loss)$30.9  $(3.7) $(11.3) 15.9  
Pension costs other than service      0.2
Pension costs (benefits) other than servicePension costs (benefits) other than service(0.1) 
Interest expense, net      5.2
Interest expense, net5.5  
Income before income taxes      15.3
Income tax expense      (39.8)
Net income      $55.1
Walter Energy AccrualWalter Energy Accrual37.4  
Loss before income taxesLoss before income taxes(26.9) 
Income tax benefitIncome tax benefit(5.9) 
Net lossNet loss$(21.0) 
Consolidated Analysis
Net sales for the quarter ended December 31, 20182019 increased 8.1%10.3% or $14.5$19.8 million to $212.6 million from $192.8 million from $178.3 million driven primarily by higher volumes at both Infrastructure and Technologies,due to Krausz sales, as well as higher pricing and shipment volumes at Infrastructure.
Gross profit for the quarter ended December 31, 20182019 increased $4.7$12.5 million to $60.1$72.6 million from $55.4$60.1 million in the prior year period, primarily due to increased net saleshigher pricing, product mix and improved manufacturing performance,the addition of Krausz, which werewas partially offset by higher materialcosts associated with tariffs and freight costs and the effect of tariffs. Material costs increased nearly 5% percent year over year in the quarter.inflation. Gross margin was 31.2%34.1% for the quarter ended December 31, 20182019 compared to 31.1%31.2% in the prior year period.
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Selling, general and administrative expenses (“SG&A”) for the quarter ended December 31, 20182019 increased to $41.0$49.9 million from $39.8$41.0 million in the prior year period due primarily to higher volumethe inclusion of Krausz’s SG&A expenses as well as IT-related activities, personnel-related costs and personnel-related investments, including in engineering and research and development.professional fees. SG&A as a percentage of net sales declined towas 23.5% and 21.3% in the quarterquarters ended December 31, 2019 and 2018, from 22.3% inrespectively. Krausz related expenses accounted for approximately half of the prior year period.increase.

Interest expense, net increased $0.3Strategic reorganization and other charges were $2.4 million in the quarter ended December 31, 20182019 and were $3.2 million in the prior year period.
Interest expense, net increased $1.9 million in the quarter ended December 31, 2019 compared to the prior year period.period primarily due to a non-cash adjustment to capitalized interest in the quarter and decreased interest income. The components of interest expense, net are provided below.
Three months ended
December 31,
20192018
 (in millions)
Notes$6.2  $6.2  
Deferred financing costs amortization0.30.3
ABL Agreement0.10.1
Capitalized interest, including adjustment1.3
Other interest expense0.3
7.9  6.9  
Interest income(0.5) (1.4) 
Interest expense, net$7.4  $5.5  
 Three months ended
 December 31,
 2018 2017
 (in millions)
Notes$6.2
 $
Term Loan
 4.8
Interest rate swap contracts
 0.4
Deferred financing costs amortization0.3
 0.5
ABL Agreement0.1
 0.2
Other interest expense0.3
 0.1
 6.9
 6.0
Interest income(1.4) (0.8)
 $5.5
 $5.2
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% from 35%, 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 were subject to a blended federal statutory tax rate of 24.5% throughout fiscal 2018 and are subject to a 21% rate in fiscal 2019.
For the quarter ended December 31, 2018, we reported a net income tax benefit of $5.9 million, which was affected by a $7.7 million benefit related to the Walter Energy Accrual as well as a benefit of $0.6 million related to the finalization of the impact of the one-time transition tax. The reconciliation between the U.S. federal statutory income tax rate and the effective tax rate is presented below.
Three months ended Three months ended
December 31,December 31,
2018 201720192018
U.S. federal statutory income tax rate21.0 % 24.5 %U.S. federal statutory income tax rate21.0 %21.0 %
Adjustments to reconcile to the effective tax rate:   Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit3.3
 4.3
State income taxes, net of federal benefit4.5  3.3  
Valuation allowance adjustment related to stock compensation
 (5.7)
Excess tax benefits related to stock compensation1.3
 (2.8)
Domestic production activities deduction
 (1.6)
Excess tax (benefits) related to stock compensationExcess tax (benefits) related to stock compensation(1.5) 1.3  
Tax credits0.4
 (0.9)Tax credits(1.1) 0.4  
Global Intangible Low-taxed Income(0.1) 
Global Intangible Low-taxed Income0.1  (0.1) 
Foreign income taxesForeign income taxes(0.7) —  
Valuation allowanceValuation allowance(0.7) —  
Other(0.3) 0.5
Other1.5  (0.3) 
25.6 % 18.3 %23.1 %25.6 %
Walter Energy accrual(5.8) 
Walter Energy accrual(0.3) (5.8) 
Remeasurement related to tax law changes2.1
 (278.4)
Transition taxTransition tax—  2.1  
Effective income tax rate21.9 % (260.1)%Effective income tax rate22.8 %21.9 %
Segment Analysis
Infrastructure
Net sales for the quarter ended December 31, 20182019 increased 7.4%12.1% to $192.8 million compared to $172.0 million comparedin the prior year period due to $160.1the inclusion of Krausz net sales as well as higher pricing and increased shipment volumes.
Gross profit for the quarter ended December 31, 2019 increased to $68.2 million from $56.8 million in the prior year period primarily due to higher shipment volumesthe inclusion of Krausz gross profit and higher sales pricing.
Gross profitmargin was 35.4% for the quarter ended December 31, 2018 increased to $56.8 million from $52.5 million in the prior year period due to increased net sales and improved manufacturing performance, partially offset by higher material and freight costs and the effect of tariffs. Gross margin improved to 33.0% for the quarter ended December 31, 20182019 compared to 32.8%33.0% in the prior year period.

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SG&A for the quarter ended December 31, 20182019 increased to $25.9$32.5 million from $24.4$25.9 million in the prior year period. This increase was primarily due to higher volume-related personnelthe inclusion of Krausz’s SG&A expenses. SG&A was 15.1% and 15.2%as a percentage of net sales was 16.9% and 15.1% for the quarters ended December 31, 20182019 and 2017,2018, respectively.
Technologies
Net sales in the quarter ended December 31, 2018 increased2019 decreased to $20.8$19.8 million from $18.2$20.8 million in the prior year period, primarily driven by lower shipment volumes at Metrology, which were partially offset by higher volumes at Mueller Systems.Echologics.
Gross profit in the quarter ended December 31, 20182019 increased to $3.3$4.4 million compared to $2.9$3.3 million in the prior year period as a result of increased net sales. Gross margin was 15.9% in both the quarter ended December 31, 2018 and in the prior year period.
SG&A decreased to $7.0$6.4 million in the quarter ended December 31, 20182019 compared to $7.5$7.0 million in the prior year period due to reduced marketing and personnel-related expenses. SG&A decreased to 33.7%as a percentage of net sales was 32.3% and 33.7% for the quarterquarters ended December 31, 2019 and 2018, from 41.2% of net sales in the prior year period.respectively.
Overall our operating performance at Technologies improved $1.0Corporate
SG&A was $11.0 million in the quarter ended December 31, 2018.
Corporate
SG&A2019 and was $8.1 million in the quarter ended December 31, 2018 compared to $7.9 million in the prior year period. This increase was primarily due to IT-related activities, personnel-related costs and professional fees.
Liquidity and Capital Resources
We had cash and cash equivalents of $198.8$136.8 million at December 31, 20182019 and $93.8$122.0 million of additional borrowing capacity under our ABL Agreement based on December 31, 2018 data, which, along with cash generated by operations, would be our source of incremental liquidity.2019 data. Undistributed earnings from our subsidiaries in Canada, China, and ChinaIsrael are considered to be permanently invested outside the United States. At December 31, 2018,2019, cash and cash equivalents included $11.6$12.1 million, $4.3 million and $6.7$17.5 million in Canada, China and China,Israel, respectively.
We expect the recently enacted tax law changes to benefit our liquidity through reduction 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, we will pay the transition tax over eight years, and we do not expect any payments to have a material liquidity impact in any particular year.
We did not repurchase shares of our common stock during the quarter ended December 31, 2018,2019 and have $160$150 million remaining on our share repurchase authorization.
The ABL Agreement and 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 from operating activities are categorized below.
Three months endedThree months ended
December 31,December 31,
2018 201720192018
(in millions) (in millions)
Collections from customers$242.3
 $216.1
Collections from customers$253.6  $242.3  
Disbursements, other than interest and income taxes(220.4) (211.3)Disbursements, other than interest and income taxes(231.4) (220.4) 
Walter Tax accrual paymentWalter Tax accrual payment(22.2) —  
Interest payments, net(11.7) (4.4)Interest payments, net(12.0) (11.7) 
Income tax refunds (payments), net(0.3) 0.1
Cash provided by (used in) operating activities$9.9
 $0.5
Income tax payments, netIncome tax payments, net(0.4) (0.3) 
Cash (used in) provided by operating activitiesCash (used in) provided by operating activities$(12.4) $9.9  
Collections from customers were higher during the three months ended December 31, 20182019 compared to the prior year period primarily due to the timingincreased sales as well as collections of cash receipts and net sales growth.acquired Krausz receivables.
Increased disbursements, other than interest and income taxes, during the three months ended December 31, 20182019 reflect increased purchasing activity andexpenses, differences in the timing of expenditures.

expenditures and payments of acquired Krausz payables. Additionally we disbursed $22.2 million related to the final settlement of Walter Tax.
Capital expenditures were $15.9$15.2 million in the three months ended December 31, 20182019 compared to $6.4$15.9 million in the prior year period. These expenditures were primarily investment in announced large capital projects. We estimate 20192020 capital expenditures will be between $58 million$80 and $62 million, although we are also evaluating possibilities for additional capital expenditures in 2019.$90 million.
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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, 2019.2020. However, our ability to make these payments will depend partly upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.
ABL Agreement
At December 31, 2018,2019, the ABL Agreement consisted of a revolving credit facility for up to $175 million of revolving credit borrowings, swing line loans and letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150 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 a margin ranging from 125 to 150 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 25 to 50 basis points. At December 31, 2018,2019, the applicable LIBOR-based margin was 125 basis points.
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, 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.
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 under the ABL Agreement.
5.5% Senior Unsecured Notes
On June 12, 2018, we privately issued $450.0 million of Senior Unsecured Notes (“Notes”), which mature in June 2026 and bear interest at 5.5%, paid semi-annually. Substantially all of our U.S. subsidiaries guarantee the Notes, which are subordinate to borrowings under the ABL. Based on quoted market prices, the outstanding Notes had a fair value of $436.5$473.6 million at December 31, 2018.2019.
An indenture securing the Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends and make investments. We believe we were compliant with these covenants at December 31, 20182019 and expect to remain in compliance through December 31, 2019.2020.
We may redeem some or all of the Notes at any time or from time to time prior to June 15, 2021 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or after June 15, 2021 at specified redemption prices (as set forth in the Indenture). Additionally, we may redeem up to 40% of the aggregate principal amount of the Notes at any time or from time to time prior to June 15, 2021 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the Indenture). Upon a change in control (as defined in the Indenture), we will be required to offer to purchase the Notes at a price equal to 101% of the outstanding principal amount of the Notes.

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Our corporate credit rating and the credit rating for our debt are presented below.
 Moody’s  Standard & Poor’s
December 31,September 30,December 31,September 30,
2019201920192019
Corporate credit ratingBa2Ba2BBBB
ABL AgreementNot ratedNot ratedNot ratedNot rated
NotesBa3Ba3BBBB
OutlookStableStableStableStable
 Moody’s   Standard & Poor’s
 December 31, September 30, December 31, September 30,
 2018 2018 2018 2018
Corporate credit ratingBa2 Ba2 BB BB
ABL AgreementNot rated Not rated Not rated Not rated
NotesBa3 Ba3 BB BB
OutlookStable Stable Stable Stable

Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance or “special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, at December 31, 20182019 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases. Therefore, we were not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.
We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At December 31, 2018,2019, we had $15.9$13.8 million of letters of credit and $30.0$22.7 million of surety bonds outstanding.
Seasonality
Our business is dependent upon the construction industry, which is seasonal due to the impact of cold weather conditions. Net sales and operating income have historically been lowest in the quarterly periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.
Item 4.CONTROLS AND PROCEDURES
Item 4. CONTROLS AND PROCEDURES
During the quarter ended December 31, 2018,2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.
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PART II OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
Item 1. LEGAL PROCEEDINGS
Refer to the information provided in Note 12.13. to the Notes to the Condensed Consolidated Financial Statements presented in Item 11. of Part I of this report.
Item 1A.RISK FACTORS
Item 1A.  RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in PART I, “Item 1A. RISK FACTORS” in our Annual Report , each of which could materially affect our business, financial condition or operating results. These described risks are not the only risks facing us. Additional risks and uncertainties not known to us or that we deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
Our operations and results may be negatively impacted by the coronavirus outbreak
We operate two facilities in China – one in Jingmen and the other in Taicang. Our Jingmen facility is located in the Hubei Province, where the coronavirus is believed to have originated. The World Health Organization has declared the coronavirus outbreak a “Public Health Emergency of International Concern” and the U.S. Department of State has instructed travelers to avoid all nonessential travel to China. As a result of these measures, and after consultation with governmental and health authorities, we have temporarily closed our facilities in Jingmen and Taicang. Although there are still too many variables and uncertainties regarding the coronavirus outbreak to fully assess the potential impact on our business, we believe that our existing inventory levels and other operations will be able to meet customer commitments and demand for the next few months. However, a prolonged shutdown of our Chinese operations, or other facilities in China that are engaged directly or indirectly in our supply chain, could have a negative effect on our results and supply chain, and broader global effects of potentially reduced consumer confidence and other macro issues could also have a negative effect on our overall business.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended December 31, 2018,2019, shares were surrendered to us to pay the tax withholding obligations of participants in connection with the lapsing of restrictions on restricted stock units as follows.follows:
Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans or programs Maximum dollar value of shares that may yet be purchased under the plans or programs
October 1-31, 2018 
 $
 n/a n/a
November 1-30, 2018 30,731
 10.48
 n/a n/a
December 1-31, 2018 92,168
 10.53
 n/a n/a
Total 122,899
 $10.52
 n/a n/a
PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsMaximum dollar value of shares that may yet be purchased under the plans or programs (in millions)
October 1-31, 2019—  $—  —  —  
November 1-30, 201931,656  11.25  —  —  
December 1-31, 201932,037  11.26  —  —  
Total63,693  $—  —  —  
We did not repurchase shares of our common stock during the quarter ended December 31, 20182019 under our share repurchase authorization, and we have $160$150 million remaining under this authorization.
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Item 6. EXHIBITS
Item 6.EXHIBITS
Exhibit No.Document
2.1*10.1
31.1*10.20.4
31.1*
31.2*
32.1*
32.2*
101*
*  Filed with this quarterly report
**     Management compensatory plan, contract, or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MUELLER WATER PRODUCTS, INC.
Date:February 6, 20195, 2020By:/s/ Michael S. Nancarrow
Michael S. Nancarrow
Chief Accounting Officer

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