0001350593-21-000049.txt : 20210805 0001350593-21-000049.hdr.sgml : 20210805 20210805161922 ACCESSION NUMBER: 0001350593-21-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20210630 FILED AS OF DATE: 20210805 DATE AS OF CHANGE: 20210805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Mueller Water Products, Inc. CENTRAL INDEX KEY: 0001350593 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 203547095 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32892 FILM NUMBER: 211148489 BUSINESS ADDRESS: STREET 1: 1200 ABERNATHY RD, NE STREET 2: SUITE 1200 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 770-206-4200 MAIL ADDRESS: STREET 1: 1200 ABERNATHY RD, NE STREET 2: SUITE 1200 CITY: ATLANTA STATE: GA ZIP: 30328 FORMER COMPANY: FORMER CONFORMED NAME: Mueller Holding Company, Inc. DATE OF NAME CHANGE: 20060123 10-Q 1 mwa-20210630.htm 10-Q mwa-20210630
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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 June 30, 2021
    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.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 SymbolName of Each Exchange on Which Registered
Common stock, par value $0.01
MWA
New 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 every Interactive Data File required to be submitted 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 such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer                      Accelerated filer           
Non-accelerated filer                      Smaller reporting company      
Emerging growth company     



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 158,560,235 shares of common stock of the registrant outstanding at July 31, 2021.




PART I
Item 1.     FINANCIAL STATEMENTS
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 June 30,September 30,
 20212020
 (in millions, except share amounts)
Assets:
Cash and cash equivalents$228.6 $208.9 
Receivables, net of allowance for credit losses of $3.1 million and $2.5 million
200.7 180.8 
Inventories, net176.9 162.5 
Other current assets26.2 29.0 
Total current assets632.4 581.2 
Property, plant and equipment, net275.3 253.8 
Intangible assets402.0 408.9 
Goodwill116.0 99.8 
Other noncurrent assets58.9 51.3 
Total assets$1,484.6 $1,395.0 
Liabilities and equity:
Current portion of long-term debt$1.0 $1.1 
Accounts payable
86.6 67.3 
Other current liabilities101.3 86.6 
Total current liabilities188.9 155.0 
Long-term debt445.6 446.5 
Deferred income taxes102.1 96.5 
Other noncurrent liabilities64.8 56.3 
Total liabilities801.4 754.3 
Commitments and contingencies (Note 12.)
Common stock: 600,000,000 shares authorized; 158,527,319 and 158,064,750 shares outstanding at June 30, 2021 and September 30, 2020, respectively
1.6 1.6 
Additional paid-in capital1,358.7 1,378.0 
Accumulated deficit(662.3)(714.2)
Accumulated other comprehensive loss(14.8)(24.7)
Total stockholders’ equity683.2 640.7 
Total liabilities and equity$1,484.6 $1,395.0 

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


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 Three months endedNine months ended
June 30,June 30,
 2021202020212020
(in millions, except per share amounts)
Net sales$310.5 $228.5 $815.4 $698.8 
Cost of sales205.1 152.8 543.2 464.5 
Gross profit105.4 75.7 272.2 234.3 
Operating expenses:
Selling, general and administrative58.8 47.1 162.2 146.3 
Strategic reorganization and other charges3.9 8.6 6.1 11.9 
Total operating expenses62.7 55.7 168.3 158.2 
Operating income42.7 20.0 103.9 76.1 
Other expenses (income):
Pension benefit other than service(0.8)(0.7)(2.4)(2.2)
Interest expense, net6.8 6.1 19.0 19.5 
Loss on early extinguishment of debt16.7  16.7  
Walter Energy Accrual   0.2 
Net other expenses22.7 5.4 33.3 17.5 
Income before income taxes20.0 14.6 70.6 58.6 
Income tax expense5.6 3.4 18.6 13.3 
Net income$14.4 $11.2 $52.0 $45.3 
Net income per share:
Basic$0.09 $0.07 $0.33 $0.29 
Diluted$0.09 $0.07 $0.33 $0.29 
Weighted average shares outstanding:
Basic158.5 157.8 158.4 157.8 
Diluted159.3 158.5 159.0 158.6 
Dividends declared per share$0.0550 $0.0525 $0.1650 $0.1575 

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


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 Three months endedNine months ended
June 30,June 30,
2021202020212020
 (in millions)
Net income$14.4 $11.2 $52.0 $45.3 
Other comprehensive income (loss):
Pension0.7 0.7 1.9 2.2 
Income tax effects(0.2)(0.2)(0.5)(0.5)
Foreign currency translation4.4 (1.7)8.5  
   Total other comprehensive income (loss), net4.9 (1.2)9.9 1.7 
Total comprehensive income$19.3 $10.0 $61.9 $47.0 

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


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY 
(UNAUDITED)
Three months endedNine months ended
June 30,June 30,
2021202020212020
(in millions)
Common stock
Balance, beginning of period$1.6 $1.6 $1.6 $1.6 
Change in common stock at par value    
Balance, end of period1.6 1.6 1.6 1.6 
Additional paid-in capital
Balance, beginning of period1,364.2 1,390.1 1,378.0 1,410.7 
Dividends declared(8.7)(8.3)(26.1)(24.9)
Shares repurchased under buyback program   (5.0)
Buyout of noncontrolling interest   (3.2)
Shares retained for employee taxes  (1.0)(0.7)
Stock-based compensation2.7 1.1 6.3 3.8 
Stock issued under stock compensation plan0.5 0.4 1.5 2.6 
Balance, end of period1,358.7 1,383.3 1,358.7 1,383.3 
Accumulated deficit
Balance, beginning of period(676.7)(752.1)(714.2)(786.2)
Net income14.4 11.2 52.0 45.3 
Cumulative effect of accounting change  (0.1) 
Balance, end of period(662.3)(740.9)(662.3)(740.9)
Accumulated other comprehensive (loss) income
Balance, beginning of period(19.7)(33.1)(24.7)(36.0)
Other comprehensive (loss) income4.9 (1.2)9.9 1.7 
Balance, end of period(14.8)(34.3)(14.8)(34.3)
Noncontrolling interest
Balance, beginning of period   2.2 
Acquisition of joint venture partner’s interest   (2.2)
Balance, end of period    
Total stockholders' equity$683.2 $609.7 $683.2 $609.7 

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


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine months ended
June 30,
 20212020
 (in millions)
Operating activities:
Net income$52.0 $45.3 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation23.4 21.7 
Amortization21.2 21.1 
Loss on early debt extinguishment16.7  
Stock-based compensation6.3 3.8 
Pension (benefits) costs(1.4)2.2 
Deferred income taxes0.9 1.4 
Inventory reserves provision6.8 5.6 
Other, net1.2 1.6 
Changes in assets and liabilities, net of acquisition:
Receivables, net(18.1)17.4 
Inventories(19.1)5.0 
Other assets0.3 0.7 
Accounts payable18.1 (25.6)
Walter Energy accrual (22.0)
Other current liabilities11.3 6.0 
Other noncurrent liabilities3.7 (6.4)
Net cash provided by operating activities123.3 77.8 
Investing activities:
Capital expenditures(46.1)(51.2)
Acquisition, net of cash acquired(19.7) 
Proceeds from sale of assets0.4 0.3 
Net cash used in investing activities
(65.4)(50.9)
Financing activities:
Issuance of debt450.0  
Repayment of debt(462.4) 
Dividends paid(26.1)(24.9)
Deferred financing costs paid(6.0) 
Proceeds from financing transaction3.9  
Acquisition of joint venture partner's interest (5.2)
Employee taxes related to stock-based compensation(1.0)(0.7)
Common stock issued1.5 2.6 
Common stock repurchased under buyback program (5.0)
Other(0.5)0.6 
Net cash used in financing activities
(40.6)(32.6)
Effect of currency exchange rate changes on cash2.4 (0.3)
Net change in cash and cash equivalents19.7 (6.0)
Cash and cash equivalents at beginning of period208.9 176.7 
Cash and cash equivalents at end of period$228.6 $170.7 
Supplemental cash flow information:
Cash paid for interest$25.2 $24.3 
Cash paid for income taxes$12.6 $5.9 
The accompanying notes are an integral part of the condensed consolidated financial statements.
5


MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2021
(UNAUDITED)
Note. 1 Organization and Basis of Presentation
Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in two business segments: Infrastructure and Technologies. Infrastructure manufactures valves for water and gas systems, including butterfly, iron gate, tapping, check, knife, plug and ball valves, as well as dry-barrel and wet-barrel fire hydrants and a broad line of pipe connection and repair products, such as clamps and couplings used to repair leaks. Technologies offers metering systems, leak detection, pipe condition assessment and other related smart-enabled products and services. The “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries. With regard to the Company’s segments, “we,” “us” or “our” may also refer to the segment being discussed.
In July 2014, Infrastructure acquired a 49% ownership interest in an industrial valve joint venture for $1.7 million. As a result of substantive control features in the operating agreement, all of the joint venture’s assets, liabilities and results of operations were included in our consolidated financial statements. Infrastructure acquired the remaining 51% ownership interest in the business in October 2019.
On June 14, 2021, we acquired all the outstanding capital stock of i2O Water Ltd, a provider of pressure management solutions to more than 100 water companies in 45 countries. i2O Water Ltd is organized under the laws of the United Kingdom. The condensed consolidated balance sheet at June 30, 2021 includes the preliminary acquisition accounting for i20 Water Ltd. The results of i20 Water Ltd’s operations and cash flows for the period subsequent to the acquisition are included in the condensed consolidated statement of operations and condensed consolidated statement of cash flows, respectively, since the acquisition date. Refer to Note 2 for additional disclosures related to the acquisition.
During the three months ended March 31, 2021, we aligned the consolidation of the financial statements of Krausz Industries Development Ltd. and subsidiaries (“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 nine months ended June 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.
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 and 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, 2020. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. The condensed consolidated balance sheet at September 30, 2020 was derived from audited financial statements, but it does not include all disclosures required by GAAP.
Our business is seasonal as a result of cold weather conditions. Net sales and operating income have historically 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 Guidance
During 2016, the Financial Accounting Standards Board (“FASB”) issued standard Accounting Standard Codification (“ASC”) 326 - Current Expected Credit Losses to replace the “incurred loss” impairment approach with an “expected loss”
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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.
Recent Accounting Guidance Not Yet Adopted
In December 2019, the FASB issued Accounting Standards Update (“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 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 plan to adopt this standard on October 1, 2021 and do not expect it to have a material impact on our financial statements.
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”). The new 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 can be adopted prospectively from a date within an interim period subsequent to March 12, 2020. We are currently evaluating our contracts and the optional expedients provided by ASU 2020-04. We plan to adopt this standard on October 1, 2021 and do not expect it to have a material impact on our financial statements.
Restructuring
In November 2019, we announced the purchase of a new facility in Kimball, Tennessee to support and enhance our investment in our Chattanooga, Tennessee large casting foundry. As a result, we announced subsequent closures of our facilities in Hammond, Indiana and Woodland, Washington. Expenses incurred for these closures were primarily related to personnel and inventory and are included in Strategic reorganization and other charges.
In March 2021, we announced the planned closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada. Most of the activities from these plants will be transferred to our Kimball, Tennessee facility. We expect to substantially complete these facility closures by the third quarter of our fiscal year 2022 and expect to incur total expenses related to this restructuring of approximately $14.0 million, including termination benefit costs of approximately $4.8 million and other associated costs of $9.2 million. Of the total $14.0 million estimated costs, approximately $3.6 million are expected to be non-cash charges. Expenses incurred during the nine months ended June 30, 2021 were approximately $4.2 million, including approximately $1.8 million of termination benefit costs which are included in Strategic reorganization and other charges and approximately $2.4 million in inventory write-downs which are included in Cost of sales.
Activity in accrued restructuring, reported as part of other current liabilities, is presented below.
Nine months ended
June 30,
20212020
(in millions)
Beginning balance$2.8 $1.7 
Expenses incurred2.0 3.1 
Amounts paid(2.2)(1.5)
Ending balance$2.6 $3.3 

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
7


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 lapses. 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 have determined that the investment fund and the Sub-CDE are variable interest entities (“VIEs”) and that we are the primary beneficiary of the VIEs. The ongoing activities of the VIEs, namely collecting and remitting interest and fees and administering NMTC compliance, were contemplated in the initial design of the transaction and are not expected to significantly affect economic performance throughout the life of the VIEs. Additionally, we are obligated to deliver tax benefits and provide various other guarantees to Wells Fargo and to absorb the losses of the VIEs. Wells Fargo does not have a material interest in the underling 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 included in our financial statements within Other noncurrent liabilities as a result of its redemption features.
Direct costs associated with Wells Fargo’s capital contribution have been netted against the recorded proceeds, resulting in a net cash contribution to us of $3.9 million. Other direct costs incurred associated with executing the transaction were capitalized and will be recognized as interest expense over the seven-year tax credit period. Incremental costs to maintain the structure during the compliance period will be expensed as incurred.

Note 2.    Business Combination
Acquisition of i20 Water Ltd
On June 14, 2021, we acquired all the outstanding capital stock of i20 Water Ltd for $19.7 million, net of cash acquired. The purchase agreement provides for customary final adjustments, including a net working capital adjustment, which we expect to occur in calendar 2021.
We have recognized the assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of the consideration paid over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for the business combination is based on currently available information and is considered preliminary. We have retained a third-party valuation specialist to assist in our estimate of the fair value of acquired intangible assets. We have not yet received a final valuation report for acquired intangible assets and we are also still gathering information about income taxes, deferred taxes and current assets and liabilities. The final accounting for the business combination may differ materially from that presented in these unaudited consolidated statements.
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The following is a summary of the estimated fair values of the net assets acquired (in millions):
Assets, net of cash:
Receivables$0.5 
Inventories0.6 
Other current assets0.9 
  Tradename2.0 
  Customer relationships2.1 
  Non-compete agreements0.4 
  Developed technology5.9 
  Goodwill13.6 
Liabilities:
Accounts payable(0.8)
Other current liabilities(2.9)
Deferred income taxes(2.6)
Fair value of net assets acquired, net of cash$19.7 
The preliminary estimated goodwill above is attributable to the strategic opportunities and synergies that we expect to arise from the acquisition of i20 Water Ltd and the workforce of the acquired business. The goodwill is nondeductible for income tax purposes.

Note 3.    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 our revenues from contracts with customers by reportable segment (see Note 10.) and further by geographical region as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Geographical region represents the location of the customer.
Contract Asset and Liability Balances
The timing of revenue recognition, billings and cash collections results in customer receivables, customer advance payments and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers as well as unbilled amounts. Amounts are billed in accordance with contractual terms and unbilled amounts arise when the timing of billing differs from the timing of revenue recognized.
Customer 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 of when we expect to recognize revenue. We reverse these contract liabilities and recognize revenue when we satisfy the related performance obligations. We include current deferred revenue within Other current liabilities.
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The table below represents the balances of our customer receivables and deferred revenues.
June 30,September 30,
20212020
(in millions)
Billed receivables$199.9 $180.3 
Unbilled receivables7.2 5.3 
Total customer receivables$207.1 $185.6 
Deferred revenues$7.4 $5.6 

Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Performance obligations are supported by customer contracts which provide frameworks for the nature of the distinct products or services. We allocate the transaction price of each contract to the performance obligations on the basis of standalone selling price and recognize revenue when, or as, control of the performance obligation transfers to the customer.
Most of our performance obligations are satisfied at a “point in time” for sales of equipment and for provision of one-time services, and we generally recognize such revenue when goods are shipped or when the services are provided. The remainder of our performance obligations are satisfied “over time” for our software hosting and leak detection monitoring services, and we generally recognize such revenue ratably as services are provided over the expected term of the contract.
We offer warranties to our customers in the form of assurance-type warranties, which provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. Such warranties generally cannot be purchased separately. We accrue our expected warranty obligations at the time of sale.
Costs to Obtain or Fulfill a Contract
We incur certain incremental costs to obtain a contract, which primarily relate to sales commissions. Our commissions are paid based on either orders or shipments, and we reserve the right to claw back any commission in the event of product returns or lost collections. Since the expected benefit associated with these incremental costs is one year or less based on the nature of the products sold and services provided, we expense such costs as incurred.
Note 4. Income Taxes
The reconciliation between the U.S. federal statutory income tax rate and the effective income tax rate is presented below.
 Three months endedNine months ended
June 30,June 30,
2021202020212020
U.S. federal statutory income tax rate21.0 %21.0 %21.0 %21.0 %
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit4.2 4.5 4.2 4.5 
Excess tax (benefits) related to stock-based compensation  (0.3)(0.6)
Tax credits(1.7)(1.7)(1.7)(2.6)
Global Intangible Low-Taxed Income0.5 (0.2)0.5 (0.1)
Foreign income tax rate differential(0.4)(0.5)(0.4)(0.6)
Nondeductible compensation0.6 1.0 0.6 0.6 
Basis difference in foreign investment1.2 0.3 1.2  
Valuation allowances (0.3)0.7 (0.5)
Reversal of uncertain tax positions (2.1) (0.5)
Other2.6 1.3 0.5 1.5 
Effective income tax rate28.0 %23.3 %26.3 %22.7 %

At June 30, 2021 and September 30, 2020, the gross liabilities for uncertain tax positions were $5.0 million and $4.5 million, respectively, and are included within Other noncurrent liabilities.
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Note 5. Borrowing Arrangements
The components of our long-term debt are presented below.
 June 30,September 30,
 20212020
 (in millions)
4.0% Senior Notes$450.0 $ 
5.5% Senior Notes 450.0 
Finance leases2.1 2.5 
452.1 452.5 
Less deferred financing costs(5.5)(4.9)
Less current portion(1.0)(1.1)
Long-term debt$445.6 $446.5 

4.0% Senior Unsecured Notes. On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“Notes”), which mature on June 15, 2029 and bear interest at 4.0%, paid semi-annually on June 15th and December 15th. We capitalized $5.5 million of debt issuance costs, which are being amortized over the term of the Notes using the effective interest method. Proceeds from the Notes, along with cash on hand were used to redeem our previously existing 5.5% Senior Unsecured Notes (“5.5% Notes”). Substantially all of our U.S. subsidiaries guarantee the Notes, which are subordinate to borrowings under our asset-based lending agreement (“ABL Agreement”). Based on quoted market prices, which is a Level 1 measurement, the outstanding Notes had a fair value of $461.3 million as of June 30, 2021.
An indenture securing the Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at June 30, 2021.

We may redeem some or all of the 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). Additionally, we may redeem up to 40% of the aggregate principal amount of the Notes at any time or from time to time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices (as set forth in the Indenture). Upon a change in control (as defined in the Indenture), we would be required to offer to purchase the Notes at a price equal to 101% of the outstanding principal amount of the Notes.

5.5% Senior Unsecured Notes. On June 12, 2018, we privately issued $450.0 million of 5.5% Notes which were set to mature in 2026 and bore interest at 5.5%, paid semi-annually. We called the 5.5% Notes effective June 17, 2021 and redeemed the 5.5% Notes with proceeds from the issuance of the Notes and cash on hand. As a result, we incurred $16.7 million in loss on extinguishment of debt, comprised of a $12.4 million call premium and a $4.3 million write-off of the remaining deferred debt issuance costs.

ABL Agreement. The ABL Agreement consists of a $175.0 million revolving credit facility that includes up to $25.0 million in swing line loans and up to $60.0 million of letters of credit and 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 the 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 ranging from 100 to 125 basis points. At June 30, 2021, the applicable rate was LIBOR plus 200 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 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, less certain reserves. Prepayments may be made at any time with no penalty.

11


The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. receivables and inventories, certain cash and other supporting obligations. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap as defined in the ABL Agreement. Excess availability based on June 30, 2021 data was $145.1 million as reduced by outstanding letters of credit of $15.0 million and accrued fees and expenses of $1.7 million.
Note 6. Derivative Financial Instruments
In connection with the acquisition of Singer Valve in 2017, we loaned U.S. dollar-denominated 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. The currency swap contracts expire in February 2022. We have not designated these swaps as hedges and thus we include the changes in their fair values in earnings to offset the currency gains and losses associated with the intercompany loan. The values of our currency swap contracts were liabilities of $1.6 million and $0.2 million at June 30, 2021 and September 30, 2020, respectively, and are included in Other current liabilities and Other noncurrent liabilities, respectively.
Note 7. Retirement Plans
The components of net periodic benefit cost for our pension plans are presented below.
Three months endedNine months ended
June 30,June 30,
 2021202020212020
 (in millions)
Service cost$0.4 $0.4 $1.2 $1.2 
Pension costs (benefits) other than service:
Interest cost2.5 2.8 7.5 8.4 
Expected return on plan assets(3.9)(4.2)(11.7)(12.6)
Amortization of actuarial net loss0.6 0.7 1.8 2.0 
Pension benefits other than service(0.8)(0.7)(2.4)(2.2)
Net periodic benefit$(0.4)$(0.3)$(1.2)$(1.0)

The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive loss.
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Note 8. 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 during the nine months ended June 30, 2021 are as follows:
Units grantedWeighted average grant date fair value per instrumentTotal grant date fair value
(in millions)
Quarter ended December 31, 2020
    MRSUs234,199 $15.39 $3.6 
    Phantom Plan instruments180,987 11.86 2.1 
    Restricted stock units129,081 11.86 1.5 
    Non-qualified stock options423,405 3.05 1.3 
    PRSUs: 2020 award60,019 11.86 0.7 
                  2019 award84,483 11.86 1.0 
    Employee stock purchase plan instruments40,286 1.92 0.1 
Quarter ended March 31, 2021
    MRSUs4,187 $14.26 $0.1 
    Phantom Plan instruments1,254 11.94  
    Restricted stock units82,565 12.81 1.1 
    Non-qualified stock options8,115 3.08  
    Employee stock purchase plan instruments35,325 2.24 0.1 
Quarter ended June 30, 2021
    Phantom Plan instruments3,567 $14.29 $0.1 
    Restricted stock units7,127 13.32 0.1 
    Employee stock purchase plan instruments32,916 2.52 0.1 
$11.9 

An MRSU award represents a target number of units that may be paid out at the end of a three-year award cycle based on a calculation of our relative total shareholder return (“TSR”) performance as compared with a selected peer group's TSR. Settlements, in our common shares, will range from zero to two times the number of MRSUs granted, depending on our TSR performance relative to that of the peer group.
Compensation expense attributable to MRSUs is based on the fair value of the awards on their respective grant dates, as determined using a Monte Carlo model. The assumptions used to determine the grant date fair value are indicated below.
January 27, 2021December 2, 2020
Variables used in determining grant date fair value:
Dividend yield1.84 %1.77 %
Risk-free rate0.16 %0.21 %
Expected term (in years)2.672.83

The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the units are expected to be outstanding.
At June 30, 2021, the outstanding Phantom Plan instruments had a fair value of $14.42 per instrument and our liability for Phantom Plan instruments was $2.7 million and is included within Other current liabilities and Other noncurrent liabilities.
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Stock options generally vest on each anniversary date of the original grant ratably over three years. Compensation expense attributed to stock options is based on the fair value of the awards on their respective grant dates, as determined using a Black-Scholes model. The assumptions used to determine the grant date fair value are indicated below.
January 27, 2021December 2, 2020
Variables used in determining grant date fair value:
Dividend yield2.01 %2.01 %
Risk-free rate0.66 %0.66 %
Expected term (in years)6.006.00

The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the options are expected to be outstanding.
A PRSU award consists of a number of units that may be paid out at the end of a 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. Settlements, in our common shares, will range from zero to two times the number of PRSUs granted, depending on our financial performance relative to the targets.
We did not issue any shares of common stock during the three months ended June 30, 2021. We issued 103,058 shares of common stock during the nine months ended June 30, 2021 to settle PRSUs during the period. Additionally, we issued 2,324 and 221,873 shares of common stock to settle restricted stock units vested and issued zero and 108,950 shares of common stock to settle stock options exercised during the three and nine months ended June 30, 2021, respectively.
Operating income included stock-based compensation expense of $3.4 million and $1.8 million during the three months ended June 30, 2021 and 2020, respectively, and $8.4 million and $5.0 million during the nine months ended June 30, 2021 and 2020, respectively. At June 30, 2021, there was approximately $11.5 million of unrecognized compensation expense related to stock-based compensation arrangements and there were 199,994 PRSUs that have been awarded for the 2021 and 2022 performance periods for which performance goal achievement cannot yet be determined.
We excluded 131,178 and 474,423 stock-based compensation instruments from the calculations of diluted earnings per share for the three months ended June 30, 2021 and 2020, respectively, and 566,666 and 274,009 for the nine months ended June 30, 2021 and 2020, respectively, since their inclusion would have been antidilutive.
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Note 9. Supplemental Balance Sheet Information
Selected supplemental asset information is presented below.
 June 30,September 30,
 20212020
 (in millions)
Inventories, net:
Purchased components and raw material$102.2 $87.3 
Work in process31.2 32.4 
Finished goods43.5 42.8 
       Total inventories, net$176.9 $162.5 
Other current assets:
Prepaid expenses$10.7 $10.9 
Non-trade receivables7.1 8.5 
Workers’ compensation reimbursement receivable1.1  
Maintenance and repair supplies and tooling2.7 3.7 
Income taxes0.6 5.5 
Other current assets4.0 0.4 
       Total other current assets$26.2 $29.0 
Property, plant and equipment, net:
Land$6.1 $6.2 
Buildings81.6 80.4 
Machinery and equipment428.4 406.3 
Construction in progress76.0 57.4 
     Total property, plant and equipment592.1 550.3 
Accumulated depreciation(316.8)(296.5)
     Total property, plant and equipment, net$275.3 $253.8 
Other noncurrent assets:
Operating lease right-of-use assets$24.0 $25.6 
Maintenance and repair supplies and tooling19.1 17.5 
Workers’ compensation reimbursement receivable3.2  
Pension assets4.2 0.9 
Note receivable1.8 1.8 
Deferred financing fees1.4 1.3 
Other noncurrent assets5.2 4.2 
     Total other noncurrent assets$58.9 $51.3 

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Selected supplemental liability information is presented below.
 June 30,September 30,
 20212020
 (in millions)
Other current liabilities:
Compensation and benefits$38.9 $32.8 
Customer rebates16.0 9.6 
Warranty accrual3.1 7.2 
Deferred revenues7.4 5.6 
Refund liability5.5 4.3 
Taxes other than income taxes4.7 3.9 
Operating lease liabilities3.8 4.0 
Workers’ compensation accrual3.6 2.7 
CARES Act payroll tax liabilities3.6  
Restructuring liabilities2.6 2.8 
Environmental liabilities 1.2 1.2 
Interest payable1.7 7.3 
Income taxes payable 0.2 
Other9.2 5.0 
     Total other current liabilities$101.3 $86.6 
Other noncurrent liabilities:
Operating lease liabilities$21.8 $23.3 
Warranty accrual8.0 7.2 
Transition tax liability4.7 5.2 
Uncertain tax position liability5.0 4.5 
NMTC liability3.9  
Workers’ compensation accrual8.5 3.8 
Asset retirement obligation 3.6 3.5 
CARES Act payroll tax liabilities3.6 3.3 
Deferred development grant2.5 2.5 
Other3.2 3.0 
     Total other noncurrent liabilities $64.8 $56.3 

Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis each September 1st and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
The following table summarizes information concerning our goodwill balance for the nine months ended June 30, 2021, in millions.

Balance at September 30, 2020$99.8 
Acquisition of i2O Water Ltd13.6 
Effects of changes in foreign currency exchange rates2.6 
Balance at June 30, 2021$116.0 

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Note 10. Segment Information
Summarized financial information for our segments is presented below. Net sales and operating income associated with certain products have been reclassified as Technologies segment items to conform to the current period presentation.
Three months endedNine months ended
June 30,June 30,
2021202020212020
 (in millions)
Net sales, excluding intercompany:
Infrastructure$287.3 $209.4 $750.1 $641.6 
Technologies23.2 19.1 65.3 57.2 
$310.5 $228.5 $815.4 $698.8 
Operating income (loss):
Infrastructure$64.0 $43.6 $158.2 $129.4 
Technologies(2.7)(3.6)(8.8)(10.0)
Corporate(18.6)(20.0)(45.5)(43.3)
$42.7 $20.0 $103.9 $76.1 
Depreciation and amortization:
Infrastructure$13.0 12.2 $38.2 $36.3 
Technologies2.1 2.3 6.2 6.4 
Corporate0.1  0.2 0.1 
$15.2 $14.5 $44.6 $42.8 
Strategic reorganization and other (credits) charges:
Infrastructure$0.2 $ $(0.4)$0.4 
Technologies    
Corporate3.7 8.6 6.5 11.5 
$