Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and related notes included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and other factors that may cause actual results to differ materially from those projected in any forward-looking statements, as discussed in “Disclosure Regarding Forward-Looking Statements.” These risks and uncertainties include but are not limited to those set forth in “Item 1A. RISK FACTORS”.
Overview
Business
We operate our business through two segments, Infrastructure and Technologies.
We estimate approximately 60% to 65% of the Company’s 2021 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.
In 2021, both Infrastructure and Technologies were impacted by raw material and other cost inflation, supply chain disruptions and labor availability challenges.
We expect the operating environment to continue to be very challenging in 2022, as a result of the uncertainty around the depth and duration of the pandemic. We may continue to be impacted by raw material and other cost inflation, supply chain disruptions and labor availability challenges. While we expect that the municipal repair and replacement activity and new residential construction end markets will remain healthy in 2022, we do anticipate that growth will slow down relative to the strong recovery experienced during 2021.In 2022, we believe that supply chain disruptions could extend overall build cycles for new residential construction, including lot development.
Infrastructure
After experiencing challenges in 2020 resulting from the pandemic, municipal spending in 2021 recovered during the fiscal year as compared with the prior year. According to the United States Department of Labor, the trailing twelve-month average consumer price index for water and sewerage rates at September 30, 2021 increased 3.0%. While the economic effects of the pandemic have impacted revenues for some water utilities in the United States, the economic recovery enabled water utilities to maintain repair and replacement activities. While uncertainty related to the pandemic continues to impact the operating environment, residential construction activity was very strong in 2021 after recovering in 2020. The year over year percentage change in housing starts is a key indicator of demand for Infrastructure’s products sold in the residential construction market. The strength of the residential construction activity during 2021 was reflected in total housing starts in the United States increasing approximately 18%. In October 2021, Blue Chip Economic Indicators forecasted a 1.3% decrease in housing starts for the calendar year 2022 compared to the calendar year 2021.
Technologies
The municipal water market is the key end market for Technologies. As compared with Infrastructure products, Technologies products and services are primarily project-oriented and often depend on customer adoption of our technology-based products and services.
Consolidated
For our fiscal year 2022, we anticipate that consolidated net sales will be 4% to 8% higher than our fiscal year 2021 driven by the benefits of higher pricing and increased shipment volumes, resulting from modest growth in our end markets and our ability to deliver the backlog at Infrastructure and Technologies. In 2021, we encountered increased material costs as a result of higher raw material prices, particularly brass ingot and scrap steel, as well as higher freight, labor costs and energy expenses. In 2022, we anticipate that inflation will continue to lead to higher costs.
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Results of Operations
Year Ended September 30, 2021 Compared to Year Ended September 30, 2020
Infrastructure Technologies Corporate Total
(in millions)
Operating expenses:
Strategic reorganization and other (benefits) charges (0.3) — 8.3 8.0
Pension benefit other than service (3.3)
Interest expense, net 23.4
Loss on early extinguishment of debt 16.7
Income before income taxes 94.9
Income tax expense 24.5
Net income $ 70.4
Infrastructure Technologies Corporate Total
(in millions)
Operating expenses:
Strategic reorganization and other charges 0.6 0.1 12.3 13.0
Pension benefit other than service (3.0)
Interest expense, net 25.5
Walter Energy accrual 0.2
Income before income taxes 94.1
Income tax expense 22.1
Net income $ 72.0
Consolidated Analysis
Net sales for 2021 increased 15.2% to $1,111.0 million from $964.1 million in the prior year primarily as a result of higher shipment volume across most of our product lines and higher pricing. Additionally, net sales benefited as a result of $6.0 million of Krausz sales from the elimination of the one-month reporting lag.
Gross profit increased $30.3 million to $358.5 million for 2021 compared with $328.2 million in the prior year. This increase was primarily a result of increased shipment volume and higher pricing, partially offset by higher manufacturing costs as a result of inflation, higher labor costs, and a $2.4 million inventory write-off associated with the announcement of our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada. Gross margin decreased to 32.3% in 2021 as compared with 34.0% in the prior year.
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Selling, general and administrative expenses (“SG&A”) increased 10.3% to $218.8 million for 2021 from $198.4 million in the prior year. As a percentage of net sales, SG&A decreased 90 basis points to 19.7% of net sales from 20.6% in the prior year. The increase in SG&A was primarily a result of increased personnel-related expenses, including incentive compensation, sales commissions associated with higher net sales and orders, and stock-based compensation. Additional increases were a result of inflation, new product development and information technology spending. Fiscal year 2020 SG&A included pandemic-driven benefits from temporarily reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.
Strategic reorganization and other charges for 2021 primarily relate to termination benefits associated with our plant closures in Aurora, Illinois and Surrey, British Columbia, Canada, the June 2021 mass shooting tragedy at our Albertville facility, and certain transaction-related costs, partially offset by a one-time settlement gain in connection with an indemnification of a previously owned property. In 2020, Strategic reorganization and other charges primarily relate to a legal settlement, facility closure costs, transaction costs associated with the acquisition of Krausz, and personnel matters.
Interest expense, net declined $2.1 million in 2021 from the prior year primarily as a result of the retirement of our 5.5% Senior Unsecured Notes (“5.5% Senior Notes”), which were replaced with 4.0% Senior Unsecured Notes (“4.0% Senior Notes”) as well as an increase in capitalized interest on our large capital projects, partially offset by lower interest income.
(in millions)
4.0% Senior Notes 6.2 —
Deferred financing costs amortization 1.1 1.2
ABL Agreement 0.9 0.6
Capitalized interest (2.3) (0.3)
Other interest expense 0.3 0.3
Total interest expense 23.8 26.6
Interest income (0.4) (1.1)
Total interest expense, net $ 23.4 $ 25.5
Income tax expense of $24.5 million in 2021 included an effective income tax rate of 25.8%, which was higher than the 23.5% rate in the prior year.
Segment Analysis
Infrastructure
Net sales for 2021 increased $138.4 million, or15.7%, to $1,022.0 million from $883.6 million in the prior year. Net sales increased primarily as a result of increased shipment volume, favorable pricing and $6.0 million in Krausz net sales as a result of the elimination of the one-month reporting lag. We believe the increased shipment volume was a result of strong demand driven by residential construction and municipal repair and replacement activity.
Gross profit for 2021 increased $29.3 million, or 9.3%, to $345.0 million from $315.7 million in the prior year primarily as a result of increased shipment volume, higher sales pricing and the benefit of the elimination of the Krausz one-month reporting lag. These increases were partially offset by higher material and other costs associated with inflation, specifically related to brass ingot, scrap steel and purchased parts, a $2.4 million inventory write-off associated with the announcement of the closure of our Aurora, Illinois and Surrey, British Columbia, Canada facilities and $2.9 million in expenses related to the pandemic, including voluntary emergency paid leave and other employee costs as well as additional sanitation and cleaning expenses. Gross margin was 33.8% in 2021, a 190 basis point decrease compared with 35.7% in the prior year.
SG&A in 2021 increased 9.2% to $141.0 million from $129.1 million in the prior year primarily as a result of increased personnel-related costs including higher sales commissions associated with higher net sales and orders, inflation, information technology spending, and new product development. Fiscal year 2020 SG&A included pandemic-driven benefits resulting from temporarily reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions. SG&A was 13.8% and 14.6% of net sales for 2021 and 2020, respectively.
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Technologies
Net sales in 2021 increased to $89.0 million from $80.5 million in the prior year primarily as a result of higher shipment volumes and the acquisition of i2O.
Gross profit in 2021 increased $1.0 million to $13.5 million from $12.5 million in the prior year as a result of higher shipment volumes, partially offset by inflation and inventory adjustments. Gross margin decreased to 15.2% in 2021 from 15.5% in the prior year.
SG&A increased to $26.6 million in 2021 from $24.8 million in the prior year primarily as a result of personnel-related expenses. Fiscal year 2020 SG&A included pandemic-driven benefits resulting from temporarily reduced travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions. SG&A as a percentage of net sales was 29.9% for 2021 and 30.8% in the prior year.
Corporate
SG&A increased by $6.7 million from $44.5 million in 2020 to $51.2 million in 2021 as a result of increased personnel-related expenses and inflation. Fiscal year 2020 SG&A included pandemic-driven benefits resulting from temporary reductions in travel, trade show and event spending as well as temporary employee furloughs and temporary salary reductions.
Year Ended September 30, 2020 Compared to Year Ended September 30, 2019
Management’s Discussion and Analysis comparing the results for the year ended September 30, 2020 to the results for the year ended September 30, 2019 can be found in our Form 10-K for the year ended September 30, 2020.
Financial Condition
Cash and cash equivalents were $227.5 million at September 30, 2021 and $208.9 million at September 30, 2020. Cash and cash equivalents increased during 2021 as a result of $156.7 million in cash provided by operating activities, partially offset by capital expenditures of $62.7 million, dividend payments of $34.8 million, the $19.7 million acquisition of i2O, $12.4 million in debt repayments, net, and $10.0 million in share repurchases.
Receivables, net were $212.2 million at September 30, 2021 and $180.8 million at September 30, 2020. This increase was primarily a result of the increase in net sales year over year.
Inventories, net were $184.7 million at September 30, 2021 and $162.5 million at September 30, 2020. Inventories increased during 2021 as a result of increased volume and inflationary costs.
Property, plant and equipment, net was $283.4 million at September 30, 2021 and $253.8 million at September 30, 2020. Property, plant and equipment increased primarily as a result of our previously-announced capital expansion projects in Kimball, Tennessee and Decatur, Illinois. Capital expenditures, including software development costs capitalized and capitalized interest, were $62.7 million in 2021. Depreciation expense was $31.4 million in 2021 compared to $29.6 million in 2020 as a result of generally higher level of capital expenditures over the last three years.
Intangible assets were $392.5 million at September 30, 2021 and $408.9 million at September 30, 2020. Finite-lived intangible assets, net totaling $118.7 million at September 30, 2021, are amortized over their estimated useful lives. Amortization expense was $28.2 million in both 2021 and 2020. We expect amortization expense for these assets to range between approximately $27 million and $29 million in each of the next three years with a decrease to approximately $6 million in fiscal 2025 and approximately $5 million in fiscal 2026. Indefinite-lived intangible assets, $273.8 million at September 30, 2021, are not amortized but are tested for possible impairment at least annually.
Accounts payable and other current liabilities were $219.1 million at September 30, 2021 and $153.9 million at September 30, 2020. Payables increased during 2021 as a result of increased production volume and the impact of higher material costs. Other current liabilities increased during 2021 primarily as a result of personnel-related expenses, including incentive compensation and sales commissions, as well as customer rebates and income taxes.
Total outstanding debt was $446.9 million at September 30, 2021 and $447.6 million at September 30, 2020.
Deferred income taxes were net liabilities of $94.8 million at September 30, 2021 and $96.3 million at September 30, 2020, primarily related to intangible assets. The $1.5 million decrease in the net liability was primarily the result of an increase in deferred tax assets related to increased inventory reserves partially offset by an increase in deferred tax liabilities related to
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bonus depreciation for plant, property and equipment and the cost basis difference of a foreign subsidiary, net of reductions in deferred tax liabilities related to intangible assets.
Liquidity and Capital Resources
We had cash and cash equivalents of $227.5 million at September 30, 2021 and approximately $158.7 million of additional borrowing capacity under our ABL Agreement based on September 30, 2021 data. Undistributed earnings from our subsidiaries in Israel, Canada and China are considered to be permanently invested outside of the United States. At September 30, 2021, cash and cash equivalents included $39.2 million, $12.6 million, and $3.5 million in Israel, Canada and China, respectively.
Net cash provided by operating activities was $156.7 million for 2021 compared with $140.3 million for 2020 primarily as a result of the Walter tax matter which was paid in 2020 and did not recur in 2021.
Capital expenditures were $62.7 million for 2021 compared with $67.7 million for 2020. We estimate 2022 capital expenditures will be between $70 million and $80 million. We expect our capital expenditures will be elevated over the next several years as we invest more in our machinery, equipment and facilities for product introductions, enhanced productivity and maintenance. Additionally, in fiscal year 2021, we completed construction of our large casting foundry in Chattanooga, Tennessee, initiated the construction of a new brass foundry in Decatur, Illinois that will replace our existing foundry in Decatur, and are building out our facility in Kimball, Tennessee to leverage our large casting foundry, consolidate other plants and to insource various parts and components.
Income tax payments were higher during 2021 compared with the prior year primarily as a result of the Walter tax matter, which was expensed in 2019 and was deducted for tax purposes in 2020. This did not recur in 2021. We expect the effective tax rate in 2022 to be between 25% and 27%.
In 2015, we announced the authorization of a stock repurchase program for up to $50.0 million of our common stock. The program does not commit us to any particular timing or quantity of purchases, and we may suspend or discontinue the program at any time. In 2017, we announced an increase in the authorization of this program to $250.0 million. We acquired 651,271 and 418,374 shares of our common stock in 2021 and 2020, respectively. At September 30, 2021, we had remaining authorization of $135.0 million to repurchase shares of our common stock.
We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At September 30, 2021, we had $15.0 million of letters of credit and $36.7 million of surety bonds outstanding.
We anticipate our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating needs, capital expenditures and debt service obligations as they become due through September 30, 2022. 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
At September 30, 2021, our asset-based lending agreement (“ABL Agreement”) consisted of a $175.0 million revolving credit facility that includes up to $25.0 million of swing line loans and allows for up to $60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150.0 million in certain circumstances subject to adequate borrowing base availability.
Borrowings under the ABL Agreement bear interest at a floating rate equal to the London Inter Bank Offered Rate (“LIBOR”) plus an applicable margin of 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus an applicable margin of 100 to 125 basis points. At September 30, 2021, the LIBOR-based applicable margin was 200 basis points.
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The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances. The borrowing base under the ABL Agreement is equal to the sum of (a) 85% of the value of eligible accounts receivable and (b) the lesser of (i) 70% of the value of eligible 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 Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our United States inventory, accounts receivable, certain cash and other supporting obligations.
The ABL Agreement terminates on July 29, 2025 and includes an annual commitment fee for any unused borrowing capacity of 37.5 basis points. 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 September 30, 2021 data was $158.7 million, as reduced by $15.0 million of outstanding letters of credit and $1.3 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 in June 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 rate 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 United States subsidiaries guarantee the 4.0% Senior Notes, which are subordinate to borrowings under our ABL Agreement.
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 September 30, 2021.
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 as set forth in the Indenture. Upon a change of control as defined in the Indenture, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.
5.5% Senior Unsecured Notes
On June 12, 2018, we privately issued $450.0 million of 5.5% Senior Unsecured Notes (“5.5% Senior Notes”), which were set to mature in 2026 and bore interest at 5.5%, paid semi-annually. We called the 5.5% Senior Notes effective June 17, 2021 and settled with proceeds from the issuance of the 4.0% Senior Notes and cash on hand. As a result, we incurred $16.7 million in loss on early extinguishment of debt, comprised of a $12.4 million call premium and a $4.3 million write-off of the remaining deferred debt issuance costs associated with the retirement of the 5.5% Senior Notes.
Credit Ratings
Our corporate credit rating and the credit ratings for our debt and outlook are presented below.
Moody’s Standard & Poor’s
September 30, September 30,
Corporate credit rating Ba1 Ba2 BB BB
ABL Agreement Not rated Not rated Not rated Not rated
4.0% Senior Notes Ba1 N/A BB N/A
5.5% Senior Notes N/A Ba3 N/A BB
Outlook Stable Stable Stable Stable
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Effect of Inflation
We experience changing price levels primarily related to purchased components and raw materials. Infrastructure experienced a 33% increase in the average cost per ton of scrap steel and a 35% increase in the average cost of brass ingot in 2021 compared to 2020. Technologies was also unfavorably affected by the 35% increase in the average cost of brass ingot. We anticipate inflation in raw and other material costs in 2022, which may have an adverse effect on our margins to the extent we are unable to pass on such higher costs to our customers.
Material Cash Requirements
We enter into a variety of contractual obligations as part of our normal operations in addition to capital expenditures. As of September 30, 2021, 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 $18.9 million in 2022 and $18.0 million annually thereafter through 2029, (ii) operating and finance lease obligations that total $34.9 million in cash payments through 2033 and $2.3 million thereafter through 2026, respectively, and (iii) purchase obligations for raw materials and other parts within our Infrastructure segment of approximately $122.9 million which we will incur during 2022. We expect to fund these cash requirements from cash on hand and cash generated from operations.
Seasonality
Our water infrastructure business depends on construction activity. Net sales and operating income have historically been lowest in the quarters ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction and other field crew activity. Generally speaking, for Infrastructure, approximately 45% of a fiscal year’s net sales occurs in the first half of the fiscal year with 55% occurring in the second half of the fiscal year, though this pattern was disrupted by the pandemic in 2020. See “Item 1A. RISK FACTORS-Seasonal demand for certain of our products and services may adversely affect our financial results.”
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“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 include the below items.
Revenue Recognition
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. See Note 3. for more information regarding our revenues.
Inventories, net
We record inventories at the lower of first-in, first-out method cost or estimated net realizable value. Inventory cost includes an overhead component that can be affected by levels of production and actual costs incurred. We evaluate the need to record adjustments for impairment of inventory at least quarterly. This evaluation includes such factors as anticipated usage, inventory levels and ultimate product sales value. If in our judgment persuasive evidence exists that the net realizable value of inventory is lower than its cost, the inventory value is written-down to its estimated net realizable value. Significant judgments regarding future events and market conditions must be made when estimating net realizable value.
Income Taxes
We recognize deferred tax liabilities and deferred tax assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the
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differences between the financial statements and the tax basis of assets and liabilities, using enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets when, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Our tax balances are based on our expectations of future operating performance, reversal of taxable temporary differences, tax planning strategies, interpretation of the tax regulations currently enacted and rulings in numerous tax jurisdictions.
We only record tax benefits for positions that we believe are more likely than not of being sustained under audit examination based solely on the technical merits of the associated tax position. The amount of tax benefit recognized for any position that meets the more-likely-than-not threshold is the largest amount of the tax benefit that we believe is greater than 50% likely of being realized.
Accounting for the Impairment of Goodwill and Indefinite-lived Intangible Assets
We test indefinite-lived intangible assets and goodwill for impairment annually or more frequently if events or circumstances indicate possible impairment. We performed this annual impairment testing at September 1, 2021, using standard valuation methodologies and rates that we considered reasonable and appropriate.
We evaluated goodwill for impairment using a quantitative analysis. We performed this annual impairment testing at September 1, and concluded that our goodwill was not impaired. This analysis is dependent on management’s best estimates of future operating results, including forecasted revenues, earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins and the selection of reasonable discount rates. We also consider the guideline public company method when estimating the fair value of our reporting units. We tested the indefinite-lived intangible assets for impairment using a “royalty savings method,” which is a variation of the discounted cash flow method. This method estimates a fair value by calculating an estimated discounted future cash flow stream from the hypothetical licensing of the indefinite-lived intangible assets. If this estimated fair value exceeds the carrying value, no impairment is indicated. This analysis is dependent on management’s best estimates of future operating results and the selection of reasonable discount rates and hypothetical royalty rates. We performed this annual impairment testing at September 1, and concluded that our indefinite-lived intangible assets were not impaired. Significantly different projected operating results could result in different conclusions regarding impairment.
Other long-lived assets, including finite-lived intangible assets, are amortized over their respective estimated useful lives and reviewed for impairment if events or circumstances indicate possible impairment.
Warranty Costs
We accrue for warranty expenses that can include customer costs of repair and/or replacement, including labor, materials, equipment, freight and reasonable overhead costs. We accrue for the estimated cost of product warranties at the time of sale if such costs are determined to be reasonably estimable at that time. Warranty cost estimates are revised throughout applicable warranty periods as better information regarding warranty costs becomes available. 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. These estimates are inherently uncertain as they are based on historical data. If warranty claims are made in the current period for issues that have not historically been the subject of warranty claims and were not taken into consideration in establishing the accrual or if claims for issues already considered in establishing the accrual exceed expectations, warranty expense may exceed the accrual for that particular product. Additionally, a significant increase in costs of repair or replacement could require additional warranty expense. We monitor and analyze our warranty experience and costs periodically and revise our warranty accrual as necessary. However, as we cannot predict actual future claims, the potential exists for the difference in any one reporting period to be material.
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Contingencies
We are involved in litigation, investigations and claims arising in the normal course of business. We estimate and accrue liabilities resulting from such matters based on a variety of factors, including outstanding legal claims and proposed settlements; assessments by counsel of pending or threatened litigation; and assessments of potential environmental liabilities and remediation costs. We believe we have adequately accrued for these potential liabilities; however, facts and circumstances may change and could cause the actual liability to exceed the estimates, or may require adjustments to the recorded liability balances in the future. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change as a result of such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes. For more information on these and other contingencies, see Note 17. of the Notes to Consolidated Financial Statements. See also “Item 1. BUSINESS - Regulatory and Environmental Matters,” “Item 1A. RISK FACTORS”.
Workers’ Compensation, Defined Benefit Pension Plans, Environmental and Other Long-term Liabilities
We are obligated for various liabilities that ultimately will be determined over what could be very long future time periods. We established the recorded liabilities for such items at September 30, 2021 using estimates for when such amounts will be paid and what the amounts of such payments will be. These estimates are subject to change based on numerous factors, including among others, regulatory changes, technology changes, the investment performance of related assets, longevity of participants, the discount rate used and changes to plan designs.
Business Combinations
We recognize assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of purchase price over the estimated fair values of identifiable net assets recorded as goodwill. Assigning fair values requires us to make significant estimates and assumptions regarding the fair value of identifiable intangible assets. We may refine these estimates if necessary over a period not to exceed one year by taking into consideration new information that, if known at the acquisition date, would have affected the fair values recognized for assets acquired and liabilities assumed.
Significant estimates and assumptions are used in estimating the value of acquired identifiable intangible assets, including estimating future cash flows based on forecasted revenues and EBITDA margins that we expect to generate following the acquisition, selecting an applicable royalty rate where needed, applying an appropriate discount rate to estimate a present value of those cash flows and determining their useful lives. These assumptions are forward-looking and could be affected by future economic and market conditions.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks, including potential losses arising from adverse changes in market prices and rates, such as various commodity prices and foreign exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Our primary financial instruments are cash and cash equivalents. This includes cash in banks and highly rated, liquid money market investments. We believe these instruments are not subject to material potential near-term losses in future earnings from reasonably possible near-term changes in market rates or prices.
Commodity Price Risk
Our products are made using various purchased components and several basic raw materials, including brass ingot, scrap steel, sand and resin. We expect prices for these items to fluctuate based on marketplace demand. Our product margins and level of profitability may fluctuate whether or not we pass increases in purchased component and raw material costs on to our customers.
Infrastructure experienced a 33% increase in the average cost per ton of scrap steel and a 35% increase in the average cost of brass ingot in 2021 compared to 2020. Technologies was also unfavorably affected by the 35% increase in the average cost of brass ingot. See “Item 1A. RISK FACTORS-The prices of our purchased components and raw materials can be volatile.”
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Currency Risk
Our principal assets, liabilities and operations outside the United States are in Israel, Canada and China. These assets and liabilities are translated into United States dollars at currency exchange rates in effect at the end of each period, with the effect of such translation reflected in other comprehensive income (loss). Our stockholders’ equity will fluctuate depending upon the weakening or strengthening of the United States dollar against these non-United States currencies. Net sales and expenses of these subsidiaries are translated into United States dollars at the average currency exchange rate during the period.
Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Registered Public Accounting Firm, Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements that are filed as part of this Annual Report are listed under “Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES” and are set forth beginning on page F-1.
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Item 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 Securities Exchange Act of 1934, as amended (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 Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report. Based on this evaluation, those officers have concluded that, at September 30, 2021, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2021, we continued our multi-year implementation of upgrades to our enterprise resource planning (“ERP”) system.
Aside from the above, there were no changes in internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting at September 30, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013 framework). After doing so, management concluded that, at September 30, 2021, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting at September 30, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included in this Annual Report.
Item 9B. OTHER INFORMATION
Not applicable.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The name, age at November 18, 2021 and position of each of our executive officers and directors at September 30, 2021 are presented below.
Name Age Position
Scott Hall 57 President and Chief Executive Officer
Marietta Edmunds Zakas 62 Executive Vice President and Chief Financial Officer
William A. Cofield 62 Senior Vice President, Operations & Supply Chain
Scott P. Floyd 52 Senior Vice President, Infrastructure
Todd P. Helms 54 Senior Vice President, Chief Human Resource Officer
Chad D. Mize 45 Senior Vice President, Sales and Marketing
Kenji Takeuchi 49 Senior Vice President, Technology Solutions
Richelle R. Feyerherm 50 Vice President, Operations Controller
Suzanne G. Smith 54 Vice President and Chief Accounting Officer
Mark J. O’Brien 78 Non-Executive Chairman of the Board of Directors
Shirley C. Franklin 76 Director
Thomas J. Hansen 72 Director
Jerry W. Kolb 85 Director
Christine Ortiz 51 Director
Bernard G. Rethore 80 Director
Jeffery S. Sharritts 53 Director
Lydia W. Thomas 77 Director
Michael T. Tokarz 72 Director
Stephen C. Van Arsdell 71 Director
Scott Hall has served as our President and Chief Executive Officer since January 2017. He served as President and CEO of Textron’s Industrial segment from December 2009 until January 2017. Mr. Hall joined Textron in 2001 as president of Tempo, a multi-facility roll-up of communication test equipment. He was named president of Greenlee, a manufacturer of tools used in installing wire and cable, in 2003 when Tempo became part of Textron’s Greenlee business unit. Prior to joining Textron, Mr. Hall had several leadership roles at General Cable, a leading manufacturer of wire and cable. Mr. Hall ran General Cable’s Canadian businesses before taking over responsibility for General Cable’s global Communications business. Mr. Hall earned his Bachelor of Commerce degree from Memorial University of Newfoundland and a Master of Business Administration from the University of Western Ontario Ivey School of Business.
Steven S. Heinrichs has served as our Executive Vice President, Chief Legal and Compliance Officer and Secretary since August 2018. He served as Senior Vice President, General Counsel and Secretary of Neenah, Inc. (f/k/a Neenah Paper, Inc.), which spun off from Kimberly-Clark Corporation in December 2004, from June 2004 to July 2018. Mr. Heinrichs joined Kimberly-Clark as Chief Counsel, Pulp and Paper and General Counsel for Neenah, Inc. Prior to his employment with Kimberly-Clark, Mr. Heinrichs served as Associate General Counsel and Assistant Secretary for Mariner Health Care, Inc., a nursing home and long-term acute care hospital company. Before joining Mariner Health Care in 2003, Mr. Heinrichs served as Associate General Counsel and Assistant Secretary for American Commercial Lines LLC, a leading inland barge and shipbuilding company from 1998 through 2003. Mr. Heinrichs engaged in the private practice of law with Skadden, Arps, Slate, Meagher and Flom LLP and Shuttleworth, Smith, McNabb and Williams PLLC from 1994 through 1998. Mr. Heinrichs earned a Master of Business Administration from the Kellogg School of Management at Northwestern University in 2008, his law degree from Tulane University in 1994, and his Bachelor of Arts degree from the University of Virginia.
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Marietta Edmunds Zakas has served as our Executive Vice President and Chief Financial Officer since January 2018. She served as Senior Vice President, Strategy, Corporate Development and Communications from November 2006 to December 2017. She was also the interim head of Human Resources from January 2016 to December 2017. Previously, Ms. Zakas held various positions at Russell Corporation, an athletic apparel, footwear and equipment company, culminating in her role as Corporate Vice President, Chief of Staff, Business Development and Treasurer. She earned a Bachelor of Arts degree with honors from Randolph-Macon Woman’s College (now known as Randolph College), a Master of Business Administration degree from the University of Virginia Darden School of Business and a Juris Doctor from the University of Virginia School of Law. Ms. Zakas is a director of Atlantic Capital Bank and Atlantic Capital Bancshares.
William A. Cofield has served as our Senior Vice President, Operations & Supply Chain since January 2018. Previously, Mr. Cofield served as Vice President of Operations and Supply Chain for MGA Entertainment from May 2014 to December 2018 and Vice President of Operations for the Rubbermaid business within Newell Brands, Inc. (formerly Newell Rubbermaid, Inc.) from January 2009 to May 2014. Mr. Cofield earned his Bachelor of Science degree from the United States Military Academy. Upon graduation, he was commissioned as an officer in the United States Army where he served for 10 years. Mr. Cofield achieved the rank of Major before resigning his commission.
Scott P. Floyd has served as our Senior Vice President, Water Flow Solutions since October 2021. He served as Senior Vice President, Infrastructure from June 2020 to September 2021; Vice President and General Manager - Specialty Valves from February 2019 to May 2020; Plant Manager of our Cleveland, Tennessee facility from October 2007 to February 2019; Plant Manager of our Brownsville, Texas facility from March 2016 to February 2019; and Operations Manager of our Cleveland, Tennessee facility from September 1998 to October 2007.
Todd P. Helms has served as our Senior Vice President and Chief Human Resources Officer since February 2020. Previously, Mr. Helms held the position of Executive Vice President and Chief Human Resource Officer at Synovus Financial Corporation and as Senior Vice President, Human Resources at Genuine Parts Company. Mr. Helms earned a Bachelor of Science degree from King College, a Bachelor of Mechanical Engineering from Georgia Institute of Technology and a Master of Business Administration from Ohio University.
Chad D. Mize has served as our Senior Vice President, Sales and Marketing since October 2019. He served as Vice President and General Manager of the Brass, Gas and Repair Value Stream from October 2017 to September 2019; Chief Financial Officer and Vice President of Mueller Co. LLC from March 2010 to September 2017; Corporate Controller from January 2007 to February 2010; and Manager of Financial Reporting and Analysis from October 2004 to December 2006. Previously, Mr. Mize served as Senior Audit Supervisor of Archer Daniels Midland from May 1998 to September 2004. Mr. Mize earned a Bachelor of Science degree from Illinois State University and a Master of Business Administration from Millikin University.
Kenji Takeuchi has served as our Senior Vice President, Water Management Solutions since October 2021. He served as Senior Vice President, Technology Solutions from October 2019 to September 2021. Previously, Mr. Takeuchi served as a Startup Catalyst at the Advanced Technology Development Center at Georgia Tech, Georgia’s technology incubator. Prior to that, he served as Chief Technology Officer and Vice President of Engineering of Honeywell International Inc. and held various executive-level positions at Flextronics, culminating in his role as Vice President, Products and Technology. Mr. Takeuchi earned a Bachelor of Mechanical Engineering from Georgia Institute of Technology and a Master of Engineering from the University of California at Berkeley and completed the Executive Education Program at Stanford University’s Graduate School of Business.
Richelle R. Feyerherm has served as our Vice President, Operations Controller since November 2019. Previously, Ms. Feyerherm served as a Financial Officer of the Water Products division of Lonza Group, Ltd. from October 2011 to February 2019. Ms. Feyerherm earned her Bachelor of Science degree from the State University of New York and is a certified public accountant.
Suzanne G. Smith has served as our Vice President and Chief Accounting Officer since January 2021. Previously, Ms. Smith served as Chief Accounting Officer for ModivCare Inc, from February 2019 through November 2020 and for Cumulus Media from May 2017 through February 2019 and served as Vice President and Corporate Controller for EmployBridge Holdings from 2015 to 2017. Ms Smith is a certified public accountant, and she earned a Bachelor of Science degree from The Ohio State University and a Master of Business Administration from Georgia State University.
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Mark J. O’Brien has been a member of our Board of Directors since April 2006 and has served as our Non-Executive Chairman since January 2018. He served as Chairman of Walter Investment Management Corp. (formerly Walter Industries’ Homes Business), a mortgage portfolio owner and mortgage originator and servicer, from 2009 through December 2015, and he served as its Chief Executive Officer from 2009 to October 2015. Mr. O’Brien has been President and Chief Executive Officer of Brier Patch Capital and Management, Inc., a real estate management and investment firm, since 2004. He served in various executive capacities at Pulte Homes, Inc., a home building company, for 21 years, retiring as President and Chief Executive Officer in 2003.Mr. O’Brien earned a Bachelor of Arts degree in history from the University of Miami.
Shirley C. Franklin has been a member of our Board of Directors since November 2010. Ms. Franklin serves as the President of Clarke Franklin Associates, a management consulting firm. In addition, Ms. Franklin serves as Chair of the board of directors of the National Center for Civil and Human Rights and is a board member of the Paul Volcker Alliance, both non-profit organizations dedicated to public service missions. From 2002 to 2010, Ms. Franklin was mayor of Atlanta, Georgia. Ms. Franklin earned a Bachelor of Arts degree in sociology from Howard University and a Master’s degree in sociology from the University of Pennsylvania.
Thomas J. Hansen has been a member of our Board of Directors since October 2011. Until 2012, Mr. Hansen served as Vice Chairman of Illinois Tool Works Inc. (“ITW”), a manufacturer of fasteners and components, consumable systems and a variety of specialty products and equipment. He joined ITW in 1980 as sales and marketing manager of the Shakeproof Industrial Products businesses. From 1998 until May 2006, Mr. Hansen served as Executive Vice President of ITW. Mr. Hansen earned a Bachelor of Science degree in marketing from Northern Illinois University and a Master of Business Administration degree from Governors State University.
Jerry W. Kolb has been a member of our Board of Directors since April 2006. From 1986 to 1998, Mr. Kolb served as a Vice Chairman of Deloitte LLP, a registered public accounting firm. Mr. Kolb earned a Bachelor of Science degree in accountancy with highest honors from the University of Illinois and Master of Business Administration degree in finance from DePaul University. Mr. Kolb is a certified public accountant.
Christine Ortiz has been a member of our Board of Directors since November 2018. Dr. Ortiz is the Morris Cohen Professor of Materials Science and Engineering at the Massachusetts Institute of Technology. The author of more than 200 scholarly publications, she has supervised research projects across multiple academic disciplines, received 30 national and international honors, including the Presidential Early Career Award in Science and Engineering awarded to her by President George W. Bush, and served as the Dean for Graduate Education at MIT from 2010 to 2016. She is also the founder of an innovative, nonprofit, post-secondary educational institution, Station1. Dr. Ortiz earned a Bachelor of Science degree from Rensselaer Polytechnic Institute and a Master of Science degree and a Doctor of Philosophy degree from Cornell University, each in the field of materials science and engineering.
Bernard G. Rethore has been a member of our Board of Directors since April 2006. Mr. Rethore has served as Chairman Emeritusof Flowserve Corporation, a manufacturer of pumps, valves, seals and components, since 2000. From January 2000 to April 2000, he served as Flowserve’s Chairman and previously served as its Chairman, President and Chief Executive Officer. In 2008, Mr. Rethore was honored by the Outstanding Directors Exchange as an Outstanding Director of the Year, and in 2012, he was designated a Board Leadership Fellow by the National Association of Corporate Directors. Mr. Rethore earned a Bachelor of Arts degree in Economics (Honors) from Yale University and a Master of Business Administration degree from the Wharton School of the University of Pennsylvania, where he was a Joseph P. Wharton Scholar and Fellow.
Jeffery S. Sharritts has been a member of our Board of Directors since March 2021. Mr. Sharritts is the Senior Vice President of the Americas at Cisco. Mr. Sharritts has previously served as its Senior Vice President, U.S. Commercial Sales from 2014 to 2018. Mr Sharritts holds Advisory Board Member positions with the Georgia Chamber of Commerce and Metro Atlanta Chamber of Commerce. Mr. Sharritts earned a Bachelor of Science degree in Business Administration from The Ohio State University.
Lydia W. Thomas has been a member of our Board of Directors since January 2008. Dr. Thomas served as President and Chief Executive Officer of Noblis, Inc., a public interest scientific research, technology and strategy company, from 1996 to 2007. She was previously with The MITRE Corporation, Center for Environment, Resources and Space, serving as Senior Vice President and General Manager from 1992 to 1996, Vice President from 1989 to 1992 and Technical Director from 1982 to 1989. In 2013, she was honored by the Outstanding Directors Exchange as an Outstanding Director of the Year. Dr. Thomas is also a member of the Council on Foreign Relations. She earned a Bachelor of Science degree in zoology from Howard University, a Master of Science degree in microbiology from American University and a Doctor of Philosophy degree in cytology from Howard University.
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Michael T. Tokarz has been a member of our Board of Directors since April 2006. From 1985 until 2002, Mr. Tokarz served as a member of the limited liability company that serves as the general partner of Kohlberg Kravis Roberts & Co. L.P., a private equity company. He served as non-executive Chairman of the Board of Walter Energy, Inc. until July 2016, and until May 2017, he served as a director of CNO Financial Group, Inc. (formerly Conseco, Inc.), an insurance provider, and as a director of Walter Investment Management Corp. Mr. Tokarz has served as a director of the Tokarz Group, LLC, an investment company, since 2002 and of MVC Capital, Inc., a registered investment company, since 2003. In 2007, he was honored by the Outstanding Directors Exchange as an Outstanding Director of the Year. Mr. Tokarz earned a Bachelor of Arts degree in economics with high distinction and a Master of Business Administration degree in finance from the University of Illinois.
Stephen C. Van Arsdell has been a member of our Board of Directors since July 2019. Mr. Van Arsdell is a former senior partner of Deloitte LLP, where he served as Chairman and Chief Executive Officer of Deloitte & Touche LLP from 2010-2012 and as Deputy Chief Executive Officer from 2009-2010. He also served as a member of Deloitte’s board of directors from 2003-2009, during which time he held the position of Vice Chairman. Mr. Van Arsdell has served as a member of the board of directors of First Midwest Bancorp, Inc. since 2017 and has been a member of the audit committee of Brown Brothers Harriman since 2015. Mr. Van Arsdell earned both a Bachelor of Science degree in Accounting and a Masters of Accounting Science degree from the University of Illinois. He is a certified public accountant.
Additional Information
Additional information required by this item will be contained in our definitive proxy statement issued in connection with the 2022 Annual Meeting of Stockholders filed with the SEC within 120 days after September 30, 2021 and is incorporated herein by reference.
Our website address is www.muellerwaterproducts.com. You may read and print our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and any amendments to those reports from the investor relations section of our website free of charge. These reports are available on our website soon after we file them with or furnish them to the SEC. These reports should also be available through the SEC’s website at www.sec.gov.
We have adopted a written code of conduct that applies to all directors, officers and employees, including a separate code that applies only to our principal executive officer and senior financial officers in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated thereunder. Our Code of Business Conduct and Ethics is available in the corporate governance section of our website. In the event that we make changes in, or provide waivers from, the provisions of this Code of Business Conduct and Ethics for which SEC disclosure is required, we will make such disclose in the corporate governance section of our website.
We have adopted corporate governance guidelines. The guidelines and the charters of our board committees are available in the corporate governance section of our website. Copies of the Code of Business Conduct and Ethics, corporate governance guidelines and board committee charters are also available in print upon written request to the Corporate Secretary, Mueller Water Products, Inc., 1200 Abernathy Road N.E., Suite 1200, Atlanta, GA 30328.
Item 11.EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive proxy statement issued in connection with the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information set forth below and the information set forth in “Part II, Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES,” the information required by this item will be contained in our definitive proxy statement issued in connection with the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
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Index to Financial Statements
Securities Authorized for Issuance under Equity Compensation Plans
We have two compensation plans under which our equity securities are authorized for issuance. The Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan (“ESPP”) was approved by our sole stockholder in May 2006 and amended by our stockholders in February 2016. The Mueller Water Products, Inc. 2006 Stock Incentive Plan (“2006 Plan”) was approved by our sole stockholder in May 2006 and amended by our stockholders in January 2008, January 2009 and January 2012.
The following table sets forth certain information relating to these equity compensation plans at September 30, 2021.
Equity compensation plans approved by stockholders:
(1)Consists of the maximum number of shares that could be earned upon exercise or vesting of outstanding stock-based awards granted under the 2006 Plan. This includes 1,199,873 shares associated with share-settled performance units that may or may not be earned, depending on Company performance or stock market performance, as described in Note 12. of the Notes to the Consolidated Financial Statements.
(2)Weighted-average exercise price of 599,799 options.
(3)The number of securities initially available for issuance under the 2006 Plan was 20,500,000 shares.
(4)The number of securities initially available for issuance under the ESPP Plan was 5,800,000 shares.
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be contained in our definitive proxy statement issued in connection with the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in our definitive proxy statement issued in connection with the 2022 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Financial Statements
Index to financial statements Pagenumber
Reports of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets at September 30, 2021 and 2020 F-4
(b)Financial Statement Schedules
The information required by Schedule II is included in the Notes to Consolidated Financial Statements. All other schedules required by Item 15(b) are not applicable or not required.
(c)Exhibits
Exhibit no. Document
42
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Index to Financial Statements
Exhibit no. Document
10.34 ** Mueller Water Products, Inc. Form of Stock Option Grant Award Agreement
43
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Index to Financial Statements
Exhibit no. Document
21.1** Subsidiaries of Mueller Water Products, Inc.
23.1** Consent of Independent Registered Accounting Firm.
* Management compensatory plan, contract or arrangement
** Filed with this Annual Report
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Index to Financial Statements
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 18, 2021
MUELLER WATER PRODUCTS, INC.
By: /s/ Scott Hall
Name: Scott Hall
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Scott Hall President and Chief Executive Officer November 18, 2021
Scott Hall
Marietta Edmunds Zakas
Suzanne G. Smith
Mark J. O’Brien
/s/ Shirley C. Franklin Director November 18, 2021
Shirley C. Franklin
/s/ Thomas J. Hansen Director November 18, 2021
Thomas J. Hansen
/s/ Jerry W. Kolb Director November 18, 2021
Jerry W. Kolb
/s/ Christine Ortiz Director November 18, 2021
Christine Ortiz
/s/ Bernard G. Rethore Director November 18, 2021
Bernard G. Rethore
/s/ Jeffery S. Sharritts Director November 18, 2021
Jeffery S. Sharritts
/s/ Lydia W. Thomas Director November 18, 2021
Lydia W. Thomas
/s/ Michael T. Tokarz Director November 18, 2021
Michael T. Tokarz
/s/ Stephen C. Van Arsdell Director November 18, 2021
Stephen C. Van Arsdell
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Index to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mueller Water Products, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mueller Water Products, Inc. and subsidiaries(the Company) as of September 30, 2021 and 2020, the related consolidated statements of operations,comprehensive income, equity and cash flows for each of the three years in the period ended September 30, 2021, and the related notes(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)and our report dated November 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
F- 1
Table of Contents
Index to Financial Statements
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Valuation of Goodwill - Krausz Industries Reporting Unit
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Atlanta, Georgia
November 18, 2021
F- 2
Table of Contents
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Mueller Water Products, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Mueller Water Products, Inc. and subsidiaries’ internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Mueller Water Products, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended September 30, 2021, and the related notesand our report dated November 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 18, 2021
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Index to Financial Statements
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
(in millions, except share amounts)
Assets:
Cash and cash equivalents $ 227.5 $ 208.9
Property, plant and equipment, net 283.4 253.8
Other noncurrent assets 73.3 51.3
Liabilities and stockholders’ equity:
Current portion of long-term debt $ 1.0 $ 1.1
Other current liabilities 127.1 86.6
Deferred income taxes 95.1 96.5
Other noncurrent liabilities 62.0 56.3
Commitments and contingencies (Note 17.)
Accumulated other comprehensive loss (5.0) (24.7)
Total liabilities and stockholders’ equity $ 1,518.0 $ 1,395.0
The accompanying notes are an integral part of the consolidated financial statements.
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Index to Financial Statements
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
(in millions, except per share amounts)
Operating expenses:
Gain on sale of idle property — — (2.4)
Strategic reorganization and other charges 8.0 13.0 16.3
Pension (benefit) cost other than service (3.3) (3.0) 0.4
Loss on early extinguishment of debt 16.7 — —
Walter Energy accrual — 0.2 22.0
Net income per share:
Weighted average shares outstanding:
The accompanying notes are an integral part of the consolidated financial statements.
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Index to Financial Statements
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
(in millions)
Other comprehensive income (loss):
Income tax effects (3.6) (1.1) 3.8
Foreign currency translation 9.2 8.0 6.3
Total other comprehensive income (loss) 19.7 11.3 (3.2)
Total comprehensive income $ 90.1 $ 83.3 $ 60.6
The accompanying notes are an integral part of the consolidated financial statements.
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Index to Financial Statements
MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 2021
(in millions)
Dividends declared — (32.0) — — — (32.0)
Stock-based compensation — 4.3 — — — 4.3
Shares retained for employee taxes — (1.3) — — — (1.3)
Common stock issued — 5.2 — — — 5.2
Stock repurchased under buyback program — (10.0) — — — (10.0)
Other comprehensive loss, net of tax — — — (3.2) — (3.2)
Dividends declared — (33.1) — — — (33.1)
Stock-based compensation — 5.3 — — — 5.3
Shares retained for employee taxes — (0.9) — — — (0.9)
Common stock issued — 3.5 — — — 3.5
Stock repurchased under buyback program — (5.0) — — — (5.0)
Acquisition of joint venture partner’s interest — (2.5) — — (2.2) (4.7)
Other comprehensive income, net of tax — — — 11.3 — 11.3
Dividends declared — (34.8) — — — (34.8)
Cumulative effect of accounting change (Note 2.) — — (0.1) — — (0.1)
Stock-based compensation — 8.1 — — — 8.1
Shares retained for employee taxes — (1.0) — — — (1.0)
Common stock issued — 1.9 — — — 1.9
Stock repurchased under buyback program — (10.0) — — — (10.0)
Other comprehensive income, net of tax — — — 19.7 — 19.7
The accompanying notes are an integral part of the consolidated financial statements.
F- 7
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(in millions)
Operating activities:
Loss on early extinguishment of debt 16.7 — —
Stock-based compensation 8.1 5.3 4.3
Pension (benefit) cost (1.9) 2.8 2.0
Deferred income taxes (5.3) 7.2 1.3
Inventory reserves provision 3.1 4.3 2.4
Gain on disposal of assets — — (2.5)
Changes in assets and liabilities, net of acquisitions:
Walter Energy accrual — (22.0) 22.0
Other current liabilities 37.5 6.6 (6.1)
Pension obligations, related to contributions — — (0.7)
Other noncurrent liabilities 2.5 1.9 (9.8)
Net cash provided by operating activities 156.7 140.3 92.5
Investing activities:
Acquisitions, net of cash acquired (19.7) — (127.5)
Proceeds from sales of assets 0.7 0.2 2.3
Net cash used in investing activities (81.7) (67.5) (211.8)
Financing activities:
Repayment of 5.5% Senior Notes (462.4) — —
Issuance of 4.0% Senior Notes 450.0 — —
Deferred financing costs paid (6.0) (1.1) —
Proceeds from financing transaction 3.9 — —
Acquisition of joint venture partner’s interest — (5.2) —
Employee taxes related to stock-based compensation (1.0) (0.9) (1.3)
Common stock issued 1.9 3.5 5.2
Stock repurchased under buyback program (10.0) (5.0) (10.0)
Repayment of Krausz debt — — (13.2)
Net cash used in financing activities (58.8) (41.4) (50.9)
Effect of currency exchange rate changes on cash 2.4 0.8 (0.2)
Net change in cash and cash equivalents 18.6 32.2 (170.4)
Cash and cash equivalents at beginning of year 208.9 176.7 347.1
The accompanying notes are an integral part of the consolidated financial statements.
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Cash and cash equivalents at end of year $ 227.5 $ 208.9 $ 176.7
Supplemental cash flow information:
Cash paid for income taxes $ 16.8 $ 15.3 $ 29.1
The accompanying notes are an integral part of the consolidated financial statements.
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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.Organization
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, automatic control and ball valves, as well as dry-barrel and wet-barrel fire hydrants and pipe repair products. Technologies offers metering systems, leak detection, pipe condition assessment and other products and services for the water infrastructure industry. 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. We sold our Anvil segment on January 6, 2017 and our U.S. Pipe segment on April 1, 2012.
We have approximately 3,400 employees globally, of which 66% of our hourly workers are covered by collective bargaining agreements.
In July 2014, Infrastructure acquired a 49% ownership in an industrial valve joint-venture for $1.7 million. As a result of substantive control features in the joint-venture agreement, all of the joint venture’s assets, liabilities and results of operations were included in our consolidated financial statements. The noncontrolling interest portion was included in selling, general and administrative expenses. Noncontrolling interest was recorded at its carrying value, which approximated fair value. Infrastructure acquired the remaining 51% noncontrolling interest on October 3, 2019.
On December 3, 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”). During our 2020 and 2019 fiscal years, we included the financial statements of Krausz on a one-month lag. Refer to Note 5. for additional disclosures. During the three months ended March 31, 2021, we aligned the consolidation of the financial statements of Krausz in the Company’s consolidated financial statements, eliminating the previous inclusion of Krausz financial statements with a one-month reporting lag. In accordance with applicable accounting literature, the elimination of the one-month reporting lag is considered to be a change in accounting principle. We believe this change in accounting principle is preferable as the financial statements of all of our subsidiaries are now reported on the same basis, providing the most current information available. The effect of the elimination of the reporting lag during the year ended September 30, 2021 resulted in an increase of $6.0 million to net sales and an increase of $1.4 million to operating income. We concluded that the effect of this change is not material to the balance sheets, statements of operations, statements of cash flows, net income and earnings per share and therefore have not retrospectively applied this change.
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. The consolidated balance sheet at September 30, 2021 includes the preliminary estimated fair values of the net assets of i2O. The Company is still reviewing the impact of taxes and certain other items. The results of i2O’s operations and cash flows for the period subsequent to the acquisition are included in the consolidated statement of operations and consolidated statement of cash flows, respectively. Refer to Note 5. for additional disclosures related to the acquisition.
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. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.
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.
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
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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 underling economics of the project. Consequently, we have included the financial statements of the VIEs in our consolidated financial statements.
Intercompany transactions between us and the VIEs have been eliminated in consolidation. Wells Fargo’s contribution to the investment fund is consolidated in our financial statements as an Other noncurrent liability as a result of its redemption features.
Direct costs associated with Wells Fargo’s capital contribution have been netted against the recorded proceeds, resulting in a net cash contribution of $3.9 million. Other direct costs associated with the transaction were capitalized and will be recognized as interest expense over the seven-year tax credit period. Incremental costs to maintain the structure during the compliance period are expensed as incurred.
Note 2.Summary of Significant Accounting Policies
Cash and Cash Equivalents. All highly liquid investments with remaining maturities of 90 days or less when purchased are classified as cash equivalents. Where there is no right of offset against cash balances, outstanding checks are included in accounts payable.
Receivables, net. Receivables are amounts due from customers. To reduce credit risk, credit investigations are generally performed prior to accepting orders from new customers and, when necessary, letters of credit, bonds or other instruments are required to ensure payment.
We present trade receivables net of customer discounts and an allowance for credit losses. Our consolidated statements of operations reflect the measurement of credit losses for newly recognized trade receivables, as well as the expected increases or decreases of expected credit losses that have taken place during the period. When we determine a specific trade receivable will not be collected, we charge off the uncollectible amount against the allowance. Our periodic evaluations of expected credit losses are based upon our judgments regarding prior collection experience, specific customer creditworthiness, other current conditions, and forecasts of current economic trends within the industries served that may affect the collectability of the reported amounts. Significantly weaker than anticipated industry or economic conditions could impact our customers’ ability to pay such that actual credit losses may be greater than the amounts provided for in this allowance.
The following table summarizes information concerning our allowance for credit losses.
(in millions)
Balance at beginning of year $ 2.5 $ 1.5 $ 1.4
Provision charged to expense 1.1 1.1 0.3
Balance at end of year $ 3.5 $ 2.5 $ 1.5
Inventories, net. Inventories are recorded at the lower of first-in, first-out method cost or estimated net realizable value. We evaluate our inventory in terms of excess and obsolete exposures. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels and ultimate product sales value. Inventory cost includes an overhead component
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that is affected by levels of production and actual costs incurred. We periodically evaluate the effects of production levels and costs capitalized as part of inventory.
The following table summarizes information concerning our inventory valuation reserves.
(in millions)
Balance at beginning of year $ 11.7 $ 7.5 $ 5.1
Provision charged to expense 5.9 4.7 3.4
Inventory disposed (3.6) (0.7) (1.2)
Balance at end of year $ 14.8 $ 11.7 $ 7.5
Maintenance and repair supplies and tooling. Maintenance and repair supplies and tooling is included in Other current assets and Other noncurrent assets. Costs for perishable tools and maintenance items are expensed when put into service. Costs for more durable items are amortized over their estimated useful lives, ranging from 3 to 10 years.
Property, Plant and Equipment, net. Property, plant and equipment is recorded at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 10 to 20 years for land improvements, 10 to 40 years for buildings and 3 to 15 years for machinery and equipment. Leasehold improvements and capitalized leases are depreciated using the straight-line method over the lesser of the useful life of the asset or the remaining lease term. Gains and losses upon disposition are reflected in operating results in the period of disposition.
Direct internal and external costs to implement computer systems and internal-use software are capitalized. Capitalized costs are depreciated over the estimated useful life of the system or software, generally six years, beginning when software is ready for its intended use.
Liabilities are recognized at fair value for asset retirement obligations related to plant and landfill closures in the period in which they are reasonably estimable and the carrying amounts of the related long-lived assets are correspondingly adjusted. Over time, the liabilities are accreted to their estimated future values. At September 30, 2021 and 2020, asset retirement obligations were $3.8 million.
Leases. Refer to Note 4. for information regarding our leases.
Accounting for the Impairment of Long-Lived Assets. We test indefinite-lived intangible assets and goodwill for impairment annually or more frequently if events or circumstances indicate impairment is possible. We perform our annual impairment testing at September 1. We amortize finite-lived intangible assets over their respective estimated useful lives and review for impairment if events or circumstances indicate impairment is possible. Refer to Note 6. for information regarding our impairment testing.
Workers’ Compensation. Our exposure to workers’ compensation claims is generally limited to $0.8 million per incident. Liabilities, including those related to claims incurred but not reported, are recorded principally using annual valuations based on discounted future expected payments and using historical data combined with insurance industry data when historical data is limited. Our gross workers’ compensation liabilities were $10.5 million as of September 30, 2021, and we expect to recover $3.5 million in insurance which is included as a receivable in Other current assets and Other noncurrent assets as of September 30, 2021. As of September 30, 2020, our net worker’s compensation liability was $6.2 million.
Warranty Costs. We accrue for warranty expenses, which include costs of repair and/or replacement, including labor, materials, equipment, freight and reasonable overhead costs. We accrue for the estimated cost of product warranties at the time of sale if such costs are determined to be probable and reasonably estimable at that time. We monitor and analyze our warranty experience and costs periodically and may revise our warranty accruals as necessary. Critical factors in our accrual 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.
Activity in our accrued warranty, reported as part of both other current liabilities and other noncurrent liabilities, is presented below.
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(in millions)
Balance at beginning of year $ 14.4 $ 17.1 $ 20.0
Warranty costs (8.2) (5.3) (6.8)
Balance at end of year $ 9.7 $ 14.4 $ 17.1
Deferred Financing Costs. Costs to finance debt are charged to expense over the lives of the debt agreements. Remaining costs and the future period over which financing costs would be charged to expense are reassessed when amendments to the related financing agreements or prepayments occur.
Deferred financing costs are offset against the underlying long-term debt in the accompanying consolidated balance sheets. Deferred financing costs under agreements that do not have outstanding debt and in other instances, such as our ABL Agreement and with regard to our NMTC transaction, are included in Other noncurrent assets consistent with the life of the instrument. Deferred financing costs of $6.6 million at September 30, 2021 are scheduled to amortize as follows: $1.0 million related to the ABL Agreement and $0.3 million related to the NMTC transaction which are amortized on a straight-line basis and; $5.3 million related to the 4.0% Senior Unsecured Notes (“4.0% Senior Notes”) which is amortized using the effective interest rate method. All such amortization will be over the remaining term of the respective debt. Refer to Note 8. for disclosures related to our borrowing arrangements.
Derivative Instruments and Hedging Activities. We manage U.S. dollar - Canadian dollar exchange rate risk related to an intercompany loan with swap contracts, which we have not designated as hedges. As a result, the changes in the fair value of these contracts are reported currently in earnings. The values of our currency swap contracts were liabilities of $1.1 million and $0.2 million as of September 30, 2021 and 2020, respectively, and are included in Other current liabilities and Other noncurrent liabilities, respectively, in our consolidated balance sheets. The currency swap contracts expire in February 2022.
Income Taxes. Deferred tax liabilities and deferred tax assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Such liabilities and assets are determined based on the differences between the financial statement basis and the tax basis of assets and liabilities, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided when, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
We only record tax benefits for positions that management believes are more likely than not of being sustained under audit based solely on the technical merits of the associated tax position. The amount of tax benefit recognized for any position that meets the more-likely-than-not threshold is the largest amount of the tax benefit that we believe is greater than 50% likely of being realized.
Environmental Expenditures. We capitalize environmental expenditures that increase the life or efficiency of noncurrent assets or that reduce or prevent environmental contamination. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable. We are indemnified under an agreement with a predecessor to Tyco for certain environmental liabilities that existed at August 16, 1999. Refer to Note 17. for additional disclosures regarding our environmental liabilities.
Revenue Recognition. Refer to Note 3. for disclosures regarding our revenues.
Stock-based Compensation. Compensation expense for stock-based awards granted to employees and directors is based on the fair value at the grant dates for our stock-settled share awards and is based on the fair value at each reporting date for our cash-settled share awards. Refer to Note 12. for more information regarding our stock-based compensation. Stock-based compensation expense is included within Selling, general and administrative expenses.
Research and Development. Research and development costs are expensed as incurred.
Advertising. Advertising costs are expensed as incurred.
Translation of Foreign Currency. Assetsand liabilities of our businesses whose functional currencies are not denominated in the United States dollar are translated into United States dollars using currency exchange rates at the balance sheet date. Revenues and expenses are translated at average currency exchange rates during the period. Foreign currency translation gains
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and losses are reported as a component of accumulated other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in earnings as incurred.
Recently Adopted Accounting Pronouncements
During 2016, the Financial Accounting Standards Board (“FASB”) issued standard Accounting Standard Codification (“ASC”) 326 - Current Expected Credit Losses (“ASC 326”) to replace the “incurred loss” impairment approach with an “expected loss” approach. This requires consideration of a broader range of reasonable and supportable information to estimate credit losses. We have completed historical and forward-looking analyses for receivables and adopted this guidance effective October 1, 2020. Upon adoption, there was an immaterial impact of $0.1 million to our retained earnings.
Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by clarifying and amending existing guidance related to the recognition of franchise tax, the evaluation of a step up in the tax basis of goodwill, and the effects of enacted changes in tax laws or rates in the effective tax rate computation, among other clarifications. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. We will adopt this standard on October 1, 2021 and it is not expected to have a material impact on our financial statements.
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (“ASU 2020-04”). The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective from March 12, 2020, but can be adopted prospectively from a date within an interim period subsequent to March 12, 2020. We are currently evaluating our contracts and the optional expedients provided by ASU 2020-04. We will adopt this standard on October 1, 2021 and it is not expected to have a material impact on our financial statements.
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
Refer to Note 16. for disaggregation 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 (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 revenues represent contract liabilities and are 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.
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The table below represents the balances of our customer receivables and deferred revenues.
September 30,
(in millions)
Unbilled receivables 2.3 5.3
Total customer receivables, gross $ 219.3 $ 185.6
Deferred revenues $ 5.4 $ 5.6
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 control of the performance obligation transfers to the customer. 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 classify shipping and handling costs, such as freight to our customers’ destinations, as a component of cost of goods sold.
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 98% , 99% and 98% of our revenues in the years ended September 30, 2021, 2020 and 2019, respectively. The revenues recognized at a point in time related to the sale of our products are recognized when the obligations of the terms of our contract are 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 2%, 1% and 2% of our revenues in the years ended September 30, 2021, 2020 and 2019, respectively.
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.
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 a combination of orders and shipments, 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 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.
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Note 4. Leases