mwa-20211231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32892

MUELLER WATER PRODUCTS, INC.

(Exact name of registrant as specified in its charter)


Delaware						20-3547095
(State or other jurisdiction of						(I.R.S. Employer
incorporation or organization)						Identification No.)

1200 Abernathy Road N.E

Suite 1200

Atlanta, GA 30328

(Address of principal executive offices)

(770) 206-4200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

Large accelerated filer ☒ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

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

There were 156,873,419 shares of $0.01 par value common stock of the registrant outstanding at January 31, 2022, which trade under the ticker symbol MWA on the New York Stock Exchange.

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ITEM		PAGE

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets - December 31, 2021 and September 30, 2021	3

	Unaudited Condensed Consolidated Statements of Operations - Three Months Ended December 31, 2021 and 2020	4

	Unaudited Condensed Consolidated Statements of Comprehensive Income - Three Months Ended December 31, 2021 and 2020	5

	Unaudited Condensed Consolidated Statements of Equity - Three Months Ended December 31, 2021 and 2020	6

	Unaudited Condensed Consolidated Statements of Cash Flows - Three Months Ended December 31, 2021 and 2020	7

	Notes to the Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 6.	Exhibits	29

	Signatures	30

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PART I

Item 1. FINANCIAL STATEMENTS

MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	December 31,		September 30,
	2021		2021

	(in millions, except share amounts)
Assets:
Cash and cash equivalents	$	207.3	$	227.5
Receivables, net of allowance for credit losses of $4.1 million and $3.5 million	180.4		212.2
Inventories, net	209.7		184.7
Other current assets	30.6		29.3
Total current assets	628.0		653.7
Property, plant and equipment, net	286.9		283.4
Intangible assets, net	386.9		392.5
Goodwill	117.7		115.1
Other noncurrent assets	74.0		73.3
Total assets	$	1,493.5	$	1,518.0

Liabilities and stockholders’ equity:
Current portion of long-term debt	$	1.0	$	1.0
Accounts payable	83.9		92.0
Other current liabilities	114.4		127.1
Total current liabilities	199.3		220.1
Long-term debt	445.9		445.9
Deferred income taxes	99.3		95.1
Other noncurrent liabilities	57.1		62.0
Total liabilities	801.6		823.1

Commitments and contingencies (Note 12.)

Common stock: 600,000,000 shares authorized; 156,834,758 and 157,955,433 shares outstanding at December 31, 2021 and September 30, 2021, respectively	1.6		1.6
Additional paid-in capital	1,313.8		1,342.2
Accumulated deficit	(624.5)		(643.9)
Accumulated other comprehensive income (loss)	1.0		(5.0)
Total stockholders’ equity	691.9		694.9
Total liabilities and stockholders’ equity	$	1,493.5	$	1,518.0

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

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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three months ended
	December 31,
	2021		2020

	(in millions, except per share amounts)
Net sales	$	272.3	$	237.4
Cost of sales	184.7		159.0
Gross profit	87.6		78.4
Operating expenses:
Selling, general and administrative	56.3		49.2
Strategic reorganization and other charges	2.4		1.4
Total operating expenses	58.7		50.6
Operating income	28.9		27.8
Other expenses (income):
Pension benefit other than service	(1.0)		(0.8)
Interest expense, net	4.3		6.1
Net other expenses	3.3		5.3
Income before income taxes	25.6		22.5
Income tax expense	6.2		5.8
Net income	$	19.4	$	16.7

Net income per share:
Basic	$	0.12	$	0.11
Diluted	$	0.12	$	0.11

Weighted average shares outstanding:
Basic	158.0		158.1
Diluted	158.9		158.8

Dividends declared per share	$	0.058	$	0.055

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

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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three months ended
	December 31,
	2021		2020

	(in millions)
Net income	$	19.4	$	16.7
Other comprehensive income (loss):
Pension	0.4		0.7
Income tax effects	(0.1)		(0.2)
Foreign currency translation	5.7		4.5
Total comprehensive income	6.0		5.0
Comprehensive income	$	25.4	$	21.7

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

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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)


	Three months ended
	December 31,
	2021		2020

	(in millions)
Common stock
Balance, beginning of period	$	1.6	$	1.6
Change in common stock at par value	—		—
Balance, end of period	1.6		1.6

Additional paid-in capital
Balance, beginning of period	1,342.2		1,378.0
Dividends declared	(9.2)		(8.7)

Shares retained for employee taxes	(1.9)		(0.9)
Shares repurchased under buyback program	(20.0)		—
Stock-based compensation	2.0		1.9
Stock issued under stock compensation plan	0.7		0.6
Balance, end of period	1,313.8		1,370.9

Accumulated deficit
Balance, beginning of period	(643.9)		(714.2)
Net income	19.4		16.7
Cumulative effect of accounting change	—		(0.1)
Balance, end of period	(624.5)		(697.6)

Accumulated other comprehensive income (loss)
Balance, beginning of period	(5.0)		(24.7)
Other comprehensive income	6.0		5.0
Balance, end of period	1.0		(19.7)


Total stockholders' equity	$	691.9	$	655.2

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

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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Three months ended
	December 31,
	2021		2020

	(in millions)
Operating activities:
Net income	$	19.4	$	16.7
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisition:
Depreciation	8.0		7.7
Amortization	7.2		7.0
Stock-based compensation	2.0		1.9
Pension benefit	(0.7)		(0.5)
Deferred income taxes	3.6		1.6
Inventory reserves provision	3.5		0.9
Other, net	1.0		0.5
Changes in assets and liabilities, net of acquisition:
Receivables, net	31.9		24.0
Inventories	(28.3)		(4.8)
Other assets	(0.8)		(1.3)
Accounts payable	(8.4)		(9.4)
Other current liabilities	(12.8)		(9.9)
Other noncurrent liabilities	(5.8)		(0.3)
Net cash provided by operating activities	19.8		34.1
Investing activities:
Capital expenditures	(11.0)		(15.6)
Acquisition purchase price adjustment	0.2		—
Proceeds from sales of assets	—		0.1
Net cash used in investing activities	(10.8)		(15.5)
Financing activities:
Dividends paid	(9.2)		(8.7)
Employee taxes related to stock-based compensation	(1.9)		(0.9)
Common stock issued	0.7		0.6
Proceeds from financing transaction	—		3.9
Deferred financing costs paid	—		(0.5)
Common stock repurchased under buyback program	(20.0)		—
Capital leases	(0.1)		(0.2)
Net cash used in financing activities	(30.5)		(5.8)
Effect of currency exchange rate changes on cash	1.3		1.3
Net change in cash and cash equivalents	(20.2)		14.1
Cash and cash equivalents at beginning of period	227.5		208.9
Cash and cash equivalents at end of period	$	207.3	$	223.0

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

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	Three months ended
	December 31,
	2021		2020

	(in millions)
Supplemental cash flow information
Cash paid for interest, net	$	10.0	$	12.4
Cash paid for income taxes	0.4		0.7

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

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MUELLER WATER PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2021

(UNAUDITED)

Note. 1 Organization and Basis of Presentation

Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in two business segments: Water Flow Solutions and Water Management Solutions. These segments are based on a management reorganization that became effective October 1, 2021; prior period information has been recast to conform to the current presentation. Water Flow Solutions’ product portfolio includes iron gate valves, specialty valves and service brass products. Water Management Solutions’ product and service portfolio includes fire hydrants, repair and installation, natural gas, metering, leak detection, pressure control and software products. The “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries, and may also refer to the segment being discussed.

On December 3, 2018, we completed our acquisition of Krausz Industries Development Ltd. and subsidiaries (“Krausz”). During the year ended September 30, 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 included 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 subsequent to the acquisition are included in the Company’s consolidated statement of operations and consolidated statement of cash flows, respectively. Refer to Note 2. 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 in recording assets, liabilities, sales and expenses as well as in the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2021. In our opinion, all normal and recurring adjustments that we consider necessary for a fair financial statement presentation have been made. The condensed consolidated balance sheet at September 30, 2021 was derived from audited financial statements, but it does not include all disclosures required by GAAP.

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

In preparing these financial statements in conformity with GAAP, we have considered and, where appropriate, included the effects of the COVID-19 pandemic on our operations. The pandemic continues to provide significant challenges to the U.S. and global economies.

Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year.

Recently Adopted Accounting Guidance

During 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 326 - Current Expected Credit Losses to replace the “incurred loss” impairment approach with an “expected loss” approach, which requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We have completed historical and forward-looking analyses for receivables and adopted this guidance effective October 1, 2020. Upon adoption, there was no material impact to our financial statements.

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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 adopted this standard on October 1, 2021 and there was no material impact to 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”). This guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Inter Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. ASU 2020-04 is effective from March 12, 2020, but can be adopted prospectively from a date within an interim period subsequent to March 12, 2020. We evaluated our contracts and the optional expedients provided by ASU 2020-04. We adopted this standard on October 1, 2021 and there was no material impact to our financial statements.

Restructuring

Since November 2019, we have announced the purchase and closure of several facilities. We purchased a new facility in Kimball, Tennessee to support and enhance our investment in our Chattanooga, Tennessee large casting foundry and closed our facilities in Hammond, Indiana, Woodland, Washington and Surrey, British Columbia, Canada. We also announced the closure of our facility in Aurora, Illinois which we expect to complete by the third quarter of fiscal year 2022. The majority of the activities from these facilities have been, or will be, transferred to our Kimball, Tennessee facility. Activity in accrued restructuring, reported as part of Other current liabilities, is presented below.


	Three months ended
	December 31,
	2021		2020

	(in millions)
Beginning balance	$	3.1	$	2.8
Expenses incurred	1.2		0.2
Amounts paid	(1.3)		(1.1)
Ending balance	$	3.0	$	1.9

New Markets Tax Credit Program

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

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

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

We determined that the investment fund and the Sub-CDE are variable interest entities (“VIEs”) and that we are the primary beneficiary of the VIEs. The ongoing activities of the VIEs, namely collecting and remitting interest and fees and administering NMTC compliance, were contemplated in the initial design of the transaction and are not expected to

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significantly affect economic performance throughout the life of the VIEs. Additionally, we are obligated to deliver tax benefits and provide various other guarantees to Wells Fargo and to absorb the losses of the VIEs. Wells Fargo does not have a material interest in the underlying economics of the project. Consequently, we have included the financial statements of the VIEs in our consolidated financial statements.

Intercompany transactions between us and the VIEs have been eliminated in consolidation. Wells Fargo’s contribution to the investment fund is consolidated in our financial statements 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 are being recognized as interest expense over the seven-year tax credit period. Incremental costs to maintain the structure during the compliance period are expensed as incurred.

Note 2. Acquisitions

Acquisition of i2O Water Ltd

On June 14, 2021, we acquired all the outstanding capital stock of i2O for $19.7 million, net of cash acquired. The purchase agreement provided for customary final adjustments, including a net working capital adjustment that was completed during the three months ended December 31, 2021, resulting in a purchase price of $19.5 million.

We have recognized the assets acquired and liabilities assumed at their estimated acquisition date fair values, with the excess of the purchase price over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for the business combination is considered to be preliminary. We are still gathering information related to income taxes and certain other items. The results of i2O are included in our Water Management Solutions segment.

The goodwill below is attributable to the strategic opportunities and synergies that we expect to arise from the acquisition of i2O and the value of its workforce. The goodwill is nondeductible for income tax purposes. Identified intangible assets consist of customer relationships, non-compete agreements and developed technology with an estimated weighted-average useful life of approximately 12 years and trade names with an indefinite life. Values of intangible assets were determined using a discounted cash flow method.

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


Assets, net of cash:
Receivables	$	0.5
Inventories	0.6
Other current assets	0.9
Identified intangible assets:
Tradename	1.8
Customer relationships	2.1
Non-compete agreements	0.1
Developed technology	3.5
Goodwill	11.9
Liabilities:
Accounts payable	(0.8)
Other current liabilities	(1.1)
Fair value of net assets acquired, net of cash	$	19.5

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Note 3. Revenue from Contracts with Customers

We recognize revenue when control of promised products or services is transferred to our customers, in amounts that reflect the consideration to which we expect to be entitled in exchange for those products or services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, the payment terms are identified, the contract has commercial substance and collectability of consideration is probable. We determine the appropriate revenue recognition for our contracts with customers by analyzing the type, terms and conditions of each contract or arrangement with a customer.

Disaggregation of Revenue

We disaggregate our revenues from contracts with customers by reportable segment (see Note 10.) and further by geographical region as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Geographical region represents the location of the customer.

Contract Asset and Liability Balances

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

Advance payments and billings in excess of revenue are recognized and recorded as deferred revenue, the majority of which we expect to receive within one year and therefore is included 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 relieved and revenue is recognized when the performance obligation is satisfied.

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


	December 31,		September 30,
	2021		2021

	(in millions)
Billed receivables	$	181.8	$	213.4
Unbilled receivables	2.7		2.3
Gross customer receivables	184.5		215.7
Allowance for credit losses	(4.1)		(3.5)
Receivables, net	$	180.4	$	212.2

Deferred revenues	$	7.4	$	5.4

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. Our performance obligations are satisfied at a point in time for sales of equipment or over time for our software hosting and leak detection monitoring services. Performance obligations are supported by customer contracts, which provide frameworks for the nature of the distinct products or services. 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 based typically on historical experience and known trends. We do not recognize variable consideration in the event there are uncertainties in the amount of variable consideration to be paid nor when it is probable there will be a significant reversal in the related revenue.

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 sales.

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.

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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.

We offer warranties to our customers in the form of assurance-type warranties that 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.

Note 4. Income Taxes

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


	Three months ended
	December 31,
	2021		2020
U.S. federal statutory income tax rate	21.0	%	21.0	%
Adjustments to reconcile to the effective tax rate:
State income taxes, net of federal benefit	3.9		4.5
Excess tax benefits related to stock-based compensation	(1.0)		(0.6)
Tax credits	(1.2)		(1.4)
Global Intangible Low-Taxed Income	0.3		0.6
Foreign income tax rate differential	(0.7)		(0.9)
Valuation allowances	1.4		1.5
Other	0.5		1.1

Effective income tax rate	24.2	%	25.8	%

At December 31, 2021 and September 30, 2021, the gross liabilities for unrecognized income tax benefits were $4.6 million and $4.8 million, respectively, and are included in Other noncurrent liabilities.

Note 5. Borrowing Arrangements

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


	December 31,		September 30,
	2021		2021

	(in millions)
4.0% Senior Notes	$	450.0	$	450.0
Finance leases	2.0		2.2
Total borrowings	452.0		452.2
Less deferred financing costs	(5.1)		(5.3)
Less current portion	(1.0)		(1.0)
Long-term debt	$	445.9	$	445.9

ABL Agreement. Our ABL Agreement consists of a revolving credit facility for up to $175.0 million which includes up to $25.0 million through swing line loans and may have up to $60.0 million of letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150.0 million in certain circumstances subject to adequate borrowing base availability.

Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR plus an applicable margin range of 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus an applicable margin range of from 100 to 125 basis points. At December 31, 2021 the applicable margin was LIBOR plus 200 basis points.

The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in

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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 inventories, accounts receivable, certain cash and other related items.

The ABL Agreement terminates on July 29, 2025 and includes a commitment fee for any unused borrowing capacity of 37.5 basis points per annum. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million or 10% of the Loan Cap as defined in the ABL Agreement. Excess availability based on December 31, 2021 data was $133.8 million, as reduced by $15.0 million of outstanding letters of credit and $1.4 million of accrued fees and expenses.

4.0% Senior Unsecured Notes. On May 28, 2021, we privately issued $450.0 million of 4.0% Senior Unsecured Notes (“4.0% Senior Notes”), which mature on June 15, 2029 and bear interest at 4.0%, paid semi-annually in June and December. We capitalized $5.5 million of financing costs that are being amortized over the term of the 4.0% Senior Notes using the effective interest method. Substantially all of our U.S. subsidiaries guarantee the 4.0% Senior Notes that are subordinate to borrowings under our ABL Agreement. Based on quoted market prices that are a Level 1 measurement, the outstanding 4.0% Senior Notes had a fair value of $456.9 million at December 31, 2021.

An indenture governing the 4.0% Senior Notes (“Indenture”) contains customary covenants and events of default, including covenants that limit our ability to incur certain debt and liens. There are no financial maintenance covenants associated with the Indenture. We believe we were in compliance with these covenants at December 31, 2021.

As set forth in the Indenture, we may redeem some or all of the 4.0% Senior Notes at any time or from time to 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 or from time to time prior to June 15, 2024 with the net proceeds of specified equity offerings at specified redemption prices. Upon a change of control, we would be required to offer to purchase the 4.0% Senior Notes at a price equal to 101% of the outstanding principal amount of the 4.0% Senior Notes.

Note 6. Derivative Financial Instruments

In connection with the acquisition of Singer Valve in 2017, we loaned funds to one of our Canadian subsidiaries. Although this intercompany loan has no direct effect on our consolidated financial statements, it creates exposure to currency risk for the Canadian subsidiary. To reduce this exposure, we entered into a U.S. dollar-Canadian dollar swap contract with the Canadian subsidiary and an offsetting Canadian dollar-U.S. dollar swap with a domestic bank. We have not designated these swaps as hedges and the changes in their fair value are included in earnings, offsetting the currency gains and losses associated with the intercompany loan.

The values of our currency swap contracts were liabilities of $1.2 million and $1.1 million at December 31, 2021 and September 30, 2021, respectively, and are included in Other current liabilities. The currency swap contracts expire in February 2022.

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Note 7. Retirement Plans

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


	Three months ended
	December 31,
	2021		2020

	(in millions)
Service cost	$	0.3	$	0.4
Pension costs (benefits) other than service:
Interest cost	2.4		2.5
Expected return on plan assets	(3.8)		(3.9)
Amortization of actuarial net loss	0.4		0.6
Pension benefits other than service	(1.0)		(0.8)
Net periodic benefit	$	(0.7)	$	(0.4)

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

Note 8. Stock-based Compensation Plans

We grant various forms of stock-based compensation, including market-based restricted stock units (“MRSUs”), restricted stock units, stock options and performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”), Phantom Plan instruments under our Mueller Water Products, Inc. 2012 Phantom Plan, and Employee stock purchase plan instruments under our 2006 Employee Stock Purchase Plan. Grants issued during the three months ended December 31, 2021 are as follows:


	Number granted	Weighted average grant date fair value per instrument		Total grant date fair value (in millions)
Quarter ended December 31, 2021
MRSUs	230,089	$	15.76	$	3.6
Phantom Plan instruments	199,549	$	13.64	$	2.7
Restricted stock units	135,129	$	13.64	$	1.8
Non-qualified stock options	457,482	$	3.43	$	1.6
PRSUs: 2020 award	57,627	$	13.81	$	0.8
Employee stock purchase plan instruments	38,069	$	3.01	$	0.1
				$	10.6

SEC Form 10-Q filed by MUELLER WATER PRODUCTS