Washington, D.C. 20549
MUELLER WATER PRODUCTS, INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act:
Item 1. FINANCIAL STATEMENTS
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
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 acquired a 49% ownership interest in an industrial valve joint venture for $1.7 million. Due toAs a result of substantive control features in the operating agreement, all of the joint venture’s assets, liabilities and results of operations were included in our consolidated financial statements. We included an adjustment for the income attributable to the noncontrolling interest in selling, general and administrative expenses. Infrastructure acquired the remaining 51% ownership interest in the business in October 2019.
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make certain estimates and assumptions that affect the reported amounts ofin recording assets, liabilities, sales and expenses and the disclosure of contingent assets and liabilities for the reporting periods.liabilities. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2019.2020. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. The condensed consolidated balance sheet data at September 30, 20192020 was derived from audited financial statements, but it does not include all disclosures required by GAAP.
In preparing these financial statements in conformity with GAAP, we have considered and, where appropriate, reflectedincluded the effects of the COVID-19 pandemic on our operations. As of June 30, 2020, such effects did not result in the impairment of the carrying value of our assets. The pandemic continues to provide significant challenges to the U.S. and global economies.
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 have recognized the assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of the purchase priceconsideration paid 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 of the fair value of acquired intangible assets. We have not yet received a final valuation report for acquired intangible assets and we are also still gathering information about income taxes, deferred taxes and current assets and liabilities. The final accounting for the business combination may differ materially from that presented in these unaudited consolidated statements.
We recognize revenue when control of promised products or services is transferred to our customers, in amounts that reflect the consideration to which we expect to be entitled in exchange for those products or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer.
We disaggregate our revenues from contracts with customers by reportable segment (see Note 11.10.) and further by geographical region as we believe this 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.
The timing of revenue recognition, billings and cash collections results in customer receivables, customer advance payments and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers as well as unbilled amounts (contract assets).amounts. Amounts are billed in accordance with contractual terms and unbilled amounts arise when the timing of billing differs from the timing of revenue recognized.
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 which provide frameworks 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.customer.
We offer warranties to our customers in the form of assurance-type warranties, which provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. TheseSuch warranties generally cannot be purchased separately. There was no change toWe accrue our expected warranty accounting as a resultobligations at the time of the implementation of the new revenue standard and we continue to use our current cost accrual method.sale.
We incur certain incremental costs to obtain a contract, which primarily relate to incremental sales commissions. Our commissions are paid based on either orders andor shipments, and we reserve the right to claw back any commissionscommission in casethe event of product returns or lost collections. AsSince the expected benefit associated with these incremental costs is one year or less based on the nature of the productproducts sold and benefits received,services provided, we have applied a practical expedient and therefore do not capitalize the relatedexpense such costs and expense them as incurred, consistent with our previous accounting treatment.incurred.
Note 4. Leases
The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive loss.
During the quarter ended March 31, 2019, we settled our obligation to our Canadian pension plan participants through a combination of lump sum payments and purchases of annuities. We made a contribution to the plans of $1.0 million, which was included in pension costs other than service, to fund these settlements.12
Also during the quarter ended March 31, 2019, we recorded an estimated settlement liability for our exiting a multi-employer pension plan at one of our manufacturing locations, which resulted in an expense of $1.1 million that we included in strategic reorganization and other charges. We subsequently paid the liability in May 2019.
Note 9.8. Stock-based Compensation Plans
We have grantedgrant various forms of stock-based compensation, including stock options,market-based restricted stock units (“MRSUs”), restricted stock units, stock options and 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”)., Phantom Plan instruments under our Mueller Water Products, Inc. 2012 Phantom Plan, and Employee stock purchase plan instruments under our 2006 Employee Stock Purchase Plan. Grants during the nine months ended June 30, 2021 are as follows:
| | | | | | | | | | | | | | | | | |
| Units granted | | Weighted average grant date fair value per instrument | | Total grant date fair value (in millions) |
Quarter ended December 31, 2020 | | | | | |
MRSUs | 234,199 | | | $ | 15.39 | | | $ | 3.6 | |
Phantom Plan instruments | 180,987 | | | 11.86 | | | 2.1 | |
Restricted stock units | 129,081 | | | 11.86 | | | 1.5 | |
Non-qualified stock options | 423,405 | | | 3.05 | | | 1.3 | |
PRSUs: 2020 award | 60,019 | | | 11.86 | | | 0.7 | |
2019 award | 84,483 | | | 11.86 | | | 1.0 | |
Employee stock purchase plan instruments | 40,286 | | | 1.92 | | | 0.1 | |
| | | | | |
Quarter ended March 31, 2021 | | | | | |
MRSUs | 4,187 | | | $ | 14.26 | | | $ | 0.1 | |
Phantom Plan instruments | 1,254 | | | 11.94 | | | 0 | |
Restricted stock units | 82,565 | | | 12.81 | | | 1.1 | |
Non-qualified stock options | 8,115 | | | 3.08 | | | 0 | |
Employee stock purchase plan instruments | 35,325 | | | 2.24 | | | 0.1 | |
| | | | | |
Quarter ended June 30, 2021 | | | | | |
Phantom Plan instruments | 3,567 | | | $ | 14.29 | | | $ | 0.1 | |
Restricted stock units | 7,127 | | | 13.32 | | | 0.1 | |
Employee stock purchase plan instruments | 32,916 | | | 2.52 | | | 0.1 | |
| | | | | $ | 11.9 | |
An 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 our relative total shareholder return (“TSR”) performance as compared with a selected peer group's TSR. Settlements, in our common shares, will range from 0 to 2 times the number of MRSUs granted, depending on our TSR performance relative to that of the peer group.
Compensation expense attributable to MRSUs is based on the fair value of the awards on their respective grant dates, as determined using a Monte Carlo model. The assumptions used to determine the grant date fair value are indicated below. | | | | | | | | | | | |
| January 27, 2021 | | December 2, 2020 |
Variables used in determining grant date fair value: | | | |
Dividend yield | 1.84 | % | | 1.77 | % |
Risk-free rate | 0.16 | % | | 0.21 | % |
Expected term (in years) | 2.67 | | 2.83 |
The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the units are expected to be outstanding.
At June 30, 2021, the outstanding Phantom Plan instruments had a fair value of $14.42 per instrument and our liability for Phantom Plan instruments was $2.7 million and is included within Other current liabilities and Other noncurrent liabilities.
Stock options generally vest on each anniversary date of the original grant ratably over three years. Compensation expense attributed to stock options is based on the fair value of the awards on their respective grant dates, as determined using a Black-Scholes model. The assumptions used to determine the grant date fair value are indicated below. | | | | | | | | | | | |
| January 27, 2021 | | December 2, 2020 |
Variables used in determining grant date fair value: | | | |
Dividend yield | 2.01 | % | | 2.01 | % |
Risk-free rate | 0.66 | % | | 0.66 | % |
Expected term (in years) | 6.00 | | 6.00 |
The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the options are expected to be outstanding.
A PRSU award consists of a number of units that may be paid out at the end of a multi-yearthree-year award cycle consisting of a series of annual performance periods coinciding with our fiscal years. After we establish 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 designatedtwo following years. Settlements, in our common shares, will range from 0 to 2 times the number of PRSUs granted, depending on our financial performance againstrelative to the targets.
A MRSU award represents a target numberWe did not issue any shares of units that may be paid out atcommon stock during 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 TSR. 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.
The table below provides information regarding MRSU awards, which were valued using Monte Carlo simulations on the dates the units were granted.
| | | | | | | | | | | | | | | | | |
| December 3, 2019 | | January 28, 2020 | | February 24, 2020 |
Fair Value at grant date | $ | 14.94 | | | $ | 16.76 | | | $ | 18.17 | |
Units granted | 147,213 | | | 2,763 | | | 7,498 | |
Variables used in determining grant date fair value: | | | | | |
Dividend yield | 1.87 | % | | 1.76 | % | | 1.73 | % |
Risk-free rate | 1.53 | % | | 1.44 | % | | 1.23 | % |
Expected term (in years) | 2.83 | | 2.67 | | 2.60 |
We awarded 209,966 stock-settled PRSUs and 157,474 MRSUs in the ninethree months ended June 30, 2020 that are scheduled to settle in three years.
2021. We issued 93,647 shares and 181,065103,058 shares of common stock during the nine months ended June 30, 2020 and 2019, respectively,2021 to settle PRSUs that vested during those periods.
In addition to the PRSU activity,period. Additionally, we issued 1,6182,324 and 248,612221,873 shares of common stock forto settle restricted stock units vested and issued 0 and 108,950 shares of common stock to settle stock options exercised during the three and nine months ended June 30, 2020,2021, respectively.
We have granted cash-settled Phantom Plan instruments under the Mueller Water Products, Inc. Phantom Plan (“Phantom Plan”). At June 30, 2020, the outstanding Phantom Plan instruments had a fair value of $9.43 per instrument and our liability for Phantom Plan instruments was $1.6 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 nine months ended June 30, 2020 as follows.
| | | | | | | | | | | | | | | | | | | | |
| | Number granted | | Weighted average grant date fair value per instrument | | Total grant date fair value (in millions) |
Quarter ended December 31, 2019 | | | | | | |
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 | | 65,428 | | | 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 | |
| | | | | | |
Quarter ended March 31, 2020 | | | | | | |
Restricted stock units | | 118,684 | | | 12.14 | | | 1.4 | |
Employee stock purchase plan instruments | | 53,876 | | | 2.09 | | | 0.1 | |
PRSUs: 2020 award | | 13,682 | | | 12.09 | | | 0.2 | |
MRSUs | | 10,261 | | | 17.79 | | | 0.2 | |
| | | | | | |
Quarter ended June 30, 2020: | | | | | | |
Restricted stock units | | 2,118 | | | 9.20 | | | — | |
Employee stock purchase plan instruments | | 48,282 | | | 3.64 | | | 0.2 | |
| | | | | | $ | 10.7 | |
Operating income included stock-based compensation expense of $1.8$3.4 million and $1.4$1.8 million during the three months ended June 30, 20202021 and 2019,2020, respectively, and $5.0$8.4 million and $4.2$5.0 million during the nine months ended June 30, 20202021 and 2019,2020, respectively. At June 30, 2020,2021, there was approximately $8.9$11.5 million of unrecognized compensation expense related to stock-based compensation arrangements and there were 218,966199,994 PRSUs that have been awarded for the 2021 and 2022 performance periods for which performance goals have not been set.goal achievement cannot yet be determined.
We excluded 474,423131,178 and 202,245 of474,423 stock-based compensation instruments from the calculations of diluted earnings per share for the quartersthree months ended June 30, 20202021 and 2019,2020, respectively, and 274,009566,666 and 167,775274,009 for the nine months ended June 30, 20202021 and 2019,2020, respectively, since their inclusion would have been antidilutive.
Note 10.9. Supplemental Balance Sheet Information
Selected supplemental asset information is presented below.
| | | | | | | | | | | |
| June 30, | | September 30, |
| 2020 | | 2019 |
| | | |
| (in millions) | | |
Inventories: | | | |
Purchased components and raw material | $ | 97.8 | | | $ | 95.2 | |
Work in process | 32.9 | | | 43.7 | |
Finished goods | 49.6 | | | 52.5 | |
| $ | 180.3 | | | $ | 191.4 | |
| | | |
Other current assets: | | | |
Prepaid expenses | $ | 11.1 | | | $ | 9.6 | |
Non-trade receivables | 12.2 | | | 6.3 | |
Maintenance and repair supplies and tooling | 3.9 | | | 4.2 | |
Income taxes | 0.2 | | | 4.7 | |
Other | 0.7 | | | 1.2 | |
| $ | 28.1 | | | $ | 26.0 | |
| | | |
Property, plant and equipment: | | | |
Land | $ | 6.5 | | | $ | 5.2 | |
Buildings | 77.0 | | | 68.9 | |
Machinery and equipment | 396.2 | | | 362.9 | |
Construction in progress | 54.5 | | | 48.0 | |
| 534.2 | | | 485.0 | |
Accumulated depreciation | (289.3) | | | (267.9) | |
| $ | 244.9 | | | $ | 217.1 | |
| | | |
Other noncurrent assets: | | | |
Operating lease right of use asset | $ | 26.3 | | | $ | — | |
Maintenance and repair supplies and tooling | 17.5 | | | 16.4 | |
Workers compensation reimbursement receivable | 3.1 | | | 3.1 | |
Note receivable | 1.8 | | | 1.8 | |
Other | 2.5 | | | 2.6 | |
| $ | 51.2 | | | $ | 23.9 | |
| | | | | | | | | | | |
| June 30, | | September 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
Inventories, net: | | | |
Purchased components and raw material | $ | 102.2 | | | $ | 87.3 | |
Work in process | 31.2 | | | 32.4 | |
Finished goods | 43.5 | | | 42.8 | |
Total inventories, net | $ | 176.9 | | | $ | 162.5 | |
| | | |
Other current assets: | | | |
Prepaid expenses | $ | 10.7 | | | $ | 10.9 | |
Non-trade receivables | 7.1 | | | 8.5 | |
Workers’ compensation reimbursement receivable | 1.1 | | | 0 | |
Maintenance and repair supplies and tooling | 2.7 | | | 3.7 | |
Income taxes | 0.6 | | | 5.5 | |
Other current assets | 4.0 | | | 0.4 | |
Total other current assets | $ | 26.2 | | | $ | 29.0 | |
| | | |
Property, plant and equipment, net: | | | |
Land | $ | 6.1 | | | $ | 6.2 | |
Buildings | 81.6 | | | 80.4 | |
Machinery and equipment | 428.4 | | | 406.3 | |
Construction in progress | 76.0 | | | 57.4 | |
Total property, plant and equipment | 592.1 | | | 550.3 | |
Accumulated depreciation | (316.8) | | | (296.5) | |
Total property, plant and equipment, net | $ | 275.3 | | | $ | 253.8 | |
| | | |
Other noncurrent assets: | | | |
Operating lease right-of-use assets | $ | 24.0 | | | $ | 25.6 | |
Maintenance and repair supplies and tooling | 19.1 | | | 17.5 | |
Workers’ compensation reimbursement receivable | 3.2 | | | 0 | |
Pension assets | 4.2 | | | 0.9 | |
Note receivable | 1.8 | | | 1.8 | |
Deferred financing fees | 1.4 | | | 1.3 | |
Other noncurrent assets | 5.2 | | | 4.2 | |
Total other noncurrent assets | $ | 58.9 | | | $ | 51.3 | |
Selected supplemental liability information is presented below.
| | | | | | | | | | | |
| June 30, | | September 30, |
| 2020 | | 2019 |
| | | |
| (in millions) | | |
Other current liabilities: | | | |
Compensation and benefits | $ | 29.1 | | | $ | 28.5 | |
Customer rebates | 8.5 | | | 8.7 | |
Taxes other than income taxes | 3.6 | | | 3.3 | |
Warranty | 6.7 | | | 6.5 | |
Income taxes | 4.4 | | | 0.6 | |
Environmental | 1.2 | | | 1.2 | |
Interest | 1.1 | | | 7.3 | |
Restructuring | 1.9 | | | 1.7 | |
Walter Energy Accrual | — | | | 22.0 | |
Operating lease liabilities | 4.2 | | | — | |
Deferred revenues | 5.4 | | | 4.7 | |
Refund liability | 4.8 | | | 3.3 | |
Accrued settlements | 10.1 | | | 0.2 | |
Other | 3.8 | | | 5.0 | |
| $ | 84.8 | | | $ | 93.0 | |
| | | |
Other noncurrent liabilities: | | | |
Operating lease liabilities | $ | 23.8 | | | $ | — | |
Warranty | 8.5 | | | 10.7 | |
Transition tax | 4.1 | | | 5.8 | |
Unrecognized income tax benefits | 3.5 | | | 3.3 | |
Asset retirement obligation | 3.3 | | | 3.6 | |
Pension | 1.8 | | | 5.0 | |
Workers compensation | 1.2 | | | 1.9 | |
Other | 3.4 | | | 2.9 | |
| $ | 49.6 | | | $ | 33.2 | |
| | | | | | | | | | | |
| June 30, | | September 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
Other current liabilities: | | | |
Compensation and benefits | $ | 38.9 | | | $ | 32.8 | |
Customer rebates | 16.0 | | | 9.6 | |
Warranty accrual | 3.1 | | | 7.2 | |
Deferred revenues | 7.4 | | | 5.6 | |
Refund liability | 5.5 | | | 4.3 | |
Taxes other than income taxes | 4.7 | | | 3.9 | |
Operating lease liabilities | 3.8 | | | 4.0 | |
Workers’ compensation accrual | 3.6 | | | 2.7 | |
CARES Act payroll tax liabilities | 3.6 | | | 0 | |
Restructuring liabilities | 2.6 | | | 2.8 | |
Environmental liabilities | 1.2 | | | 1.2 | |
Interest payable | 1.7 | | | 7.3 | |
Income taxes payable | 0 | | | 0.2 | |
Other | 9.2 | | | 5.0 | |
Total other current liabilities | $ | 101.3 | | | $ | 86.6 | |
| | | |
Other noncurrent liabilities: | | | |
Operating lease liabilities | $ | 21.8 | | | $ | 23.3 | |
Warranty accrual | 8.0 | | | 7.2 | |
Transition tax liability | 4.7 | | | 5.2 | |
Uncertain tax position liability | 5.0 | | | 4.5 | |
NMTC liability | 3.9 | | | 0 | |
Workers’ compensation accrual | 8.5 | | | 3.8 | |
Asset retirement obligation | 3.6 | | | 3.5 | |
CARES Act payroll tax liabilities | 3.6 | | | 3.3 | |
Deferred development grant | 2.5 | | | 2.5 | |
Other | 3.2 | | | 3.0 | |
Total other noncurrent liabilities | $ | 64.8 | | | $ | 56.3 | |
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis each September 1st and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. During the second quarter ended March 31, 2020, we performed an interim assessment for Krausz, both qualitative and quantitative and determined Krausz’s goodwill and indefinite-lived assets were not impaired. However, the excess of the fair value over the carrying value was not significant.
With our third quarter results and amid the continued pandemic, we reviewed our previous assumptions, our revised expectations and determined it was not more-likely-than-not that the goodwill and indefinite-lived intangibles were impaired as of June 30, 2020. However, with continued uncertainty related to the pandemic, we cannot provide assurance that our estimates will be realized.
The following table summarizes information concerning our goodwill balance for the nine months ended June 30, 2020,2021, in millions.
| | | | | |
Balance at beginning of yearSeptember 30, 2020 | $ | 95.799.8 | |
Purchase accounting adjustmentsAcquisition of i2O Water Ltd | 0.313.6 | |
ChangeEffects of changes in foreign currency exchange rates | 0.42.6 | |
Balance as ofat June 30, 20202021 | $ | 96.4116.0 | |
Note 11.10. Segment Information
Summarized financial information for our segments is presented below. Net sales and operating income associated with certain products have been reclassified as Technologies segment items to conform to the current period presentation. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended | | |
| June 30, | | June 30, | | |
| 2021 | | 2020 | | 2021 | | 2020 | | | | |
| | | | | | | | | | | |
| (in millions) |
Net sales, excluding intercompany: | | | | | | | | | | | |
Infrastructure | $ | 287.3 | | | $ | 209.4 | | | $ | 750.1 | | | $ | 641.6 | | | | | |
Technologies | 23.2 | | | 19.1 | | | 65.3 | | | 57.2 | | | | | |
| $ | 310.5 | | | $ | 228.5 | | | $ | 815.4 | | | $ | 698.8 | | | | | |
Operating income (loss): | | | | | | | | | | | |
Infrastructure | $ | 64.0 | | | $ | 43.6 | | | $ | 158.2 | | | $ | 129.4 | | | | | |
Technologies | (2.7) | | | (3.6) | | | (8.8) | | | (10.0) | | | | | |
Corporate | (18.6) | | | (20.0) | | | (45.5) | | | (43.3) | | | | | |
| $ | 42.7 | | | $ | 20.0 | | | $ | 103.9 | | | $ | 76.1 | | | | | |
Depreciation and amortization: | | | | | | | | | | | |
Infrastructure | $ | 13.0 | | | 12.2 | | | $ | 38.2 | | | $ | 36.3 | | | | | |
Technologies | 2.1 | | | 2.3 | | | 6.2 | | | 6.4 | | | | | |
Corporate | 0.1 | | | 0 | | | 0.2 | | | 0.1 | | | | | |
| $ | 15.2 | | | $ | 14.5 | | | $ | 44.6 | | | $ | 42.8 | | | | | |
Strategic reorganization and other (credits) charges: | | | | | | | | | | | |
Infrastructure | $ | 0.2 | | | $ | 0 | | | $ | (0.4) | | | $ | 0.4 | | | | | |
Technologies | 0 | | | 0 | | | 0 | | | 0 | | | | | |
Corporate | 3.7 | | | 8.6 | | | 6.5 | | | 11.5 | | | | | |
| $ | 3.9 | | | $ | 8.6 | | | $ | 6.1 | | | $ | 11.9 | | | | | |
Capital expenditures: | | | | | | | | | | | |
Infrastructure | $ | 13.8 | | | $ | 13.4 | | | $ | 43.3 | | | $ | 49.1 | | | | | |
Technologies | 1.2 | | | 0.5 | | | 2.7 | | | 1.8 | | | | | |
Corporate | 0 | | | 0 | | | 0.1 | | | 0.3 | | | | | |
| $ | 15.0 | | | $ | 13.9 | | | $ | 46.1 | | | $ | 51.2 | | | | | |
Infrastructure disaggregated net revenues: | | | | | | | | | | | |
Central | $ | 71.1 | | | $ | 57.4 | | | $ | 192.1 | | | $ | 163.6 | | | | | |
Northeast | 52.9 | | | 38.7 | | | 141.8 | | | 135.3 | | | | | |
Southeast | 57.6 | | | 35.6 | | | 144.1 | | | 119.8 | | | | | |
West | 71.2 | | | 50.7 | | | 188.1 | | | 154.3 | | | | | |
United States | 252.9 | | | 182.4 | | | 666.2 | | | 573.0 | | | | | |
Canada | 27.9 | | | 20.7 | | | 60.4 | | | 47.3 | | | | | |
Other international locations | 6.5 | | | 6.3 | | | 23.5 | | | 21.3 | | | | | |
| $ | 287.3 | | | $ | 209.4 | | | $ | 750.1 | | | $ | 641.6 | | | | | |
Technologies disaggregated net revenues: | | | | | | | | | | | |
Central | $ | 5.7 | | | $ | 5.1 | | | $ | 17.3 | | | $ | 13.6 | | | | | |
Northeast | 3.0 | | | 4.1 | | | 10.0 | | | 15.0 | | | | | |
Southeast | 8.5 | | | 5.2 | | | 22.3 | | | 16.6 | | | | | |
West | 4.8 | | | 3.7 | | | 12.7 | | | 8.9 | | | | | |
United States | 22.0 | | | 18.1 | | | 62.2 | | | 54.1 | | | | | |
Canada | 0.5 | | | 0.3 | | | 0.9 | | | 1.2 | | | | | |
Other international locations | 0.7 | | | 0.7 | | | 2.3 | | | 1.9 | | | | | |
| $ | 23.2 | | | $ | 19.1 | | | $ | 65.3 | | | $ | 57.2 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | Nine months ended | | | | | | |
| June 30, | | | | June 30, | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
| | | | | | | | | | | |
| (in millions) | | | | | | | | | | |
Net sales, excluding intercompany: | | | | | | | | | | | |
Infrastructure | $ | 209.9 | | | $ | 250.2 | | | $ | 643.0 | | | $ | 636.3 | | | | | |
Technologies | 18.6 | | | 24.1 | | | 55.8 | | | 64.8 | | | | | |
| $ | 228.5 | | | $ | 274.3 | | | $ | 698.8 | | | $ | 701.1 | | | | | |
Operating income (loss): | | | | | | | | | | | |
Infrastructure | $ | 43.8 | | | $ | 60.6 | | | $ | 129.9 | | | $ | 131.6 | | | | | |
Technologies | (3.8) | | | (2.2) | | | (10.5) | | | (9.5) | | | | | |
Corporate | (20.0) | | | (11.2) | | | (43.3) | | | (36.8) | | | | | |
| $ | 20.0 | | | $ | 47.2 | | | $ | 76.1 | | | $ | 85.3 | | | | | |
Depreciation and amortization: | | | | | | | | | | | |
Infrastructure | $ | 12.2 | | | $ | 11.3 | | | $ | 36.3 | | | $ | 32.8 | | | | | |
Technologies | 2.3 | | | 2.0 | | | 6.4 | | | 5.9 | | | | | |
Corporate | — | | | — | | | 0.1 | | | 0.1 | | | | | |
| $ | 14.5 | | | $ | 13.3 | | | $ | 42.8 | | | $ | 38.8 | | | | | |
Strategic reorganization and other charges: | | | | | | | | | | | |
Infrastructure | $ | — | | | $ | — | | | $ | 0.4 | | | $ | 1.1 | | | | | |
Technologies | — | | | — | | | — | | | — | | | | | |
Corporate | 8.6 | | | 2.5 | | | 11.5 | | | 11.5 | | | | | |
| $ | 8.6 | | | $ | 2.5 | | | $ | 11.9 | | | $ | 12.6 | | | | | |
Capital expenditures: | | | | | | | | | | | |
Infrastructure | $ | 13.4 | | | $ | 18.9 | | | $ | 49.1 | | | $ | 46.7 | | | | | |
Technologies | 0.5 | | | 1.8 | | | 1.8 | | | 4.5 | | | | | |
Corporate | — | | | 1.7 | | | 0.3 | | | 1.7 | | | | | |
| $ | 13.9 | | | $ | 22.4 | | | $ | 51.2 | | | $ | 52.9 | | | | | |
Infrastructure disaggregated net revenues: | | | | | | | | | | | |
Central | $ | 57.5 | | | $ | 58.8 | | | $ | 163.9 | | | $ | 154.1 | | | | | |
Northeast | 38.8 | | | 52.0 | | | 135.7 | | | 134.8 | | | | | |
Southeast | 35.7 | | | 41.3 | | | 120.3 | | | 117.2 | | | | | |
West | 50.8 | | | 63.8 | | | 154.5 | | | 159.1 | | | | | |
United States | 182.8 | | | 215.9 | | | 574.4 | | | 565.2 | | | | | |
Canada | 20.7 | | | 24.1 | | | 47.3 | | | 49.3 | | | | | |
Other international locations | 6.4 | | | 10.2 | | | 21.3 | | | 21.8 | | | | | |
| $ | 209.9 | | | $ | 250.2 | | | $ | 643.0 | | | $ | 636.3 | | | | | |
Technologies disaggregated net revenues: | | | | | | | | | | | |
Central | $ | 5.0 | | | $ | 6.6 | | | $ | 13.3 | | | $ | 20.5 | | | | | |
Northeast | 4.0 | | | 5.5 | | | 14.6 | | | 12.3 | | | | | |
Southeast | 5.1 | | | 8.0 | | | 16.1 | | | 21.7 | | | | | |
West | 3.6 | | | 2.3 | | | 8.7 | | | 6.6 | | | | | |
United States | 17.7 | | | 22.4 | | | 52.7 | | | 61.1 | | | | | |
Canada | 0.3 | | | 0.5 | | | 1.2 | | | 0.8 | | | | | |
Other international locations | 0.6 | | | 1.2 | | | 1.9 | | | 2.9 | | | | | |
| $ | 18.6 | | | $ | 24.1 | | | $ | 55.8 | | | $ | 64.8 | | | | | |
Note 12.11. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is presented below.
| | | | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Total |
| | | | | |
| (in millions) | | | | |
Balance at September 30, 2019 | $ | (36.0) | | | $ | — | | | $ | (36.0) | |
Current period other comprehensive income | 1.7 | | | — | | | $ | 1.7 | |
Balance at June 30, 2020 | $ | (34.3) | | | $ | — | | | $ | (34.3) | |
| | | | | | | | | | | | | | | | | |
| Pension, net of tax | | Foreign currency translation | | Total |
| | | | | |
| (in millions) |
Balance at September 30, 2020 | $ | (32.7) | | | $ | 8.0 | | | $ | (24.7) | |
Current period other comprehensive income | 1.4 | | | 8.5 | | | 9.9 | |
Balance at June 30, 2021 | $ | (31.3) | | | $ | 16.5 | | | $ | (14.8) | |
Note 13.12. 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.matters, unless otherwise indicated below. 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”JCI”), sold our businesses to a previous owner in August 1999, TycoJCI 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’sJCI’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, TycoJCI has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the TycoJCI indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such TycoJCI indemnitors has changed. Should any of these TycoJCI 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 a 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, which was sold in 2012, has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a proposed Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of EPA’sthe Environmental Protection Agency’s remediation costs, the number and financial viability of the other PRPs (there are four other PRPs currently) and the determination of the final allocation of the costs among the PRPs. Since the amounts of such costs cannot be reasonably estimated at this time, no amounts have been accrued for this matter at June 30, 2020.2021.
Walter Energy. On November 18, 2019, we paid approximately $22.2 million to the IRSInternal Revenue Service in final settlement of a tax dispute related to our former parent company, Walter Energy, Inc., as described more fully in Note 17. to our Form 10-K for the year ended September 30, 2019.
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, 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 “Court”). 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 complaint 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. 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. On June 11, 2020, the Court granted Defendants’ motion to dismiss and dismissed the action with prejudice. The time period for appealing the Court’s decision has expired.
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 advanced metering 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, which were provided by parties other than Mueller Systems, for the City’s water treatment plants, sewer lines and billing system (the “Project”).On June 11, 2018, the City filed a lawsuit against Siemens and several of its contractors (excluding Mueller Systems) for multiple claims related to the Project, including claims for fraud, negligence, breach of implied 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 Siemens Lawsuit.
In February 2020, the City dismissed all claims against Mueller Systems in the Siemens Lawsuit. On March 27, 2020, the City and Siemens executed a settlement agreement whereby Siemens agreed to pay the City $89.8 million (“Settlement Amount”) in order to settle the Siemens Lawsuit (the “Settlement”). As a result of the Settlement, Siemens is seeking to recover a portion of the Settlement Amount from Mueller Systems, and the parties are in negotiations to resolve this matter on reasonable terms, conditions and amounts. At June 30, 2020, we have accrued a liability of $10.0 million in connection with this matter and have also recorded an asset for related insurance proceeds of $5.0 million. However, the settlement agreement is not final and the ultimate loss could materially differ from this amount. Should settlement negotiations fail and a legal action ultimately arise against us in this matter, we intend to vigorously defend against such legal action. However, the outcome of a legal action in this matter, if any, cannot be predicted with certainty.
The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the U.S. and global economies. As a result of the pandemic, we experienced adverse business conditions during our third quarter. We have taken and continue to take steps to maximize liquidity by limiting cash expenditures, including furloughing significant numbers of our employees, implementing temporary shutdowns of our manufacturing facilities or portions of our manufacturing facilities, implementing temporary salary reductions for our senior leadership team, deferral of capital expenditures, reduced fees for our Board of Directors and aggressively reducing general and administrative spending. We are uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, and while the extent to which the pandemic affects our results will depend on future developments, the outbreak could result in material effects to our future financial position, results of operations, cash flows and liquidity.
Mass Shooting Event at our Henry PrattMueller Co. Facility in Aurora, Illinois.Albertville, Alabama. On FebruaryJune 15, 2019,2021, we experienced a mass shooting event at our Henry PrattMueller Co. facility in Aurora, Illinois,Albertville, Alabama, in which fivetwo employees were killed and one employee and six law enforcement officerstwo employees 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 expected to have a material adverse effect on our results of operations or cash flows. However, the possibility of other legal proceedings, and any related effects, arising from this event cannot be predicted with certainty.
The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the U.S. and global economies. We have taken action and continue to counter such disruption and work to protect the safety of our production workers as essential workers at our various manufacturing plants, distribution centers and research and development centers. We are uncertain of the potential magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, and while the extent to which the pandemic affects our results will depend on future developments, including COVID-19 variants, the outbreak could result in material effects to our future financial position, results of operations, cash flows and liquidity.
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 saledivestitures of assets and the divestiture of businesses, such as the divestitures ofsubsidiaries, U.S. Pipe and Anvil, we may agree to indemnify buyers and related parties for certain losses or liabilities incurred by these parties with respect to: (i) the representations and warranties made by us to these parties in connection with the sale and (ii) liabilities related to the pre-closing operations of the assets or business sold. Indemnities related to pre-closing operations generally include certain environmental and tax liabilities and other liabilities not assumed by these parties in the transaction.
Indemnities related to the pre-closing operations of sold assets or businesses normally do not represent additional liabilities to us, but simply serve to protect these parties from potential liability associated with our obligations existing at the time of the sale. As with any liability, we have accrued for those pre-closing obligations that are considered probable and reasonably estimable. Should circumstances change, increasing the likelihood of payments related to a specific indemnity, we will accrue a liability when future payment is probable and the amount is reasonably estimable.
Other Matters. We monitor and analyze our warranty experience and costs periodically and may revise our accruals as necessary. Critical factors in our analyses include warranty terms, specific claim situations, general incurred and projected failure rates, the nature of product failures, product and labor costs, and general business conditions.
We are party to a number of lawsuits arising in the ordinary course of business, including product liability cases for products manufactured by us or third parties. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such other litigation is not likely to have a materially adverse effect on our businessfinancial position, results of operations, cash flows or prospects.liquidity.
Note 14.13. Subsequent Events
On July 28, 2020,29, 2021, our boardBoard of directorsDirectors declared a dividend of $0.0525$0.0550 per share on our common stock, payable on or about August 20, 20202021 to stockholders of record at the close of business on August 10, 2020.2021.
On July 30, 2020, we amended our ABL Agreement. This amendment, among other things, (i) extended the termination date of the revolving credit facility to July 29, 2025, (ii) established a LIBOR “floor” of 75 basis points, (iii) increased the margin applying to LIBOR-based loans to a range between 200 to 225 basis points, and the margin applying to base rate loans to a range between 100 to 125 basis points, (iv) increased the commitment fee applicable to unused amounts under the revolving credit commitment to 37.5 basis points and (v) increased our ability to issue cash dividends.
On August 5, 2020, we announced the closure of our Woodland, Washington knife gate manufacturing operations, which will be relocated to our new facility in Kimball, Tennessee.
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 the Company intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, the COVID-19 pandemic, go-to-market strategies, operational excellence, acceleration of new product development, end market performance, net sales performance, adjusted operating income and adjusted EBITDA performance, margins, capital expenditure plans, litigation outcomes, capital allocation and growth strategies, restructuring efficiencies and future warranty charges. Forward-looking statements are based on certain assumptions and assessments made by the Company in light of the Company’sbased on 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 the extent, duration and severity of the impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections), the Company and the financial/capital markets, government-mandated facility closures, COVID-19 related facility closures and other manufacturing restrictions, logistical challenges and supply chain interruptions, potential litigation and claims emanating from the COVID-19 pandemic, and health, safety and employee/labor issues in Company facilities around the world; unexpected or greater than expected increases in costs of raw materials and purchased components; regional, national or global political, economic, market and competitive conditions; cyclical and changing demand in core markets such as municipal spending; government monetary or fiscal policies; residential and nonresidential construction, and natural gas distribution; manufacturing and product performance; expectations for changes in volumes, continued execution of cost productivity initiatives and improved pricing; warranty exposures (including the adequacy of warranty reserves); the Company’s ability to successfully resolve significant legal proceedings, claims, lawsuits or government investigations; compliance with environmental, trade and anti-corruption laws and regulations; changing regulatory, trade and tariff conditions; failure to achieve expected cost savings, net sales expectations, profitability expectations and manufacturing efficiencies from restructuring and consolidation activities and our large capital investments in Chattanooga and Kimball, Tennessee and Decatur, Illinois; the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures; andas well as other factors that are described in the section entitled “RISK FACTORS” in Item 1A of the Company’s most recently filed Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q (all of which risks may be amplified by the pandemic). Forward-looking statements do not guarantee future performance and are only as of the date they are made.made and do not guarantee future performance. The Company undertakes no duty to update its forward-looking statements except as required by law. Undue reliance should not be placed on any forward-looking statements. You are advised to review any further disclosures the Company makes on related subjects in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S. Securities and Exchange Commission.
Overview
COVID-19 Pandemic
On March 11, 2020 the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. Since March 31, 2020, the COVID-19 pandemic has continued to spread and various state and local governments have issued or extended “shelter-in-place” orders which have impacted and restricted various aspects of our business.
We continue to closely monitor the effects of the pandemic on all aspects of our business, including how it will impact our employees, the municipalities and the residential and non-residential industries we serve, our communities, our customers and our suppliers. The pandemic had a material negative effect on our fiscal third quarter operations and affected our financial results to date. However, the full financial effect of the pandemic cannot be reasonably estimated at this time due to the uncertainties relating to the pandemic, its severity, and its duration.These uncertainties include the severity of the pandemic, the duration of the outbreak, governmental, municipality, business or other actions in response to the pandemic, the effect on customer demand and our customers’ ability to pay for our products and services, and changes to our operations caused by the pandemic. The health of our workforce and our ability to manage our operations and other critical functions cannot be predicted and are vital to our operations.
To mitigate the negative financial impact of the pandemic, we have taken steps to maximize liquidity by limiting cash expenditures, including temporary furloughing of significant numbers of our employees, implementing temporary shutdowns of our manufacturing facilities or portions of our manufacturing facilities, implementing temporary salary reductions for our senior leadership team, deferring some capital expenditures, temporarily reducing fees for our Board of Directors and aggressively reducing general and administrative spending. Some of these steps are continuing into the fourth quarter.
Further, global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, as well as other unanticipated consequences, remain unknown. For further information regarding the effects of the pandemic on our business, please see item 1A. Risk Factors in this report, which is incorporated herein by reference. Additionally, we have incurred incremental costs to address the pandemic, including costs associated with voluntary emergency paid leave, additional cleaning, disinfectants and sanitation materials to help keep our employees safe and to protect the communities that we serve as well as costs associated with a closure of a manufacturing facility in China and inefficiencies in certain other facilities. The pandemic has also caused supply chain disruptions that have resulted in higher costs in the manufacture of our products.
We continue to operate as an essential business, providing products and services to our customers that they need to manage and maintain our nation’s critical water infrastructure. We have implemented preparedness plans to keep our team safe while we work, including new physical distancing processes and procedures and the use of additional personal protective equipment. All of our facilities are operational and able to fill orders at August 6, 2020, and our teams have worked effectively to address the few temporary closures we have experienced. We continue to proactively monitor our supply chain and have not experienced any material supply chain issues since the temporary closure of our Jingmen facility, which is located near Wuhan in the Hubei Province and partially reopened on March 15, 2020.
We continue to prioritize returning cash to our shareholders through our quarterly dividend, as we declared our quarterly dividend on July 28, 2020. However, we have temporarily suspended our share repurchase program to provide additional financial flexibility.
We have experienced and expect to continue to experience a material slowdown in our end markets for the second half of our fiscal year, especially in residential construction, and our net sales decreased 16.7% in our third quarter as compared with the prior year period. Our municipal market end users provide critical water, energy and public works infrastructure services and continue to operate during this crisis, but they have reduced and may continue to reduce discretionary spending. We are hopeful that our end markets will recover swiftly from the impact of the pandemic. However, the timing and magnitude of any recovery remain highly uncertain. We are reviewing all aspects of our business and taking action as needed, including adjusting our production capacity to preserve liquidity and cash flow during this difficult period. In addition to eliminating non-critical business expenses, we are evaluating further actions as changes in market demand evolve.
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 60-65% of our 20192020 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 25-30% were related to residential construction activity and less than 10% were related to natural gas utilities.utilities spending.
Prior toWe expect the pandemic, we expected 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 the low single digitsoperating environment during 2020. We continue to expect a slowdown in our end markets for the remainder of our fiscal year as a result of2021 to continue to be very challenging due to the economic effectsuncertainty around the depth and duration of the pandemic, butwhich has accelerated and may continue to accelerate inflation and global supply chain disruptions. We anticipate that growth in the residential construction has improved at a faster pace than anticipated.end market will continue to help offset anticipated challenges in the project-related portion of the municipal market. In July 2020,2021, Blue Chip Economic Indicators forecasted a 8% decrease16% increase in housing starts for calendar 20202021 compared to the prior year primarily due to pandemic effects.the low interest rate environment in the United States.
We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable volume variances, voluntary emergency paid leave, additional cleaning, disinfectants and sanitation materials for our employees and at our facilities. We expect to continue to incur such costs, which may be significant, as we continue to respond to the pandemic. All of our facilities are operational and our teams have worked effectively to address the few temporary closures we have experienced due to the pandemic. The last such closure was in August 2020. The pandemic also caused supply chain disruption that has resulted in higher costs in the manufacture of our products. We expect these conditions to persist in the near term and may worsen until the pandemic abates.
Infrastructure
OnIn December 3, 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel,Israel. During the three months ended March 31, 2021, we aligned the consolidation of Krausz in the consolidated financial statements which previously included results on a one-month reporting lag. The impact of the elimination of the reporting lag during the nine months ended June 30, 2021 resulted in an increase of $6.0 million to net sales and $1.4 million in operating income.
In July 2014, Infrastructure acquired a 49% ownership interest in an industrial valve joint venture for $140.7 million, net$1.7 million. As a result of cash acquired, includingsubstantive control features in the assumptionoperating agreement, all of the joint venture’s assets, liabilities and simultaneous repayment of certain debt of $13.2 million. We include financial results of Krauszoperations were included in our consolidated financial statements on a one-month lag.
In October 2019, westatements. Infrastructure acquired the noncontrollingremaining 51% ownership interest of our previously existing joint venture operation for a negotiated purchase price of $5.4 million.in the business in October 2019.
Technologies
The municipal market is the key end market for Technologies. The businesses inOur Technologies aresegment is typically project-oriented and dependdependent on customerour customers’ adoption of theirour technology-based products and services.
Critical Accounting Policies and Estimates
AccountingOn June 14, 2021, we acquired all the outstanding capital stock of i20 Water Ltd, a provider of pressure management solutions to more than 100 water companies in 45 countries for Goodwill
At March 31, 2020, in connection with pandemic-related disruptions on$19.7 million, net of cash acquired. i2O Water Ltd is organized under the overall market and our business, we performed a quantitative goodwill impairment assessment of our Krausz reporting unit. The Krausz reporting unit had $85.9 million of goodwill at March 31, 2020. We used a discounted cash flow model to determine the estimated fair valuelaws of the reporting unit. We made estimates and assumptions regarding future revenue, cash flows, discount rates, and long-term growth ratesUnited Kingdom. The purchase agreement provides for customary final adjustments, including a net working capital adjustment, which we expect to estimate the Krausz reporting unit’s fair value.
These assumptions represented our best estimates and we believe they were reasonable and appropriate. However, they are forecastsoccur in the midst of a complex and still-developing situation with the pandemic, and as such they involve a high degree of uncertainty.
•The discount rate in the model, which includes a forecast-risk factor, was 12.8 percent.
•Long-term growth of revenue in the model beyond 2025 was 3 percent.
•Long term growth of free cash flow in the model beyond 2025 growth was 5 percent.
The results of the quantitative impairment assessment indicated that the Krausz reporting unit’s fair value exceeded its carrying value. However, the excess of the fair value over the carrying value was not significant.
During the third quarter we assessed for impairment indicators of the Krausz reporting unit and determined that it was not more-likely-than-not that the goodwill was impaired as of June 30, 2020.
The continuation of pandemic-related effects on our business and the overall market could potentially materially change the key assumptions and lead to future impairment charges.2021.
Results of Operations
Three Months Ended June 30, 20202021 Compared to Three Months Ended June 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2020 | | | | | | |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) | | | | | | |
Net sales | $ | 209.9 | | | $ | 18.6 | | | $ | — | | | $ | 228.5 | |
Gross profit | 73.5 | | | 2.2 | | | — | | | $ | 75.7 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 29.7 | | | 6.0 | | | 11.4 | | | 47.1 | |
Strategic reorganization and other charges | — | | | — | | | 8.6 | | | 8.6 | |
| 29.7 | | | 6.0 | | | 20.0 | | | 55.7 | |
Operating income (loss) | $ | 43.8 | | | $ | (3.8) | | | $ | (20.0) | | | 20.0 | |
Non-operating expenses: | | | | | | | |
Pension benefit other than service | | | | | | | (0.7) | |
Interest expense, net | | | | | | | 6.1 | |
Income before income taxes | | | | | | | 14.6 | |
Income tax expense | | | | | | | 3.4 | |
Net income | | | | | | | $ | 11.2 | |
| | | | | | | |
| Three months ended June 30, 2019 | | | | | | |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) | | | | | | |
Net sales | $ | 250.2 | | | $ | 24.1 | | | $ | — | | | $ | 274.3 | |
Gross profit | 92.7 | | | 4.5 | | | — | | | $ | 97.2 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 32.1 | | | 6.7 | | | 8.7 | | | 47.5 | |
Strategic reorganization and other charges | — | | | — | | | 2.5 | | | 2.5 | |
| 32.1 | | | 6.7 | | | 11.2 | | | 50.0 | |
Operating income (loss) | $ | 60.6 | | | $ | (2.2) | | | $ | (11.2) | | | 47.2 | |
Pension benefit other than service | | | | | | | (0.1) | |
Interest expense, net | | | | | | | 4.2 | |
Walter Energy Accrual | | | | | | | 0.5 | |
Income before income taxes | | | | | | | 42.6 | |
Income tax expense | | | | | | | 8.9 | |
Net income | | | | | | | $ | 33.7 | |
2020 | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2021 |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) |
Net sales | $ | 287.3 | | | $ | 23.2 | | | $ | — | | | $ | 310.5 | |
Gross profit | 101.1 | | | 4.3 | | | — | | | $ | 105.4 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 36.9 | | | 7.0 | | | 14.9 | | | 58.8 | |
Strategic reorganization and other charges | 0.2 | | | — | | | 3.7 | | | 3.9 | |
Total operating expenses | 37.1 | | | 7.0 | | | 18.6 | | | 62.7 | |
Operating income (loss) | $ | 64.0 | | | $ | (2.7) | | | $ | (18.6) | | | 42.7 | |
Other expenses (income): | | | | | | | |
Loss on early extinguishment of debt | | | | | | | 16.7 | |
Pension benefit other than service | | | | | | | (0.8) | |
Interest expense, net | | | | | | | 6.8 | |
Income before income taxes | | | | | | | 20.0 | |
Income tax expense | | | | | | | 5.6 | |
Net income | | | | | | | $ | 14.4 | |
| | | | | | | |
| Three months ended June 30, 2020 |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) |
Net sales | $ | 209.4 | | | $ | 19.1 | | | $ | — | | | $ | 228.5 | |
Gross profit | 73.3 | | | 2.4 | | | — | | | $ | 75.7 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 29.7 | | | 6.0 | | | 11.4 | | | 47.1 | |
Strategic reorganization and other charges | — | | | — | | | 8.6 | | | 8.6 | |
Total operating expenses | 29.7 | | | 6.0 | | | 20.0 | | | 55.7 | |
Operating income (loss) | $ | 43.6 | | | $ | (3.6) | | | $ | (20.0) | | | 20.0 | |
Other expenses (income): | | | | | | | |
Pension benefit other than service | | | | | | | (0.7) | |
Interest expense, net | | | | | | | 6.1 | |
Income before income taxes | | | | | | | 14.6 | |
Income tax expense | | | | | | | 3.4 | |
Net income | | | | | | | $ | 11.2 | |
Consolidated Analysis
Net sales for the quarterthree months ended June 30, 2020 decreased 16.72021 increased $82.0 million or 35.9 percent or $45.8to $310.5 million tofrom $228.5 million from $274.3 millionin the comparable prior year period. This increase was primarily due to reduceda result of increased shipment volumes inat both segments dueInfrastructure and Technologies compared to the effects of the pandemic, which were partially offset byprior year and higher pricing.pricing at Infrastructure.
Gross profit for the quarterthree months ended June 30, 2021 increased $29.7 million to $105.4 million from $75.7 million in the prior year period. Gross profit increased primarily as a result of increased volumes and higher pricing. Partially offsetting the increase in gross profit were higher manufacturing costs due to inflation. Gross margin was 33.9% for the three months ended June 30, 2021 and improved 80 basis points compared to 33.1% in the prior year period.
Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2021 increased $11.7 million to $58.8 million from $47.1 million in the prior year period primarily as a result of new product development and information technology expenses, higher personnel-related expenses including sales commissions associated with higher net sales and orders, incentive compensation and stock-based compensation. Additionally, travel and entertainment expenses were higher in the current year period, and we benefited from temporary reduction in personnel expenses due to furloughs and temporary pay cuts in the prior year period. SG&A as a percentage of net sales was 18.9% and 20.6% in the three months ended June 30, 2021 and 2020, respectively.
Strategic reorganization and other charges for the three months ended June 30, 2021 were $3.9 million, which primarily consisted of expenses associated with the Albertville tragedy, as well as termination benefits associated with the previously announced closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada and acquisition transaction costs. Strategic reorganization and other charges for the three months ended June 30, 2020 decreased $21.5of $8.6 million included an accrual related to $75.7a litigation settlement, facility relocation expenses and senior executive severance costs.
Interest expense, net increased $0.7 million in the three months ended June 30, 2021 compared to the prior year period primarily as a result of the timing of the issuance of the 4.0% Senior Notes and the extinguishment of the 5.5% Senior Notes. The components of interest expense, net are provided below. | | | | | | | | | | | |
| Three months ended |
| June 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
5.5% Notes | $ | 5.2 | | | $ | 6.2 | |
4.0% Notes | 1.7 | | | — | |
Deferred financing costs amortization | 0.3 | | | 0.2 | |
ABL Agreement | 0.2 | | | 0.2 | |
Capitalized interest | (0.6) | | | (0.5) | |
Other interest cost | 0.1 | | | 0.1 | |
| 6.9 | | | 6.2 | |
Interest income | (0.1) | | (0.1) | |
Interest expense, net | $ | 6.8 | | | $ | 6.1 | |
The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below. | | | | | | | | | | | |
| Three months ended |
| June 30, |
| 2021 | | 2020 |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % |
Adjustments to reconcile to the effective tax rate: | | | |
State income taxes, net of federal benefit | 4.2 | | | 4.5 | |
Tax credits | (1.7) | | | (1.7) | |
Global Intangible Low-taxed Income | 0.5 | | | (0.2) | |
Foreign income tax rate differential | (0.4) | | | (0.5) | |
Nondeductible compensation | 0.6 | | | 1.0 | |
Basis difference in foreign investment | 1.2 | | | 0.3 | |
Valuation allowance | — | | | (0.3) | |
Reversal of uncertain tax positions | — | | | (2.1) | |
Other | 2.6 | | | 1.3 | |
Effective income tax rate | 28.0 | % | | 23.3 | % |
Segment Analysis
Infrastructure
Net sales for the three months ended June 30, 2021 increased $77.9 million or 37.2 percent to $287.3 million compared to $209.4 million in the prior year period. This increase was primarily a result of increased shipment volume and higher pricing across most of our Infrastructure product lines.
Gross profit for the three months ended June 30, 2021 increased to $101.1 million from $97.2$73.3 million in the prior year period primarily due to decreasedincreased volumes and higher pricing, which were partially offset by inflation effecting Cost of sales. Gross margin was 35.2% for the three months ended June 30, 2021 and was 35.0% in the prior year period.
SG&A for the three months ended June 30, 2021 increased to $36.9 million from $29.7 million in the prior year period. This increase was primarily the result of higher personnel-related expenses, including sales commissions associated with higher net sales and orders, and incentive compensation, as well as information technology spending. Additionally, travel and entertainment expenses were higher in the current year period, and we benefited from the temporary reduction in personnel expenses due to furloughs and temporary pay reductions in the prior year period. SG&A as a percentage of net sales was 12.8% and 14.2%, respectively, for the three months ended June 30, 2021 and 2020.
Technologies
Net sales for the three months ended June 30, 2021 increased $4.1 million or 21.5% to $23.2 million from $19.1 million in the prior year period, primarily due to increased shipment volumes of our metering products.
Gross profit for the three months ended June 30, 2021 was $4.3 million compared to $2.4 million in the prior year period. Gross margin percentage was 18.5% and 12.6%, in the three months ended June 30, 2021 and 2020, respectively.
SG&A increased to $7.0 million from $6.0 million in the prior year period primarily due to increased new product development costs. SG&A as a percentage of net sales was 30.2% and 31.4% for the three months ended June 30, 2021 and 2020, respectively.
Corporate
SG&A was $14.9 million and $11.4 million in the three months ended June 30, 2021 and 2020, respectively, which was primarily the result of personnel-related expenses including stock-based compensation and incentive compensation. Additionally, travel and entertainment expenses were higher in the current year period as we benefited from the temporary reduction in personnel expenses due to furloughs and temporary pay cuts in the prior year period.
Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended June 30, 2021 |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) |
Net sales | $ | 750.1 | | | $ | 65.3 | | | $ | — | | | $ | 815.4 | |
Gross profit | 261.1 | | | 11.1 | | | — | | | $ | 272.2 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 103.3 | | | 19.9 | | | 39.0 | | | 162.2 | |
Strategic reorganization and other (credits) charges | (0.4) | | | — | | | 6.5 | | | 6.1 | |
Total operating expenses | 102.9 | | | 19.9 | | | 45.5 | | | 168.3 | |
Operating income (loss) | $ | 158.2 | | | $ | (8.8) | | | $ | (45.5) | | | 103.9 | |
Other expenses (income): | | | | | | | |
Loss on early extinguishment of debt | | | | | | | 16.7 | |
Pension benefit other than service | | | | | | | (2.4) | |
Interest expense, net | | | | | | | 19.0 | |
Income before income taxes | | | | | | | 70.6 | |
Income tax expense | | | | | | | 18.6 | |
Net income | | | | | | | $ | 52.0 | |
| | | | | | | |
| Nine months ended June 30, 2020 |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) |
Net sales | $ | 641.6 | | | $ | 57.2 | | | $ | — | | | $ | 698.8 | |
Gross profit | 225.4 | | | 8.9 | | | — | | | $ | 234.3 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 95.6 | | | 18.9 | | | 31.8 | | | 146.3 | |
Strategic reorganization and other charges | 0.4 | | | — | | | 11.5 | | | 11.9 | |
Total operating expenses | 96.0 | | | 18.9 | | | 43.3 | | | 158.2 | |
Operating income (loss) | $ | 129.4 | | | $ | (10.0) | | | $ | (43.3) | | | 76.1 | |
Other expenses (income): | | | | | | | |
Pension benefit other than service | | | | | | | (2.2) | |
Interest expense, net | | | | | | | 19.5 | |
Walter Energy Accrual | | | | | | | 0.2 | |
Income before income taxes | | | | | | | 58.6 | |
Income tax expense | | | | | | | 13.3 | |
Net income | | | | | | | $ | 45.3 | |
Consolidated Analysis
Net sales for the nine months ended June 30, 2021 increased $116.6 million or 16.7 percent to $815.4 million from $698.8 million primarily due to increased shipment volumes across most of our product lines, higher pricing and a result of $6.0 million in Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag.
Gross profit for the nine months ended June 30, 2021 increased $37.9 million to $272.2 million from $234.3 million in the prior year period, primarily due to increased shipment volumes and $5.2 million of expenses related tohigher pricing. These increases were partially offset by inflation and lesser expenditures associated with the pandemic, including certain unfavorable volume variances treated as period costs, voluntary emergency paid leave for employees and other employee costs as well as additional sanitation and cleaning fees. Cost of sales infees, and a $2.4 million inventory write-off recorded during the prior year quarter included $2.3 million of costsnine months ended June 30, 2021 associated with the Krausz acquisition.announcement of our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada. Gross margin was 33.1%33.4% for the quarternine months ended June 30, 20202021 compared to 35.4%33.5% in the prior year period.
Selling, general and administrative expenses (“SG&A”) for the quarternine months ended June 30, 2020 decreased2021 increased to $47.1$162.2 million from $47.5$146.3 million in the prior year period primarily due primarily to temporary expense reductions related to the pandemic, including reduced travel, trade shows and events as well as temporary furloughs and pay reductions for employees. These benefits were partially offset by increasesan increase in other personnel-related expenses, including incentive compensation, an increase in sales commissions associated with higher net sales and professional fees.orders, and stock-based compensation. Additionally, SG&A increased as a result of inflation and new product development and information technology spending. SG&A as a percentage of net sales was 20.6%19.9% and 17.3%20.9% in the quartersnine months ended June 30, 20202021 and 2019,2020, respectively.
Strategic reorganization and other charges for the nine months ended June 30, 2021 were $6.1 million, which primarily related to the Albertville tragedy, and termination benefits associated with our announced plan closures in Aurora, Illinois and Surrey, British Columbia, Canada, as well as, legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification from a previously owned property. Strategic reorganization and other charges for the quarternine months ended June 30, 2020 were $8.6$11.9 million which primarily relate to an accrual related to a potentiallitigation settlement with Siemens,accrual, previously announced facility relocation expensesclosures and senior executive severance costs,legal and were $2.5 million in the prior year period.professional service expenses.
Interest expense, net increased $1.9declined $0.5 million in the quarternine months ended June 30, 20202021 compared to the prior year period primarily due to decreasedan increase in capitalized interest, incomepartially offset by an increase in interest expense as a result of the timing of the redemption of the 5.5% Notes and capitalized interest.the issuance of the 4.0% Notes, as well as a decline in interest income. The components of net interest expense net are provided below.
| | | | | | | | | | | |
| Three months ended | | |
| June 30, | | |
| 2020 | | 2019 |
| | | |
| (in millions) | | |
Notes | $ | 6.2 | | | $ | 6.2 | |
Deferred financing costs amortization | 0.2 | | | 0.3 | |
ABL Agreement | 0.2 | | | 0.1 | |
Capitalized interest | (0.5) | | | (1.2) | |
Other interest cost (benefit) | 0.1 | | | (0.6) | |
| 6.2 | | | 4.8 | |
Interest income | (0.1) | | | (0.6) | |
Interest expense, net | $ | 6.1 | | | $ | 4.2 | |
| | | | | | | | | | | |
| Nine months ended |
| June 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
5.5% Notes | $ | 17.6 | | | $ | 18.6 | |
4.0% Notes | 1.7 | | | — | |
Deferred financing costs amortization | 0.8 | | | 0.9 | |
ABL Agreement | 0.7 | | | 0.4 | |
Capitalized interest | (1.7) | | | 0.2 | |
Other interest cost | 0.3 | | | 0.4 | |
Interest expense | 19.4 | | | 20.5 | |
Interest income | (0.3) | | | (1.0) | |
Interest expense, net | $ | 19.0 | | | $ | 19.5 | |
The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.
| | | | | | | | | | | |
| Three months ended | | |
| June 30, | | |
| 2020 | | 2019 |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % |
Adjustments to reconcile to the effective tax rate: | | | |
State income taxes, net of federal benefit | 4.5 | | | 4.5 | |
Excess tax benefits related to stock compensation | — | | | (0.3) | |
Tax credits | (1.7) | | | (1.2) | |
Global Intangible Low-taxed Income | (0.1) | | | 0.6 | |
Foreign income taxes | (0.5) | | | — | |
Valuation allowance | (0.3) | | | — | |
Reversal of uncertain tax positions | (1.6) | | | (5.2) | |
Other | 2.6 | | | 1.9 | |
| 23.3 | % | | 21.3 | % |
Walter Energy Accrual | — | | | (0.4) | % |
Effective income tax rate | 23.3 | % | | 20.9 | % |
Segment Analysis | | | | | | | | | | | |
| Nine months ended |
| June 30, |
| 2021 | | 2020 |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % |
Adjustments to reconcile to the effective tax rate: | | | |
State income taxes, net of federal benefit | 4.2 | | | 4.5 | |
Excess tax (benefits) related to stock-based compensation | (0.3) | | | (0.6) | |
Tax credits | (1.7) | | | (2.6) | |
Global Intangible Low-taxed Income | 0.5 | | | (0.1) | |
Foreign income tax rate differential | (0.4) | | | (0.6) | |
Nondeductible compensation | 0.6 | | | 0.6 | |
Basis difference in foreign investment | 1.2 | | | — | |
Valuation allowance | 0.7 | | | (0.5) | |
Reversal of uncertain tax positions | — | | | (0.5) | |
Other | 0.5 | | | 1.5 | |
Effective income tax rate | 26.3 | % | | 22.7 | % |
Infrastructure
Net sales for the quarter ended June 30, 2020 decreased 16.1 percent to $209.9 million compared to $250.2 million in the prior year period due to decreased shipment volumes due to the effects of the pandemic, which were partially offset by higher pricing.
Gross profit for the quarter ended June 30, 2020 decreased to $73.5 million from $92.7 million in the prior year period primarily due to decreased shipment volumes and $4.5 million of expenses related to the pandemic, including certain unfavorable volume variances treated as period costs, voluntary emergency paid leave for employees and additional sanitation and cleaning fees. The prior year period included $2.3 million of costs related to the Krausz acquisition. Gross margin was 35.0% for the quarter ended June 30, 2020 compared to 37.1% in the prior year period.
SG&A for the quarter ended June 30, 2020 decreased to $29.7 million from $32.1 million in the prior year period. This decrease was primarily due to decreased personnel related costs from temporary cost savings initiatives related to the pandemic. SG&A as a percentage of net sales was 14.1% and 12.8% for the quarters ended June 30, 2020 and 2019, respectively.
Technologies
Net sales in the quarter ended June 30, 2020 decreased to $18.6 million from $24.1 million in the prior year period, due to lower shipment volumes. We experienced a decline during the quarter as projects were delayed because of shelter-in-place restrictions.
Gross profit in the quarter ended June 30, 2020 was $2.2 million and was $4.5 million in the prior year period. The decline in gross profit was primarily due to the decline in net sales. Expenses related directly to the pandemic totaled $0.7 million.
SG&A decreased to $6.0 million from $6.7 million in the prior year period. SG&A as a percentage of net sales was 32.3% and 27.8% for the quarters ended June 30, 2020 and 2019, respectively.
Corporate
SG&A was $11.4 million in the quarter ended June 30, 2020 and was $8.7 million in the prior year period. This increase was primarily due to information technology-related activities, personnel-related costs and professional fees.
Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended June 30, 2020 | | | | | | |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) | | | | | | |
Net sales | $ | 643.0 | | | $ | 55.8 | | | $ | — | | | $ | 698.8 | |
Gross profit | 225.9 | | | 8.4 | | | — | | | $ | 234.3 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 95.6 | | | 18.9 | | | 31.8 | | | 146.3 | |
Strategic reorganization and other charges | 0.4 | | | — | | | 11.5 | | | 11.9 | |
| 96.0 | | | 18.9 | | | 43.3 | | | 158.2 | |
Operating income (loss) | $ | 129.9 | | | $ | (10.5) | | | $ | (43.3) | | | 76.1 | |
Non-operating expenses: | | | | | | | |
Pension benefit other than service | | | | | | | (2.2) | |
Interest expense, net | | | | | | | 19.5 | |
Walter Energy Accrual | | | | | | | 0.2 | |
Income before income taxes | | | | | | | 58.6 | |
Income tax expense | | | | | | | 13.3 | |
Net income | | | | | | | $ | 45.3 | |
| | | | | | | |
| Nine months ended June 30, 2019 | | | | | | |
| Infrastructure | | Technologies | | Corporate | | Total |
| | | | | | | |
| (in millions) | | | | | | |
Net sales | $ | 636.3 | | | $ | 64.8 | | | $ | — | | | $ | 701.1 | |
Gross profit | 221.4 | | | 10.7 | | | — | | | $ | 232.1 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 88.7 | | | 20.2 | | | 25.3 | | | 134.2 | |
Strategic reorganization and other charges | 1.1 | | | — | | | 11.5 | | | 12.6 | |
| 89.8 | | | 20.2 | | | 36.8 | | | 146.8 | |
Operating income (loss) | $ | 131.6 | | | $ | (9.5) | | | $ | (36.8) | | | 85.3 | |
Pension costs other than service | | | | | | | 0.8 | |
Interest expense, net | | | | | | | 15.6 | |
Walter Energy Accrual | | | | | | | 38.4 | |
Loss before income taxes | | | | | | | 30.5 | |
Income tax benefit | | | | | | | 6.9 | |
Net income | | | | | | | $ | 23.6 | |
Consolidated Analysis
Net sales for the nine months ended June 30, 2020 decreased 0.3% or $2.3 million to $698.8 million from $701.1 million in the prior year period primarily due to decreased shipment volumes in both segments due to the pandemic, which was offset by the addition of Krausz sales in the first quarter, and higher pricing.
Gross profit for the nine months ended June 30, 2020 increased $2.2 million to $234.3 million from $232.1 million in the prior year period, primarily due to higher pricing, improved product mix and the addition of Krausz, which was partially offset by decreased shipments and pandemic-related expenses. The prior year period included $4.5 million of expenses related to the Krausz inventory step-up. Gross margin was 33.5% for the nine months ended June 30, 2020 compared to 33.1% in the prior year period.
Selling, general and administrative expenses (“SG&A”) for the nine months ended June 30, 2020 increased to $146.3 million from $134.2 million in the prior year period due primarily to the inclusion of Krausz’s SG&A expenses in the first quarter as well as information technology related activities, personnel-related costs and professional fees. SG&A as a percentage of net sales was 20.9% and 19.1% in the nine months ended June 30, 2020 and 2019, respectively.
Strategic reorganization and other charges were $11.9 million in the nine months ended June 30, 2020 and were $12.6 million in the prior year period.
Interest expense, net increased $3.9 million in the nine months ended June 30, 2020 compared to the prior year period primarily due to decreased interest income and a non-cash adjustment to capitalized interest in the first quarter of the current period. The components of interest expense, net are provided below.
| | | | | | | | | | | |
| Nine months ended | | |
| June 30, | | |
| 2020 | | 2019 |
| | | |
| (in millions) | | |
Notes | $ | 18.6 | | | $ | 18.6 | |
Deferred financing costs amortization | 0.9 | | | 0.9 | |
ABL Agreement | 0.4 | | | 0.4 | |
Capitalized interest, including adjustment | 0.2 | | | (1.2) | |
Other interest expense | 0.3 | | | (0.3) | |
| 20.5 | | | 18.4 | |
Interest income | $ | (1.0) | | | $ | (2.8) | |
Interest expense, net | $ | 19.5 | | | $ | 15.6 | |
The reconciliation between the U.S. federal statutory income tax rate and the effective tax rate is presented below.
| | | | | | | | | | | |
| Nine months ended | | |
| June 30, | | |
| 2020 | | 2019 |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % |
Adjustments to reconcile to the effective tax rate: | | | |
State income taxes, net of federal benefit | 4.5 | | | 5.6 | |
Excess tax benefits related to stock compensation | (0.6) | | | (1.4) | |
Tax credits | (2.6) | | | (2.7) | |
Global Intangible Low-taxed Income | (0.1) | | | 1.2 | |
Foreign income taxes | (0.6) | | | — | |
Valuation allowance | (0.5) | | | — | |
Reversal of uncertain tax positions | (0.5) | | | (7.2) | |
Other | 2.0 | | | 3.6 | |
| 22.6 | % | | 20.0 | % |
Walter Energy Accrual | — | | | 4.6 | |
Transition tax benefit | — | | | (1.9) | |
Effective income tax rate | 22.6 | % | | 22.7 | % |
Segment Analysis
Infrastructure
Net sales for the nine months ended June 30, 20202021 increased 1.1%$108.5 million or 16.9 percent to $643.0$750.1 million compared to $636.3$641.6 million in the prior year period primarily due to the inclusionhigher shipment volumes across most of Krausz in the first quarter andour product lines, higher pricing partially offsetand the result of $6.0 million in Krausz sales recorded during the three months ended March 31, 2021 by declines in volume associated witheliminating the pandemic.
Gross profit for the nine months ended June 30, 20202021 increased $35.7 million to $225.9$261.1 million from $221.4$225.4 million in the prior year period primarily due to increased shipment volumes, higher pricing, improved manufacturing performance and the inclusionbenefit from the elimination of the Krausz and higher sales pricing,one-month reporting lag. These increases were partially offset by declines in volume and recognition of certain manufacturing variances as periodhigher costs and other expensesassociated with inflation, a $2.4 million Inventory write-off associated with the pandemic. The prior year period included $4.5announcement of the closure of our Aurora, Illinois and Surrey, British Columbia, Canada facilities and $2.9 million ofin expenses related to the Krausz inventory step-up.pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning fees. Gross margin was 35.1%34.8% for the nine months ended June 30, 2020 compared to 34.8%2021 and was 35.1% in the prior year period.
SG&A for the nine months ended June 30, 20202021 increased to $95.6$103.3 million from $88.7$95.6 million in the prior year period. This increase was primarily due to the inclusiona result of Krausz, whichan increase in personnel-related expenses, including higher sales commissions as a result of higher net sales and orders, incentive compensation and stock-based compensation. Additionally, SG&A increased as a result of inflation, information technology spending and new product development. Partially offsetting these increases was offset by costa temporary expense reduction measures we have takenof $2.9 million related to the pandemic.pandemic, including reduced travel, trade shows and events. SG&A as a percentage of net sales was 14.9%13.8% and 13.9%14.9% for the nine months ended June 30, 20202021 and 2019,2020, respectively.
Technologies
Net sales infor the nine months ended June 30, 2020 decreased2021 increased $8.1 million or 14.2% to $55.8$65.3 million from $64.8 million in the prior year period, driven by lower shipment volumes from our metering products and reduced volume of leak-detection services performed due to the pandemic, which was offset by higher pricing.
Gross profit was $8.4 million compared to $10.7 million in the prior year period.
SG&A decreased to $18.9 million in the nine months ended June 30, 2020 compared to $20.2$57.2 million in the prior year period, primarily due to reduced marketinghigher shipment volumes of our metering and personnel-related expenses, including those cost reduction measures relatedleak detection-related products.
Gross profit for the nine months ended June 30, 2021 was $11.1 million compared to $8.9 million in the pandemic.prior year period. Gross margin percentage was 17.0% and 15.6% in the nine months ended June 30, 2021 and 2020, respectively.
SG&A was $19.9 million and $18.9 million in the current and prior year periods, respectively. The increase was primarily as a result of new product development. SG&A as a percentage of net sales was 33.9%30.5% and 31.2%33.0% for the nine months ended June 30, 20202021 and 2019,2020, respectively.
Corporate
SG&A was $39.0 million and $31.8 million in the nine months ended June 30, 2021 and 2020, and was $25.3 million in the prior year period. Thisrespectively. The increase was primarily due to IT-related activities,as a result of higher personnel-related costsexpenses including incentive compensation and professional fees, which were offset by cost reduction measures we have taken related to the pandemic.stock-based compensation expense.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $170.7$228.6 million at June 30, 20202021 and $116.1$145.1 million of additional borrowing capacity under our ABL Agreement based on June 30, 20202021 data. Undistributed earnings from our subsidiaries in Canada, China, and Israel are considered to be permanently invested outside the United States. At June 30, 2020,2021, cash and cash equivalents included $8.3$31.1 million, $5.4$11.7 million and $17.6$6.3 million in Israel, Canada and China, and Israel, respectively. As of August 6, 2020, we have no plans to repatriate cash.
WeOn July 29, 2021, we declared a quarterly dividend of $0.0525$0.0550 per share, on July 28, 2020, payable on or about August 20, 2020,2021, which will result in an estimated $8.3$8.7 million cash outlay.
We did not purchaserepurchase any shares of our outstanding common stock under our share repurchase program during the quarterthree and nine months ended June 30, 20202021 and have $145had $145.0 million remaining onunder our share repurchase authorization. To enhance our liquidity position in response to the pandemic, we elected to temporarily suspend share repurchases under our existing share repurchase program. The program remains authorized by the Board of Directors and we may resume share repurchases in the future at any time, depending upon market conditions, our capital needs and other factors.
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.
| | | | | | | | | | | |
| Nine months ended |
| June 30, |
| 2021 | | 2020 |
| | | |
| (in millions) |
Collections from customers | $ | 797.4 | | | $ | 716.2 | |
Disbursements, other than interest and income taxes | (636.3) | | | (586.0) | |
Walter Energy payment | — | | | (22.2) | |
Interest payments, net | (25.2) | | | (24.3) | |
Income tax payments, net | (12.6) | | | (5.9) | |
Cash provided by operating activities | $ | 123.3 | | | $ | 77.8 | |
| | | | | | | | | | | |
| Nine months ended | | |
| June 30, | | |
| 2020 | | 2019 |
| | | |
| (in millions) | | |
Collections from customers | $ | 716.2 | | | $ | 704.0 | |
Disbursements, other than interest and income taxes | (586.0) | | | (635.6) | |
Walter tax matter payment | (22.2) | | | — | |
Interest payments, net | (24.3) | | | (23.2) | |
Income tax payments, net | (5.9) | | | (27.4) | |
Cash provided by operating activities | $ | 77.8 | | | $ | 17.8 | |
Collections from customers were higher during the nine months ended June 30, 20202021 compared to the prior year period primarily due to the inclusion of Krausz in our consolidated results.net sales growth.
DecreasedIncreased disbursements, other than interest and income taxes, during the nine months ended June 30, 20202021 primarily reflect the results of cost containment actions we have taken during the pandemic.relate to higher costs and expenses associated with increased sales. Additionally, we disbursed $22.2$22.0 million related to the final settlement of the Walter tax matter.matter in the prior year period.
Capital expenditures were $51.2$46.1 million in the nine months ended June 30, 2020 compared to $52.92021 and $51.2 million in the prior year period. These expenditures were primarily inassociated with previously announced large capital projects. For the full-year 2020,fiscal 2021, we have reducedprovided guidance that our plans for capital expenditures and now expect spendingare expected to be between $71$75.0 million and $75 million as compared with our prior guidance range of between $80 million and $90$80.0 million.
We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, income tax payments, capital expenditures and debt service obligations as they become due through June 30, 2021.2022.
We believe that additional borrowings through various financing alternatives remain available if required. The future effects of the pandemic cannot be predicted with certainty and may increase our borrowing costs and other costs of capital or otherwise adversely affect our financial condition and liquidity, and we cannot guarantee that we will have access to external financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues going forward.in the future.
ABL Agreement
At June 30, 2020,2021, the ABL Agreement consisted of a $175.0 million revolving credit facility forthat includes up to $175$25.0 million of revolving credit borrowings,through swing line loans and may have up to $60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150$150.0 million in certain circumstances subject to adequate borrowing base availability. We may borrow up to $25 million through swing line loans and may have up to $60 million of letters of credit outstanding.
At July 30, 2020, the maturity of the ABL Agreement was extended to July 29, 2025 and borrowingsBorrowings under the amended ABL Agreement bear interest at a floating rate equal to LIBOR, plus aan applicable margin ranging from 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus aan applicable margin ranging from 100 to 125 basis points. At July 31, 2020,June 30, 2021, the applicable LIBOR-based marginrate was LIBOR plus 200 basis points. The amended ABL agreement also calls for a commitment fee of 37.5 basis points, annually, on undrawn amounts.
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 canmay 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.
The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 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 underas defined in the ABL Agreement. Excess availability based on June 30, 2021 data was $145.1 million, as reduced by $15.0 million of outstanding letters of credit and $1.7 million of accrued fees and expenses.
5.5%4.0% Senior Unsecured Notes
On June 12, 2018,May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“Notes”), which mature in June 2026December 2029 and bear interest at 5.5%4.0%, paid semi-annually.semi-annually in June and December. We capitalized $5.5 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 cash on hand were used to redeem previously existing 5.5% Notes. 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 $460.1 million at June 30, 2020.our ABL Agreement.
An indenture securing the Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens, pay dividends and certain other restricted payments and make investments.liens. There are no financial maintenance covenants associated with the Indenture. We believe we were compliantin compliance with these covenants at June 30, 2020.2021.
We may redeem some or all of the Notes at any time or from time to time prior to June 15, 20212024 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or after June 15, 20212024 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, 20212024 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 willwould be required to offer to purchase the Notes at a price equal to 101% of the outstanding principal amount of the Notes.
5.5% Senior Unsecured Notes
On June 12, 2018, we privately issued $450.0 million of 5.5% Notes, which were set to mature in 2026 and bore interest at 5.5%, paid semi-annually. We called the 5.5% Notes effective June 17, 2021 and settled with proceeds from the issuance of the Notes and cash on hand. As a result, we incurred $16.7 million in loss on extinguishment of debt, comprised of a $12.4 million call premium and a $4.3 million write-off of the remaining deferred debt issuance costs associated with the retirement of the 5.5% Notes.
Our corporate credit rating and the credit rating for our debt are presented below. These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency.
| | | | | | | | | | | | | | | | | | | | | | | |
| Moody’s | | | | Standard & Poor’s | | |
| June 30, | | September 30, | | June 30, | | September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Corporate credit rating | Ba2 | | Ba2 | | BB | | BB |
ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
Notes | Ba3 | | Ba3 | | BB | | BB |
Outlook | Stable | | Stable | | Stable | | Stable |
agencies. | | | | | | | | | | | | | | | | | | | | | | | |
| Moody’s | | Standard & Poor’s |
| June 30, | | September 30, | | June 30, | | September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Corporate credit rating | Ba1 | | Ba2 | | BB | | BB |
ABL Agreement | Not rated | | Not rated | | Not rated | | Not rated |
4.0% Notes | Ba1 | | N/A | | BB | | N/A |
5.5% Notes | N/A | | Ba3 | | N/A | | BB |
Outlook | Stable | | Stable | | Stable | | Stable |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, including 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 June 30, 20202021 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 June 30, 2020,2021, we had $13.8$15.0 million of letters of credit and $37.7$36.7 million of surety bonds outstanding.
Seasonality
Our business is seasonal due to the impactas a result of cold weather conditions. Net sales and operating income have historically been lowest in the quarterlythree month 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
During the quarterthree months ended June 30, 2020,2021, we continued our multi-year implementation of upgrades to our enterprise resource planning (ERP) system and the implementation of a new information technology system for processing of payroll and employee-related transactions.
Aside from the above, 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.
As a result of the COVID-19 pandemic, many of our employees began working remotely in March 2020 and continued to do so as of the date of this filing. This change to our working environment didhas not havehad a material effect on our internal control over financial reporting during the most recent quarter.reporting. We will continue monitoring and assessing any impacts from the pandemic on our internal controls.
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.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Refer to the information provided in Note 13.12. to the Notes to the Condensed Consolidated Financial Statements presented in Item 1. of Part I of this report.
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.
The negative impact of the COVID-19 pandemic on our operations may increase
The outbreak of COVID-19 is impacting cities, states and countries around the world and is temporarily changing the way we live and work. The pandemic has also caused a shift in how we manage our business, think about work and how our work gets done. Businesses as well as federal, state and local governments have implemented significant measures to attempt to mitigate this public health crisis and may continue to take additional actions. Although the ultimate severity and duration of the pandemic is uncertain at this time, the pandemic is having meaningful adverse impacts on our financial condition and results of operations as discussed in PART I, “Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”. As the impact of the pandemic continues, we may continue to experience additional plant closures, illness or quarantine of our employees, supply chain disruptions, transportation delays, cost increases, more extensive travel restrictions, closures or disruptions of businesses and facilities, or social, economic, political or labor instability in the affected areas. These same factors may continue to impact our suppliers, customers and distributors and the severity of such impacts could increase. We have implemented significant changes to the way we work in an attempt to enhance and secure the health and safety of our workforce and the communities in which they operate. However, the health implications of the pandemic are extensive and the extent, duration and severity of the pandemic are highly uncertain. It is also uncertain whether the measures we have taken — and additional measures we may undertake in the future — and the actions taken by governmental agencies will be successful. Accordingly, should there be unexpected health implications for our employees, communities or others, we could face litigation or other claims and we could suffer damage to our reputation, brand and operations, which could adversely affect our business.
We have incurred additional costs to address the pandemic as discussed in PART I, “Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,”, including costs associated with unfavorable volume variances, voluntary emergency paid leave, additional cleaning, disinfectants and sanitation materials for our employees and at our facilities. We expect to continue to incur such costs, which may be significant, as we continue to implement operational changes in response to this pandemic. All of our facilities were operational and able to fill orders on August 6, 2020, and our teams have worked effectively to address the few temporary closures we have experienced. The pandemic has also caused supply chain disruption that has resulted in higher costs in the manufacture of our products. We expect these conditions to persist for the near term and may worsen until the pandemic abates.
Continued disruptions in our markets and the global economy may cause us to have to assess impairments of our assets and cause us to incur and record non-cash impairment charges.
Further, our management is focused on mitigating the impact of the pandemic on our operations, which has required, and will continue to require, a large investment of time and resources across our business and may delay other strategic initiatives and large capital projects that are important to the business. Additionally, many of our employees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
The extent to which the pandemic impacts us will depend on a number of factors and developments that we are not able to predict or control, including, among others: the severity of the virus; the duration of the outbreak; governmental, business and other actions (which could include limits on funding for our products or services); the health of and the effect on our workforce; and the potential effects on our internal controls including those over financial reporting and information technology as a result of changes in working environments such as shelter-in-place and similar orders that are applicable to our employees, including management. In addition, if the pandemic continues to create disruptions or turmoil in the credit or financial markets, it could adversely affect our ability to access capital on favorable terms and continue to meet our liquidity needs, all of which are highly uncertain and cannot be predicted.
We also cannot predict the impact that the pandemic will have on third parties with which we do business, and each of their financial conditions, including their viability and ability to pay for our products and services; however, any material effect on these parties could adversely impact us. The extent of the impact of the pandemic on our operations and financial results depends on future developments and is highly uncertain. The situation is changing rapidly and future impacts may materialize that are not yet known.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarterthree months ended June 30, 2020,2021, 781 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:units.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 (in millions) |
April 1-30, 2020 | | — | | | $ | — | | | — | | | $ | 145.0 | |
May 1-31, 2020 | | — | | | — | | | — | | | 145.0 | |
June 1-30, 2020 | | 529 | | | 9.70 | | | — | | | 145.0 | |
Total | | 529 | | | $ | — | | | — | | | 145.0 | |
We have temporarily suspendeddid not repurchase any shares of our share repurchase program due to COVID-19. We have $145common stock during the three months ended June 30, 2021, and we had $145.0 million remaining under our share repurchase authorization.
Item 6. EXHIBITS
| | | | | | | | |
Exhibit No. | | Document |
10.1* | | |
31.1* | | |
31.2* | | |
32.1* | | |
32.2* | | |
101* | | |
104* | | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its iXBRL tags are embedded within the Inline XBRL document. |
* Filed or furnished as applicable with this quarterly report
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: | August 6, 20205, 2021 | By: | /s/ Michael S. NancarrowSuzanne G. Smith |
| | | Michael S. NancarrowSuzanne G. Smith |
| | | Chief Accounting Officer |