UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
    QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 20212022
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-32892
MUELLER WATER PRODUCTS, INC.
(Exact name of registrant as specified in its charter)

Delaware 20-3547095
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Abernathy Road N.EN.E.
Suite 1200
Atlanta, GA 30328
(Address of principal executive offices)
(770) 206-4200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, par value $0.01MWANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer           Accelerated filer     
Non-accelerated filer    Smaller reporting company      
Emerging growth company     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No
There were 156,873,419156,264,139 shares of $0.01 par value common stock of the registrant outstanding at January 31, 2022, which trade under the ticker symbol MWA on the New York Stock Exchange.2023.




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PART I
Item 1.     FINANCIAL STATEMENTS
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 December 31,September 30,
 20212021
 (in millions, except share amounts)
Assets:
Cash and cash equivalents$207.3 $227.5 
Receivables, net of allowance for credit losses of $4.1 million and $3.5 million180.4 212.2 
Inventories, net209.7 184.7 
Other current assets30.6 29.3 
Total current assets628.0 653.7 
Property, plant and equipment, net286.9 283.4 
Intangible assets, net386.9 392.5 
Goodwill117.7 115.1 
Other noncurrent assets74.0 73.3 
Total assets$1,493.5 $1,518.0 
Liabilities and stockholders’ equity:
Current portion of long-term debt$1.0 $1.0 
Accounts payable83.9 92.0 
Other current liabilities114.4 127.1 
Total current liabilities199.3 220.1 
Long-term debt445.9 445.9 
Deferred income taxes99.3 95.1 
Other noncurrent liabilities57.1 62.0 
Total liabilities801.6 823.1 
Commitments and contingencies (Note 12.)
Common stock: 600,000,000 shares authorized; 156,834,758 and 157,955,433 shares outstanding at December 31, 2021 and September 30, 2021, respectively1.6 1.6 
Additional paid-in capital1,313.8 1,342.2 
Accumulated deficit(624.5)(643.9)
Accumulated other comprehensive income (loss)1.0 (5.0)
Total stockholders’ equity691.9 694.9 
Total liabilities and stockholders’ equity$1,493.5 $1,518.0 
 December 31,September 30,
 20222022
 (in millions, except share amounts)
Assets:
Cash and cash equivalents$125.6 $146.5 
Receivables, net of allowance for credit losses of $6.1 million and $5.6 million
201.9 228.0 
Inventories, net314.0 278.7 
Other current assets30.4 26.8 
Total current assets671.9 680.0 
Property, plant and equipment, net302.9 301.6 
Intangible assets, net355.6 361.2 
Goodwill100.0 98.6 
Other noncurrent assets56.2 56.7 
Total assets$1,486.6 $1,498.1 
Liabilities and stockholders’ equity:
Current portion of long-term debt$0.9 $0.8 
Accounts payable103.5 122.8 
Other current liabilities109.2 117.4 
Total current liabilities213.6 241.0 
Long-term debt446.1 446.1 
Deferred income taxes85.8 86.3 
Other noncurrent liabilities53.3 55.4 
Total liabilities798.8 828.8 
Commitments and contingencies (Note 10.)
Common stock: 600,000,000 shares authorized; 156,208,077 and 155,844,138 shares outstanding at December 31, 2022, and September 30, 2022, respectively
1.6 1.6 
Additional paid-in capital1,271.0 1,279.6 
Accumulated deficit(544.8)(567.3)
Accumulated other comprehensive loss(40.0)(44.6)
Total stockholders’ equity687.8 669.3 
Total liabilities and stockholders’ equity$1,486.6 $1,498.1 

The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months ended
December 31,
 20212020
(in millions, except per share amounts)
Net sales$272.3 $237.4 
Cost of sales184.7 159.0 
Gross profit87.6 78.4 
Operating expenses:
Selling, general and administrative56.3 49.2 
Strategic reorganization and other charges2.4 1.4 
Total operating expenses58.7 50.6 
Operating income28.9 27.8 
Other expenses (income):
Pension benefit other than service(1.0)(0.8)
Interest expense, net4.3 6.1 
Net other expenses3.3 5.3 
Income before income taxes25.6 22.5 
Income tax expense6.2 5.8 
Net income$19.4 $16.7 
Net income per share:
Basic$0.12 $0.11 
Diluted$0.12 $0.11 
Weighted average shares outstanding:
Basic158.0 158.1 
Diluted158.9 158.8 
Dividends declared per share$0.058 $0.055 
 Three months ended
December 31,
 20222021
(in millions, except per share amounts)
Net sales$314.8 $272.3 
Cost of sales221.6 184.7 
Gross profit93.2 87.6 
Operating expenses:
Selling, general and administrative62.9 56.3 
Strategic reorganization and other (benefits) charges(3.7)2.4 
Total operating expenses59.2 58.7 
Operating income34.0 28.9 
Other expenses (income):
Pension expense (benefit) other than service0.9 (1.0)
Interest expense, net3.7 4.3 
Net other expenses4.6 3.3 
Income before income taxes29.4 25.6 
Income tax expense6.9 6.2 
Net income$22.5 $19.4 
Net income per share:
Basic$0.14 $0.12 
Diluted$0.14 $0.12 
Weighted average shares outstanding:
Basic156.4 158.0 
Diluted157.0 158.9 
Dividends declared per share$0.061 $0.058 

The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 Three months ended
December 31,
20212020
 (in millions)
Net income$19.4 $16.7 
Other comprehensive income (loss):
Pension0.4 0.7 
Income tax effects(0.1)(0.2)
Foreign currency translation5.7 4.5 
Total comprehensive income6.0 5.0 
Comprehensive income$25.4 $21.7 
 Three months ended
December 31,
20222021
 (in millions)
Net income$22.5 $19.4 
Other comprehensive income (loss) :
Pension benefit adjustments0.9 0.4 
Income tax effects(0.3)(0.1)
  Foreign currency translation4.0 5.7 
   Total other comprehensive income, net4.6 6.0 
Comprehensive income$27.1 $25.4 

The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY 
(UNAUDITED)
Three months ended
December 31,
20212020
(in millions)
Common stock
Balance, beginning of period$1.6 $1.6 
Change in common stock at par value— — 
Balance, end of period1.6 1.6 
Additional paid-in capital
Balance, beginning of period1,342.2 1,378.0 
Dividends declared(9.2)(8.7)
Shares retained for employee taxes(1.9)(0.9)
Shares repurchased under buyback program(20.0)— 
Stock-based compensation2.0 1.9 
Stock issued under stock compensation plan0.7 0.6 
Balance, end of period1,313.8 1,370.9 
Accumulated deficit
Balance, beginning of period(643.9)(714.2)
Net income19.4 16.7 
Cumulative effect of accounting change— (0.1)
Balance, end of period(624.5)(697.6)
Accumulated other comprehensive income (loss)
Balance, beginning of period(5.0)(24.7)
Other comprehensive income6.0 5.0 
Balance, end of period1.0 (19.7)
Total stockholders' equity$691.9 $655.2 
  Common  
stock
Additional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
(loss) income
Total    
 (in millions)
Balance at September 30, 2022$1.6 $1,279.6 $(567.3)$(44.6)$669.3 
Net income— — 22.5 — 22.5 
Dividends declared— (9.5)— — (9.5)
Stock-based compensation— 1.8 — — 1.8 
Shares retained for employee taxes— (1.5)— — (1.5)
Common stock issued— 0.6 — — 0.6 
Other comprehensive income, net of tax— — — 4.6 4.6 
Balance at December 31, 2022$1.6 $1,271.0 $(544.8)$(40.0)$687.8 


  Common  
stock
Additional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
(loss) income
Total    
 (in millions)
Balance at September 30, 2021$1.6 $1,342.2 $(643.9)$(5.0)$694.9 
Net income— — 19.4 — 19.4 
Dividends declared— (9.2)— — (9.2)
Stock-based compensation— 2.0 — — 2.0 
Shares retained for employee taxes— (1.9)— — (1.9)
Stock repurchased under buyback program(20.0)— — (20.0)
Common stock issued— 0.7 — — 0.7 
Other comprehensive income, net of tax— — — 6.0 6.0 
Balance at December 31, 2021$1.6 $1,313.8 $(624.5)$1.0 $691.9 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three months ended
December 31,
 20212020
 (in millions)
Operating activities:
Net income$19.4 $16.7 
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
Depreciation8.0 7.7 
Amortization7.2 7.0 
Stock-based compensation2.0 1.9 
Pension benefit(0.7)(0.5)
Deferred income taxes3.6 1.6 
Inventory reserves provision3.5 0.9 
Other, net1.0 0.5 
Changes in assets and liabilities, net of acquisition:
Receivables, net31.9 24.0 
Inventories(28.3)(4.8)
Other assets(0.8)(1.3)
Accounts payable(8.4)(9.4)
Other current liabilities(12.8)(9.9)
Other noncurrent liabilities(5.8)(0.3)
Net cash provided by operating activities19.8 34.1 
Investing activities:
Capital expenditures(11.0)(15.6)
Acquisition purchase price adjustment0.2 — 
Proceeds from sales of assets— 0.1 
Net cash used in investing activities(10.8)(15.5)
Financing activities:
Dividends paid(9.2)(8.7)
Employee taxes related to stock-based compensation(1.9)(0.9)
Common stock issued0.7 0.6 
Proceeds from financing transaction— 3.9 
Deferred financing costs paid— (0.5)
Common stock repurchased under buyback program(20.0)— 
Capital leases(0.1)(0.2)
Net cash used in financing activities(30.5)(5.8)
Effect of currency exchange rate changes on cash1.3 1.3 
Net change in cash and cash equivalents(20.2)14.1 
Cash and cash equivalents at beginning of period227.5 208.9 
Cash and cash equivalents at end of period$207.3 $223.0 

 Three months ended
December 31,
 20222021
 (in millions)
Operating activities:
Net income$22.5 $19.4 
Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of acquisition:
Depreciation7.8 8.0 
Amortization7.0 7.2 
Gain on sale of assets(4.0)— 
Stock-based compensation1.8 2.0 
Pension expense (benefit)1.1 (0.7)
Deferred income taxes(0.9)3.6 
Inventory reserves provision1.2 3.5 
Other, net0.5 1.0 
Changes in assets and liabilities, net of acquisition:
Receivables, net26.4 31.9 
Inventories(36.1)(28.3)
Other assets(3.6)(0.8)
Accounts payable(19.6)(8.4)
Other current liabilities(8.4)(12.8)
Other noncurrent liabilities(2.2)(5.8)
Net cash (used in) provided by operating activities(6.5)19.8 
Investing activities:
Capital expenditures(9.9)(11.0)
Acquisition, net of cash acquired— 0.2 
Proceeds from sale of assets5.1 — 
Net cash used in investing activities(4.8)(10.8)
Financing activities:
Dividends paid(9.5)(9.2)
Employee taxes related to stock-based compensation(1.5)(1.9)
Common stock issued0.6 0.7 
Common stock repurchased under buyback program— (20.0)
Financing leases(0.1)(0.1)
Net cash used in financing activities(10.5)(30.5)
Effect of currency exchange rate changes on cash0.9 1.3 
Net change in cash and cash equivalents(20.9)(20.2)
Cash and cash equivalents at beginning of period146.5 227.5 
Cash and cash equivalents at end of period$125.6 $207.3 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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 Three months ended
December 31,
 20212020
 (in millions)
Supplemental cash flow information
Cash paid for interest, net$10.0 $12.4 
Cash paid for income taxes0.4 0.7 

 Three months ended
December 31,
 20222021
 (in millions)
Supplemental cash flow information:
Cash paid for interest, net$8.6 $10.0 
Cash paid for income taxes, net$0.2 $0.4 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 20212022
(UNAUDITED)
Note. 1Note 1. Organization and Basis of Presentation
Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in 2two business segments: Water Flow Solutions and Water Management Solutions. These segments are based on a management reorganization that became effective October 1, 2021; prior period information has been recast to conform to the current presentation.2021. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. The “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries, andsubsidiaries. With regard to the Company’s segments, “we,” “us” or “our” may also refer to the segment being discussed.
On December 3, 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”). During the year ended September 30, 2021, we aligned the consolidation of the financial statements of Krausz in the Company’s consolidated financial statements, eliminating the previous inclusion of Krausz financial statements with a one-month reporting lag. In accordance with applicable accounting literature, the elimination of the one-month reporting lag is considered to be a change in accounting principle. We believe this change in accounting principle is preferable as the financial statements of all of our subsidiaries are now reported on the same basis, providing the most current information available. The effect of the elimination of the reporting lag during the year ended September 30, 2021 resulted in an increase of $6.0 million to net sales and an increase of $1.4 million to operating income. We concluded that the effect of this change is not material to the balance sheets, statements of operations, statements of cash flows, net income and earnings per share and therefore have not retrospectively applied this change.
On June 14, 2021, we acquired all the outstanding capital stock of i2O Water Ltd (“i2O”), a provider of pressure management solutions to more than 100 water companies in 45 countries. The consolidated balance sheet at September 30,During the three months ended December 31, 2021, included the preliminary estimated fair valueswe recorded a purchase price adjustment of the net assets$0.2 million, resulting in a final purchase price of i2O. The Company is still reviewing the impact of taxes and certain other items. The results of i2O’s operations and cash flows subsequent to the acquisition are included in the Company’s consolidated statement of operations and consolidated statement of cash flows, respectively. Refer to Note 2. for additional disclosures related to the acquisition.$19.5 million.
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 in recording assets, liabilities, sales and expenses as well as in the disclosure of contingent assets and 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, 2021.2022. 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 at September 30, 20212022 was derived from our audited financial statements, but it does not include all disclosures required by GAAP.
Our business is seasonal as a result of the impact of cold weather conditions. Net sales and operating income historically have been lowest in the three 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.

In preparing these financial statements in conformity with GAAP, we have considered and, where appropriate, included the effects of the COVID-19 pandemic on our operations. 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.
Recently Adopted Accounting GuidancePronouncements
During 2016,In December 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 326 - Current Expected Credit Losses to replace the “incurred loss” impairment approach with an “expected loss” approach, which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We have completed historical and forward-looking analyses for receivables and adopted this guidance effective October 1, 2020. Upon adoption, there was no material impact to our financial statements.
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In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, "Income Taxes2022-06, “Reference Rate Reform (Topic 740)848): SimplifyingDeferral of the Accounting for Income Taxes”Sunset Date of Topic 848” (“ASU 2019-12”2022-06”). ASU 2019-12 simplifies2022-06 defers the accountingsunset date for income taxes by clarifying and amending existing guidance relatedapplying the reference rate reform relief in ASC 848 to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in theDecember 31, 2024 from December 31, 2022. ASU 2022-06 became effective tax rate computation, among other clarifications. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.
immediately upon issuance. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective from March 12, 2020, but canmay be adopted prospectively from a date within an interim period subsequent to March 12, 2020. We evaluated our contracts and the optional expedients provided by ASU 2020-04. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. ASU 2019-12 was effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.

Restructuring
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Between November 2019 and March 2021, we have announced the purchase and closure of several facilities. We purchased a new facility in Kimball, Tennessee to support and enhance our investment in our Chattanooga, Tennessee large casting foundry and closed our facilities in Hammond, Indiana, Woodland, Washington and Surrey, British Columbia, Canada. We also announcedcompleted the closure of our facility in Aurora, Illinois which we expect to complete by the third quarter ofduring our fiscal year 2022. The majority of the activities from these facilities have been, or will be,plants were transferred to our Kimball, Tennessee facility. Activity in accruedIn connection with these reorganizations, we recognized certain restructuring reportedcosts. During the three months ended December 31, 2022, we recorded a $4.0 million gain, before tax, on the sale of the Aurora, Illinois facility. The restructuring accrual amounts as part of Other current liabilities, is presented below.
Three months ended
December 31,
20212020
(in millions)
Beginning balance$3.1 $2.8 
Expenses incurred1.2 0.2 
Amounts paid(1.3)(1.1)
Ending balance$3.0 $1.9 

December 31, 2022 and December 31, 2021 were immaterial.
New Markets Tax Credit Program

On December 22, 2020, we entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (“Wells Fargo”) related to our brass foundry construction project in Decatur, Illinois under a qualified New Markets Tax Credit program (“NMTC”). The NMTC is a federal program intended to encourage capital investment in qualified lower income communities. Under the NMTC, investors claim federal income tax credits over a period of seven years in connection with qualified investments in the equity of community development entities (“CDE”s), which are privately managed investment institutions that are certified to make qualified low-income community investments, such as in our foundry project.

Under the NMTC, Wells Fargo contributed capital of $4.8 million to an investment fund and we loaned $12.2 million to the fund. Wells Fargo is entitled to the associated tax credits, which are subject to 100% recapture if we do not comply with various regulations and contractual provisions surrounding the foundry project. We have indemnified Wells Fargo for any loss or recapture of tax credits related to the transaction until the seven-year period elapses. We do not anticipate any credit recaptures will be required in connection with this arrangement.

The investment fund contributed $16.5 million cash for a 99.99% stake in a joint venture (“Sub-CDE”) with a CDE. The Sub-CDE then loaned $16.2 million to us, with the use of the loan proceeds restricted to foundry project expenditures. This transaction also includes a put/call provision under which we may be obligated or entitled to repurchase Wells Fargo’s interest in the investment fund. We believe that Wells Fargo will exercise its put option in December 2027 for nominal consideration, resulting in our becoming the sole owner of the investment fund, cancelling the related loans, and recognizing an estimated gain of $3.9 million.

We determined that the investment fund and the Sub-CDE are variable interest entities (“VIEs”) and that we are the primary beneficiary of the VIEs. The ongoing activities of the VIEs, namely collecting and remitting interest and fees and administering NMTC compliance, were contemplated in the initial design of the transaction and are not expected to
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significantly affect economic performance throughout the life of the VIEs. Additionally, we are obligated to deliver tax benefits and provide various other guarantees to Wells Fargo and to absorb the losses of the VIEs. Wells Fargo does not have a material interest in the underlying economics of the project. Consequently, we have included the financial statements of the VIEs in our consolidated financial statements.

Intercompany transactions between us and the VIEs have been eliminated in consolidation. Wells Fargo’s contribution to the investment fund is consolidated in our financial statements as anwithin Other noncurrent liabilityliabilities as a result of its redemption features.

Direct costs associated with Wells Fargo’s capital contribution have beenwere netted against the recorded proceeds, resulting in a net cash contribution of $3.9 million. Other direct costs associated with the transaction were capitalized and are being recognized as interest expense over the seven-year tax credit period. Incremental costs to maintain the structure during the compliance period are expensed as incurred.

Note 2.    Acquisitions
Acquisition of i2O Water Ltd
On June 14, 2021, we acquired all the outstanding capital stock of i2O for $19.7 million, net of cash acquired. The purchase agreement provided for customary final adjustments, including a net working capital adjustment that was completed during the three months ended December 31, 2021, resulting in a purchase price of $19.5 million.
We have recognized the assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of the purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for the business combination is considered to be preliminary. We are still gathering information related to income taxes and certain other items. The results of i2O are included in our Water Management Solutions segment.
The goodwill below is attributable to the strategic opportunities and synergies that we expect to arise from the acquisition of i2O and the value of its workforce. The goodwill is nondeductible for income tax purposes. Identified intangible assets consist of customer relationships, non-compete agreements and developed technology with an estimated weighted-average useful life of approximately 12 years and trade names with an indefinite life. Values of intangible assets were determined using a discounted cash flow method.
The following is a summary of the preliminary estimated fair values of the net assets acquired (in millions):
Assets, net of cash:
Receivables$0.5 
Inventories0.6 
Other current assets0.9 
Identified intangible assets:
     Tradename1.8 
     Customer relationships2.1 
     Non-compete agreements0.1 
     Developed technology3.5 
Goodwill11.9 
Liabilities:
Accounts payable(0.8)
Other current liabilities(1.1)
     Fair value of net assets acquired, net of cash$19.5 


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Note 3.    2.    Revenue from Contracts with Customers
We recognize revenue when control of promised products or services is transferred to our customers, in amounts that reflect the consideration to which we expect to be entitled in exchange for those products or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer.

Disaggregation of Revenue
We disaggregate
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Refer to Note 8. for disaggregation of our revenues from contracts with customers by reportable segment (see Note 10.) and further by geographical region, aswhich 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.

Contract Asset and Liability Balances

Differences in the timing of revenue recognition, billing and cash collection result in customer receivables, advance payments and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers as well as unbilled amounts (i.e., contract assets). Amounts are billed in accordance with contractual terms and unbilled amounts arise when the timing of billing differs from the timing of revenue recognized.

Advance payments and billings in excess of revenue are recognized and recorded as deferred revenue, the majority of which is classified as current based on the timing when we expect to receive within one year and therefore is includedrecognize revenue. We include current deferred revenue within Other current liabilities in the accompanying consolidated balance sheets. Deferred revenues representrevenue represents contract liabilities and areis recorded when customers remit cash payments in advance of our satisfaction of performance obligations under contractual arrangements. Contract liabilities are relieved and revenue is recognizedreversed when the performance obligation is satisfied.satisfied and revenue is recognized.

The table below represents the balances of our customer receivables and deferred revenues.revenue.

December 31,September 30,
20212021
(in millions)
Billed receivables$181.8 $213.4 
Unbilled receivables2.7 2.3 
Gross customer receivables184.5 215.7 
Allowance for credit losses(4.1)(3.5)
Receivables, net$180.4 $212.2 
Deferred revenues$7.4 $5.4 
December 31,September 30,
20222022
(in millions)
Billed receivables$203.5 $230.5 
Unbilled receivables4.5 3.1 
  Gross customer receivables208.0 233.6 
Allowance for credit losses(6.1)(5.6)
Receivables, net$201.9 $228.0 
Deferred revenue$8.4 $8.1 

Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Our performance obligations are satisfied at a point in time for sales of equipment or over time for our software hosting and leak detection monitoring services. Performance obligations are supported by customer contracts, which provide frameworks for the nature of the distinct products or services. We allocate the transaction price of each contract to the performance obligations on the basis of standalone selling price and recognize revenue when control of the performance obligation transfers to the customer. The transaction price is adjusted for our estimate of variable consideration which may include discounts and rebates. To estimate variable consideration, we apply the expected value or the most likely amount method, based on whichever method most appropriately predicts the amount of consideration we expect to receive. The method applied is typically based typically on historical experience and known trends. We do not recognize variable consideration inconstrain the event there are uncertainties in the amountamounts of variable consideration that are included in the transaction price, to be paid nor whenthe extent that it is probable there will bethat a significant reversal in the related revenue.amount of cumulative revenue recognized will not occur or when uncertainties around the variable consideration are resolved.

We exclude from the measurement of the transaction price all taxes assessed by a governmental authority. We classify shipping and handling costs, such as freight to our customers’ destinations, as a component of Cost of sales.

We have elected to use the practical expedient to not adjust the transaction price of a contract for the effects of a significant financing component if, at the inception of the contract, we expect that the period between when we transfer a product or service to a customer and when a customer remits payment will be one year or less.
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The revenues recognized at a point in time related toRevenue for the sale of our products areis recognized when the obligations of the terms of our contract are satisfied, which is when the customer is able to direct the use of and obtain substantially all of the benefits from the product, which generally occurs upon shipment when control of the product transfers to the customer.

We offer warranties to our customers in the form of assurance-type warranties thatwhich provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. These warranties cannot be purchased separately.separately from us.
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Costs to Obtain or Fulfill a Contract
Shipping and handling costs associated with freight activities after the customer has obtained control of a product are included in cost of sales at the time the related revenue is recognized.

We incur certain incremental costs to obtain a contract, which primarily relate to incremental sales commissions. Our sales commissions are paid based on a combination of orders and shipments, and we reserve the right to claw back any commissions in case of product returns, cancellations or lost collections. As the expected benefit associated with these incremental costs is generally one year or less based on the nature of the product sold and benefits received, we have applied a practical expedient and therefore do not capitalize the related costs and expense them as incurred.

Note 4.3. Income Taxes

The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.

 Three months ended
December 31,
20212020
U.S. federal statutory income tax rate21.0 %21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit3.9 4.5 
Excess tax benefits related to stock-based compensation(1.0)(0.6)
Tax credits(1.2)(1.4)
Global Intangible Low-Taxed Income0.3 0.6 
Foreign income tax rate differential(0.7)(0.9)
Valuation allowances1.4 1.5 
Other0.5 1.1 
Effective income tax rate24.2 %25.8 %
 Three months ended
December 31,
20222021
U.S. federal statutory income tax rate21.0 %21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit3.4 3.9 
Excess tax benefits related to stock-based compensation0.7 (1.0)
Tax credits(1.6)(1.2)
Global Intangible Low-Taxed Income0.8 0.3 
Foreign income tax rate differential(1.6)(0.7)
Nondeductible compensation0.5 — 
Valuation allowances(0.2)1.4 
Other0.5 0.5 
Effective income tax rate23.5 %24.2 %

At December 31, 20212022 and September 30, 2021,2022, the gross liabilities for unrecognized income tax benefits were $4.6$4.8 million and $4.8$4.7 million, respectively, and are included in Other noncurrent liabilities.

Note 5.4. Borrowing Arrangements

The components of our long-term debt are as follows:
 December 31,September 30,
 20212021
 (in millions)
4.0% Senior Notes$450.0 $450.0 
Finance leases2.0 2.2 
Total borrowings452.0 452.2 
Less deferred financing costs(5.1)(5.3)
Less current portion(1.0)(1.0)
Long-term debt$445.9 $445.9 
 December 31,September 30,
 20222022
 (in millions)
4.0% Senior Notes$450.0 $450.0 
Finance leases1.4 1.6 
Total borrowings451.4 451.6 
Less: deferred financing costs(4.4)(4.7)
Less: current portion(0.9)(0.8)
Long-term debt$446.1 $446.1 

ABL Agreement. Our ABL Agreementasset-based lending agreement, as amended, (“ABL”) is provided by a consortium of banking institutions and consists of a revolving credit facility for up to $175.0 million which includesin borrowing that expires on July 29, 2025. The ABL allows up to $25.0 million throughof 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 $150.0 million in certain circumstances subject to adequate borrowing base availability.

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Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR plus an applicable margin range of 200 to 225 basis points, or a base rate, as defined in the ABL, Agreement, plus an applicable margin range of from 100 to 125 basis points. At December 31, 20212022 the applicable margin wasfor LIBOR plusbased loans was 200 basis points and for base rate loans was 100 basis points.

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
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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 inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less certain reserves. Prepayments can be made at any time without penalty.

Substantially all of our United States subsidiaries are borrowers under the ABL 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 United States inventories,inventory, accounts receivable, certain cash balances and other related items.supporting assets.

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. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million orand 10% of the Loan Cap as defined in the ABL Agreement.ABL. Excess availability based on December 31, 20212022 data was $133.8$162.4 million, as reduced by $15.0$12.4 million of outstanding letters of credit and $1.4$0.2 million of accrued fees and expenses.

4.0% Senior Unsecured Notes. On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0%, paid semi-annually in June and December. We capitalized $5.5 million of financing costs thatwhich are being amortized over the term of the 4.0% Senior Notes using the effective interest method. Proceeds from the 4.0% Senior Notes, along with cash on hand, were used to redeem our previously existing 5.5% Senior Notes. Substantially all of our U.S.United States subsidiaries guarantee the 4.0% Senior Notes, thatwhich are subordinate to borrowings under our ABL Agreement.ABL. Based on quoted market prices, that arewhich is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $456.9$395.8 million at December 31, 2021.2022.

An indenture governingsecuring the 4.0% Senior Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at December 31, 2021.2022.

As set forth in the Indenture, we may redeem some or all of the 4.0% Senior Notes at any time or from time to time prior to June 15, 2024 at certain “make-whole” redemption prices and on or after June 15, 2024 at specified redemption prices. Additionally, we may redeem up to 40% of the aggregate principal amount of the 4.0% Senior Notes at any time or from time to time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices. Upon a change of control, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.amount.

Note 6. Derivative Financial Instruments
In connection with the acquisition of Singer Valve in 2017, we loaned funds to one of our Canadian subsidiaries. Although this intercompany loan has no direct effect on our consolidated financial statements, it creates exposure to currency risk for the Canadian subsidiary. To reduce this exposure, we entered into a U.S. dollar-Canadian dollar swap contract with the Canadian subsidiary and an offsetting Canadian dollar-U.S. dollar swap with a domestic bank. We have not designated these swaps as hedges and the changes in their fair value are included in earnings, offsetting the currency gains and losses associated with the intercompany loan.
The values of our currency swap contracts were liabilities of $1.2 million and $1.1 million at December 31, 2021 and September 30, 2021, respectively, and are included in Other current liabilities. The currency swap contracts expire in February 2022.
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Note 7.5. Retirement Plans

The components of net periodic benefit cost for our pension plans are presented below.

Three months ended
December 31,
 20212020
 (in millions)
Service cost$0.3 $0.4 
Pension costs (benefits) other than service:
Interest cost2.4 2.5 
Expected return on plan assets(3.8)(3.9)
Amortization of actuarial net loss0.4 0.6 
Pension benefits other than service(1.0)(0.8)
Net periodic benefit$(0.7)$(0.4)
Three months ended
December 31,
 20222021
 (in millions)
Service cost$0.2 $0.3 
Pension costs (benefits) other than service:
Interest cost3.5 2.4 
Expected return on plan assets(3.5)(3.8)
Amortization of actuarial net loss0.9 0.4 
Pension costs (benefits) other than service0.9 (1.0)
Net periodic costs (benefits)$1.1 $(0.7)

The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive income (loss).

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Note 8.6. Stock-based Compensation Plans

We grant various forms of stock-based compensation, including market-based restricted stock units (“MRSUs”), restricted stock units, stock options and performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”), Phantom Plan instruments under our Mueller Water Products, Inc. 2012 Phantom Plan, and Employee stock purchase plan instruments under our 2006 Employee Stock Purchase Plan. Grants issued during the three months ended December 31, 20212022 are as follows:

Number grantedWeighted average grant date fair value per instrumentTotal grant date fair value
(in millions)
Quarter ended December 31, 2021
    MRSUs230,089 $15.76 $3.6 
    Phantom Plan instruments199,549 $13.64 $2.7 
    Restricted stock units135,129 $13.64 $1.8 
    Non-qualified stock options457,482 $3.43 $1.6 
    PRSUs: 2020 award57,627 $13.81 $0.8 
    Employee stock purchase plan instruments38,069 $3.01 $0.1 
$10.6 
Number grantedWeighted average grant date fair value per instrumentTotal grant date fair value
(in millions)
Quarter ended December 31, 2022
MRSUs166,284 $15.08 $2.5 
PRSUs166,284 $11.41 $1.9 
Restricted stock units228,692 $11.39 $2.6 
Phantom Plan instruments267,093 $11.41 $3.0 
Non-qualified stock options573,279 $3.31 $1.9 
Employee stock purchase plan instruments47,463 $2.56 $0.1 
$12.0 

An MRSU award represents a target number of units that may be paid out at the end of a three-year award cycle based on a calculation of our relative total shareholder return (“TSR”) performance as compared with the TSR of a selected peer group's TSR.group. Settlements, in our common shares, will range from zero to 2two times the number of MRSUs granted, depending on our TSR performance relative to that of the peer group.
Compensation expense attributed to MRSUs is based on the fair value of the awards on their respective grant dates, as determined using a Monte Carlo model. The assumptions used to determine the grant-dategrant date fair value are indicated below.

November 30, 202129, 2022
Variables used in determining grant date fair value:
Dividend yield1.702.20 %
Risk-free rate0.764.20 %
Expected term (in years)2.832.8

The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the units are expected to be outstanding.
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At December 31, 2021,2022, the outstanding Phantom Plan instruments had a fair valuevalue of $14.40 per$10.76 per instrument and our liability for Phantom Plan instruments was $1.9$1.4 million and is included within Other current and Other noncurrent liabilities.

Stock options generally vest ratably over three years on each anniversary date. Compensation expense attributed to stock options is based on the fair value of the awards on their respective grant dates, using a Black-Scholes model. The assumptions used to determine the grant-dategrant date fair value are indicated below.

November 30, 202129, 2022
Dividend yield1.621.80 %
Risk-free rate1.333.89 %
Expected term (in years)6.00

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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 target number of units that may be paid out at the end of a three-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 two following years.cycle. Settlements, in our common shares, will range from zero to 2two times the number of PRSUs granted, depending on our financial performance relative to the targets.

We issued 240,412282,472 shares of common stock to settle PRSUs vested during the three months ended December 31, 2021 to settle PRSUs vested during the period.2022. Additionally, we issued 130,018128,048 and 141,13537,734 shares of common stock to settle restricted stock units vested and stock options exercised,exercised, respectively, during the three months ended December 31, 2021.2022. Additionally, 131,670 shares of common stock were surrendered to us to pay the withholding obligations of equity award participants.

Operating income included stock-based compensation expense of $2.6$2.7 million and $2.5$2.6 million during the three months ended December 31, 20212022 and 2020,2021, respectively. At December 31, 2021,2022, there was approximately $14.5$15.8 million of unrecognized compensation expense related to stock-based compensation arrangements and there were 57,627 PRSUs that have been awarded for the 2022 performance period forarrangements, which performance goal achievement cannot yetwill be determined.expensed through December 2025.

We excluded 1,274,371 and 277,344 and 258,522 stock-based compensation instruments from the calculations of diluted earnings per share in the three months ended December 31, 20212022 and 2020,2021, respectively, since their inclusion would have been antidilutive.
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Note 9.7. Supplemental Balance Sheet Information
Selected supplemental asset information is presented below.

 December 31,September 30,
 20212021
 (in millions)
Inventories:
Purchased components and raw material$125.9 $100.9 
Work in process41.5 41.6 
Finished goods42.3 42.2 
Total inventories$209.7 $184.7 
Other current assets:
Prepaid expenses$13.8 $12.8 
Non-trade receivables10.0 10.7 
Maintenance and repair supplies and tooling2.7 2.9 
Income taxes0.2 0.2 
Workers’compensation reimbursement receivable0.8 0.8 
Other current assets3.1 1.9 
Total other current assets$30.6 $29.3 
Property, plant and equipment:
Land$5.5 $6.1 
Buildings84.4 84.6 
Machinery and equipment436.2 433.3 
Construction in progress91.5 83.7 
Total property, plant and equipment617.6 607.7 
Accumulated depreciation(330.7)(324.3)
Property, plant and equipment, net$286.9 $283.4 
Other noncurrent assets:
Operating lease right-of-use assets$26.4 $27.1 
Maintenance and repair supplies and tooling19.8 19.3 
Workers’ compensation reimbursement receivable2.7 2.7 
Pension asset17.9 16.8 
Note receivable1.8 1.8 
Deferred financing fees1.2 1.3 
Other noncurrent assets4.2 4.3 
Total other noncurrent assets$74.0 $73.3 
 December 31,September 30,
 20222022
 (in millions)
Inventories:
Purchased components and raw materials$200.2 $181.8 
Work in process, net56.0 56.8 
Finished goods, net57.8 40.1 
Total inventories$314.0 $278.7 
Other current assets:
Prepaid expenses$18.1 $14.6 
Non-trade receivables2.3 1.6 
Maintenance and repair supplies and tooling3.2 2.8 
Income taxes0.8 0.8 
Workers’ compensation reimbursement receivable2.5 2.6 
Other current assets3.5 4.4 
Total other current assets$30.4 $26.8 
Property, plant and equipment:
Land$5.7 $5.7 
Buildings86.5 87.6 
Machinery and equipment453.4 456.0 
Construction in progress110.1 104.7 
Total property, plant and equipment655.7 654.0 
Accumulated depreciation(352.8)(352.4)
Property, plant and equipment, net$302.9 $301.6 
Other noncurrent assets:
Operating lease right-of-use assets$25.1 $26.0 
Maintenance and repair supplies and tooling20.4 20.4 
Workers’ compensation reimbursement receivable3.6 3.6 
Pension asset0.4 0.6 
Note receivable1.8 1.7 
Deferred financing fees0.9 1.0 
Other noncurrent assets4.0 3.4 
Total other noncurrent assets$56.2 $56.7 

Selected supplemental liability information is presented below.

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Selected supplemental liability information is presented below.
December 31,September 30, December 31,September 30,
20212021 20222022
(in millions) (in millions)
Other current liabilities:Other current liabilities:Other current liabilities:
Compensation and benefitsCompensation and benefits$28.4 $44.6 Compensation and benefits$27.1 $40.2 
Customer rebatesCustomer rebates27.4 19.6 Customer rebates21.3 16.2 
Income taxes payableIncome taxes payable15.1 7.5 
Warranty accrualWarranty accrual5.6 6.7 Warranty accrual6.5 6.5 
Deferred revenues7.4 5.4 
Deferred revenueDeferred revenue8.4 8.1 
Refund liabilityRefund liability5.2 6.0 Refund liability4.5 4.2 
Taxes other than income taxesTaxes other than income taxes4.6 4.4 Taxes other than income taxes3.6 4.4 
Operating lease liabilitiesOperating lease liabilities3.6 4.0 Operating lease liabilities4.7 4.4 
Workers’ compensation accrualWorkers’ compensation accrual2.7 2.6 Workers’ compensation accrual4.8 4.6 
CARES Act payroll tax liabilitiesCARES Act payroll tax liabilities3.6 3.6 CARES Act payroll tax liabilities— 4.4 
Restructuring liabilitiesRestructuring liabilities3.1 3.1 Restructuring liabilities0.7 3.3 
Environmental liabilitiesEnvironmental liabilities— 1.2 Environmental liabilities0.7 0.7 
Interest payableInterest payable0.8 6.2 Interest payable0.8 5.3 
Income taxes payable10.8 8.5 
Other current liabilitiesOther current liabilities11.2 11.2 Other current liabilities11.0 7.6��
Total other current liabilitiesTotal other current liabilities$114.4 $127.1 Total other current liabilities$109.2 $117.4 
Other noncurrent liabilities:Other noncurrent liabilities:Other noncurrent liabilities:
Operating lease liabilitiesOperating lease liabilities$23.8 $24.6 Operating lease liabilities$21.6 $22.4 
Warranty accrualWarranty accrual3.1 3.0 Warranty accrual3.4 4.2 
Transition tax liabilityTransition tax liability4.7 4.7 Transition tax liability4.1 4.1 
Uncertain tax position liabilityUncertain tax position liability4.6 4.8 Uncertain tax position liability4.8 4.7 
NMTC liabilityNMTC liability3.9 3.9 NMTC liability3.9 3.9 
Workers’ compensation accrualWorkers’ compensation accrual8.1 7.9 Workers’ compensation accrual6.5 6.5 
Asset retirement obligationAsset retirement obligation3.6 3.6 Asset retirement obligation3.6 3.6 
CARES Act payroll tax liabilities— 3.6 
Deferred development grantDeferred development grant2.5 2.5 Deferred development grant2.5 2.5 
Other noncurrent liabilitiesOther noncurrent liabilities2.8 3.4 Other noncurrent liabilities2.9 3.5 
Total other noncurrent liabilitiesTotal other noncurrent liabilities$57.1 $62.0 Total other noncurrent liabilities$53.3 $55.4 

Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis each September 1st and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
The following table summarizes information concerning our goodwill, balance inall of which is within our Water Management Solutions segment, during the three months ended December 31, 2021,2022, in millions.

Balance at September 30, 20212022:
Goodwill$115.1822.7 
Acquisition purchase price adjustmentAccumulated impairment(0.2)(724.1)
Effects of changesNet goodwill98.6 
Activity during the three months ended December 31, 2022:
Change in foreign currency exchange rates2.81.4 
Balance at December 31, 20212022$117.7100.0 

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Note 10.8. Segment Information

We adopted a new management structure effective October 1, 2021; prior period information has been recast to conform to the current presentation. The recasting has no effect on our previously reported consolidated balance sheets, consolidated statements of operations, or consolidated statements of cash flows. Thehave two newly named business units and reportable segments, are Water Flow Solutions and Water Management Solutions. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Summarized financial information for our segments is presented below.

Three months ended
December 31,
20212020
 (in millions)
Net sales, excluding intercompany:
Water Flow Solutions$154.9 $128.8 
Water Management Solutions117.4 108.6 
$272.3 $237.4 
Operating income (loss):
Water Flow Solutions$31.3 $23.1 
Water Management Solutions11.4 17.0 
Corporate(13.8)(12.3)
$28.9 $27.8 
Depreciation and amortization:
Water Flow Solutions$7.4 $7.4 
Water Management Solutions7.7 7.2 
Corporate0.1 0.1 
$15.2 $14.7 
Strategic reorganization and other charges:
Water Flow Solutions$— $0.1 
Water Management Solutions0.1 — 
Corporate2.3 1.3 
$2.4 $1.4 
Capital expenditures:
Water Flow Solutions$9.4 $12.3 
Water Management Solutions1.6 3.2 
Corporate— 0.1 
$11.0 $15.6 
Water Flow Solutions disaggregated net revenues:
Central$40.5 $35.0 
Northeast30.0 24.9 
Southeast37.3 23.1 
West38.1 36.3 
United States145.9 119.3 
Canada7.9 5.7 
Other international locations1.1 3.8 
$154.9 $128.8 
Water Management Solutions disaggregated net revenues:
Central$28.8 $26.8 
Northeast24.3 24.4 
Southeast25.5 22.6 
West24.7 22.1 
United States103.3 95.9 
Canada7.6 6.7 
Other international locations6.5 6.0 
$117.4 $108.6 
Three months ended
December 31,
20222021
 (in millions)
Net sales, excluding intercompany:
Water Flow Solutions$165.6 $154.9 
Water Management Solutions149.2 117.4 
$314.8 $272.3 
Operating income (loss):
Water Flow Solutions$24.2 $31.3 
Water Management Solutions19.6 11.4 
Corporate(9.8)(13.8)
$34.0 $28.9 
Depreciation and amortization:
Water Flow Solutions$7.7 $7.4 
Water Management Solutions7.0 7.7 
Corporate0.1 0.1 
$14.8 $15.2 
Strategic reorganization and other (benefits) charges:
Water Flow Solutions$— $— 
Water Management Solutions— 0.1 
Corporate(3.7)2.3 
$(3.7)$2.4 
Capital expenditures:
Water Flow Solutions$7.8 $9.4 
Water Management Solutions2.1 1.6 
Corporate— — 
$9.9 $11.0 
Water Flow Solutions disaggregated net revenue:
Central$44.0 $40.5 
Northeast31.3 30.0 
Southeast33.4 37.3 
West49.2 38.1 
United States157.9 145.9 
Canada4.4 7.9 
Other international locations3.3 1.1 
$165.6 $154.9 
Water Management Solutions disaggregated net revenue:
Central$41.5 $28.8 
Northeast31.2 24.3 
Southeast33.3 25.5 
West29.1 24.7 
United States135.1 103.3 
Canada7.3 7.6 
Other international locations6.8 6.5 
$149.2 $117.4 
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Note 11.9. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is as follows:

  Pension, net of taxForeign currency translationTotal
(in millions)
Balance at September 30, 2021$(22.2)$17.2 $(5.0)
Current period other comprehensive income0.3 5.7 $6.0 
Balance at December 31, 2021$(21.9)$22.9 $1.0 
  Pension, net of taxForeign currency translationTotal
(in millions)
Balance at September 30, 2022$(36.3)$(8.3)$(44.6)
Current period other comprehensive income0.6 4.0 4.6 
Balance at December 31, 2022$(35.7)$(4.3)$(40.0)


Note 12.10. 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. AdministrativeLegal and administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. Other than the litigation described below, we do not believe that any of our outstanding litigation would have a materially adverse effect on our financial position, results of operations, cash flows or liquidity.

Environmental. We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the operations at many of our properties and with respect to remediating environmental conditions that may exist at our own or other properties. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.

In the acquisition agreement pursuant to which a predecessor to Tyco International plc, now Johnson Controls International plc (“Tyco”), sold our businesses to a previous owner in August 1999, Tyco agreed to indemnify us and our affiliates, among other things, for all “Excluded Liabilities.” Excluded Liabilities include, among other things, substantially all liabilities relating to the time prior to August 1999, including environmental liabilities. The indemnity survives indefinitely. Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. Since 2007, Tyco has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the Tyco indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such Tyco indemnitors has changed. Should any of these Tyco indemnitors become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.

On July 13, 2010, Rohcan Investments Limited, the former owner of property leased by Mueller Canada Ltd. and located in Milton, Ontario, filed suita lawsuit against Mueller Canada Ltd. and its directors seeking C$10.0 million in damages arising from the defendants’ alleged environmental contamination of the property and breach of lease. On November 15, 2022, Mueller Canada Ltd. leasedagreed to pay Rohcan Investments Limited C$1.5 million in settlement of all liability, damages and other claims related to the property from 1988 through 2008.lawsuit. We have paid the settlement amount, and are pursuing indemnification from a former owner for certain potential liabilities that are alleged in this lawsuit, and we have accrued for other liabilities not covered by indemnification.  On December 7, 2011, the Court denied the plaintiff’s motion for summary judgment.lawsuit.

The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act 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 the 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 December 31, 2021.

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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 employees. 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 whileWhile the extent to which the pandemic affectscontinues to affect our results will depend on future developments, the outbreakpandemic could result in material effects to our future financial position, results of operations, cash flows and liquidity.

Mass Shooting Event at our Mueller Co. Facility in Albertville, Alabama. On June 15, 2021, we experienced a mass shooting event at our Mueller Co. facility in Albertville, Alabama, in which two employees were killed and two employees were injured.Alabama. Various claims arising from the event have been filed 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 outcome of these claims, or legal proceedings, and related effects arising from this event cannot be predicted with certainty.
Indemnifications
Indemnification. We are a party to contracts in which it is common for us to agree to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct. We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities.

Additionally, in connection with the sale of assets and the divestiture of businesses, such as the divestitures of U.S. Pipe and Anvil, we may agree to indemnify buyers and related parties for certain losses or liabilities incurred by these parties with respect to: (i) the representations and warranties made by us to these parties in connection with the sale and (ii) liabilities related to the pre-closing operations of the assets or business sold. Indemnities related to pre-closing operations generally include certain environmental and tax liabilities and other liabilities not assumed by these parties in the transaction.

Indemnities related to the pre-closing operations of sold assets or businesses normally do not represent additional liabilities to us, but simply serve to protect these parties from potential liability associated with our obligations existing at the time of the sale. As with any liability, we have accrued for those pre-closing obligations that are considered probable and reasonably estimable. Should circumstances change, increasing the likelihood of payments related to a specific indemnity, we will accrue a liability when future payment is probable and the amount is reasonably estimable.

Other Matters. We monitor and analyze our warranty experience and costs periodically and may revise our accruals as necessary. Critical factors in our analyses include warranty terms, specific claim situations, general incurred and projected failure rates, the nature of product failures, product and labor costs, and general business conditions.

We are party to a number of lawsuits arising in the ordinary course of business, including product liability cases for products manufactured by us or third parties. 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 financial position, results of operations, cash flows or liquidity.

Note 13.11. Subsequent Events
On January 27, 2022,25, 2023, our Board of Directors declared a dividend of $0.058$0.061 per share on our common stock, payable on or about February 21, 20222023 to stockholders of record at the close of business on February 10, 2022.2023.
A new collective bargaining agreement with the International Association of Machinists and Aerospace Workers at our Chattanooga, Tennessee facility was successfully negotiated and signed in January, 2023. The agreement expires January 14, 2027.

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Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this report. This report contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.federal securities laws. All statements that address activities, events or developments that 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,environmental/sustainability plans, go-to-market strategies, operational excellence, acceleration of new product development, end marketfinancial or operating performance, net sales performance, adjusted operating income and adjusted EBITDA performance, margins, capital expenditure plans, litigation outcomes, capital allocation and growth strategies,strategy plans, restructuring efficiencies and projected warranty charges. Forward-looking statements are based on certain assumptions and assessments made by the Company in light of the Company’s experience and perception of historical trends, current conditions and expected future developments.
Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the extent, duration and severitycontinued impact of the impact of theCOVID-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,collection of receivables); logistical challenges and supply chain interruptions, potential litigationdisruptions, geopolitical conditions, or other events; an inability to realize the anticipated benefits from our operational initiatives, including our large capital investments in Chattanooga and claims emanating fromKimball, Tennessee, and Decatur, Illinois, plant closures, and our reorganization and related strategic realignment activities; an inability to attract or retain a skilled and diverse workforce, increased competition related to the COVID-19 pandemic,workforce and health, safetylabor markets; an inability to protect the Company’s information systems against service interruption, misappropriation of data or breaches of security; failure to comply with personal data protection and 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;privacy laws; cyclical and changing demand in core markets such as municipal spending;spending, residential construction, and natural gas distribution; government monetary or fiscal policies; residential and nonresidential construction, and natural gas distribution;the impact of adverse weather conditions; the impact of manufacturing and product performance; expectations for changes in volumes, continued executionthe impact of cost productivity initiativeswage, commodity and improved pricing; warranty exposures (includingmaterials price inflation; the adequacyimpact of warranty reserves); the Company’s abilityclaims; an inability to successfully resolve significant legal proceedings claims, lawsuits or government investigations; compliance with environmental, trade and anti-corruption laws and regulations; climate change and legal or regulatory responses thereto; 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; an inability to achieve some or all of our Environmental, Social and Governance (“ESG”) goals; as well asgoals; and other factors that are described in the section entitled “RISK FACTORS” in Item 1A of the Company’s most recently filedrecent Annual Report on Form 10-K and in this Quarterly Reportlater filings on Form 10-Q, (all of which risks may be amplified by the pandemic). as applicable.

Forward-looking statements do not guarantee future performance and are only as of the date they are made and do not guarantee future performance.made. The Company undertakes no duty to update its forward-looking statements except as required by law. Undue reliance should not be placed on any forward-looking statements. 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
Business
We estimate approximately 55-60%Approximately 60% to 65% of our 20212022 net sales were forassociated with repair and replacement directly related to municipal water infrastructure spending, approximately 30-35%25% to 30% were related to residential construction activity and less than 10% were related to natural gas utilities spending.
We expect the operating environment during fiscal year 20222023 to be very challenging as a result of the uncertainty around the depthongoing inflationary pressures, labor challenges and duration of the pandemic which has accelerated and may continue to accelerate, inflation, labor availability and global supply chain disruptions.potential recession. We anticipate that growthhealthy demand in the municipal repair and replacement market due to favorable budgets, especially at larger municipalities. While demand from the new residential construction end market was at healthy levels during the fiscal year 2022, especially for lot and land development activity, we anticipate that activity levels will help offset anticipated challengesslow in the project-related portion of the municipal market.2023 based on higher interest rates leading to a decrease in demand for new residential housing. In January 2022,2023, Blue Chip Economic Indicators forecastedforecasted a 17.3% decrease in housing starts to be flat for the calendar 2022year 2023 as compared withto the priorcalendar year despite robust demand for housing and low inventories.2022.
We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable manufacturing variances, and labor shortages and additional cleaning, including disinfectants and sanitation materials, for our employees and at our facilities. We expect to continue to incur such costs that 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 dueIn addition to the pandemic. The last such closure waspandemic, the war in August 2020. The pandemic alsoUkraine has caused supply chain disruptiondisruptions that hashave resulted in higher costs to manufacture our products and in the manufacture of our products.capital expenditures. We expect these conditions to persist in the near term and may worsen until the pandemic abates.term.
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We announced a new management structure effective October 1, 2021. The new structure is designed to increase revenue growth, drive operational excellence, accelerate new product development and enhance profitability. We anticipate the reorganization will strengthen the alignment of products, solutions and services with customer needs, accelerate new product introductions and improve product life cycle management. Thehave two newly named business units and reportable segments aresegments: Water Flow Solutions and Water Management Solutions.
Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Flow Solutions represented 56%57% of our fiscal 20212022 net sales. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Water Management Solutions represented 44%43% of our fiscal 20212022 net sales.

In January 2023, the International Association of Machinists and Aerospace Workers (“IAM”) in our Chattanooga, Tennessee facility, which consists of approximately 100 members, went on strike for five regularly scheduled workdays. The effect of this event was immaterial to our operations. A new collective bargaining agreement was successfully negotiated and signed with the IAM in our Chattanooga, Tennessee facility in January, 2023. The agreement expires on January 14, 2027.

Results of Operations

Three Months Ended December 31, 2022 Compared to Three Months Ended December 31, 2021

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Results of Operations
 Three months ended December 31, 2022
 Water Flow SolutionsWater Management SolutionsCorporate  Total    
 (in millions)
Net sales$165.6 $149.2 $— $314.8 
Gross profit$46.6 $46.6 $— $93.2 
Operating expenses:
Selling, general and administrative22.4 27.0 13.5 62.9 
Strategic reorganization and other benefits— — (3.7)(3.7)
Total operating expenses22.4 27.0 9.8 59.2 
Operating income (loss)$24.2 $19.6 $(9.8)34.0 
Non-operating expenses:
Pension expense other than service0.9 
Interest expense, net3.7 
Income before income taxes29.4 
Income tax expense6.9 
Net income$22.5 
 Three months ended December 31, 2021
 Water Flow SolutionsWater Management SolutionsCorporateTotal
 (in millions)
Net sales$154.9 $117.4 $— $272.3 
Gross profit$52.1 $35.5 $— $87.6 
Operating expenses:
Selling, general and administrative20.8 24.0 11.5 56.3 
Strategic reorganization and other charges— 0.1 2.3 2.4 
Total operating expenses20.8 24.1 13.8 58.7 
Operating income (loss)$31.3 $11.4 $(13.8)28.9 
Non-operating expenses:
Pension benefit other than service(1.0)
Interest expense, net4.3 
Income before income taxes25.6 
Income tax expense6.2 
Net income$19.4 
Three Months Ended December 31, 2021 Compared to Three Months Ended December 31, 2020
 Three months ended December 31, 2021
 Water Flow SolutionsWater Management SolutionsCorporate  Total    
 (in millions)
Net sales$154.9 $117.4 $— $272.3 
Gross profit52.1 35.5 — $87.6 
Operating expenses:
Selling, general and administrative20.8 24.0 11.5 56.3 
Strategic reorganization and other charges— 0.1 2.3 2.4 
Total operating expenses20.8 24.1 13.8 58.7 
Operating income (loss)$31.3 $11.4 $(13.8)28.9 
Non-operating expenses:
Pension benefit other than service(1.0)
Interest expense, net4.3 
Income before income taxes25.6 
Income tax expense6.2 
Net income$19.4 
 Three months ended December 31, 2020
 Water Flow SolutionsWater Management SolutionsCorporateTotal
 (in millions)
Net sales$128.8 $108.6 $— $237.4 
Gross profit41.9 36.5 — $78.4 
Operating expenses:
Selling, general and administrative18.7 19.5 11.0 49.2 
Strategic reorganization and other charges0.1 — 1.3 1.4 
Total operating expenses18.8 19.5 12.3 50.6 
Operating income (loss)$23.1 $17.0 $(12.3)27.8 
Pension benefit other than service(0.8)
Interest expense, net6.1 
Income before income taxes22.5 
Income tax expense5.8 
Net income$16.7 
Consolidated Analysis
Net sales in the three months ended December 31, 20212022 increased $34.9$42.5 million or 14.7%15.6% to $272.3$314.8 million as compared with $237.4 million in the prior period primarily as a result of increased shipment volumes and higher pricing across most of our product lines.
Gross profit in the three months ended December 31, 2021 increased $9.2 million to $87.6 million from $78.4$272.3 million in the prior year period primarily as a result of increased shipment volumes and higher pricing across most of our product lines in both segments, which werewas partially offset by higher costs of sales associated with inflation, unfavorable manufacturing performance, labor challenges, supply chain disruptions and our restructuring activity. lower volumes on certain products.

Gross margin was 32.2%profit in the three months ended December 31, 20212022 increased $5.6 million or 6.4% to $93.2 million from $87.6 million in the prior year period, primarily as a result of higher pricing across most of our product lines, which was partially offset by higher cost of sales and lower volumes on certain products. The higher cost of sales was primarily a result of unfavorable manufacturing performance and inflation. Unfavorable manufacturing performance was a result of outsourcing,
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machine downtime, supply chain disruptions and labor productivity mainly in our foundry operations. Gross margin was 29.6% in the three months ended December 31, 2022 as compared with 33.0%32.2% in the prior year period.

Selling, general and administrative expenses (“SG&A”) in the three months ended December 31, 20212022 increased $6.6 million or 11.7% to $56.3$62.9 million from $49.2$56.3 million in the prior year period primarily as a result of the inclusion of i2O Water,due to higher personnel costs and sales commissions, investments in technology, inflation and increased travel and trade show expenditures, inflation, increased information technology related activities, and personnel-related costs. partially offset by foreign exchange gains. SG&A as a percentage of net sales was 20.0% and 20.7% for both the three months ended December 31, 2022 and December 31, 2021, and 2020.respectively.
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Strategic reorganization and other charges in the three months ended December 31, 2022 was a benefit of $3.7 million which primarily consisted of a $4.0 million gain, before tax, on the sale of the Aurora, Illinois facility, which was partially offset by certain transaction-related expenses. Strategic reorganization and other charges for the three months ended December 31, 2021 were $2.4 million, which primarily consisted of expenses associated with the Albertville tragedy, as well as termination benefits associated with the previously announced closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada. Strategic reorganization and other charges

Net interest expense in the three months ended December 31, 2020 were $1.42022 declined $0.6 million and primarily relatedor 14.0% to transaction costs as well as legal and professional service expenses.
Interest expense, net declined $1.8$3.7 million in the three months ended December 31, 2021 as compared with $4.3 million in the prior year period primarily due to higher interest income received as a result of the refinancing of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”) with the 4.0% Senior Notes.rising interest rates. The components of net interest expense are provided below.
Three months ended
December 31,
20212020
 (in millions)
5.5% Senior Notes$— $6.2 
4.0% Senior Notes4.5 — 
Deferred financing costs amortization0.2 0.3 
ABL Agreement0.2 0.2 
Capitalized interest(0.6)(0.6)
Other interest cost0.1 0.2 
Total interest expense4.4 6.3 
Interest income(0.1)(0.2)
Interest expense, net$4.3 $6.1 

Three months ended
December 31,
20222021
 (in millions)
4.0% Senior Notes4.5 4.5 
Deferred financing costs amortization0.3 0.2 
ABL Agreement0.2 0.2 
Capitalized interest(0.7)(0.6)
Other interest cost0.1 0.1 
Total interest expense4.4 4.4 
Interest income(0.7)(0.1)
Interest expense, net$3.7 $4.3 
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The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.

 Three months ended
December 31,
20212020
U.S. federal statutory income tax rate21.0 %21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit3.9 4.5 
Excess tax benefits related to stock-based compensation(1.0)(0.6)
Tax credits(1.2)(1.4)
Global Intangible Low-taxed Income0.3 0.6 
Foreign income tax rate differential(0.7)(0.9)
Valuation allowances1.4 1.5 
Other0.5 1.1 
Effective income tax rate24.2 %25.8 %
 Three months ended
December 31,
20222021
U.S. federal statutory income tax rate21.0 %21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit3.4 3.9 
Excess tax benefits related to stock-based compensation0.7 (1.0)
Tax credits(1.6)(1.2)
Global Intangible Low-taxed Income0.8 0.3 
Foreign income tax rate differential(1.6)(0.7)
Nondeductible compensation0.5 — 
Valuation allowances(0.2)1.4 
Other0.5 0.5 
Effective income tax rate23.5 %24.2 %

Segment Analysis

Water Flow Solutions

Net sales in the three months ended December 31, 20212022 increased 20.3%$10.7 million or 6.9% to $154.9$165.6 million as compared with $128.8 million in the prior year period primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.
Gross profit in the three months ended December 31, 2021 increased 24.3% to $52.1 million from $41.9$154.9 million in the prior year period primarily as a result of higher pricing increased shipment volumes, and favorable manufacturing performance,across most of the segment’s product lines partially offset by higher costs associated with inflation. lower volumes.

Gross margin was 33.6%profit in the three months ended December 31, 2021 and 32.5%2022 decreased $5.5 million or 10.6% to $46.6 million from $52.1 million in the prior year period primarily as a result of lower volumes and higher cost of sales associated with unfavorable manufacturing performance, and inflation which were partially offset by higher pricing. Gross margin was 28.1% in the three months ended December 31, 2022 and 33.6% in the prior year period.

SG&A in the three months ended December 31, 2022 increased $1.6 million to $22.4 million from $20.8 million in the prior year period primarily due to higher personnel costs and sales commissions, investments in technology, inflation and increased travel and trade show expenditures. SG&A as a percentage of net sales was 13.5% and 13.4% in the three months ended December 31, 2022 and 2021, respectively.

Water Management Solutions

Net sales in the three months ended December 31, 2022 increased $31.8 million or 27.1% to $149.2 million as compared with $117.4 million in the prior year period, primarily as a result of higher pricing across most of the segment’s product lines as well as increased volumes.

Gross profit in the three months ended December 31, 2022 was $46.6 million as compared with $35.5 million in the prior year period. Gross margin increased to 31.2% in the three months ended December 31, 2022 as compared with 30.2% in the prior year period primarily as a result of higher pricing and increased volumes, partially offset by unfavorable manufacturing performance and inflation.

SG&A in the three months ended December 31, 2022 increased $3.0 million to $27.0 million from $24.0 million in the prior year period primarily due to higher personnel costs and sales commissions, and outside services, partially offset by foreign exchange gains. SG&A as a percentage of net sales was 18.1% and 20.4% in the three months ended December 31, 2022 and 2021, respectively.

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Corporate

SG&A increased $2.0 million to $13.5 million in the three months ended December 31, 2021 increased to $20.8 million from $18.7 million in the prior year period primarily as a result of increased travel and trade show expenditures, inflation, increased information technology related activities, and higher personnel-related expenses. SG&A as a percentage of net sales was 13.4% and 14.5% in the three months ended December 31, 2021 and 2020, respectively.
Water Management Solutions
Net sales in the three months ended December 31, 2021 increased 8.1% to $117.4 million2022 as compared with $108.6 million in the prior year period, primarily as a result of increased shipment volumes and higher pricing across most of the segment’s product lines.
Gross profit in the three months ended December 31, 2021 was $35.5 million as compared with $36.5 million in the prior year period. Gross margin declined to 30.2% in the three months ended December 31, 2021 as compared with 33.6% in the prior year period primarily as a result of higher Cost of sales associated with inflation and unfavorable manufacturing performance which was partially offset by higher pricing and increased shipment volumes.
SG&A increased to $24.0 million from $19.5 million in the prior year period primarily as a result of the inclusion of i2O Water, engineering investments, inflation, increased travel and trade show expenditures, and higher personnel-related expenses. SG&A as a percentage of net sales was 20.4% and 18.0% in the three months ended December 31, 2021 and 2020, respectively.
Corporate
SG&A increased to $11.5 million in the three months ended December 31, 2021 as compared with $11.0 million in the three months ended December 31, 2020 primarily as a result of inflationincreased personnel costs and higher personnel-related expenses.inflation.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of $207.3$125.6 million at December 31, 20212022 and $133.8$162.4 million of additional borrowing capacity under our ABL Agreement based on December 31, 20212022 data. Undistributed earnings from our subsidiaries in Israel, Canada, China, and IsraelChina are considered to be permanently invested outside the United States. At December 31, 2021,2022, cash and cash equivalents included $40.6included $48.3 million, $24.3$7.2 million, and $2.9$10.7 million in Israel,Israel, Canada, and China, respectively.
We declared a quarterly dividend of $0.058$0.061 per share on January 27, 2022,25, 2023, payable on or about February 21, 20222023 to holders of record as of February 10, 2022,2023, which will result in an estimated $9.2$9.5 million cash outlay.
We repurchased $20.0 milliondid not repurchase any of our outstanding common stock during the three months ended December 31, 20212022 and had $115.0$100.0 million remaining of our share repurchase authorization.
The ABL Agreement and 4.0% Senior Notes contain customary representations and warranties, covenants and provisions governing an event of default.  The covenants restrict our ability to engage in certain specified activities, including but not limited to the payment of dividends and the redemption of our common stock.
Collections from customers were higher duringNet cash used in operating activities was $6.5 million during the three months ended December 31, 20212022 as compared with net cash provided by operating activities of $19.8 million in the prior year period primarily as a result of net sales growth between the periods.period. Inventory purchases increased during the three months ended December 31, 20212022 as compared with the three months ended December 31, 20202021 as a result of inflation, increased sales volumesupply chain management and supply change management.inflation. Additionally, the decline in cash as a result of operating activities during the comparable periods included: a deferred tax increase of $4.5 million, a pension expense increase of $1.8 million, and a $1.2 million increase in inventory reserves. Other current liabilities and other noncurrent liabilities decreased primarily as a result of employee incentive payouts and the timing of payroll payments, the repayment of the CARES Act employer payroll tax deferral.deferral, interest payments, and the payment of restructuring expenses.

Capital expenditures were $11.0$9.9 million in the three months ended December 31, 20212022 as compared with $15.6$11.0 million in the prior year period. Capital expenditures decreased primarily as a result of lower expenditures associated with the new Decatur foundry as compared with the prior year period. For fiscal year 2022,2023, we have provided guidance that our capital expenditures are expected to be between $70.0 million and $80.0 million.
We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, income tax payments, capital expenditures and debt service obligations as they become due through December 31, 2022.
We believe that additional borrowings through various financing alternatives remain available if required. The2023. However, our ability to make these payments will depend largely on our future effects of the pandemic cannotoperating performance, which may be predicted with certainty and may increase our borrowing costsaffected by general economic, financial, competitive, legislative, regulatory, business and other costs of capital or otherwise adversely affectfactors beyond our financial condition and liquidity, and we cannot guarantee that we will have access to externalcontrol.
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financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues in the future.
ABL Agreement
AtAs of December 31, 2021, the2022, our ABL Agreement consistedis provided by a consortium of banking institutions and consists of a $175.0 million revolving credit facility which includesfor up to $175.0 million in borrowings that expires on July 28, 2025. Included in the ABL is the ability to borrow up to $25.0 million throughof 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 $150.0 million in certain circumstances subject to adequate borrowing base availability.

Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR plus an applicable margin ranging from 200 to 225 basis points, or a base rate, as defined in the ABL, Agreement, plus an applicable margin rangingrange from 100 to 125 basis points. At December 31, 2021,2022, the applicable ratemargin was LIBOR plus 200 basis points.points for LIBOR-based loans, and 100 basis points for base rate loans.

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 eligible inventories,inventory, less certain reserves. Prepayments can be made at any time with no penalty.

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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 related items.assets.

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. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million orand 10% of the Loan Cap as defined in the ABL Agreement.ABL. Excess availability based on December 31, 20212022 data was $133.8was $162.4 million, as reduced by $15.0$12.4 million of outstanding letters of credit and $1.4$0.2 million of accrued fees and expenses.

4.0% Senior Unsecured Notes

On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature in Decemberon June 15, 2029 and bear interest at 4.0%, paid semi-annually in June and December. We capitalized $5.5 million of financing costs, which are being amortized over the term of the 4.0% Senior Notes using the effective interest method. Proceeds from the 4.0% Senior Notes, along with cash on hand, were used to redeem previously existing 5.5% Senior Notes. Substantially all of our U.S. subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL Agreement.ABL. Based on quoted market prices, which is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $456.9$395.8 million at December 31, 2021.2022.

An indenture governingsecuring the 4.0% Senior Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at December 31, 2021.2022.
We
As set forth in the Indenture, we may redeem some or all of the 4.0% Senior Notes at any time or from time to time prior to June 15, 2024 at certain “make-whole” redemption prices (as set forth in the Indenture) and on or after June 15, 2024 at specified redemption prices (as set forth in the Indenture).prices. Additionally, we may redeem up to 40% of the aggregate principal amount of the 4.0% Senior Notes at any time or from time to time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the Indenture).prices. Upon a change in control, (as defined in the Indenture), we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.
5.5% Senior Unsecured Notes
On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Notes, which were set to mature in 2026 and bore interest at 5.5%, paid semi-annually. We called the 5.5% Senior Notes effective June 17, 2021 and settled with proceeds from the issuance of the 4.0% Senior 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% Senior Notes.
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amount.

Our corporate credit rating and the credit rating for our debt are presented below. These ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agencies.

 Moody’s  Standard & Poor’s
December 31,September 30,December 31,September 30,
2021202120212021
Corporate credit ratingBa1Ba1BBBB
ABL AgreementNot ratedNot ratedNot ratedNot rated
4.0% Senior NotesBa1Ba1BBBB
OutlookStableStableStableStable
 Moody’s  Standard & Poor’s
December 31,September 30,December 31,September 30,
2022202220222022
Corporate credit ratingBa1Ba1BBBB
ABL AgreementNot ratedNot ratedNot ratedNot rated
4.0% Senior NotesBa1Ba1BBBB
OutlookStableStableStableStable

Material Cash Requirements

We enter into a variety of contractual obligations as part of our normal operations in addition to capital expenditures. As of December 31, 2022, we have (i) debt obligations related to our $450.0 million 4.0% Senior Notes which mature in 2029 and include cash interest payments of $18.0 million in 2023 annually through 2029, (ii) cash obligations of $31.4 million for operating leases through 2033 and $1.4 million for finance leases through 2026, and (iii) purchase obligations for raw materials and other parts of approximately $154.0 million which we expect to incur during the next 12 months. We expect to fund these cash requirements from cash on hand and cash generated from operations.

Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, at December 31, 20212022 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.
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We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At December 31, 2021,2022, we had $15.0$12.4 million of letters of credit and $32.5$32.5 million of surety bonds outstanding.

Seasonality

Our business is seasonal as a result of the impact of cold weather conditions. Net sales and operating income historically have been lowest in the three monththree-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.

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. These estimates are based upon experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We consider an accounting estimate to be critical if changes in the estimate that are reasonably likely to occur over time or the use of reasonably different estimates could have a material impact on our financial condition or results of operations. Our critical accounting estimates can be found in the “Critical Accounting Estimates” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2022 Annual Report on Form 10-K. There have been no changes in the Company’s determination of critical accounting policies and estimates since September 30, 2022.
Item 4.    CONTROLS AND PROCEDURES

There have been no changes in our internal control over financial reporting which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended December 31, 2021.2022.

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 theour Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. There are inherent limitations in all control systems, including the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of one or more persons. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and, while our disclosure controls and procedures are designed to be effective under circumstances where they should reasonably be expected to operate effectively, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

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PART II OTHER INFORMATION
Item 1.    LEGAL PROCEEDINGS

Refer to the information provided in Note 12.10. 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.

Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended December 31, 2021, 141,0622022, 131,670 shares were surrendered to us to pay the tax withholding obligations of participants in connection with the vesting of restricted stock units.equity awards.

We repurchased 1,408,274 sharesdid not repurchase any share of our common stock during the three months ended December 31, 2021 for $20.02022, and we had $100.0 million remaining under our share repurchase authorization, and we had $115.0 million remaining under this authorization.

PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsMaximum dollar value of shares that may yet be purchased under the plans or programs (in millions)
October 1-31, 2021— $— — $135.0 
November 1-30, 2021606,400 $14.57 — 126.2 
December 1-31, 2021801,874 $13.89 — 115.0 
Total1,408,274 $14.18 — 

Item 6.     EXHIBITS
Exhibit No. Document
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(formatted as Inline XBRL document.and contained in Exhibit 101).
*     Filed with this quarterly report
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MUELLER WATER PRODUCTS, INC.
Date:February 4, 20223, 2023By:/s/ Suzanne G. Smith
  Suzanne G. Smith
  Chief Accounting Officer

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