NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX
MONTHS ENDED
MARCH 31,
2017
Note 1. Organization
Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in
two
business segments: Mueller Co. and Mueller Technologies. Mueller Co. 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. Mueller Technologies offers metering systems, leak detection, pipe condition assessment and other related 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.
On January 6, 2017, we sold our former Anvil segment. Anvil's results of operations and the gain from its sale have been classified as discontinued operations, and its assets and liabilities have been classified as held for sale, for all periods presented.
On
February 6, 2017
, we entered into an accelerated share repurchase agreement with Bank of America, N.A. (“Bank of America”) to repurchase
$50 million
of our outstanding common stock. On February 7, 2017, we paid
$50 million
to Bank of America, for which we received an initial delivery of approximately
2.9 million
shares of our common stock. We received another
1.2 million
shares of our common stock in
April 2017
and
May 2017
, which fulfilled the agreement. The total number of shares of our common stock repurchased pursuant to the agreement was based on the average of the daily volume-weighted average prices of our common stock, less a fixed discount, over the term of the agreement.
Mueller Co. owns a
49%
ownership interest in an industrial valve joint venture. Due to substantive control features in the operating agreement, all of the joint venture's assets, liabilities and results of operations are included in our consolidated financial statements. The net loss attributable to noncontrolling interest is included in selling, general and administrative expenses. Noncontrolling interest is recorded at its carrying value, which approximates fair value.
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.
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses and the disclosure of contingent assets and liabilities for the reporting periods. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. The condensed consolidated balance sheet data at
September 30, 2016
was derived from audited financial statements, but does not include all disclosures required by GAAP.
Note 2. Divestiture
On
January 6, 2017
, we sold our former Anvil segment to affiliates of One Equity Partners for cash proceeds of
$305.7 million
and the agreement by the purchaser to reimburse us for expenditures to settle certain previously existing liabilities.
The table below presents a summary of the sale of Anvil, in millions.
|
|
|
|
|
Gross cash proceeds
|
$
|
305.7
|
|
Noncash proceeds
|
1.9
|
|
Total proceeds
|
307.6
|
|
Transaction expenses
|
(8.3
|
)
|
Net proceeds
|
299.3
|
|
Assets and liabilities disposed
|
(189.8
|
)
|
Gain on sale, pre-tax
|
109.5
|
|
Income tax
|
(41.6
|
)
|
Gain on sale, net of tax
|
$
|
67.9
|
|
The table below presents a summary of the operating results for the Anvil discontinued operations. These operating results do not reflect what they would have been had Anvil not been classified as discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in millions)
|
Net sales
|
$
|
—
|
|
|
$
|
86.4
|
|
|
$
|
83.1
|
|
|
$
|
166.0
|
|
Cost of sales
|
—
|
|
|
60.8
|
|
|
62.8
|
|
|
119.3
|
|
Gross profit
|
—
|
|
|
25.6
|
|
|
20.3
|
|
|
46.7
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
(1.4
|
)
|
|
17.3
|
|
|
16.9
|
|
|
34.9
|
|
Other charges
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Total operating expenses
|
(1.4
|
)
|
|
17.3
|
|
|
17.1
|
|
|
34.9
|
|
Income before income taxes
|
1.4
|
|
|
8.3
|
|
|
3.2
|
|
|
11.8
|
|
Income tax expense
|
0.7
|
|
|
2.9
|
|
|
1.2
|
|
|
4.2
|
|
|
0.7
|
|
|
5.4
|
|
|
2.0
|
|
|
7.6
|
|
Gain on sale, net of tax
|
67.9
|
|
|
—
|
|
|
67.9
|
|
|
—
|
|
Income from discontinued operations
|
$
|
68.6
|
|
|
$
|
5.4
|
|
|
$
|
69.9
|
|
|
$
|
7.6
|
|
The table below presents the components of the balance sheet accounts classified as assets and liabilities held for sale and the related net deferred income tax liability.
|
|
|
|
|
|
September 30,
|
|
2016
|
|
(in millions)
|
Assets:
|
|
Receivables, net
|
$
|
54.9
|
|
Inventories
|
83.1
|
|
Other current assets
|
4.1
|
|
Total current assets held for sale
|
142.1
|
|
|
|
Property, plant and equipment, net
|
46.7
|
|
Intangible assets
|
51.4
|
|
Other noncurrent assets
|
1.8
|
|
Total noncurrent assets held for sale
|
99.9
|
|
Total assets held for sale
|
$
|
242.0
|
|
|
|
Liabilities:
|
|
Current portion of long-term debt
|
$
|
0.3
|
|
Accounts payable
|
27.1
|
|
Other current liabilities
|
17.4
|
|
Total current liabilities held for sale
|
44.8
|
|
|
|
Long-term debt
|
0.4
|
|
Other noncurrent liabilities
|
0.4
|
|
Total noncurrent liabilities held for sale
|
0.8
|
|
Total liabilities held for sale
|
$
|
45.6
|
|
|
|
Net deferred income tax liability associated with discontinued operation
|
$
|
13.0
|
|
Note 3. Acquisition
On February 15, 2017, we acquired Singer Valve, a manufacturer of automatic control valves, and its affiliate that distributes Singer Valve products in the U.S, for an aggregate cash purchase price of approximately
$26.5 million
, subject to customary post-closing adjustments, which we do not expect to be material. Singer had net sales of approximately
$15 million
in calendar 2016 and is included in our Mueller Co. segment. The initial allocation of purchase price to the assets and liabilities of these companies, which is still subject to change, is presented below, in millions.
|
|
|
|
|
Assets acquired and liabilities assumed:
|
|
Cash
|
$
|
0.3
|
|
Receivables
|
2.9
|
|
Inventories
|
4.5
|
|
Other current assets
|
0.4
|
|
Property, plant and equipment
|
0.9
|
|
Intangible assets and goodwill
|
18.2
|
|
Accounts payable
|
(0.5
|
)
|
Other current liabilities
|
(0.2
|
)
|
Consideration paid
|
$
|
26.5
|
|
We have not yet completed our identification and valuation of intangible assets, but we expect that any goodwill recognized will be deductible for income tax purposes.
Note 4. Income Taxes
At
March 31, 2017
and
September 30, 2016
, the gross liabilities for unrecognized income tax benefits were
$3.0 million
and
$2.8 million
, respectively.
The reconciliation between the U.S. federal statutory income tax rate and the effective tax rate is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Adjustments to reconcile to the effective tax rate:
|
|
|
|
|
|
|
|
U.S. federal statutory income tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State tax apportionment change
|
14.9
|
|
|
—
|
|
|
6.4
|
|
|
—
|
|
State income taxes, net of federal benefit
|
3.7
|
|
|
4.4
|
|
|
3.8
|
|
|
4.4
|
|
Excess tax benefit for stock-based compensation
|
(30.0
|
)
|
|
(4.2
|
)
|
|
(17.2
|
)
|
|
(3.2
|
)
|
Tax credits
|
(7.2
|
)
|
|
(0.6
|
)
|
|
(3.5
|
)
|
|
(0.6
|
)
|
U.S. manufacturing deduction
|
(4.9
|
)
|
|
(3.3
|
)
|
|
(4.1
|
)
|
|
(3.3
|
)
|
Other
|
1.5
|
|
|
0.9
|
|
|
1.3
|
|
|
(2.1
|
)
|
Effective tax rate
|
13.0
|
%
|
|
32.2
|
%
|
|
21.7
|
%
|
|
30.2
|
%
|
Note 5. Borrowing Arrangements
The components of our long-term debt are presented below.
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
2017
|
|
2016
|
|
(in millions)
|
ABL Agreement
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan
|
487.1
|
|
|
489.4
|
|
Other
|
1.3
|
|
|
1.3
|
|
|
488.4
|
|
|
490.7
|
|
Less deferred financing costs
|
6.6
|
|
|
6.3
|
|
Less current portion
|
5.5
|
|
|
5.6
|
|
Long-term debt
|
$
|
476.3
|
|
|
$
|
478.8
|
|
ABL Agreement
. At
March 31, 2017
, our asset based lending agreement (“ABL Agreement”) consisted of a revolving credit facility for up to
$225 million
of revolving credit borrowings, swing line loans and letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional
$150 million
in certain circumstances subject to adequate borrowing base availability. We may borrow up to
$25 million
through swing line loans and may have up to
$60 million
of letters of credit outstanding.
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR, plus a margin ranging from
125
to
150
basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from
25
to
50
basis points. At
March 31, 2017
, the applicable rate was LIBOR plus
125
basis points.
The ABL Agreement terminates on
July 13, 2021
. We pay a commitment fee for any unused borrowing capacity under the ABL Agreement of
25
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
March 31, 2017
data, as reduced by outstanding letters of credit, swap contract liabilities and accrued fees and expenses of
$22.2 million
, was
$125.3 million
.
Term Loan
. On
November 25, 2014
, we entered into a
$500.0 million
senior secured term loan (“Term Loan”). The proceeds from the Term Loan, along with other cash, were used to prepay our 7.375% Senior Subordinated Notes and 8.75% Senior Unsecured Notes and to satisfy and discharge our obligations under the respective indentures. During the quarter ended March 31, 2017, we amended the Term Loan, resulting in a
75
basis point reduction in the interest rate spread.
The Term Loan accrues interest at a floating rate equal to LIBOR, subject to a floor of
0.75%
, plus
250
basis points. At
March 31, 2017
, the weighted-average effective interest rate was
4.58%
. We may voluntarily repay amounts borrowed under the Term Loan at any time. The principal amount of the Term Loan is required to be repaid in quarterly installments of
$1.225 million
, with any remaining principal due on
November 25, 2021
. The Term Loan is guaranteed by substantially all of our U.S. subsidiaries and is secured by essentially all of our assets, although the ABL Agreement has a senior claim on certain collateral securing borrowings thereunder. The Term Loan is reported net of unamortized discount, which was
$1.7 million
at
March 31, 2017
. Based on quoted market prices, the outstanding Term Loan had a fair value of
$491.8 million
at
March 31, 2017
.
The Term Loan contains affirmative and negative operating covenants applicable to us and our restricted subsidiaries. We believe we were compliant with these covenants at
March 31, 2017
and expect to remain in compliance through
March 31,
2018
.
Note 6. Derivative Financial Instruments
We are exposed to interest rate risk that we manage to some extent using derivative instruments. Under our April 2015 interest rate swap contracts, we receive interest calculated using 3-month LIBOR, subject to a floor of
0.75%
, and pay fixed interest at
2.341%
, on an aggregate notional amount of
$150.0 million
. These swap contracts effectively fix the cash interest rate on
$150.0 million
of our borrowings under the Term Loan at
4.841%
from
September 30, 2016
through
September 30, 2021
.
We have designated our interest rate swap contracts as cash flow hedges of our future interest payments and elected to apply the “shortcut” method of assessing hedge effectiveness. As a result, the gains and losses on the swap contracts are reported as a component of other comprehensive income or loss and are reclassified into interest expense as the related interest payments are made. During the quarter and six months ended
March 31, 2017
, we included
$0.5 million
and
$1.1 million
of such interest expense, respectively, in income from continuing operations.
The fair values of the swap contracts are presented below.
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
2017
|
|
2016
|
|
(in millions)
|
Other current liabilities
|
$
|
1.4
|
|
|
$
|
2.0
|
|
Other noncurrent liabilities
|
0.7
|
|
|
5.3
|
|
|
$
|
2.1
|
|
|
$
|
7.3
|
|
The fair values and the classification of the fair values between current and noncurrent portions are based on calculated cash flows using publicly available interest rate forward rate yield curve information, but amounts due at the actual settlement dates are dependent on actual rates in effect at the settlement dates and may differ significantly from amounts shown above.
Note 7. Retirement Plans
During March 2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-07 (“ASU 2017-07”). This amendment to GAAP will require us to exclude the components of net periodic benefit cost other than service cost from operating income on October 1, 2018, with early adoption permitted. We plan to adopt this amendment on October 1, 2017, and this adoption will require reclassification of 2017 and 2016 results. The components of net periodic benefit cost for our pension plans and the effects this adoption will have on operating income are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in millions)
|
Service cost
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
$
|
1.0
|
|
|
$
|
0.8
|
|
Components of net periodic benefit cost that will be excluded from operating income upon adoption of ASU 2017-07:
|
|
|
|
|
|
|
|
Interest cost
|
3.6
|
|
|
5.0
|
|
|
7.2
|
|
|
10.1
|
|
Expected return on plan assets
|
(4.2
|
)
|
|
(5.1
|
)
|
|
(8.5
|
)
|
|
(10.2
|
)
|
Amortization of actuarial net loss
|
1.0
|
|
|
0.8
|
|
|
2.0
|
|
|
1.6
|
|
|
0.4
|
|
|
0.7
|
|
|
0.7
|
|
|
1.5
|
|
Net periodic benefit cost
|
$
|
0.9
|
|
|
$
|
1.1
|
|
|
$
|
1.7
|
|
|
$
|
2.3
|
|
The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive loss.
Note 8. Stock-based Compensation Plans
We have granted various forms of stock-based compensation, including stock options, restricted stock units and both cash-settled and stock-settled performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”). We have also granted cash-settled Phantom Plan instruments under the Mueller Water Products, Inc. Phantom Plan (“Phantom Plan”).
A PRSU award represents a target number of units that may be paid out at the end of a multi-year award cycle consisting of a series of annual performance periods coinciding with our fiscal years. After we determine the financial performance targets related to PRSUs for a given performance period, typically during the first quarter of that fiscal year, that portion of a PRSU award becomes granted. Thus, each award consists of a grant in the year of award and grants in the designated following years. Settlement will range from
zero
to
two
times the number of PRSUs granted, depending on our financial performance against the targets. As determined at the date of award, PRSUs may settle in cash-value equivalent of, or directly in, shares of our common stock.
The stock-settled PRSUs awarded in 2014 settled in the quarter ended December 31, 2016 with an issuance of
263,410
shares of our common stock. This settlement reflected payouts of
1.021
times target for the 2016 performance period,
zero
times target for the 2015 performance period and
two
times target for the 2014 performance period.
The
234,895
stock-settled PRSUs awarded in the
six months ended
March 31, 2017
will settle in
three
years.
During the quarter and
six months ended
March 31, 2017
,
91,547
and
346,961
restricted stock units vested, respectively.
At
March 31, 2017
, the outstanding Phantom Plan instruments had a fair value of
$11.82
per instrument and our liability for Phantom Plan instruments was
$1.9 million
.
We granted stock-based compensation under the 2006 Stock Plan, the Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan and the Phantom Plan during the
six months ended
March 31, 2017
as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number granted
|
|
Weighted average grant date fair value per instrument
|
|
Total grant date fair value
(in millions)
|
Quarter ended December 31, 2016:
|
|
|
|
|
|
|
Restricted stock units
|
|
177,861
|
|
|
$
|
13.26
|
|
|
$
|
2.4
|
|
Employee stock purchase plan instruments
|
|
39,231
|
|
|
2.34
|
|
|
0.1
|
|
Phantom Plan awards
|
|
187,115
|
|
|
13.26
|
|
|
2.5
|
|
PRSUs: 2017 award
|
|
59,285
|
|
|
13.26
|
|
|
0.8
|
|
2016 award
|
|
73,826
|
|
|
13.26
|
|
|
1.0
|
|
2015 award
|
|
68,556
|
|
|
13.26
|
|
|
0.9
|
|
Quarter ended March 31, 2017:
|
|
|
|
|
|
|
Restricted stock units
|
|
165,999
|
|
|
12.82
|
|
|
2.1
|
|
Employee stock purchase plan instruments
|
|
38,267
|
|
|
2.44
|
|
|
0.1
|
|
Phantom Plan awards
|
|
12,145
|
|
|
12.66
|
|
|
0.2
|
|
PRSUs: 2017 award
|
|
19,012
|
|
|
13.15
|
|
|
0.2
|
|
|
|
|
|
|
|
$
|
10.3
|
|
Income from continuing operations included stock-based compensation expense of
$2.0 million
and
$1.8 million
during the quarters ended
March 31, 2017
and
2016
, respectively, and
$4.7 million
and
$3.6 million
during the
six months ended
March 31, 2017
and
2016
, respectively. At
March 31, 2017
, there was approximately
$13.6 million
of unrecognized compensation expense related to stock-based compensation arrangements, and
219,866
PRSUs that have been awarded for the 2018 and 2019 performance periods, for which performance goals have not been set.
We excluded
367,841
and
1,038,029
of stock-based compensation instruments from the calculations of diluted earnings per share for the quarters ended
March 31, 2017
and
2016
, respectively, and
350,286
and
1,016,155
for the
six months ended
March 31, 2017
and
2016
, respectively, since their inclusion would have been antidilutive.
Note 9. Supplemental Balance Sheet Information
Selected supplemental balance sheet information is presented below.
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
2017
|
|
2016
|
|
(in millions)
|
Inventories:
|
|
|
|
Purchased components and raw material
|
$
|
69.1
|
|
|
$
|
67.0
|
|
Work in process
|
34.7
|
|
|
31.4
|
|
Finished goods
|
42.3
|
|
|
32.3
|
|
|
$
|
146.1
|
|
|
$
|
130.7
|
|
Property, plant and equipment:
|
|
|
|
Land
|
$
|
5.6
|
|
|
$
|
5.7
|
|
Buildings
|
51.8
|
|
|
50.6
|
|
Machinery and equipment
|
258.2
|
|
|
248.3
|
|
Construction in progress
|
11.6
|
|
|
14.8
|
|
|
327.2
|
|
|
319.4
|
|
Accumulated depreciation
|
(219.5
|
)
|
|
(211.0
|
)
|
|
$
|
107.7
|
|
|
$
|
108.4
|
|
Other current liabilities:
|
|
|
|
Compensation and benefits
|
$
|
20.2
|
|
|
$
|
32.7
|
|
Customer rebates
|
3.4
|
|
|
8.3
|
|
Taxes other than income taxes
|
3.6
|
|
|
3.0
|
|
Warranty
|
4.9
|
|
|
2.0
|
|
Income taxes
|
(2.2
|
)
|
|
4.6
|
|
Environmental
|
2.2
|
|
|
5.0
|
|
Interest
|
0.5
|
|
|
0.5
|
|
Other
|
7.3
|
|
|
5.6
|
|
|
$
|
39.9
|
|
|
$
|
61.7
|
|
Note 10. Segment Information
Summarized financial information for our segments is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
March 31,
|
|
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in millions)
|
Net sales, excluding intercompany:
|
|
|
|
|
|
|
|
Mueller Co.
|
$
|
181.6
|
|
|
$
|
182.2
|
|
|
$
|
327.9
|
|
|
$
|
326.9
|
|
Mueller Technologies
|
18.1
|
|
|
15.0
|
|
|
39.0
|
|
|
33.4
|
|
|
$
|
199.7
|
|
|
$
|
197.2
|
|
|
$
|
366.9
|
|
|
$
|
360.3
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Mueller Co.
|
$
|
34.3
|
|
|
$
|
34.9
|
|
|
$
|
60.4
|
|
|
$
|
58.7
|
|
Mueller Technologies
|
(13.7
|
)
|
|
(4.9
|
)
|
|
(15.9
|
)
|
|
(8.7
|
)
|
Corporate
|
(9.7
|
)
|
|
(8.9
|
)
|
|
(19.7
|
)
|
|
(17.5
|
)
|
|
$
|
10.9
|
|
|
$
|
21.1
|
|
|
$
|
24.8
|
|
|
$
|
32.5
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Mueller Co.
|
$
|
9.1
|
|
|
$
|
8.6
|
|
|
$
|
18.1
|
|
|
$
|
17.0
|
|
Mueller Technologies
|
1.4
|
|
|
1.2
|
|
|
2.6
|
|
|
2.3
|
|
Corporate
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
|
$
|
10.6
|
|
|
$
|
9.9
|
|
|
$
|
20.9
|
|
|
$
|
19.5
|
|
Other charges:
|
|
|
|
|
|
|
|
Mueller Co.
|
$
|
1.6
|
|
|
$
|
0.4
|
|
|
$
|
1.7
|
|
|
$
|
0.6
|
|
Mueller Technologies
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.5
|
|
Corporate
|
0.8
|
|
|
0.4
|
|
|
2.0
|
|
|
0.5
|
|
|
$
|
2.5
|
|
|
$
|
0.8
|
|
|
$
|
3.8
|
|
|
$
|
1.6
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Mueller Co.
|
$
|
4.7
|
|
|
$
|
5.2
|
|
|
$
|
7.7
|
|
|
$
|
8.8
|
|
Mueller Technologies
|
5.2
|
|
|
2.0
|
|
|
6.3
|
|
|
3.0
|
|
Corporate
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
$
|
9.9
|
|
|
$
|
7.2
|
|
|
$
|
14.1
|
|
|
$
|
11.9
|
|
Mueller Technologies' operating losses for the quarter and six months ended
March 31, 2017
include a warranty expense of
$9.8 million
, as described in
Note 12.
Note 11. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability, net of tax
|
|
Foreign currency translation
|
|
Derivative instruments, net of tax
|
|
Total
|
|
|
Balance at September 30, 2016
|
$
|
(57.7
|
)
|
|
$
|
(6.1
|
)
|
|
$
|
(4.5
|
)
|
|
$
|
(68.3
|
)
|
Current period other comprehensive income (loss)
|
1.2
|
|
|
(0.5
|
)
|
|
3.2
|
|
|
3.9
|
|
Balance at March 31, 2017
|
$
|
(56.5
|
)
|
|
$
|
(6.6
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(64.4
|
)
|
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. 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 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 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.
In September 1987, we implemented an Administrative Consent Order (“ACO”) for our Burlington, New Jersey property, which was required under the New Jersey Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act). The ACO required soil and ground-water cleanup, and we completed, and received final approval on, the soil cleanup required by the ACO. We retained this property when we sold our former U.S. Pipe segment. We expect ground-water issues as well as issues associated with the demolition of former manufacturing facilities at this site will continue and remediation by us could be required. Long-term ground-water monitoring may also be required, but we do not know how long such monitoring would be required and do not believe monitoring or further remediation costs, if any, will have a material adverse effect on any of our financial statements.
On July 13, 2010, Rohcan Investments Limited, the former owner of property leased by Mueller Canada Ltd. and located in Milton, Ontario, filed suit against Mueller Canada Ltd. and its directors seeking
C$10.0 million
in damages arising from the defendants’ alleged environmental contamination of the property and breach of lease. Mueller Canada Ltd. leased the property from 1988 through 2008. We are pursuing indemnification from a former owner for certain potential liabilities that are alleged in this lawsuit, and we have accrued for other liabilities not covered by indemnification. On December 7, 2011, the court denied the plaintiff’s motion for summary judgment.
The purchaser of U.S. Pipe has been identified as a “potentially responsible party” (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” which is sometimes referred to as “Superfund”) 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 located 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 whether the site will be added to the National Priorities List and designated as a “Superfund site,” EPA’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, if any. Accordingly, because the amount of such costs cannot be reasonably estimated at this time, no amounts were accrued for this matter at
March 31, 2017
.
Walter Energy
. Each member of the Walter Energy consolidated group, which included us (including our subsidiaries) through December 14, 2006, is jointly and severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it is a member of the group at any time during such year. Accordingly, we could be liable in the event any such federal income tax liability is incurred, and not discharged, by any other member of the Walter Energy consolidated group for any period during which we were included in the Walter Energy consolidated group.
Walter Energy effectively controlled all of our tax decisions for periods during which we were a member of the Walter Energy consolidated group for federal income tax purposes and certain combined, consolidated or unitary state and local income tax groups. Under the terms of an income tax allocation agreement between us and Walter Energy, dated May 26, 2006, we generally computed our tax liability on a stand-alone basis, but Walter Energy has sole authority to respond to and conduct all tax proceedings (including tax audits) relating to our federal income and combined state tax returns, to file all such tax returns on our behalf and to determine the amount of our liability to (or entitlement to payment from) Walter Energy for such previous periods.
According to Walter Energy's last quarterly report on Form 10-Q filed with the SEC on November 5, 2015 (“Walter November 2015 Filing”), a dispute exists with the IRS with regard to federal income taxes for years 1980 to 1994 and 1999 to 2001 allegedly owed by the Walter Energy consolidated group, which included U.S. Pipe during these periods. As a matter of law, we are jointly and severally liable for any final tax determination, which means we would be liable in the event Walter Energy is unable to pay any amounts owed. According to the Walter November 2015 Filing, at September 30, 2015, Walter Energy had
$33.0 million
of accruals for unrecognized tax benefits on the matters subject to disposition. In the Walter November 2015 Filing, Walter Energy stated it believed it had sufficient accruals to address any claims, including interest and penalties, and did not believe that any potential difference between any final settlements and amounts accrued would have a material effect on Walter Energy's financial position, but such potential difference could be material to its results of operations in a future reporting period.
In July 2015, Walter Energy filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code before the Bankruptcy Court for the Northern District of Alabama (“Chapter 11 Case”). We have been monitoring the progress of the Chapter 11 Case to determine whether we could be liable for all or a portion of this federal income tax liability if it is incurred, and not discharged, for any period during which we were included in the Walter Energy consolidated group.
On January 11, 2016, the IRS filed a proof of claim (“Proof of Claim”) in the Chapter 11 Case, alleging that Walter Energy owes amounts for prior taxable periods (specifically, 1983-1994, 2000-2002 and 2005) in an aggregate amount of
$554.3 million
(
$229.1 million
of which the IRS claims is entitled to priority status in the Chapter 11 Case). The IRS asserts that its claim is based on an alleged settlement of Walter Energy’s tax liability for the 1983-1995 taxable periods in connection with Walter Energy’s prior bankruptcy proceeding in the United States Bankruptcy Court for the Middle District of Florida. In the Proof of Claim, the IRS included an alternative calculation in the event the alleged settlement of the prior bankruptcy court is found to be non-binding, which provides for a claim by the IRS in an aggregate amount of
$860.4 million
(
$535.3 million
of which the IRS claims is entitled to priority status in the Chapter 11 Case).
According to a current report on Form 8-K filed by Walter Energy with the SEC on April 1, 2016 (“Walter April 2016 Filing”), on March 31, 2016, Walter Energy closed on the sale of substantially all of Walter Energy's Alabama assets pursuant to the provisions of Sections 105, 363 and 365 of the U.S. Bankruptcy Code. The Walter April 2016 Filing further stated that Walter Energy would have no further material business operations after April 1, 2016 and Walter Energy was evaluating its options with respect to the wind-down of its remaining assets. The asset sale did not impact the Proof of Claim, and the Proof of Claim and the alleged tax liability thereunder remain unresolved.
On February 2, 2017, at the request of Walter Energy, the Bankruptcy Court for the Norther District of Alabama signed an order converting the Chapter 11 Case to a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code, pursuant to which Walter Energy will be wound-down and liquidated (“Chapter 7 Case”). In its objection contesting such conversion, the IRS indicated its intent to pursue collection of amounts included in the Proof of Claim from former members of the Walter Energy consolidated group.
We cannot predict whether or to what extent we may become liable for the tax-related amounts of the Walter Energy consolidated group asserted in the Proof of Claim, in part, because: (i) the amounts owed by the Walter Energy consolidated group for certain of the taxable periods from 1980 through 2006 remain unresolved and (ii) it is unclear what priority, if any, the IRS will receive in the Chapter 7 Case with respect to its claims against Walter Energy. We intend to vigorously assert any and all available defenses against any liability we may have as a member of the Walter Energy consolidated group. However, we cannot currently estimate our liability, if any, relating to the tax-related liabilities of Walter Energy’s consolidated tax group for tax years prior to 2007, and such liability could have a material adverse effect on our business, financial condition, liquidity or results of operations.
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 sale of assets and the divestiture of businesses, such as the divestiture of our former U.S. Pipe and Anvil segments, 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, tax 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.
Certain Mueller Technologies radio products produced between 2011 and 2014 and installed in particularly harsh environments have been failing at higher-than-expected rates. During the quarter ended
March 31, 2017
, we conducted additional testing of these products and revised our estimates of related warranty expenses. Consequently, we recorded an additional warranty expense of
$9.8 million
associated with these products.
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. 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 future financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters. 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 business or prospects.
Note 13. Subsequent Events
On
April 19, 2017
, our board of directors declared a dividend of
$0.04
per share on our common stock, payable on or about
May 22, 2017
to stockholders of record at the close of business on
May 10, 2017
.
In
April 2017
and
May 2017
we received a total of
1.2 million
shares of our common stock in settlement of our share repurchase agreement.