Mueller Water Products, Inc. - Quarter Report: 2021 June (Form 10-Q)

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 Class	Trading Symbol	Name 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,
	2021		2020

	(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, net	176.9		162.5
Other current assets	26.2		29.0
Total current assets	632.4		581.2
Property, plant and equipment, net	275.3		253.8
Intangible assets	402.0		408.9
Goodwill	116.0		99.8
Other noncurrent assets	58.9		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 liabilities	101.3		86.6
Total current liabilities	188.9		155.0
Long-term debt	445.6		446.5
Deferred income taxes	102.1		96.5
Other noncurrent liabilities	64.8		56.3
Total liabilities	801.4		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 capital	1,358.7		1,378.0
Accumulated deficit	(662.3)		(714.2)
Accumulated other comprehensive loss	(14.8)		(24.7)
Total stockholders’ equity	683.2		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.

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three months ended				Nine months ended
	June 30,				June 30,
	2021		2020		2021		2020

	(in millions, except per share amounts)
Net sales	$	310.5	$	228.5	$	815.4	$	698.8
Cost of sales	205.1		152.8		543.2		464.5
Gross profit	105.4		75.7		272.2		234.3
Operating expenses:
Selling, general and administrative	58.8		47.1		162.2		146.3
Strategic reorganization and other charges	3.9		8.6		6.1		11.9
Total operating expenses	62.7		55.7		168.3		158.2
Operating income	42.7		20.0		103.9		76.1
Other expenses (income):
Pension benefit other than service	(0.8)		(0.7)		(2.4)		(2.2)
Interest expense, net	6.8		6.1		19.0		19.5
Loss on early extinguishment of debt	16.7		—		16.7		—
Walter Energy Accrual	—		—		—		0.2
Net other expenses	22.7		5.4		33.3		17.5
Income before income taxes	20.0		14.6		70.6		58.6
Income tax expense	5.6		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:
Basic	158.5		157.8		158.4		157.8
Diluted	159.3		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.

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three months ended				Nine months ended
	June 30,				June 30,
	2021		2020		2021		2020

	(in millions)
Net income	$	14.4	$	11.2	$	52.0	$	45.3
Other comprehensive income (loss):
Pension	0.7		0.7		1.9		2.2
Income tax effects	(0.2)		(0.2)		(0.5)		(0.5)
Foreign currency translation	4.4		(1.7)		8.5		—
Total other comprehensive income (loss), net	4.9		(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.

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)


	Three months ended				Nine months ended
	June 30,				June 30,
	2021		2020		2021		2020

	(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 period	1.6		1.6		1.6		1.6

Additional paid-in capital
Balance, beginning of period	1,364.2		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 compensation	2.7		1.1		6.3		3.8
Stock issued under stock compensation plan	0.5		0.4		1.5		2.6
Balance, end of period	1,358.7		1,383.3		1,358.7		1,383.3

Accumulated deficit
Balance, beginning of period	(676.7)		(752.1)		(714.2)		(786.2)
Net income	14.4		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) income	4.9		(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.

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine months ended
	June 30,
	2021		2020

	(in millions)
Operating activities:
Net income	$	52.0	$	45.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	23.4		21.7
Amortization	21.2		21.1
Loss on early debt extinguishment	16.7		—
Stock-based compensation	6.3		3.8
Pension (benefits) costs	(1.4)		2.2
Deferred income taxes	0.9		1.4

Inventory reserves provision	6.8		5.6
Other, net	1.2		1.6
Changes in assets and liabilities, net of acquisition:
Receivables, net	(18.1)		17.4
Inventories	(19.1)		5.0
Other assets	0.3		0.7
Accounts payable	18.1		(25.6)
Walter Energy accrual	—		(22.0)
Other current liabilities	11.3		6.0
Other noncurrent liabilities	3.7		(6.4)
Net cash provided by operating activities	123.3		77.8
Investing activities:
Capital expenditures	(46.1)		(51.2)
Acquisition, net of cash acquired	(19.7)		—
Proceeds from sale of assets	0.4		0.3
Net cash used in investing activities	(65.4)		(50.9)
Financing activities:
Issuance of debt	450.0		—
Repayment of debt	(462.4)		—
Dividends paid	(26.1)		(24.9)
Deferred financing costs paid	(6.0)		—
Proceeds from financing transaction	3.9		—
Acquisition of joint venture partner's interest	—		(5.2)
Employee taxes related to stock-based compensation	(1.0)		(0.7)
Common stock issued	1.5		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 cash	2.4		(0.3)
Net change in cash and cash equivalents	19.7		(6.0)
Cash and cash equivalents at beginning of period	208.9		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.

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”

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,
	2021		2020

	(in millions)
Beginning balance	$	2.8	$	1.7
Expenses incurred	2.0		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

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.

The following is a summary of the estimated fair values of the net assets acquired (in millions):


Assets, net of cash:
Receivables	$	0.5
Inventories	0.6
Other current assets	0.9
Tradename	2.0
Customer relationships	2.1
Non-compete agreements	0.4
Developed technology	5.9
Goodwill	13.6
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.

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


	June 30,		September 30,
	2021		2020

	(in millions)
Billed receivables	$	199.9	$	180.3
Unbilled receivables	7.2		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 ended				Nine months ended
	June 30,				June 30,
	2021		2020		2021		2020
U.S. federal statutory income tax rate	21.0	%	21.0	%	21.0	%	21.0	%
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit	4.2		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 Income	0.5		(0.2)		0.5		(0.1)
Foreign income tax rate differential	(0.4)		(0.5)		(0.4)		(0.6)
Nondeductible compensation	0.6		1.0		0.6		0.6
Basis difference in foreign investment	1.2		0.3		1.2		—
Valuation allowances	—		(0.3)		0.7		(0.5)
Reversal of uncertain tax positions	—		(2.1)		—		(0.5)
Other	2.6		1.3		0.5		1.5
Effective income tax rate	28.0	%	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.

Note 5. Borrowing Arrangements

The components of our long-term debt are presented below.


	June 30,		September 30,
	2021		2020

	(in millions)
4.0% Senior Notes	$	450.0	$	—
5.5% Senior Notes	—		450.0
Finance leases	2.1		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.

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 ended				Nine months ended
	June 30,				June 30,
	2021		2020		2021		2020

	(in millions)
Service cost	$	0.4	$	0.4	$	1.2	$	1.2
Pension costs (benefits) other than service:
Interest cost	2.5		2.8		7.5		8.4
Expected return on plan assets	(3.9)		(4.2)		(11.7)		(12.6)
Amortization of actuarial net loss	0.6		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.

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 granted	Weighted average grant date fair value per instrument		Total grant date fair value (in millions)
Quarter ended December 31, 2020
MRSUs	234,199	$	15.39	$	3.6
Phantom Plan instruments	180,987	11.86		2.1
Restricted stock units	129,081	11.86		1.5
Non-qualified stock options	423,405	3.05		1.3
PRSUs: 2020 award	60,019	11.86		0.7
2019 award	84,483	11.86		1.0
Employee stock purchase plan instruments	40,286	1.92		0.1

Quarter ended March 31, 2021
MRSUs	4,187	$	14.26	$	0.1
Phantom Plan instruments	1,254	11.94		—
Restricted stock units	82,565	12.81		1.1
Non-qualified stock options	8,115	3.08		—
Employee stock purchase plan instruments	35,325	2.24		0.1

Quarter ended June 30, 2021
Phantom Plan instruments	3,567	$	14.29	$	0.1
Restricted stock units	7,127	13.32		0.1
Employee stock purchase plan instruments	32,916	2.52		0.1
				$	11.9

An MRSU award represents a target number of units that may be paid out at the end of a three-year award cycle based on a calculation of our relative total shareholder return (“TSR”) performance as compared with a selected peer group's TSR. Settlements, in our common shares, will range from 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, 2021		December 2, 2020
Variables used in determining grant date fair value:
Dividend yield	1.84	%	1.77	%
Risk-free rate	0.16	%	0.21	%
Expected term (in years)	2.67		2.83

The expected dividend yield is based on our estimated annual dividend and our stock price history at the grant date. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield in effect at the grant date with a term equal to the expected term. The expected term represents the average period of time the units are expected to be outstanding.

At June 30, 2021, the outstanding Phantom Plan instruments had a fair value of $14.42 per instrument and our liability for Phantom Plan instruments was $2.7 million and is included within Other current liabilities and Other noncurrent liabilities.

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


	January 27, 2021		December 2, 2020
Variables used in determining grant date fair value:
Dividend yield	2.01	%	2.01	%
Risk-free rate	0.66	%	0.66	%
Expected term (in years)	6.00		6.00

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.

Note 9. Supplemental Balance Sheet Information

Selected supplemental asset information is presented below.


	June 30,		September 30,
	2021		2020

	(in millions)
Inventories, net:
Purchased components and raw material	$	102.2	$	87.3
Work in process	31.2		32.4
Finished goods	43.5		42.8
Total inventories, net	$	176.9	$	162.5

Other current assets:
Prepaid expenses	$	10.7	$	10.9
Non-trade receivables	7.1		8.5
Workers’ compensation reimbursement receivable	1.1		—
Maintenance and repair supplies and tooling	2.7		3.7
Income taxes	0.6		5.5
Other current assets	4.0		0.4
Total other current assets	$	26.2	$	29.0

Property, plant and equipment, net:
Land	$	6.1	$	6.2
Buildings	81.6		80.4
Machinery and equipment	428.4		406.3
Construction in progress	76.0		57.4
Total property, plant and equipment	592.1		550.3
Accumulated depreciation	(316.8)		(296.5)
Total property, plant and equipment, net	$	275.3	$	253.8

Other noncurrent assets:
Operating lease right-of-use assets	$	24.0	$	25.6
Maintenance and repair supplies and tooling	19.1		17.5
Workers’ compensation reimbursement receivable	3.2		—
Pension assets	4.2		0.9
Note receivable	1.8		1.8
Deferred financing fees	1.4		1.3
Other noncurrent assets	5.2		4.2
Total other noncurrent assets	$	58.9	$	51.3

Selected supplemental liability information is presented below.


	June 30,		September 30,
	2021		2020

	(in millions)
Other current liabilities:
Compensation and benefits	$	38.9	$	32.8
Customer rebates	16.0		9.6
Warranty accrual	3.1		7.2
Deferred revenues	7.4		5.6
Refund liability	5.5		4.3
Taxes other than income taxes	4.7		3.9
Operating lease liabilities	3.8		4.0
Workers’ compensation accrual	3.6		2.7
CARES Act payroll tax liabilities	3.6		—
Restructuring liabilities	2.6		2.8
Environmental liabilities	1.2		1.2
Interest payable	1.7		7.3
Income taxes payable	—		0.2
Other	9.2		5.0
Total other current liabilities	$	101.3	$	86.6

Other noncurrent liabilities:
Operating lease liabilities	$	21.8	$	23.3
Warranty accrual	8.0		7.2
Transition tax liability	4.7		5.2
Uncertain tax position liability	5.0		4.5
NMTC liability	3.9		—
Workers’ compensation accrual	8.5		3.8
Asset retirement obligation	3.6		3.5
CARES Act payroll tax liabilities	3.6		3.3
Deferred development grant	2.5		2.5
Other	3.2		3.0
Total other noncurrent liabilities	$	64.8	$	56.3

Goodwill

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis each September 1st and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

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 Ltd	13.6
Effects of changes in foreign currency exchange rates	2.6
Balance at June 30, 2021	$	116.0

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 ended				Nine months ended
	June 30,				June 30,
	2021		2020		2021		2020

	(in millions)
Net sales, excluding intercompany:
Infrastructure	$	287.3	$	209.4	$	750.1	$	641.6
Technologies	23.2		19.1		65.3		57.2
	$	310.5	$	228.5	$	815.4	$	698.8
Operating income (loss):
Infrastructure	$	64.0	$	43.6	$	158.2	$	129.4
Technologies	(2.7)		(3.6)		(8.8)		(10.0)
Corporate	(18.6)		(20.0)		(45.5)		(43.3)
	$	42.7	$	20.0	$	103.9	$	76.1
Depreciation and amortization:
Infrastructure	$	13.0	12.2		$	38.2	$	36.3
Technologies	2.1		2.3		6.2		6.4
Corporate	0.1		—		0.2		0.1
	$	15.2	$	14.5	$	44.6	$	42.8
Strategic reorganization and other (credits) charges:
Infrastructure	$	0.2	$	—	$	(0.4)	$	0.4
Technologies	—		—		—		—
Corporate	3.7		8.6		6.5		11.5
	$	3.9	$	8.6	$	6.1	$	11.9
Capital expenditures:
Infrastructure	$	13.8	$	13.4	$	43.3	$	49.1
Technologies	1.2		0.5		2.7		1.8
Corporate	—		—		0.1		0.3
	$	15.0	$	13.9	$	46.1	$	51.2
Infrastructure disaggregated net revenues:
Central	$	71.1	$	57.4	$	192.1	$	163.6
Northeast	52.9		38.7		141.8		135.3
Southeast	57.6		35.6		144.1		119.8
West	71.2		50.7		188.1		154.3
United States	252.9		182.4		666.2		573.0
Canada	27.9		20.7		60.4		47.3
Other international locations	6.5		6.3		23.5		21.3
	$	287.3	$	209.4	$	750.1	$	641.6
Technologies disaggregated net revenues:
Central	$	5.7	$	5.1	$	17.3	$	13.6
Northeast	3.0		4.1		10.0		15.0
Southeast	8.5		5.2		22.3		16.6
West	4.8		3.7		12.7		8.9
United States	22.0		18.1		62.2		54.1
Canada	0.5		0.3		0.9		1.2
Other international locations	0.7		0.7		2.3		1.9
	$	23.2	$	19.1	$	65.3	$	57.2

Note 11. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is presented below.


	Pension, net of tax		Foreign currency translation		Total

	(in millions)
Balance at September 30, 2020	$	(32.7)	$	8.0	$	(24.7)
Current period other comprehensive income	1.4		8.5		9.9
Balance at June 30, 2021	$	(31.3)	$	16.5	$	(14.8)

Note 12. Commitments and Contingencies

We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters, unless otherwise indicated below. Other than the litigation described below, we do not believe that any of our outstanding litigation would have a material adverse effect on our business or prospects.

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

In the acquisition agreement pursuant to which a predecessor to Tyco International plc, now Johnson Controls International plc (“JCI”), sold our businesses to a previous owner in August 1999, JCI 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. JCI’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, JCI has engaged in multiple corporate restructurings, split-offs and divestitures. While none of these transactions directly affects the indemnification obligations of the JCI indemnitors under the 1999 acquisition agreement, the result of such transactions is that the assets of, and control over, such JCI indemnitors has changed. Should any of these JCI indemnitors become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.

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

U.S. Pipe, which was sold in 2012, has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a proposed Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of 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 June 30, 2021.

Walter Energy. On November 18, 2019, we paid approximately $22.2 million to the Internal Revenue Service in final settlement of a tax dispute related to our former parent company, Walter Energy, Inc.

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. Various workers’ compensation claims arising from the event have been made to date, and we anticipate that additional claims may be made, and that liability under such claims, if any, is not expected to have a material adverse effect on our results of operations or cash flows. However, the possibility of other legal proceedings, and any related effects, arising from this event cannot be predicted with certainty.

The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the U.S. and global economies. We have taken action and continue to counter such disruption and work to protect the safety of our production workers as essential workers at our various manufacturing plants, distribution centers and research and development centers. We are uncertain of the potential magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, and while the extent to which the pandemic affects our results will depend on future developments, including COVID-19 variants, the outbreak could result in material effects to our future financial position, results of operations, cash flows and liquidity.

Indemnifications. We are a party to contracts in which it is common for us to agree to indemnify third parties for certain liabilities that arise out of or relate to the subject matter of the contract. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct. We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities.

Additionally, in connection with the divestitures of the subsidiaries, 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 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. Subsequent Events

On July 29, 2021, our Board of Directors declared a dividend of $0.0550 per share on our common stock, payable on or about August 20, 2021 to stockholders of record at the close of business on August 10, 2021.

Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this report. This report contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that address activities, events or developments that the Company intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, the COVID-19 pandemic, go-to-market strategies, operational excellence, acceleration of new product development, end market performance, net sales performance, adjusted operating income and adjusted EBITDA performance, margins, capital expenditure plans, litigation outcomes, capital allocation and growth strategies, restructuring efficiencies and warranty charges. Forward-looking statements are based on certain assumptions and assessments made by the Company based on experience and perception of historical trends, current conditions and expected future developments.

Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the extent, duration and severity of the impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including collections), the financial/capital markets, government-mandated facility closures, COVID-19 related facility closures and other manufacturing restrictions, logistical challenges and supply chain interruptions, potential litigation and claims emanating from the COVID-19 pandemic, and health, safety and employee/labor issues in Company facilities around the world; unexpected or greater than expected increases in costs of raw materials and purchased components; regional, national or global political, economic, market and competitive conditions; cyclical and changing demand in core markets such as municipal spending; government monetary or fiscal policies; residential and nonresidential construction, and natural gas distribution; manufacturing and product performance; expectations for changes in volumes, continued execution of cost productivity initiatives and improved pricing; warranty exposures (including the adequacy of warranty reserves); the Company’s ability to successfully resolve significant legal proceedings, claims, lawsuits or government investigations; compliance with environmental, trade and anti-corruption laws and regulations; changing regulatory, trade and tariff conditions; failure to achieve expected cost savings, net sales expectations, profitability expectations and manufacturing efficiencies from restructuring and consolidation activities and our large capital investments in Chattanooga and Kimball, Tennessee and Decatur, Illinois; the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures; as well as other factors that are described in the section entitled “RISK FACTORS” in Item 1A of the Company’s most recently filed Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q (all of which risks may be amplified by the pandemic). Forward-looking statements are only as of the date they are made and do not guarantee future performance. The Company undertakes no duty to update its forward-looking statements except as required by law. Undue reliance should not be placed on any forward-looking statements. You are advised to review any further disclosures the Company makes in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S. Securities and Exchange Commission.

Overview

Organization

On October 3, 2005, Walter Energy, Inc (“Walter Energy”) acquired all outstanding shares of capital stock representing the Mueller Co. and Anvil businesses and contributed them to its U.S. Pipe business to form Mueller Water Products, Inc. (“Mueller” or the “Company”). In June 2006, we completed an initial public offering of 28,750,000 shares of Series A common stock and in December 2006, Walter Energy distributed to its shareholders all of its equity interests in Mueller, completing our spin-off. We subsequently sold our U.S. Pipe and Anvil businesses in 2012 and 2017, respectively.

Business

We estimate approximately 60-65% of our 2020 net sales were for repair and replacement directly related to municipal water infrastructure spending, approximately 25-30% were related to residential construction activity and less than 10% were related to natural gas utilities spending.

We expect the operating environment during the remainder of our fiscal year 2021 to continue to be very challenging due to the uncertainty around the depth and duration of the pandemic, which has accelerated and may continue to accelerate inflation and global supply chain disruptions. We anticipate that growth in the residential construction end market will continue to help offset anticipated challenges in the project-related portion of the municipal market. In July 2021, Blue Chip Economic Indicators forecasted a 16% increase in housing starts for calendar 2021 compared to the prior year primarily due to the low interest rate environment in the United States.

We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable volume variances, voluntary emergency paid leave, additional cleaning, disinfectants and sanitation materials for our employees and at our facilities. We expect to continue to incur such costs, which may be significant, as we continue to respond to the pandemic. All of our facilities are operational and our teams have worked effectively to address the few temporary closures we have experienced due to the pandemic. The last such closure was in August 2020. The pandemic also caused supply chain disruption that has resulted in higher costs in the manufacture of our products. We expect these conditions to persist in the near term and may worsen until the pandemic abates.

Infrastructure

In December 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”), a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel. During the three months ended March 31, 2021, we aligned the consolidation of Krausz in the consolidated financial statements which previously included results on a one-month reporting lag. The impact of the elimination of the reporting lag during the nine months ended June 30, 2021 resulted in an increase of $6.0 million to net sales and $1.4 million in operating income.

Technologies

The municipal market is the key end market for Technologies. Our Technologies segment is typically project-oriented and dependent on our customers’ adoption of our technology-based products and services.

On June 14, 2021, we acquired all the outstanding capital stock of i20 Water Ltd, a provider of pressure management solutions to more than 100 water companies in 45 countries for $19.7 million, net of cash acquired. i2O Water Ltd is organized under the laws of the United Kingdom. The purchase agreement provides for customary final adjustments, including a net working capital adjustment, which we expect to occur in 2021.

Results of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020


	Three months ended June 30, 2021
	Infrastructure		Technologies		Corporate		Total

	(in millions)
Net sales	$	287.3	$	23.2	$	—	$	310.5
Gross profit	101.1		4.3		—		$	105.4
Operating expenses:
Selling, general and administrative	36.9		7.0		14.9		58.8
Strategic reorganization and other charges	0.2		—		3.7		3.9
Total operating expenses	37.1		7.0		18.6		62.7
Operating income (loss)	$	64.0	$	(2.7)	$	(18.6)	42.7
Other expenses (income):
Loss on early extinguishment of debt							16.7
Pension benefit other than service							(0.8)
Interest expense, net							6.8
Income before income taxes							20.0
Income tax expense							5.6
Net income							$	14.4

	Three months ended June 30, 2020
	Infrastructure		Technologies		Corporate		Total

	(in millions)
Net sales	$	209.4	$	19.1	$	—	$	228.5
Gross profit	73.3		2.4		—		$	75.7
Operating expenses:
Selling, general and administrative	29.7		6.0		11.4		47.1
Strategic reorganization and other charges	—		—		8.6		8.6
Total operating expenses	29.7		6.0		20.0		55.7
Operating income (loss)	$	43.6	$	(3.6)	$	(20.0)	20.0
Other expenses (income):
Pension benefit other than service							(0.7)
Interest expense, net							6.1
Income before income taxes							14.6
Income tax expense							3.4
Net income							$	11.2

Consolidated Analysis

Net sales for the three months ended June 30, 2021 increased $82.0 million or 35.9 percent to $310.5 million from $228.5 million in the comparable prior year period. This increase was primarily a result of increased shipment volumes at both Infrastructure and Technologies compared to the prior year and higher pricing at Infrastructure.

Gross profit for the three months ended June 30, 2021 increased $29.7 million to $105.4 million from $75.7 million in the prior year period. Gross profit increased primarily as a result of increased volumes and higher pricing. Partially offsetting the increase in gross profit were higher manufacturing costs due to inflation. Gross margin was 33.9% for the three months ended June 30, 2021 and improved 80 basis points compared to 33.1% in the prior year period.

Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2021 increased $11.7 million to $58.8 million from $47.1 million in the prior year period primarily as a result of new product development and information technology expenses, higher personnel-related expenses including sales commissions associated with higher net sales and orders, incentive compensation and stock-based compensation. Additionally, travel and entertainment expenses were higher in the current year period, and we benefited from temporary reduction in personnel expenses due to furloughs and temporary pay cuts in the prior year period. SG&A as a percentage of net sales was 18.9% and 20.6% in the three months ended June 30, 2021 and 2020, respectively.

Strategic reorganization and other charges for the three months ended June 30, 2021 were $3.9 million, which primarily consisted of expenses associated with the Albertville tragedy, as well as termination benefits associated with the previously announced closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada and acquisition transaction costs. Strategic reorganization and other charges for the three months ended June 30, 2020 of $8.6 million included an accrual related to a litigation settlement, facility relocation expenses and senior executive severance costs.

Interest expense, net increased $0.7 million in the three months ended June 30, 2021 compared to the prior year period primarily as a result of the timing of the issuance of the 4.0% Senior Notes and the extinguishment of the 5.5% Senior Notes. The components of interest expense, net are provided below.


	Three months ended
	June 30,
	2021		2020

	(in millions)
5.5% Notes	$	5.2	$	6.2
4.0% Notes	1.7		—
Deferred financing costs amortization	0.3		0.2
ABL Agreement	0.2		0.2
Capitalized interest	(0.6)		(0.5)
Other interest cost	0.1		0.1
	6.9		6.2
Interest income	(0.1)		(0.1)
Interest expense, net	$	6.8	$	6.1

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


	Three months ended
	June 30,
	2021		2020
U.S. federal statutory income tax rate	21.0	%	21.0	%
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit	4.2		4.5
Tax credits	(1.7)		(1.7)
Global Intangible Low-taxed Income	0.5		(0.2)
Foreign income tax rate differential	(0.4)		(0.5)
Nondeductible compensation	0.6		1.0
Basis difference in foreign investment	1.2		0.3
Valuation allowance	—		(0.3)
Reversal of uncertain tax positions	—		(2.1)
Other	2.6		1.3
Effective income tax rate	28.0	%	23.3	%

Segment Analysis

Infrastructure

Net sales for the three months ended June 30, 2021 increased $77.9 million or 37.2 percent to $287.3 million compared to $209.4 million in the prior year period. This increase was primarily a result of increased shipment volume and higher pricing across most of our Infrastructure product lines.

Gross profit for the three months ended June 30, 2021 increased to $101.1 million from $73.3 million in the prior year period primarily due to increased volumes and higher pricing, which were partially offset by inflation effecting Cost of sales. Gross margin was 35.2% for the three months ended June 30, 2021 and was 35.0% in the prior year period.

SG&A for the three months ended June 30, 2021 increased to $36.9 million from $29.7 million in the prior year period. This increase was primarily the result of higher personnel-related expenses, including sales commissions associated with higher net sales and orders, and incentive compensation, as well as information technology spending. Additionally, travel and entertainment expenses were higher in the current year period, and we benefited from the temporary reduction in personnel expenses due to furloughs and temporary pay reductions in the prior year period. SG&A as a percentage of net sales was 12.8% and 14.2%, respectively, for the three months ended June 30, 2021 and 2020.

Technologies

Net sales for the three months ended June 30, 2021 increased $4.1 million or 21.5% to $23.2 million from $19.1 million in the prior year period, primarily due to increased shipment volumes of our metering products.

Gross profit for the three months ended June 30, 2021 was $4.3 million compared to $2.4 million in the prior year period. Gross margin percentage was 18.5% and 12.6%, in the three months ended June 30, 2021 and 2020, respectively.

SG&A increased to $7.0 million from $6.0 million in the prior year period primarily due to increased new product development costs. SG&A as a percentage of net sales was 30.2% and 31.4% for the three months ended June 30, 2021 and 2020, respectively.

Corporate

SG&A was $14.9 million and $11.4 million in the three months ended June 30, 2021 and 2020, respectively, which was primarily the result of personnel-related expenses including stock-based compensation and incentive compensation. Additionally, travel and entertainment expenses were higher in the current year period as we benefited from the temporary reduction in personnel expenses due to furloughs and temporary pay cuts in the prior year period.

Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020


	Nine months ended June 30, 2021
	Infrastructure		Technologies		Corporate		Total

	(in millions)
Net sales	$	750.1	$	65.3	$	—	$	815.4
Gross profit	261.1		11.1		—		$	272.2
Operating expenses:
Selling, general and administrative	103.3		19.9		39.0		162.2
Strategic reorganization and other (credits) charges	(0.4)		—		6.5		6.1
Total operating expenses	102.9		19.9		45.5		168.3
Operating income (loss)	$	158.2	$	(8.8)	$	(45.5)	103.9
Other expenses (income):
Loss on early extinguishment of debt							16.7
Pension benefit other than service							(2.4)
Interest expense, net							19.0
Income before income taxes							70.6
Income tax expense							18.6
Net income							$	52.0

	Nine months ended June 30, 2020
	Infrastructure		Technologies		Corporate		Total

	(in millions)
Net sales	$	641.6	$	57.2	$	—	$	698.8
Gross profit	225.4		8.9		—		$	234.3
Operating expenses:
Selling, general and administrative	95.6		18.9		31.8		146.3
Strategic reorganization and other charges	0.4		—		11.5		11.9
Total operating expenses	96.0		18.9		43.3		158.2
Operating income (loss)	$	129.4	$	(10.0)	$	(43.3)	76.1
Other expenses (income):
Pension benefit other than service							(2.2)
Interest expense, net							19.5
Walter Energy Accrual							0.2
Income before income taxes							58.6
Income tax expense							13.3
Net income							$	45.3

Consolidated Analysis

Net sales for the nine months ended June 30, 2021 increased $116.6 million or 16.7 percent to $815.4 million from $698.8 million primarily due to increased shipment volumes across most of our product lines, higher pricing and a result of $6.0 million in Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag.

Gross profit for the nine months ended June 30, 2021 increased $37.9 million to $272.2 million from $234.3 million in the prior year period, primarily due to increased shipment volumes and higher pricing. These increases were partially offset by inflation and lesser expenditures associated with the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning fees, and a $2.4 million inventory write-off recorded during the nine months ended June 30, 2021 associated with the announcement of our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada. Gross margin was 33.4% for the nine months ended June 30, 2021 compared to 33.5% in the prior year period.

Selling, general and administrative expenses (“SG&A”) for the nine months ended June 30, 2021 increased to $162.2 million from $146.3 million in the prior year period primarily due to an increase in personnel-related expenses, including incentive compensation, an increase in sales commissions associated with higher net sales and orders, and stock-based compensation. Additionally, SG&A increased as a result of inflation and new product development and information technology spending. SG&A as a percentage of net sales was 19.9% and 20.9% in the nine months ended June 30, 2021 and 2020, respectively.

Strategic reorganization and other charges for the nine months ended June 30, 2021 were $6.1 million, which primarily related to the Albertville tragedy, and termination benefits associated with our announced plan closures in Aurora, Illinois and Surrey, British Columbia, Canada, as well as, legal and professional service expenses, partially offset by a one-time settlement gain in connection with an indemnification from a previously owned property. Strategic reorganization and other charges for the nine months ended June 30, 2020 were $11.9 million primarily related to a litigation settlement accrual, previously announced facility closures and legal and professional service expenses.

Interest expense, net declined $0.5 million in the nine months ended June 30, 2021 compared to the prior year period primarily due to an increase in capitalized interest, partially offset by an increase in interest expense as a result of the timing of the redemption of the 5.5% Notes and the issuance of the 4.0% Notes, as well as a decline in interest income. The components of net interest expense are provided below.


	Nine months ended
	June 30,
	2021		2020

	(in millions)
5.5% Notes	$	17.6	$	18.6
4.0% Notes	1.7		—
Deferred financing costs amortization	0.8		0.9
ABL Agreement	0.7		0.4
Capitalized interest	(1.7)		0.2
Other interest cost	0.3		0.4
Interest expense	19.4		20.5
Interest income	(0.3)		(1.0)
Interest expense, net	$	19.0	$	19.5

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


	Nine months ended
	June 30,
	2021		2020
U.S. federal statutory income tax rate	21.0	%	21.0	%
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit	4.2		4.5
Excess tax (benefits) related to stock-based compensation	(0.3)		(0.6)
Tax credits	(1.7)		(2.6)
Global Intangible Low-taxed Income	0.5		(0.1)
Foreign income tax rate differential	(0.4)		(0.6)
Nondeductible compensation	0.6		0.6
Basis difference in foreign investment	1.2		—
Valuation allowance	0.7		(0.5)
Reversal of uncertain tax positions	—		(0.5)
Other	0.5		1.5
Effective income tax rate	26.3	%	22.7	%

Segment Analysis

Infrastructure

Net sales for the nine months ended June 30, 2021 increased $108.5 million or 16.9 percent to $750.1 million compared to $641.6 million in the prior year period primarily due to higher shipment volumes across most of our product lines, higher pricing and the result of $6.0 million in Krausz sales recorded during the three months ended March 31, 2021 by eliminating the one-month reporting lag.

Gross profit for the nine months ended June 30, 2021 increased $35.7 million to $261.1 million from $225.4 million in the prior year period primarily due to increased shipment volumes, higher pricing, improved manufacturing performance and the benefit from the elimination of the Krausz one-month reporting lag. These increases were partially offset by higher costs associated with inflation, a $2.4 million Inventory write-off associated with the announcement of the closure of our Aurora, Illinois and Surrey, British Columbia, Canada facilities and $2.9 million in expenses related to the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning fees. Gross margin was 34.8% for the nine months ended June 30, 2021 and was 35.1% in the prior year period.

SG&A for the nine months ended June 30, 2021 increased to $103.3 million from $95.6 million in the prior year period. This increase was primarily a result of an increase in personnel-related expenses, including higher sales commissions as a result of higher net sales and orders, incentive compensation and stock-based compensation. Additionally, SG&A increased as a result of inflation, information technology spending and new product development. Partially offsetting these increases was a temporary expense reduction of $2.9 million related to the pandemic, including reduced travel, trade shows and events. SG&A as a percentage of net sales was 13.8% and 14.9% for the nine months ended June 30, 2021 and 2020, respectively.

Technologies

Net sales for the nine months ended June 30, 2021 increased $8.1 million or 14.2% to $65.3 million from $57.2 million in the prior year period, primarily due to higher shipment volumes of our metering and leak detection-related products.

Gross profit for the nine months ended June 30, 2021 was $11.1 million compared to $8.9 million in the prior year period. Gross margin percentage was 17.0% and 15.6% in the nine months ended June 30, 2021 and 2020, respectively.

SG&A was $19.9 million and $18.9 million in the current and prior year periods, respectively. The increase was primarily as a result of new product development. SG&A as a percentage of net sales was 30.5% and 33.0% for the nine months ended June 30, 2021 and 2020, respectively.

Corporate

SG&A was $39.0 million and $31.8 million in the nine months ended June 30, 2021 and 2020, respectively. The increase was primarily as a result of higher personnel-related expenses including incentive compensation and stock-based compensation expense.

Liquidity and Capital Resources

We had cash and cash equivalents on hand of $228.6 million at June 30, 2021 and $145.1 million of additional borrowing capacity under our ABL Agreement based on June 30, 2021 data. Undistributed earnings from our subsidiaries in Canada, China, and Israel are considered to be permanently invested outside the United States. At June 30, 2021, cash and cash equivalents included $31.1 million, $11.7 million and $6.3 million in Israel, Canada and China, respectively.

On July 29, 2021, we declared a quarterly dividend of $0.0550 per share, payable on or about August 20, 2021, which will result in an estimated $8.7 million cash outlay.

We did not repurchase any shares of our outstanding common stock under our share repurchase program during the three and nine months ended June 30, 2021 and had $145.0 million remaining under our share repurchase authorization.

The ABL Agreement and Notes contain customary representations and warranties, covenants and provisions governing an event of default. The covenants restrict our ability to engage in certain specified activities, including but not limited to the payment of dividends and the redemption of our common stock.

Cash flows from operating activities are categorized below.


	Nine months ended
	June 30,
	2021		2020

	(in millions)
Collections from customers	$	797.4	$	716.2
Disbursements, other than interest and income taxes	(636.3)		(586.0)
Walter Energy payment	—		(22.2)
Interest payments, net	(25.2)		(24.3)
Income tax payments, net	(12.6)		(5.9)
Cash provided by operating activities	$	123.3	$	77.8

Collections from customers were higher during the nine months ended June 30, 2021 compared to the prior year period primarily due to net sales growth.

Increased disbursements, other than interest and income taxes, during the nine months ended June 30, 2021 primarily relate to higher costs and expenses associated with increased sales. Additionally, we disbursed $22.0 million related to the final settlement of the Walter tax matter in the prior year period.

Capital expenditures were $46.1 million in the nine months ended June 30, 2021 and $51.2 million in the prior year period. These expenditures were primarily associated with previously announced large capital projects. For fiscal 2021, we have provided guidance that our capital expenditures are expected to be between $75.0 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 obligations as they become due through June 30, 2022.

We believe that additional borrowings through various financing alternatives remain available if required. The future effects of the pandemic cannot be predicted with certainty and may increase our borrowing costs and other costs of capital or otherwise adversely affect our financial condition and liquidity, and we cannot guarantee that we will have access to external financing at times and on terms we consider acceptable, or at all, or that we will not experience other liquidity issues in the future.

ABL Agreement

At June 30, 2021, the ABL Agreement consisted of a $175.0 million revolving credit facility that includes up to $25.0 million through swing line loans and may have up to $60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150.0 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 ranging from 100 to 125 basis points. At June 30, 2021, the applicable rate was LIBOR plus 200 basis points.

Substantially all of our U.S. subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. inventories, accounts receivable, certain cash and other supporting obligations.

The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. receivables and inventories, certain cash and other supporting obligations. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap as defined in the ABL Agreement. Excess availability based on June 30, 2021 data was $145.1 million, as reduced by $15.0 million of outstanding letters of credit and $1.7 million of accrued fees and expenses.

4.0% Senior Unsecured Notes

On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“Notes”), which mature in December 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 Notes using the effective interest method. Proceeds from the Notes, along with cash on hand were used to redeem previously existing 5.5% Notes. Substantially all of our U.S. subsidiaries guarantee the Notes, which are subordinate to borrowings under our ABL Agreement.

5.5% Senior Unsecured Notes

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

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

Moody’s

Standard & Poor’s

June 30,

September 30,

June 30,

September 30,

2021

2020

2021

2020

Corporate credit rating

Ba1

Ba2

ABL Agreement

Not rated

4.0% Notes

Ba1

N/A

5.5% Notes

N/A

Ba3

N/A

Outlook

Stable

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, at June 30, 2021 we did not have any undisclosed borrowings, debt, derivative contracts or synthetic leases. Therefore, we were not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.

We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At June 30, 2021, we had $15.0 million of letters of credit and $36.7 million of surety bonds outstanding.

Seasonality

Item 4. CONTROLS AND PROCEDURES

During the three months ended June 30, 2021, we continued our multi-year implementation of upgrades to our enterprise resource planning (ERP) system and the implementation of a new information technology system for processing of payroll and employee-related transactions.

Aside from the above, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As a result of the COVID-19 pandemic, many of our employees began working remotely in March 2020 and continued to do so as of the date of this filing. This change to our working environment has not had a material effect on our internal control over financial reporting. We will continue monitoring and assessing any impacts from the pandemic on our internal controls.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and our Chief Financial Officer have concluded, based on an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, that such disclosure controls and procedures were effective as of the end of the period covered by this report.

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

PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Refer to the information provided in Note 12. to the Notes to the Condensed Consolidated Financial Statements presented in Item 1. of Part I of this report.

Item 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in PART I, “Item 1A. RISK FACTORS” in our Annual Report, each of which could materially affect our business, financial condition or operating results. These described risks are not the only risks facing us. Additional risks and uncertainties not known to us or that we deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

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

During the three months ended June 30, 2021, 781 shares were surrendered to us to pay the tax withholding obligations of participants in connection with the lapsing of restrictions on restricted stock units.

We did not repurchase any shares of our common stock during the three months ended June 30, 2021, and we had $145.0 million remaining under our share repurchase authorization.

Item 6. EXHIBITS


Exhibit No.						Document
31.1*						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*						Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*						Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*						The following financial information from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in XBRL (Extensible Business Reporting Language), (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Other Comprehensive Loss, (iv) the Condensed Consolidated Statements of Stockholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements.
104*						Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its iXBRL tags are embedded within the Inline XBRL document.

* Filed or furnished as applicable with this quarterly report

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		MUELLER WATER PRODUCTS, INC.
Date:	August 5, 2021	By:	/s/ Suzanne G. Smith
			Suzanne G. Smith
			Chief Accounting Officer