Mueller Water Products, Inc. - Quarter Report: 2022 December (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 December 31, 2022

☐ 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(s)	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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☒ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

There were 156,264,139 shares of common stock of the registrant outstanding at January 31, 2023.

TABLE OF CONTENTS



ITEM		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets - December 3 1 , 2022 and September 30, 2022	3
	Unaudited Condensed Consolidated Statements of Operations - Three Months Ended December 3 1 , 2022 and 2021	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income - Three Months Ended December 3 1 , 2022 and 2021	5
	Unaudited Condensed Consolidated Statements of Equity - Three Months Ended December 3 1 , 2022 and 2021	6
	Unaudited Condensed Consolidated Statements of Cash Flows - Three Months Ended December 3 1 , 2022 and 2021	7
	Notes to the Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	29
	Signatures	29

Table of Contents

PART I

Item 1. FINANCIAL STATEMENTS

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	December 31,		September 30,
	2022		2022
	(in millions, except share amounts)
Assets:
Cash and cash equivalents	$	125.6	$	146.5
Receivables, net of allowance for credit losses of $6.1 million and $5.6 million	201.9		228.0
Inventories, net	314.0		278.7
Other current assets	30.4		26.8
Total current assets	671.9		680.0
Property, plant and equipment, net	302.9		301.6
Intangible assets, net	355.6		361.2
Goodwill	100.0		98.6
Other noncurrent assets	56.2		56.7
Total assets	$	1,486.6	$	1,498.1

Liabilities and stockholders’ equity:
Current portion of long-term debt	$	0.9	$	0.8
Accounts payable	103.5		122.8
Other current liabilities	109.2		117.4
Total current liabilities	213.6		241.0
Long-term debt	446.1		446.1
Deferred income taxes	85.8		86.3
Other noncurrent liabilities	53.3		55.4
Total liabilities	798.8		828.8

Commitments and contingencies (Note 10.)

Common stock: 600,000,000 shares authorized; 156,208,077 and 155,844,138 shares outstanding at December 31, 2022, and September 30, 2022, respectively	1.6		1.6
Additional paid-in capital	1,271.0		1,279.6
Accumulated deficit	(544.8)		(567.3)
Accumulated other comprehensive loss	(40.0)		(44.6)
Total stockholders’ equity	687.8		669.3
Total liabilities and stockholders’ equity	$	1,486.6	$	1,498.1

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

Table of Contents

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three months ended
	December 31,
		2022		2021

		(in millions, except per share amounts)
Net sales		$	314.8	$	272.3
Cost of sales		221.6		184.7
Gross profit		93.2		87.6
Operating expenses:
Selling, general and administrative		62.9		56.3
Strategic reorganization and other (benefits) charges		(3.7)		2.4
Total operating expenses		59.2		58.7
Operating income		34.0		28.9
Other expenses (income):
Pension expense (benefit) other than service		0.9		(1.0)
Interest expense, net		3.7		4.3
Net other expenses		4.6		3.3
Income before income taxes		29.4		25.6
Income tax expense		6.9		6.2
Net income		$	22.5	$	19.4

Net income per share:
Basic		$	0.14	$	0.12
Diluted		$	0.14	$	0.12

Weighted average shares outstanding:
Basic		156.4		158.0
Diluted		157.0		158.9

Dividends declared per share		$	0.061	$	0.058

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

Table of Contents

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three months ended
	December 31,
		2022		2021

		(in millions)
Net income		$	22.5	$	19.4
Other comprehensive income (loss) :
Pension benefit adjustments		0.9		0.4
Income tax effects		(0.3)		(0.1)
Foreign currency translation		4.0		5.7
Total other comprehensive income, net		4.6		6.0
Comprehensive income		$	27.1	$	25.4

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

Table of Contents

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)


	Common stock		Additional paid-in capital		Accumulated deficit		Accumulated other comprehensive (loss) income		Total
	(in millions)
Balance at September 30, 2022	$	1.6	$	1,279.6	$	(567.3)	$	(44.6)	$	669.3
Net income	—		—		22.5		—		22.5
Dividends declared	—		(9.5)		—		—		(9.5)
Stock-based compensation	—		1.8		—		—		1.8
Shares retained for employee taxes	—		(1.5)		—		—		(1.5)
Common stock issued	—		0.6		—		—		0.6

Other comprehensive income, net of tax	—		—		—		4.6		4.6
Balance at December 31, 2022	$	1.6	$	1,271.0	$	(544.8)	$	(40.0)	$	687.8


	Common stock		Additional paid-in capital		Accumulated deficit		Accumulated other comprehensive (loss) income		Total
	(in millions)
Balance at September 30, 2021	$	1.6	$	1,342.2	$	(643.9)	$	(5.0)	$	694.9
Net income	—		—		19.4		—		19.4
Dividends declared	—		(9.2)		—		—		(9.2)
Stock-based compensation	—		2.0		—		—		2.0
Shares retained for employee taxes	—		(1.9)		—		—		(1.9)
Stock repurchased under buyback program			(20.0)		—		—		(20.0)
Common stock issued	—		0.7		—		—		0.7
Other comprehensive income, net of tax	—		—		—		6.0		6.0
Balance at December 31, 2021	$	1.6	$	1,313.8	$	(624.5)	$	1.0	$	691.9

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

Table of Contents

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Three months ended
	December 31,
	2022		2021

	(in millions)
Operating activities:
Net income	$	22.5	$	19.4
Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of acquisition:
Depreciation	7.8		8.0
Amortization	7.0		7.2
Gain on sale of assets	(4.0)		—
Stock-based compensation	1.8		2.0
Pension expense (benefit)	1.1		(0.7)
Deferred income taxes	(0.9)		3.6
Inventory reserves provision	1.2		3.5
Other, net	0.5		1.0
Changes in assets and liabilities, net of acquisition:
Receivables, net	26.4		31.9
Inventories	(36.1)		(28.3)
Other assets	(3.6)		(0.8)
Accounts payable	(19.6)		(8.4)
Other current liabilities	(8.4)		(12.8)
Other noncurrent liabilities	(2.2)		(5.8)
Net cash (used in) provided by operating activities	(6.5)		19.8
Investing activities:
Capital expenditures	(9.9)		(11.0)
Acquisition, net of cash acquired	—		0.2
Proceeds from sale of assets	5.1		—
Net cash used in investing activities	(4.8)		(10.8)
Financing activities:


Dividends paid	(9.5)		(9.2)
Employee taxes related to stock-based compensation	(1.5)		(1.9)
Common stock issued	0.6		0.7

Common stock repurchased under buyback program	—		(20.0)

Financing leases	(0.1)		(0.1)
Net cash used in financing activities	(10.5)		(30.5)
Effect of currency exchange rate changes on cash	0.9		1.3
Net change in cash and cash equivalents	(20.9)		(20.2)
Cash and cash equivalents at beginning of period	146.5		227.5
Cash and cash equivalents at end of period	$	125.6	$	207.3

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

Table of Contents


	Three months ended
	December 31,
	2022		2021

	(in millions)
Supplemental cash flow information:
Cash paid for interest, net	$	8.6	$	10.0
Cash paid for income taxes, net	$	0.2	$	0.4

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

Table of Contents

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2022

(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: Water Flow Solutions and Water Management Solutions. These segments are based on a management reorganization that became effective October 1, 2021. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. The “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries. With regard to the Company’s segments, “we,” “us” or “our” may also refer to the segment being discussed.

On June 14, 2021, we acquired all the outstanding capital stock of i2O Water Ltd (“i2O”), a provider of pressure management solutions to more than 100 water companies in 45 countries. During the three months ended December 31, 2021, we recorded a purchase price adjustment of $0.2 million, resulting in a final purchase price of $19.5 million.

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make certain estimates and assumptions in recording assets, liabilities, sales and expenses as well as in the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2022. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. The condensed consolidated balance sheet at September 30, 2022 was derived from our audited financial statements, but it does not include all disclosures required by GAAP.

Our business is seasonal as a result of the impact of cold weather conditions. Net sales and operating income historically have been lowest in the three month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.

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 Pronouncements

In December 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” (“ASU 2022-06”). ASU 2022-06 defers the sunset date for applying the reference rate reform relief in ASC 848 to December 31, 2024 from December 31, 2022. ASU 2022-06 became effective immediately upon issuance. In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective from March 12, 2020, but may be adopted prospectively from a date within an interim period subsequent to March 12, 2020. We evaluated our contracts and the optional expedients provided by ASU 2020-04. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.

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

Restructuring

Table of Contents

Between November 2019 and March 2021, we announced the purchase and closure of several facilities. We purchased a new facility in Kimball, Tennessee to support and enhance our investment in our Chattanooga, Tennessee large casting foundry and closed our facilities in Hammond, Indiana, Woodland, Washington and Surrey, British Columbia, Canada. We also completed the closure of our facility in Aurora, Illinois during our fiscal year 2022. The majority of the activities from these plants were transferred to our Kimball, Tennessee facility. In connection with these reorganizations, we recognized certain restructuring costs. During the three months ended December 31, 2022, we recorded a $4.0 million gain, before tax, on the sale of the Aurora, Illinois facility. The restructuring accrual amounts as of December 31, 2022 and December 31, 2021 were immaterial.

New Markets Tax Credit Program

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

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

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

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

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

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

Note 2. 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

Table of Contents

Refer to Note 8. for disaggregation of our revenues from contracts with customers by reportable segment and by geographical region, which we believe best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Geographical region represents the location of the customer.

Contract Asset and Liability Balances

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

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

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


	December 31,		September 30,
	2022		2022

	(in millions)
Billed receivables	$	203.5	$	230.5
Unbilled receivables	4.5		3.1
Gross customer receivables	208.0		233.6
Allowance for credit losses	(6.1)		(5.6)
Receivables, net	$	201.9	$	228.0

Deferred revenue	$	8.4	$	8.1

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Our performance obligations are satisfied at a point in time for sales of equipment or over time for our software hosting and leak detection monitoring services. Performance obligations are supported by customer contracts, which provide frameworks for the nature of the distinct products or services. The transaction price is adjusted for our estimate of variable consideration which may include discounts and rebates. To estimate variable consideration, we apply the expected value or the most likely amount method, based on whichever method most appropriately predicts the amount of consideration we expect to receive. The method applied is typically based on historical experience and known trends. We constrain the amounts of variable consideration that are included in the transaction price, to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when uncertainties around the variable consideration are resolved.

We exclude from the measurement of the transaction price all taxes assessed by a governmental authority.

We have elected to use the practical expedient to not adjust the transaction price of a contract for the effects of a significant financing component if, at the inception of the contract, we expect that the period between when we transfer a product or service to a customer and when a customer remits payment will be one year or less.

Revenue for the sale of our products is recognized when the obligations of the terms of our contract are satisfied, which is when the customer is able to direct the use of and obtain substantially all of the benefits from the product, which generally occurs upon shipment when control of the product transfers to the customer.

We offer warranties to our customers which provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. These warranties cannot be purchased separately from us.

Table of Contents

Costs to Obtain or Fulfill a Contract

Shipping and handling costs associated with freight activities after the customer has obtained control of a product are included in cost of sales at the time the related revenue is recognized.

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

Note 3. Income Taxes

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


	Three months ended
	December 31,
		2022		2021
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		3.4		3.9
Excess tax benefits related to stock-based compensation		0.7		(1.0)
Tax credits		(1.6)		(1.2)
Global Intangible Low-Taxed Income		0.8		0.3
Foreign income tax rate differential		(1.6)		(0.7)
Nondeductible compensation		0.5		—
Valuation allowances		(0.2)		1.4
Other		0.5		0.5

Effective income tax rate		23.5	%	24.2	%

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

Note 4. Borrowing Arrangements

The components of our long-term debt are as follows:


	December 31,		September 30,
	2022		2022

	(in millions)
4.0% Senior Notes	$	450.0	$	450.0
Finance leases	1.4		1.6
Total borrowings	451.4		451.6
Less: deferred financing costs	(4.4)		(4.7)
Less: current portion	(0.9)		(0.8)
Long-term debt	$	446.1	$	446.1

ABL Agreement. Our asset-based lending agreement, as amended, (“ABL”) is provided by a consortium of banking institutions and consists of a revolving credit facility for up to $175.0 million in borrowing that expires on July 29, 2025. The ABL allows up to $25.0 million of swing line loans and up to $60.0 million of letters of credit. The ABL 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.

Table of Contents

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

The ABL is subject to mandatory prepayments if total outstanding borrowings under the ABL 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 is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of eligible inventory, less certain reserves. Prepayments can be made at any time without penalty.

Substantially all of our United States subsidiaries are borrowers under the ABL and are jointly and severally liable for outstanding borrowings. Our obligations under the ABL are secured by a first-priority perfected lien on all of our United States inventory, accounts receivable, certain cash balances and other supporting assets.

The ABL includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million and 10% of the Loan Cap as defined in the ABL. Excess availability based on December 31, 2022 data was $162.4 million, as reduced by $12.4 million of outstanding letters of credit and $0.2 million of accrued fees and expenses.

4.0% Senior Unsecured Notes. On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0%, paid semi-annually in June and December. We capitalized $5.5 million of financing costs which are being amortized over the term of the 4.0% Senior Notes using the effective interest method. Proceeds from the 4.0% Senior Notes, along with cash on hand, were used to redeem our previously existing 5.5% Senior Notes. Substantially all of our United States subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL. Based on quoted market prices, which is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $395.8 million at December 31, 2022.

An indenture securing the 4.0% Senior Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at December 31, 2022.

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

Note 5. Retirement Plans

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


	Three months ended
	December 31,
		2022		2021
		(in millions)
Service cost		$	0.2	$	0.3
Pension costs (benefits) other than service:
Interest cost		3.5		2.4
Expected return on plan assets		(3.5)		(3.8)
Amortization of actuarial net loss		0.9		0.4
Pension costs (benefits) other than service		0.9		(1.0)
Net periodic costs (benefits)		$	1.1	$	(0.7)

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

Table of Contents

Note 6. Stock-based Compensation Plans

We grant various forms of stock-based compensation, including market-based restricted stock units (“MRSUs”), restricted stock units, stock options and performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”), Phantom Plan instruments under our Mueller Water Products, Inc. 2012 Phantom Plan, and Employee stock purchase plan instruments under our 2006 Employee Stock Purchase Plan. Grants issued during the three months ended December 31, 2022 are as follows:


	Number granted	Weighted average grant date fair value per instrument		Total grant date fair value (in millions)












Quarter ended December 31, 2022
MRSUs	166,284	$	15.08	$	2.5
PRSUs	166,284	$	11.41	$	1.9
Restricted stock units	228,692	$	11.39	$	2.6
Phantom Plan instruments	267,093	$	11.41	$	3.0
Non-qualified stock options	573,279	$	3.31	$	1.9
Employee stock purchase plan instruments	47,463	$	2.56	$	0.1
				$	12.0

An MRSU award represents a target number of units that may be paid out at the end of a three-year award cycle based on a calculation of our relative total shareholder return (“TSR”) performance as compared with the TSR of a selected peer group. 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 attributed to MRSUs is based on the fair value of the awards on their respective grant dates, as determined using a Monte Carlo model. The assumptions used to determine the grant date fair value are indicated below.


	November 29, 2022
Variables used in determining grant date fair value:
Dividend yield	2.20	%
Risk-free rate	4.20	%
Expected term (in years)	2.8

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

At December 31, 2022, the outstanding Phantom Plan instruments had a fair value of $10.76 per instrument and our liability for Phantom Plan instruments was $1.4 million and is included within Other current and Other noncurrent liabilities.

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


	November 29, 2022
Dividend yield	1.80	%
Risk-free rate	3.89	%
Expected term (in years)	6.00

Table of Contents

A PRSU award consists of a target number of units that may be paid out at the end of a three-year award cycle. 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 issued 282,472 shares of common stock to settle PRSUs vested during the three months ended December 31, 2022. Additionally, we issued 128,048 and 37,734 shares of common stock to settle restricted stock units vested and stock options exercised, respectively, during the three months ended December 31, 2022. Additionally, 131,670 shares of common stock were surrendered to us to pay the withholding obligations of equity award participants.

Operating income included stock-based compensation expense of $2.7 million and $2.6 million during the three months ended December 31, 2022 and 2021, respectively. At December 31, 2022, there was approximately $15.8 million of unrecognized compensation expense related to stock-based compensation arrangements, which will be expensed through December 2025.

We excluded 1,274,371 and 277,344 stock-based compensation instruments from the calculations of diluted earnings per share in the three months ended December 31, 2022 and 2021, respectively, since their inclusion would have been antidilutive.

Table of Contents

Note 7. Supplemental Balance Sheet Information

Selected supplemental asset information is presented below.


	December 31,		September 30,
	2022		2022

	(in millions)
Inventories:
Purchased components and raw materials	$	200.2	$	181.8
Work in process, net	56.0		56.8
Finished goods, net	57.8		40.1
Total inventories	$	314.0	$	278.7

Other current assets:
Prepaid expenses	$	18.1	$	14.6
Non-trade receivables	2.3		1.6
Maintenance and repair supplies and tooling	3.2		2.8
Income taxes	0.8		0.8
Workers’ compensation reimbursement receivable	2.5		2.6
Other current assets	3.5		4.4
Total other current assets	$	30.4	$	26.8

Property, plant and equipment:
Land	$	5.7	$	5.7
Buildings	86.5		87.6
Machinery and equipment	453.4		456.0
Construction in progress	110.1		104.7
Total property, plant and equipment	655.7		654.0
Accumulated depreciation	(352.8)		(352.4)
Property, plant and equipment, net	$	302.9	$	301.6

Other noncurrent assets:
Operating lease right-of-use assets	$	25.1	$	26.0
Maintenance and repair supplies and tooling	20.4		20.4
Workers’ compensation reimbursement receivable	3.6		3.6
Pension asset	0.4		0.6
Note receivable	1.8		1.7
Deferred financing fees	0.9		1.0
Other noncurrent assets	4.0		3.4
Total other noncurrent assets	$	56.2	$	56.7

Selected supplemental liability information is presented below.

Table of Contents


	December 31,		September 30,
	2022		2022

	(in millions)
Other current liabilities:
Compensation and benefits	$	27.1	$	40.2
Customer rebates	21.3		16.2
Income taxes payable	15.1		7.5
Warranty accrual	6.5		6.5
Deferred revenue	8.4		8.1
Refund liability	4.5		4.2
Taxes other than income taxes	3.6		4.4
Operating lease liabilities	4.7		4.4
Workers’ compensation accrual	4.8		4.6
CARES Act payroll tax liabilities	—		4.4
Restructuring liabilities	0.7		3.3
Environmental liabilities	0.7		0.7
Interest payable	0.8		5.3
Other current liabilities	11.0		7.6
Total other current liabilities	$	109.2	$	117.4

Other noncurrent liabilities:
Operating lease liabilities	$	21.6	$	22.4
Warranty accrual	3.4		4.2
Transition tax liability	4.1		4.1
Uncertain tax position liability	4.8		4.7
NMTC liability	3.9		3.9
Workers’ compensation accrual	6.5		6.5
Asset retirement obligation	3.6		3.6

Deferred development grant	2.5		2.5
Other noncurrent liabilities	2.9		3.5
Total other noncurrent liabilities	$	53.3	$	55.4

Goodwill

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

The following table summarizes information concerning our goodwill, all of which is within our Water Management Solutions segment, during the three months ended December 31, 2022, in millions.


Balance at September 30, 2022:
Goodwill	$	822.7
Accumulated impairment	(724.1)
Net goodwill	98.6
Activity during the three months ended December 31, 2022:
Change in foreign currency exchange rates	1.4
Balance at December 31, 2022	$	100.0

Table of Contents

Note 8. Segment Information

We have two reportable segments, Water Flow Solutions and Water Management Solutions. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Summarized financial information for our segments is presented below.


	Three months ended
	December 31,
		2022		2021

		(in millions)
Net sales, excluding intercompany:
Water Flow Solutions		$	165.6	$	154.9
Water Management Solutions		149.2		117.4
		$	314.8	$	272.3
Operating income (loss):
Water Flow Solutions		$	24.2	$	31.3
Water Management Solutions		19.6		11.4
Corporate		(9.8)		(13.8)
		$	34.0	$	28.9
Depreciation and amortization:
Water Flow Solutions		$	7.7	$	7.4
Water Management Solutions		7.0		7.7
Corporate		0.1		0.1
		$	14.8	$	15.2
Strategic reorganization and other (benefits) charges:
Water Flow Solutions		$	—	$	—
Water Management Solutions		—		0.1
Corporate		(3.7)		2.3
		$	(3.7)	$	2.4
Capital expenditures:
Water Flow Solutions		$	7.8	$	9.4
Water Management Solutions		2.1		1.6
Corporate		—		—
		$	9.9	$	11.0
Water Flow Solutions disaggregated net revenue:
Central		$	44.0	$	40.5
Northeast		31.3		30.0
Southeast		33.4		37.3
West		49.2		38.1
United States		157.9		145.9
Canada		4.4		7.9
Other international locations		3.3		1.1
		$	165.6	$	154.9
Water Management Solutions disaggregated net revenue:
Central		$	41.5	$	28.8
Northeast		31.2		24.3
Southeast		33.3		25.5
West		29.1		24.7
United States		135.1		103.3
Canada		7.3		7.6
Other international locations		6.8		6.5
		$	149.2	$	117.4

Table of Contents

Note 9. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is as follows:


	Pension, net of tax		Foreign currency translation		Total

	(in millions)
Balance at September 30, 2022	$	(36.3)	$	(8.3)	$	(44.6)
Current period other comprehensive income	0.6		4.0		4.6
Balance at December 31, 2022	$	(35.7)	$	(4.3)	$	(40.0)

Note 10. Commitments and Contingencies

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

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

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

On July 13, 2010, Rohcan Investments Limited, the former owner of property leased by Mueller Canada Ltd. and located in Milton, Ontario, filed a lawsuit against Mueller Canada Ltd. and its directors seeking C$10.0 million in damages arising from the defendants’ alleged environmental contamination of the property and breach of lease. On November 15, 2022, Mueller Canada Ltd. agreed to pay Rohcan Investments Limited C$1.5 million in settlement of all liability, damages and other claims related to the lawsuit. We have paid the settlement amount, and are pursuing indemnification from a former owner for certain potential liabilities that are alleged in this lawsuit.

The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act in connection with a former manufacturing facility operated by U.S. Pipe that was in the vicinity of a proposed Superfund site located in North Birmingham, Alabama. Under the terms of the acquisition agreement relating to our sale of U.S. Pipe, we agreed to indemnify the purchaser for certain environmental liabilities, including those arising out of the former manufacturing site in North Birmingham. Accordingly, the purchaser tendered the matter to us for indemnification, which we accepted. Ultimate liability for the site will depend on many factors that have not yet been determined, including the determination of the Environmental Protection Agency’s remediation costs, the number and financial viability of the other PRPs (there are four other PRPs currently) and the determination of the final allocation of the costs among the PRPs. Since the amounts of such costs cannot be reasonably estimated at this time, no amounts have been accrued for this matter at December 31, 2022.

Table of Contents

The COVID-19 Pandemic. The pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions to the U.S. and global economies. We have taken action and continue to counter such disruption, and work to protect the safety of our employees. While the extent to which the pandemic continues to affect our results will depend on future developments, the pandemic could result in material effects to our future financial position, results of operations, cash flows and liquidity.

Mass Shooting Event at our Mueller Co. Facility in Albertville, Alabama. On June 15, 2021, we experienced a mass shooting event at our Mueller Co. facility in Albertville, Alabama. Various claims arising from the event have been filed to date, and we anticipate that additional claims may be made and that liability under such claims, if any, is not expected to have a material adverse effect on our results of operations or cash flows. However, the outcome of these claims, or legal proceedings, and related effects arising from this event cannot be predicted with certainty.

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

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

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

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

We are party to a number of lawsuits arising in the ordinary course of business, including product liability cases for products manufactured by us or third parties. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such other litigation is not likely to have a materially adverse effect on our financial position, results of operations, cash flows or liquidity.

Note 11. Subsequent Events

On January 25, 2023, our Board of Directors declared a dividend of $0.061 per share on our common stock, payable on or about February 21, 2023 to stockholders of record at the close of business on February 10, 2023.

A new collective bargaining agreement with the International Association of Machinists and Aerospace Workers at our Chattanooga, Tennessee facility was successfully negotiated and signed in January, 2023. The agreement expires January 14, 2027.

Table of Contents

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 federal securities laws. All statements that address activities, events or developments that the Company intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements, including, without limitation, statements regarding outlooks, projections, forecasts, trend descriptions, environmental/sustainability plans, go-to-market strategies, operational excellence, acceleration of new product development, financial or operating performance, litigation outcomes, capital allocation and growth strategy plans, restructuring efficiencies and projected warranty charges. Forward-looking statements are based on certain assumptions and assessments made by the Company in light of the Company’s experience and perception of historical trends, current conditions and expected future developments.

Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including the continued impact of the COVID-19 pandemic on the Company’s operations and results, including effects on the financial health of customers (including the collection of receivables); logistical challenges and supply chain disruptions, geopolitical conditions, or other events; an inability to realize the anticipated benefits from our operational initiatives, including our large capital investments in Chattanooga and Kimball, Tennessee, and Decatur, Illinois, plant closures, and our reorganization and related strategic realignment activities; an inability to attract or retain a skilled and diverse workforce, increased competition related to the workforce and labor markets; an inability to protect the Company’s information systems against service interruption, misappropriation of data or breaches of security; failure to comply with personal data protection and privacy laws; cyclical and changing demand in core markets such as municipal spending, residential construction, and natural gas distribution; government monetary or fiscal policies; the impact of adverse weather conditions; the impact of manufacturing and product performance; the impact of wage, commodity and materials price inflation; the impact of warranty claims; an inability to successfully resolve significant legal proceedings or government investigations; compliance with environmental, trade and anti-corruption laws and regulations; climate change and legal or regulatory responses thereto; changing regulatory, trade and tariff conditions; the failure to integrate and/or realize any of the anticipated benefits of recent acquisitions or divestitures; an inability to achieve some or all of our Environmental, Social and Governance goals; and other factors that are described in the section entitled “RISK FACTORS” in Item 1A of the Company’s most recent Annual Report on Form 10-K and later filings on Form 10-Q, as applicable.

Forward-looking statements do not guarantee future performance and are only as of the date they are made. The Company undertakes no duty to update its forward-looking statements except as required by law. Undue reliance should not be placed on any forward-looking statements. You are advised to review any further disclosures the Company makes on related subjects in subsequent Forms 10-K, 10-Q, 8-K and other reports filed with the U.S. Securities and Exchange Commission.

Overview

Business

Approximately 60% to 65% of our 2022 net sales were associated with repair and replacement directly related to municipal water infrastructure spending, approximately 25% to 30% were related to residential construction activity and less than 10% were related to natural gas utilities spending.

We expect the operating environment during fiscal year 2023 to be very challenging as a result of the ongoing inflationary pressures, labor challenges and potential recession. We anticipate healthy demand in the municipal repair and replacement market due to favorable budgets, especially at larger municipalities. While demand from the new residential construction end market was at healthy levels during the fiscal year 2022, especially for lot and land development activity, we anticipate that activity levels will slow in 2023 based on higher interest rates leading to a decrease in demand for new residential housing. In January 2023, Blue Chip Economic Indicators forecasted a 17.3% decrease in housing starts for the calendar year 2023 as compared to the calendar year 2022.

We have continued to incur additional costs to address the pandemic as discussed herein, including costs associated with unfavorable manufacturing variances, and labor shortages at our facilities. We expect to continue to incur such costs that may be significant as we continue to respond to the pandemic. In addition to the pandemic, the war in Ukraine has caused supply chain disruptions that have resulted in higher costs to manufacture our products and in our capital expenditures. We expect these conditions to persist in the near term.

Table of Contents

We have two reportable segments: Water Flow Solutions and Water Management Solutions. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Flow Solutions represented 57% of our fiscal 2022 net sales. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. Water Management Solutions represented 43% of our fiscal 2022 net sales.

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

Results of Operations

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

Table of Contents


	Three months ended December 31, 2022
	Water Flow Solutions		Water Management Solutions		Corporate		Total

	(in millions)
Net sales	$	165.6	$	149.2	$	—	$	314.8
Gross profit	$	46.6	$	46.6	$	—	$	93.2
Operating expenses:
Selling, general and administrative	22.4		27.0		13.5		62.9
Strategic reorganization and other benefits	—		—		(3.7)		(3.7)
Total operating expenses	22.4		27.0		9.8		59.2
Operating income (loss)	$	24.2	$	19.6	$	(9.8)	34.0
Non-operating expenses:
Pension expense other than service							0.9
Interest expense, net							3.7
Income before income taxes							29.4
Income tax expense							6.9
Net income							$	22.5

	Three months ended December 31, 2021
	Water Flow Solutions		Water Management Solutions		Corporate		Total

	(in millions)
Net sales	$	154.9	$	117.4	$	—	$	272.3
Gross profit	$	52.1	$	35.5	$	—	$	87.6
Operating expenses:
Selling, general and administrative	20.8		24.0		11.5		56.3
Strategic reorganization and other charges	—		0.1		2.3		2.4
Total operating expenses	20.8		24.1		13.8		58.7
Operating income (loss)	$	31.3	$	11.4	$	(13.8)	28.9
Non-operating expenses:

Pension benefit other than service							(1.0)
Interest expense, net							4.3
Income before income taxes							25.6
Income tax expense							6.2
Net income							$	19.4

Consolidated Analysis

Net sales in the three months ended December 31, 2022 increased $42.5 million or 15.6% to $314.8 million as compared with $272.3 million in the prior year period primarily as a result of higher pricing across most of our product lines in both segments, which was partially offset by lower volumes on certain products.

Gross profit in the three months ended December 31, 2022 increased $5.6 million or 6.4% to $93.2 million from $87.6 million in the prior year period, primarily as a result of higher pricing across most of our product lines, which was partially offset by higher cost of sales and lower volumes on certain products. The higher cost of sales was primarily a result of unfavorable manufacturing performance and inflation. Unfavorable manufacturing performance was a result of outsourcing,

Table of Contents

machine downtime, supply chain disruptions and labor productivity mainly in our foundry operations. Gross margin was 29.6% in the three months ended December 31, 2022 as compared with 32.2% in the prior year period.

Selling, general and administrative expenses (“SG&A”) in the three months ended December 31, 2022 increased $6.6 million or 11.7% to $62.9 million from $56.3 million in the prior year period primarily due to higher personnel costs and sales commissions, investments in technology, inflation and increased travel and trade show expenditures, partially offset by foreign exchange gains. SG&A as a percentage of net sales was 20.0% and 20.7% for the three months ended December 31, 2022 and December 31, 2021, respectively.

Strategic reorganization and other charges in the three months ended December 31, 2022 was a benefit of $3.7 million which primarily consisted of a $4.0 million gain, before tax, on the sale of the Aurora, Illinois facility, which was partially offset by certain transaction-related expenses. Strategic reorganization and other charges for the three months ended December 31, 2021 were $2.4 million, which primarily consisted of expenses associated with the Albertville tragedy, as well as termination benefits associated with the closures of our facilities in Aurora, Illinois and Surrey, British Columbia, Canada.

Net interest expense in the three months ended December 31, 2022 declined $0.6 million or 14.0% to $3.7 million as compared with $4.3 million in the prior year period primarily due to higher interest income received as a result of rising interest rates. The components of net interest expense are provided below.


	Three months ended
	December 31,
	2022		2021

	(in millions)
4.0% Senior Notes	4.5		4.5
Deferred financing costs amortization	0.3		0.2
ABL Agreement	0.2		0.2
Capitalized interest	(0.7)		(0.6)
Other interest cost	0.1		0.1
Total interest expense	4.4		4.4
Interest income	(0.7)		(0.1)
Interest expense, net	$	3.7	$	4.3

Table of Contents

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


	Three months ended
	December 31,
	2022		2021
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	3.4		3.9
Excess tax benefits related to stock-based compensation	0.7		(1.0)
Tax credits	(1.6)		(1.2)
Global Intangible Low-taxed Income	0.8		0.3
Foreign income tax rate differential	(1.6)		(0.7)

Nondeductible compensation	0.5		—
Valuation allowances	(0.2)		1.4
Other	0.5		0.5
Effective income tax rate	23.5	%	24.2	%

Segment Analysis

Water Flow Solutions

Net sales in the three months ended December 31, 2022 increased $10.7 million or 6.9% to $165.6 million as compared with $154.9 million in the prior year period primarily as a result of higher pricing across most of the segment’s product lines partially offset by lower volumes.

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

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

Water Management Solutions

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

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

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

Table of Contents

Corporate

SG&A increased $2.0 million to $13.5 million in the three months ended December 31, 2022 as compared with $11.5 million in the three months ended December 31, 2021 primarily as a result of increased personnel costs and inflation.

Liquidity and Capital Resources

We had cash and cash equivalents on hand of $125.6 million at December 31, 2022 and $162.4 million of additional borrowing capacity under our ABL Agreement based on December 31, 2022 data. Undistributed earnings from our subsidiaries in Israel, Canada, and China are considered to be permanently invested outside the United States. At December 31, 2022, cash and cash equivalents included $48.3 million, $7.2 million, and $10.7 million in Israel, Canada, and China, respectively.

We declared a quarterly dividend of $0.061 per share on January 25, 2023, payable on or about February 21, 2023 to holders of record as of February 10, 2023, which will result in an estimated $9.5 million cash outlay.

We did not repurchase any of our outstanding common stock during the three months ended December 31, 2022 and had $100.0 million remaining of our share repurchase authorization.

The ABL and 4.0% Senior Notes contain customary representations and warranties, covenants and provisions governing an event of default. The covenants restrict our ability to engage in certain specified activities, including but not limited to the payment of dividends and the redemption of our common stock.

Net cash used in operating activities was $6.5 million during the three months ended December 31, 2022 as compared with net cash provided by operating activities of $19.8 million in the prior year period. Inventory purchases increased during the three months ended December 31, 2022 as compared with the three months ended December 31, 2021 as a result of supply chain management and inflation. Additionally, the decline in cash as a result of operating activities during the comparable periods included: a deferred tax increase of $4.5 million, a pension expense increase of $1.8 million, and a $1.2 million increase in inventory reserves. Other current liabilities and other noncurrent liabilities decreased primarily as a result of the timing of payroll payments, the repayment of the CARES Act employer payroll tax deferral, interest payments, and the payment of restructuring expenses.

Capital expenditures were $9.9 million in the three months ended December 31, 2022 as compared with $11.0 million in the prior year period. Capital expenditures decreased primarily as a result of lower expenditures associated with the new Decatur foundry as compared with the prior year period. For fiscal year 2023, we have provided guidance that our capital expenditures are expected to be between $70.0 million and $80.0 million.

We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, income tax payments, capital expenditures and debt service obligations as they become due through December 31, 2023. However, our ability to make these payments will depend largely on our future operating performance, which may be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

ABL Agreement

As of December 31, 2022, our ABL is provided by a consortium of banking institutions and consists of a revolving credit facility for up to $175.0 million in borrowings that expires on July 28, 2025. Included in the ABL is the ability to borrow up to $25.0 million of swing line loans and up to $60.0 million of letters of credit. The ABL 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 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, plus an applicable margin range from 100 to 125 basis points. At December 31, 2022, the applicable margin was 200 basis points for LIBOR-based loans, and 100 basis points for base rate loans.

The ABL is subject to mandatory prepayments if total outstanding borrowings under the ABL 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 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 inventory, less certain reserves. Prepayments can be made at any time with no penalty.

Table of Contents

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

4.0% Senior Unsecured Notes

On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0%, paid semi-annually in June and December. We capitalized $5.5 million of financing costs, which are being amortized over the term of the 4.0% Senior Notes using the effective interest method. Proceeds from the 4.0% Senior Notes, along with cash on hand, were used to redeem previously existing 5.5% Senior Notes. Substantially all of our U.S. subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL. Based on quoted market prices, which is a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $395.8 million at December 31, 2022.

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

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

Moody’s

Standard & Poor’s

December 31,

September 30,

December 31,

September 30,

2022

Corporate credit rating

Ba1

ABL Agreement

Not rated

4.0% Senior Notes

Ba1

Outlook

Stable

Material Cash Requirements

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

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “structured finance” or “special purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, at December 31, 2022 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.

Table of Contents

We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At December 31, 2022, we had $12.4 million of letters of credit and $32.5 million of surety bonds outstanding.

Seasonality

Our business is seasonal as a result of the impact of cold weather conditions. Net sales and operating income historically have been lowest in the three-month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.

Critical Accounting Estimates

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

Item 4. CONTROLS AND PROCEDURES

There have been no changes in our internal control over financial reporting which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended December 31, 2022.

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

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

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

Table of Contents

PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Refer to the information provided in Note 10. to the Notes to the Condensed Consolidated Financial Statements presented in Item 1. of Part I of this report.

Item 1A. RISK FACTORS

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

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

During the three months ended December 31, 2022, 131,670 shares were surrendered to us to pay the tax withholding obligations of participants in connection with the vesting of equity awards.

We did not repurchase any share of our common stock during the three months ended December 31, 2022, and we had $100.0 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 December 31, 2022, 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 (formatted as Inline XBRL and contained in Exhibit 101).

* Filed 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:	February 3, 2023	By:	/s/ Suzanne G. Smith
			Suzanne G. Smith
			Chief Accounting Officer