NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
NINE
MONTHS ENDED
JUNE 30, 2019
Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in
two
business segments: Infrastructure and Technologies. Infrastructure manufactures valves for water and gas systems, including butterfly, iron gate, tapping, check, knife, plug and ball valves, as well as dry-barrel and wet-barrel fire hydrants and a broad line of pipe connection and repair products, such as clamps and couplings used to repair leaks. Technologies offers metering systems, leak detection, pipe condition assessment and other related 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.
Infrastructure 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 income or 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. 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, 2018
. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. Certain reclassifications have been made to previously reported amounts to conform to the current presentation. The condensed consolidated balance sheet data at
September 30, 2018
was derived from audited financial statements, but it does not include all disclosures required by GAAP.
On December 3, 2018, we completed our acquisition of Krausz Development Ltd. and subsidiaries (“Krausz”). We include the financial statements of Krausz in our consolidated financial statements on a one-month lag. Refer to Note 2 for additional disclosures related to the acquisition.
HR-1, commonly referred to as the Tax Cuts and Jobs Act, was enacted on December 22, 2017 and made significant revisions to federal income tax laws, including lowering the corporate income tax rate to
21%
from
35%
, effective January 1, 2018. The effects of these revisions are discussed in Note 4.
In 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance for the recognition of revenue and requiring additional financial statement disclosures. On October 1, 2018, we adopted the new guidance related to revenue recognition from contracts with customers. The new guidance was adopted using the modified retrospective approach and no transition adjustment was required. See Note 3 for more information regarding our adoption of ASC 606
- Revenue from Contracts with Customers.
In 2016, FASB issued Accounting Standards Update 2016-02
Leases
, which will require us to recognize lease assets and lease liabilities for those leases currently referred to as operating leases. We will adopt this guidance using the modified retrospective transition method beginning in the first quarter of fiscal 2020. While we are still evaluating the impact this standard will have on our consolidated financial statements and related disclosures, we have completed our initial scoping reviews and have made progress in our assessment phase as we continue to identify necessary changes to our business processes. We also have made progress in developing the policy elections we will make upon adoption and we are using new software to meet the reporting requirements of this standard. We do not believe the impact of this standard will be material to our consolidated financial statements as a whole.
On February 15, 2019, we experienced a mass shooting event at our Henry Pratt facility in Aurora, Illinois. The event resulted in the death of five employees and injuries to one employee and six law enforcement officials. For the quarter and nine months ended
June 30, 2019
, we have incurred
$0.7 million
and
$4.9 million
, respectively, in expenses related to this event, which are included in strategic reorganization and other charges. These amounts are net of anticipated insurance recoveries.
In 2017, we announced a strategic reorganization plan designed to accelerate our product innovation and revenue growth, through the adoption of a matrix management structure, where business teams have line and cross-functional responsibility for managing distinct product portfolios, and engineering, operations, sales and marketing and other functions are centralized to better align with business needs and generate greater efficiencies, which was largely completed in 2018. In October 2018, we announced the move of our Middleborough, Massachusetts research and development facility to Atlanta to consolidate our resources and accelerate product innovation through creation of a research and development center of excellence for software and electronics. Expenses incurred for these plans were primarily personnel-related and included in strategic reorganization and other charges in the Condensed Consolidated Statements of Operations.
Activity in accrued restructuring, reported as part of other current liabilities, is presented below.
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Nine months ended
|
|
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June 30,
|
|
|
2019
|
|
2018
|
|
|
(in millions)
|
|
Beginning balance
|
$
|
0.9
|
|
|
$
|
3.3
|
|
|
Expense accrued
|
5.5
|
|
|
4.4
|
|
|
Amounts paid
|
(4.6
|
)
|
|
(6.3
|
)
|
|
Ending balance
|
$
|
1.8
|
|
|
$
|
1.4
|
|
|
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|
Note 2.
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Acquisitions and Divestitures
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Divestiture of Burlington plant
On December 4, 2017, we sold an idle property in Burlington, New Jersey that had previously been a plant in our former U.S. Pipe segment and recorded a gain of
$9.0 million
in our Corporate segment. We received
$7.4 million
in cash, recorded net current assets of
$0.8 million
and conveyed plant, property and equipment with a net carrying value of
$0.4 million
, and the buyer assumed related environmental liabilities with a carrying value of
$1.2 million
.
Acquisition of Krausz
On December 3, 2018, we completed our acquisition of Krausz, a manufacturer of pipe couplings, grips and clamps with operations in the United States and Israel, for
$140.7 million
, net of cash acquired, including the assumption and simultaneous repayment of certain debt of
$13.2 million
. The acquisition of Krausz was financed with cash on hand. The purchase agreement provides for customary final adjustments, including a net working capital adjustment, which we expect to occur in 2019. Annual sales for Krausz in calendar 2017 were approximately
$43.0 million
.
We have recognized the assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of the purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for the business combination is based on currently available information and is considered preliminary. We have retained a third party valuation specialist to assist in our estimate of the fair value of acquired intangible assets and we have not yet completed that estimate. In addition, we are still gathering information about property, plant, and equipment based on facts that existed as of the date of the acquisition, as well as deferred income tax liabilities related to long-lived assets. During the quarter, we reduced intangible assets by
$5.3 million
and deferred tax liabilities by
$1.9 million
, which resulted in an increase in goodwill of
$3.4 million
. The final accounting for the business combination may differ materially from that presented in these unaudited condensed consolidated financial statements.
The results of Krausz, including net sales of
$23.0 million
, are included within our Infrastructure segment in the period from acquisition through the quarter ended June 30, 2019.
The following is a summary of the preliminary estimated fair values of the net assets acquired (in millions):
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Assets, net of cash:
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Receivables
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$
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6.9
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Inventories
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|
17.0
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Other current assets
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|
0.2
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Property, plant and equipment
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|
8.4
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Identified intangible assets:
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Patents
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32.1
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Customer relationships
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|
8.7
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Tradenames
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|
4.6
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Favorable leasehold interests
|
|
2.3
|
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Goodwill
|
|
74.4
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Liabilities:
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Accounts payable
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|
(5.5
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)
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Other current liabilities
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|
(2.9
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)
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Deferred income taxes
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(5.5
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)
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Consideration paid
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140.7
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Repayment of Krausz debt
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(13.2
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)
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Consideration paid considered as net cash used in investing
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$
|
127.5
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The preliminary estimated goodwill above is attributable to the strategic opportunities and synergies that we expect to arise from the acquisition of Krausz and the value of its workforce. The goodwill is nondeductible for income tax purposes. The intangible assets of
$47.7 million
consist of indefinite-lived tradenames and patents, customer relationships and favorable leasehold interests with an estimated weighted average useful life of approximately
12
years.
Note 3. Revenue from Contracts with Customers
We recognize revenue when control of promised products or services is transferred to our customers, in amounts that reflect the consideration to which we expect to be entitled in exchange for those products or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer.
Disaggregation of Revenue
We disaggregate our revenues from contracts with customers by reportable segment (Note 10), and further by geographical region as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Geographical region represents the location of the customer.
Contract Asset and Liability Balances
The timing of revenue recognition, billings and cash collections results in customer receivables, advance payments and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers as well as unbilled amounts (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. Customer receivables are recorded at face amounts less an allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses as a result of customers’ inability to make required payments. We evaluate the aging of the customer receivable balances, the financial condition of our customers, historical trends and the time outstanding of specific balances to estimate the amount of customer receivables that may not be collected in the future and record the appropriate provision.
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 as part of our accrued expenses. Deferred revenues represent contract liabilities and are recorded when customers remit contractual cash payments in advance of us satisfying 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 revenues.
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June 30,
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September 30,
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2019
|
|
2018
|
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(in millions)
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Billed receivables
|
$
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164.9
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$
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165.3
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Unbilled receivables
|
6.3
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|
|
2.4
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Total customer receivables
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$
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171.2
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$
|
167.7
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Deferred revenues
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$
|
3.7
|
|
|
$
|
3.3
|
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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 as related to sales of equipment or over time as related to our software hosting and leak detection monitoring services. Performance obligations are supported by customer contracts, which provide frameworks for the nature of the distinct products or services. We allocate the transaction price of each contract to the performance obligations on the basis of standalone selling price and recognize revenue when, or as, control of the performance obligation transfers to the customers.
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.
Revenues from products and services transferred to customers at a point in time represented
99%
of our revenues in the first nine months of fiscal year 2019. The revenues recognized at a point in time related to the sale of our products and was recognized when the obligations of the terms of our contract were satisfied, which generally occurs upon shipment, when control of the product transfers to the customer.
Revenues from products and services transferred to customers over time represented
1%
of our revenues in the first nine months of fiscal year 2019.
We offer warranties to our customers in the form of assurance-type warranties, which provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. These cannot be purchased separately. There was no change to our warranty accounting as a result of the implementation of the new revenue standard and we will continue to use our current cost accrual method in accordance with GAAP.
Costs to Obtain or Fulfill a Contract
We incur certain incremental costs to obtain a contract, which primarily relate to incremental sales commissions. Our commissions are paid based on shipment rather than on order and we reserve the right to claw back any commissions in case of product returns or lost collections. As the expected benefit associated with these incremental costs is 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, consistent with our previous accounting treatment.
Note 4.
Income Taxes
On December 22, 2017, HR-1, commonly referred to as the Tax Cuts and Jobs Act (“Act”), was enacted, which made significant revisions to federal income tax laws, including lowering the corporate income tax rate to
21%
from
35%
effective January 1, 2018, overhauling the taxation of income earned outside the United States and eliminating or limiting certain deductions.
Our deferred tax assets and liabilities are recorded at the enacted tax rates in effect when we expect to recognize the related tax expenses or benefits. These rates vary slightly from year to year but historically had been approximately
39%
. During the nine months ended June 30, 2018, we remeasured our deferred tax items at an average rate of approximately
25%
and recorded an income tax benefit of
$42.5 million
.
The Act also imposed a one-time transition tax on the undistributed, previously-untaxed, post-1986 foreign “earnings and profits” (as defined by the IRS) of certain U.S.-owned corporations. Determination of our transition tax liability required us to calculate foreign earnings and profits going back to 1992 and then to assess our historical overall foreign loss position and the applicability of certain foreign tax credits. For the quarter ended March 31, 2018, we recorded a provisional transaction tax of
$7.5 million
for the one-time deemed repatriation tax on accumulated foreign earnings of our foreign subsidiaries. Upon further analyses of the Act and Notices and regulations issued and proposed by the U.S. Department of the Treasury and the IRS, we finalized our calculations of the transition tax liability during the quarter ended December 31, 2018. As a result, we reduced our initial provision by
$0.6 million
, which is included as a component of income tax expense in that quarter. At
June 30, 2019
, the remaining balance of our transition obligation is
$6.4 million
, which will be paid over the next seven years, as provided in the Act.
The reconciliation between the U.S. federal statutory income tax rate and the effective tax rate is presented below.
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Three months ended
|
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Nine months ended
|
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|
June 30,
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June 30,
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|
2019
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|
2018
|
|
2019
|
|
2018
|
|
U.S. federal statutory income tax rate
|
21.0
|
%
|
|
24.5
|
%
|
|
21.0
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%
|
|
24.5
|
%
|
|
Adjustments to reconcile to the effective tax rate:
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State income taxes, net of federal benefit
|
4.5
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4.8
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|
5.6
|
|
|
4.5
|
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|
Excess tax (benefits) related to stock compensation
|
(0.3
|
)
|
|
(0.2
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)
|
|
(1.4
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)
|
|
(1.2
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)
|
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Domestic production activities deduction
|
—
|
|
|
(1.7
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)
|
|
—
|
|
|
(1.6
|
)
|
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Tax credits
|
(1.2
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)
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|
(1.1
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)
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|
(2.7
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)
|
|
(1.0
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)
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Global Intangible Low-taxed Income
|
0.6
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
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Reversal of uncertain tax positions
|
(5.2
|
)
|
|
—
|
|
|
(7.2
|
)
|
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—
|
|
|
Other
|
1.9
|
|
|
1.9
|
|
|
3.6
|
|
|
0.2
|
|
|
|
21.3
|
%
|
|
28.2
|
%
|
|
20.0
|
%
|
|
25.4
|
%
|
|
Walter Energy Accrual
|
(0.4
|
)
|
|
—
|
|
|
4.6
|
|
|
—
|
|
|
Transition tax
|
—
|
|
|
—
|
|
|
(1.9
|
)
|
|
12.3
|
|
|
Remeasurement of deferred tax items
|
—
|
|
|
—
|
|
|
—
|
|
|
(69.8
|
)
|
|
Effective income tax rate
|
20.9
|
%
|
|
28.2
|
%
|
|
22.7
|
%
|
|
(32.1
|
)%
|
At
June 30, 2019
and
September 30, 2018
, the gross liabilities for unrecognized income tax benefits were
$1.2 million
and
$3.3 million
, respectively.
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Note 5.
|
Borrowing Arrangements
|
The components of our long-term debt are presented below.
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June 30,
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September 30,
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|
2019
|
|
2018
|
|
|
(in millions)
|
|
5.5% Senior Notes
|
$
|
450.0
|
|
|
$
|
450.0
|
|
|
ABL Agreement
|
—
|
|
|
—
|
|
|
Other
|
2.2
|
|
|
1.6
|
|
|
|
452.2
|
|
|
451.6
|
|
|
Less deferred financing costs
|
6.0
|
|
|
6.6
|
|
|
Less current portion
|
0.9
|
|
|
0.7
|
|
|
Long-term debt
|
$
|
445.3
|
|
|
$
|
444.3
|
|
5.5% Senior Unsecured Notes.
On
June 12, 2018
, we privately issued
$450.0 million
of 5.5% Senior Unsecured Notes (“Notes”), which mature in 2026 and bear interest at
5.5%
. We capitalized
$6.6 million
of financing costs, which are being amortized over the term of the Notes using the effective interest method. Proceeds from the Notes along with other cash, were used to repay our Term Loan. Substantially all of our U.S. subsidiaries guarantee the Notes, which are subordinate to borrowings under the ABL. Based on quoted market prices, the outstanding Notes had a fair value of
$465.8 million
at
June 30, 2019
.
ABL Agreement
. At
June 30, 2019
, our asset based lending agreement (“ABL Agreement”) consisted of a revolving credit facility for up to
$175 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 we are permitted to issue up to
$60 million
of letters of credit.
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
June 30, 2019
, 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
June 30, 2019
data, as reduced by outstanding letters of credit and accrued fees and expenses of
$16.4 million
, was
$136.4 million
.
Capitalized Interest.
We record capitalized interest when doing so may have a significant impact on our financial statements. During the three and nine-month periods ended June 30, 2019, we capitalized
$1.2 million
in interest.
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Note 6.
|
Derivative Financial Instruments
|
In connection with the acquisition of Singer Valve in 2017, we loaned funds to one of our Canadian subsidiaries. Although this intercompany loan has no direct effect on our consolidated financial statements, it creates exposure to currency risk for the Canadian subsidiary. To reduce this exposure, we entered into a U.S. dollar-Canadian dollar swap contract with the Canadian subsidiary and an offsetting Canadian dollar-U.S. dollar swap with a domestic bank. We have not designated these swaps as hedges and the changes in their fair values are included in earnings, where they offset the currency gains and losses associated with the intercompany loan. The values of our currency swap contracts were liabilities of
$0.6 million
and
$0.9 million
as of June 30, 2019 and September 30, 2018, respectively, and are included in other noncurrent liabilities in our Condensed Consolidated Balance Sheets.
The components of net periodic benefit cost for our pension plans are presented below.
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|
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|
|
Three months ended
|
|
Nine months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(in millions)
|
|
Service cost
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
1.2
|
|
|
$
|
1.4
|
|
|
Pension costs (benefits) other than service:
|
|
|
|
|
|
|
|
|
Interest cost
|
3.5
|
|
|
3.5
|
|
|
10.5
|
|
|
10.7
|
|
|
Expected return on plan assets
|
(4.1
|
)
|
|
(4.1
|
)
|
|
(12.2
|
)
|
|
(12.4
|
)
|
|
Amortization of actuarial net loss
|
0.5
|
|
|
0.8
|
|
|
1.5
|
|
|
2.4
|
|
|
Curtailment/special settlement loss (gain)
|
—
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
|
Pension costs (benefits) other than service
|
(0.1
|
)
|
|
0.2
|
|
|
0.8
|
|
|
0.7
|
|
|
Net periodic benefit cost
|
$
|
0.3
|
|
|
$
|
0.7
|
|
|
$
|
2.0
|
|
|
$
|
2.1
|
|
The amortization of actuarial losses, net of tax, is recorded as a component of other comprehensive loss.
During the quarter ended March 31, 2019, we settled our obligations to our Canadian pension plan participants through a combination of lump-sum payments and purchases of annuities. We made a contribution to the plans of
$1.0 million
, which is included in pension costs other than service, to fund these settlements.
Also during the quarter ended March 31, 2019, we recorded an estimated settlement liability for exiting a multi-employer pension plan at one of our manufacturing locations, which resulted in an expense of
$1.1 million
that we included in strategic reorganization and other charges. During the quarter ended June 30, 2019, we paid this amount and have settled the liability to the multi-employer pension plan.
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|
|
Note 8.
|
Stock-based Compensation Plans
|
We have granted various forms of stock-based compensation, including stock options, restricted stock units and performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock 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 establish the financial performance targets related to PRSUs for a given performance period, typically during the first quarter of that fiscal year, we consider that portion of a PRSU award to be granted. Thus, each award consists of a grant in the year of award and grants in the designated following years. Settlements, in our common shares, will range from
zero
to
two
times the number of PRSUs granted, depending on our financial performance against the targets.
We awarded
332,875
stock-settled PRSUs in the nine months ended
June 30, 2019
that are scheduled to settle in
3
years.
We issued
181,065
shares and
146,061
shares of common stock during the nine months ended
June 30, 2019
and
2018
, respectively, to settle PRSUs.
In addition to the PRSU activity,
zero
and
259,107
restricted stock units vested during the three and nine months ended
June 30, 2019
, respectively.
We have granted cash-settled Phantom Plan instruments under the Mueller Water Products, Inc. Phantom Plan (“Phantom Plan”). At
June 30, 2019
, the outstanding Phantom Plan instruments had a fair value of
$9.82
per instrument and our liability for Phantom Plan instruments was
$1.3 million
.
We granted stock-based compensation awards under the 2006 Stock Plan, the Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan and the Phantom Plan during the
nine months ended
June 30, 2019
as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number granted
|
|
Weighted average grant date fair value per instrument
|
|
Total grant date fair value
(in millions)
|
|
Quarter ended December 31, 2018:
|
|
|
|
|
|
|
|
Restricted stock units
|
|
147,409
|
|
|
$
|
10.53
|
|
|
$
|
1.6
|
|
|
Employee stock purchase plan instruments
|
|
45,464
|
|
|
2.30
|
|
|
0.1
|
|
|
Phantom Plan awards
|
|
168,380
|
|
|
10.53
|
|
|
1.8
|
|
|
PRSUs: 2019 award
|
|
110,595
|
|
|
10.53
|
|
|
1.2
|
|
|
2018 award
|
|
49,236
|
|
|
10.53
|
|
|
0.5
|
|
|
2017 award
|
|
31,229
|
|
|
10.53
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2019:
|
|
|
|
|
|
|
|
Restricted stock units
|
|
76,919
|
|
|
9.35
|
|
|
0.7
|
|
|
Employee stock purchase plan instruments
|
|
43,139
|
|
|
2.50
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2019:
|
|
|
|
|
|
|
|
Restricted stock units
|
|
4,854
|
|
|
9.27
|
|
|
—
|
|
|
Employee stock purchase plan instruments
|
|
42,890
|
|
|
1.88
|
|
|
0.1
|
|
|
|
|
|
|
|
|
$
|
6.4
|
|
Operating income included stock-based compensation expense of
$1.4 million
and
$1.2 million
during the three months ended
June 30, 2019
and
2018
, respectively, and
$4.2 million
and
$5.3 million
during the nine months ended
June 30, 2019
and
2018
, respectively. At
June 30, 2019
, there was approximately
$7.7 million
of unrecognized compensation expense related to stock-based compensation arrangements and there were
264,936
PRSUs that have been awarded for the 2020 and 2021 performance periods for which performance goals have not been set.
We excluded
202,245
and
213,599
of stock-based compensation instruments from the calculations of diluted earnings per share for the quarters ended
June 30, 2019
and
2018
, respectively, and
167,775
and
245,033
for the nine months ended
June 30, 2019
and
2018
, respectively, since their inclusion would have been antidilutive.
|
|
|
|
Note 9.
|
Supplemental Balance Sheet Information
|
Selected supplemental balance sheet information is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
|
(in millions)
|
|
Inventories:
|
|
|
|
|
Purchased components and raw material
|
$
|
98.4
|
|
|
$
|
81.6
|
|
|
Work in process
|
45.9
|
|
|
37.8
|
|
|
Finished goods
|
52.9
|
|
|
37.2
|
|
|
|
$
|
197.2
|
|
|
$
|
156.6
|
|
|
|
|
|
|
|
Other current assets:
|
|
|
|
|
Maintenance and repair tooling
|
$
|
4.0
|
|
|
$
|
3.5
|
|
|
Income taxes
|
10.7
|
|
|
1.6
|
|
|
Other
|
19.8
|
|
|
12.4
|
|
|
|
$
|
34.5
|
|
|
$
|
17.5
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
Land
|
$
|
5.5
|
|
|
$
|
5.4
|
|
|
Buildings
|
59.7
|
|
|
55.9
|
|
|
Machinery and equipment
|
338.3
|
|
|
311.4
|
|
|
Construction in progress
|
54.6
|
|
|
22.2
|
|
|
|
458.1
|
|
|
394.9
|
|
|
Accumulated depreciation
|
(267.1
|
)
|
|
(244.0
|
)
|
|
|
$
|
191.0
|
|
|
$
|
150.9
|
|
|
Other current liabilities:
|
|
|
|
|
Compensation and benefits
|
$
|
27.5
|
|
|
$
|
31.7
|
|
|
Customer rebates
|
8.1
|
|
|
9.7
|
|
|
Taxes other than income taxes
|
3.8
|
|
|
3.3
|
|
|
Warranty
|
7.1
|
|
|
6.0
|
|
|
Income taxes
|
0.2
|
|
|
7.6
|
|
|
Environmental
|
1.2
|
|
|
1.2
|
|
|
Interest
|
1.2
|
|
|
8.0
|
|
|
Restructuring
|
1.8
|
|
|
0.9
|
|
|
Walter Energy Accrual
|
38.4
|
|
|
—
|
|
|
Other
|
11.6
|
|
|
8.0
|
|
|
|
$
|
100.9
|
|
|
$
|
76.4
|
|
|
|
|
|
Note 10.
|
Segment Information
|
Summarized financial information for our segments is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(in millions)
|
|
Net sales, excluding intercompany:
|
|
|
|
|
|
|
|
|
Infrastructure
|
$
|
250.2
|
|
|
$
|
224.1
|
|
|
$
|
636.3
|
|
|
$
|
595.3
|
|
|
Technologies
|
24.1
|
|
|
26.1
|
|
|
64.8
|
|
|
66.4
|
|
|
|
$
|
274.3
|
|
|
$
|
250.2
|
|
|
$
|
701.1
|
|
|
$
|
661.7
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Infrastructure
|
$
|
60.6
|
|
|
$
|
57.0
|
|
|
$
|
131.6
|
|
|
$
|
130.0
|
|
|
Technologies
|
(2.2
|
)
|
|
(16.1
|
)
|
|
(9.5
|
)
|
|
(24.7
|
)
|
|
Corporate
|
(11.2
|
)
|
|
(10.3
|
)
|
|
(36.8
|
)
|
|
(24.1
|
)
|
|
|
$
|
47.2
|
|
|
$
|
30.6
|
|
|
$
|
85.3
|
|
|
$
|
81.2
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Infrastructure
|
$
|
11.3
|
|
|
$
|
9.2
|
|
|
$
|
32.8
|
|
|
$
|
27.7
|
|
|
Technologies
|
2.0
|
|
|
1.5
|
|
|
5.9
|
|
|
4.4
|
|
|
Corporate
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
|
$
|
13.3
|
|
|
$
|
10.8
|
|
|
$
|
38.8
|
|
|
$
|
32.3
|
|
|
Strategic reorganization and other charges:
|
|
|
|
|
|
|
|
|
Infrastructure
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
0.1
|
|
|
Technologies
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
Corporate
|
2.5
|
|
|
2.6
|
|
|
11.5
|
|
|
8.2
|
|
|
|
$
|
2.5
|
|
|
$
|
2.6
|
|
|
$
|
12.6
|
|
|
$
|
8.4
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
Infrastructure
|
$
|
18.9
|
|
|
$
|
10.7
|
|
|
$
|
46.7
|
|
|
$
|
21.8
|
|
|
Technologies
|
1.8
|
|
|
2.0
|
|
|
4.5
|
|
|
5.0
|
|
|
Corporate
|
1.7
|
|
|
(0.2
|
)
|
|
1.7
|
|
|
0.1
|
|
|
|
$
|
22.4
|
|
|
$
|
12.5
|
|
|
$
|
52.9
|
|
|
$
|
26.9
|
|
|
Infrastructure disaggregated net revenues:
|
|
|
|
|
|
|
|
|
Central
|
$
|
58.8
|
|
|
$
|
55.8
|
|
|
$
|
154.1
|
|
|
$
|
149.3
|
|
|
Northeast
|
52.0
|
|
|
39.1
|
|
|
134.8
|
|
|
105.6
|
|
|
Southeast
|
41.3
|
|
|
45.0
|
|
|
117.2
|
|
|
127.7
|
|
|
West
|
63.8
|
|
|
54.5
|
|
|
159.1
|
|
|
148.7
|
|
|
United States
|
215.9
|
|
|
194.4
|
|
|
565.2
|
|
|
531.3
|
|
|
Canada
|
24.1
|
|
|
25.2
|
|
|
49.3
|
|
|
53.1
|
|
|
Other international locations
|
10.2
|
|
|
4.5
|
|
|
21.8
|
|
|
10.9
|
|
|
|
$
|
250.2
|
|
|
$
|
224.1
|
|
|
$
|
636.3
|
|
|
$
|
595.3
|
|
|
Technologies disaggregated net revenues:
|
|
|
|
|
|
|
|
|
Central
|
$
|
6.6
|
|
|
$
|
3.9
|
|
|
$
|
20.5
|
|
|
$
|
11.4
|
|
|
Northeast
|
5.5
|
|
|
4.5
|
|
|
12.3
|
|
|
13.8
|
|
|
Southeast
|
8.0
|
|
|
13.2
|
|
|
21.7
|
|
|
28.8
|
|
|
West
|
2.3
|
|
|
3.2
|
|
|
6.6
|
|
|
8.6
|
|
|
United States
|
22.4
|
|
|
24.8
|
|
|
61.1
|
|
|
62.6
|
|
|
Canada
|
0.5
|
|
|
0.8
|
|
|
0.8
|
|
|
1.3
|
|
|
Other international locations
|
1.2
|
|
|
0.5
|
|
|
2.9
|
|
|
2.5
|
|
|
|
$
|
24.1
|
|
|
$
|
26.1
|
|
|
$
|
64.8
|
|
|
$
|
66.4
|
|
|
|
|
|
Note 11.
|
Accumulated Other Comprehensive Loss
|
Accumulated other comprehensive loss is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension, net of tax
|
|
Foreign currency translation
|
|
Total
|
|
|
(in millions)
|
|
Balance at September 30, 2018
|
$
|
(26.5
|
)
|
|
$
|
(6.3
|
)
|
|
$
|
(32.8
|
)
|
|
Current period other comprehensive income (loss)
|
2.3
|
|
|
3.4
|
|
|
$
|
5.7
|
|
|
Balance at June 30, 2019
|
$
|
(24.2
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
(27.1
|
)
|
|
|
|
|
Note 12.
|
Commitments and Contingencies
|
We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our financial statements cannot be predicted with certainty as any such effect depends on the amount and timing of the resolution of such matters, and potential insurance coverage. Other than the litigation described below, we do not believe that any of our outstanding litigation would have a material adverse effect on our business or prospects.
Environmental.
We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the operations at many of our properties and with respect to remediating environmental conditions that may exist at our own or other properties. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.
In the acquisition agreement pursuant to which a predecessor to Tyco International plc, now Johnson Controls International plc (“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 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 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 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. Accordingly, because the amount of such costs cannot be reasonably estimated at this time, no amounts had been accrued for this matter at
June 30, 2019
.
Walter Energy
. We were a member of the Walter Energy, Inc (“Walter Energy”) federal tax consolidated group, through December 14, 2006, at which time the Company was spun-off from Walter Energy. Until our spin-off from Walter Energy, we joined in the filing of Walter Energy’s consolidated federal income tax return for each taxable year during which we were a member of the consolidated group. As a result, we are severally liable for the federal income tax liability, if any, of the consolidated group for each of those years. 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 that consolidated group.
In July 2015, Walter Energy filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in the Northern District of Alabama (“Chapter 11 Case”). In February 2017, the Chapter 11 case was converted to a liquidation proceeding under Chapter 7 of the U.S. Bankruptcy Code, pursuant to which Walter Energy is now in the process of being wound down and liquidated.
The IRS has asserted that Walter Energy owes substantial amounts for prior taxable periods in which we were a member of the Walter Energy tax consolidated group (specifically, 1983-1994, 2000-2002 and 2005). On January 11, 2016, the IRS filed a proof of claim (“IRS Claim”) in the Chapter 11 Case, alleging that Walter Energy owes taxes, interest and penalties for the years 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 Claim was based on IRS estimates of Walter Energy’s tax liability for years 1983 through 1994, which Walter Energy disputed. In the IRS claim, the IRS included an alternative calculation in an aggregate amount of
$860.4 million
, which it asserted would be appropriate in the event the alleged settlement is determined to be non-binding (
$535.3 million
of which the IRS claims is entitled to priority status in the Chapter 11 Case). The IRS has indicated its intent to pursue collection of amounts included in the proofs of claim from former members of the Walter Energy tax consolidated group. These liabilities are potentially significant and, if not concluded favorably, could have a material adverse effect on our business, financial condition, liquidity or results of operations.
After extensive work and discussions with the IRS, the Department of Justice, the Walter Energy bankruptcy trustee, and other involved parties and experts, the IRS has provided us with a
$37.4 million
calculation of the tax liability emanating from the activities of certain businesses of our former parent, Walter Energy (“Walter Tax Liability”; also see Item 3 - Legal Proceedings and Item 1A - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 for additional details regarding the issues associated with the Walter Tax Liability). The IRS calculation includes interest amounts calculated through January 31, 2019 and these interest amounts will continue to accrue until the matter is finalized. Accordingly, for the quarter ended December 31, 2018, we recorded a
$37.4 million
accrual (“Walter Energy Accrual”) related to the Walter Tax Liability. During the quarters ended March 31, 2019 and June 30, 2019, we recorded accruals of
$0.5 million
and
$0.5 million
, respectively, for additional accrued interest. At June 30, 2019, the Walter Energy Accrual consisted of approximately
$7 million
in unpaid taxes and approximately
$31 million
of related interest.
While our previous activities and tax positions were not the source of the Walter Tax Liability, since we were a member of the Walter Energy consolidated tax group in certain historic periods, under federal law, each member of a consolidated group for U.S. federal income tax purposes can be severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it was a member of the consolidated tax group. Thus, we recorded the Walter Energy Accrual due to the operation of several liability under federal law. We are continuing to work with other parties involved in this matter in an effort to negotiate a settlement with respect to the Walter Tax Liability, but there can be no assurance that we will be able to reach a resolution with the parties involved in this matter. Relatedly, we filed a proof of claim in the Ditech Financial LLC (“Ditech”) bankruptcy proceeding in the United States Bankruptcy Court for the Southern District of New York seeking contribution from Ditech for the Walter Tax Liability. We have no ability to predict the outcome of such proceeding.
Chapman v. Mueller Water Products, et al.
In 2017, our warranty analyses identified that certain Technologies radio products produced prior to 2017 and installed in particularly harsh environments had 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 warranty expenses. As a result, we recorded additional warranty expense of
$9.8 million
in the second quarter of 2017. During the quarter ended June 30, 2018, we completed a similar analysis and determined, based on this new information, that certain other Technologies products had been failing at higher-than-expected rates as well and that the average cost to repair or replace certain products under warranty was higher than previously estimated. As a result, in the third quarter of 2018, we recorded additional warranty expense of
$14.1 million
associated with such products. Related to the above warranty expenses, on April 11, 2019, an alleged stockholder filed a putative class action lawsuit against Mueller Water Products, Inc. and certain of our former and current officers (collectively, the “Defendants”) in the U.S. District Court for the Southern District of New York. The proposed class consists of all persons and entities that acquired our securities between May 9, 2016 and August 6, 2018 (the “Class Period”). The complaint alleges violations of the federal securities laws, including, among other things, that we made materially false and/or misleading statements and failed to disclose material adverse facts about our business, operations, and prospects during the proposed Class Period. The plaintiff seeks compensatory damages and attorneys’ fees and costs but does not specify the amount. We believe the allegations are without merit and intend to vigorously defend against the claims. However, the outcome of this legal proceeding cannot be predicted with certainty.
Mass Shooting Event at our Henry Pratt Facility in Aurora, Illinois.
On February 15, 2019, we experienced a mass shooting event at our Henry Pratt facility in Aurora, Illinois, in which five employees were killed and one employee and six law enforcement officers were injured. Various workers’ compensation claims arising from the event have been made to date, and we anticipate that additional claims may be made, and that liability under such claims, if any, is not expected to have a material adverse effect on our results of operations or cash flows. However, the possibility of other legal proceedings, and any related effects, arising from this event cannot be predicted with certainty.
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 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 reserves as necessary. Critical factors in our reserve 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 business or prospects.
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Note 13.
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Subsequent Events
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On
July 24, 2019
, our board of directors declared a dividend of
$0.0525
per share on our common stock, payable on or about
August 20, 2019
to stockholders of record at the close of business on
August 9, 2019
.