Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries, operates in two2 business segments: InfrastructureWater Flow Solutions and Technologies. Infrastructure manufactures valves for water and gas systems, including butterfly,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 tapping, check, knife, plugvalves, specialty valves and ball valves, as well as dry-barrelservice brass products. Water Management Solutions’ product and wet-barrelservice portfolio includes fire hydrants, repair and a broad line of pipe connection and repair products, such as clamps and couplings used to repair leaks. Technologies offersinstallation, natural gas, metering, systems, leak detection, pipe condition assessmentpressure control and other related smart-enabled products and services.software products. The “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and its subsidiaries. With regard to the Company’s segments, “we,” “us” or “our”subsidiaries, and may also refer to the segment being discussed.

In July 2014, Infrastructure acquired a 49% ownership interest in an industrial valve joint venture for $1.7 million. As a resultOn December 3, 2018, we completed our acquisition of substantive control features in the operating agreement, all of the joint venture’s assets, liabilitiesKrausz Industries Development Ltd. and results of operations were included in our consolidated financial statements. Infrastructure acquired the remaining 51% ownership interest in the business in October 2019.

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 andas 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, 2020.2021. 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, 20202021 was derived from audited financial statements, but it does not include all disclosures required by GAAP.

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.

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.

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.

We disaggregate our revenuesrevenue from contracts with customers by reportable segment (see Note 9.10.) 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.

TheDifferences in the timing of revenue recognition, billingsbilling and cash collections resultscollection result in customer receivables, customer advance payments and billings in excess of revenue recognized. Customer receivables include amounts billed and currently due from customers as well as unbilled amounts.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.

Customer advanceAdvance 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 of when we expect to recognize revenue. We reverse thesereceive within one year and therefore is included within Other current liabilities in the accompanying consolidated balance sheets. Deferred revenue represents contract liabilities and recognizeare 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 we satisfy the related performance obligations. We include current deferred revenue within Other current liabilities.obligation is satisfied.

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 product 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 or as, 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.

The revenue recognized at a point in time related to the sale of our performanceproducts is recognized when the obligations of the terms of our contract are satisfied, at a “point in time” for sales of equipment and for provision of one-time services, and wewhich generally recognize such revenueoccurs upon shipment when goods are shipped or when the services are provided. The remainder of our performance obligations are satisfied “over time” for our software hosting and leak detection monitoring services, and we generally recognize such revenue ratably as services are provided over the expected termcontrol of the contract.product transfers to the customer.

We offer warranties to our customers in the form of assurance-type warranties, whichthat provide assurance that the products provided will function as intended and comply with any agreed-upon specifications. Such warranties generallyThese cannot be purchased separately. We accrue our expected warranty obligations at the time of sale.

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

At March 31, 20212022 and September 30, 2020,2021, the gross liabilities for unrecognized income tax benefits were $4.7 million and $4.5$4.8 million, respectively, and are reflected withinincluded in Other noncurrent liabilities.

Borrowings under the ABL Agreement bear interest at a floating rate equal to the London Inter-Bank Offered Rate (“LIBOR”),LIBOR plus an applicable margin ranging fromrange of 200 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus an applicable margin rangingrange of from 100 to 125 basis points. At March 31, 2021,2022 the applicable ratemargin for LIBOR based loans was LIBOR plus 200 basis points and for base rate loans was 100 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 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 inventoriesinventory or (ii) 85% of the net orderly liquidation value of eligible inventories,inventory, less certain reserves. Prepayments maycan be made at any time with nowithout penalty.

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. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. receivables and inventories, certain cash and other supporting obligations. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $17.5 million andor 10% of the Loan Cap as defined in the ABL Agreement. Excess availability based on March 31, 20212022 data was $154.4$160.1 million, as reduced by $14.7 million of outstanding letters of credit of $13.8and $0.2 million andof accrued fees and expensesexpenses.

In connection with the acquisition of Singer Valve in 2017, we loaned U.S. dollar-denominated funds to one of our Canadian subsidiaries. Although this intercompany loan hashad no direct effect on our consolidated financial statements, it createscreated 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 havedid not designateddesignate these swaps as hedges and we include the changes in their fair valuesvalue were included in earnings, to offsetoffsetting the currency gains and losses associated with the intercompany loan.

The currency swap contracts expire in February 2022. The valuesvalue of our currency swap contracts were liabilitiesas of $1.4September 30, 2021 was a liability of $1.1 million, and $0.2 million at March 31, 2021 and September 30, 2020, respectively, and arewas included in Other current liabilities and Other noncurrent liabilities, respectively.liabilities. The currency swap contracts expired in February 2022.

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

An MRSU award represents a target number of units that may be paid out at the end of a three-year award cycle based on a calculation of our relative total shareholder return (“TSR”) performance as compared with the TSR of a selected peer group's TSR.group. Settlements, in our common shares, will range from 0zero to 2 times the number of MRSUs granted, depending on our TSR performance relative to that of the peer group.

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

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

A PRSU award consists of a number of units that may be paid out at the end of a three-year award cycle consisting of a series of annual performance periods coinciding with our fiscal years. After we establish the financial performance targets related to PRSUs for a given performance period, typically during the first quarter of that fiscal year, we consider that portion of a PRSU award to be granted. Thus, each award consists of a grant in the year of award and grants in the two following years. Settlements, in our common shares, will range from 0zero to 2 times the number of PRSUs granted, depending on our financial performance relative to the targets.

We did not issue any shares of common stock to settle PRSUs vested during the three months ended March 31, 2021. We2022; however, we issued 103,058240,412 shares of common stock to settle PRSUs vested during the six months ended March 31, 2021 to settle PRSUs during the period.2022. Additionally, we issued 93,973104,380 and 219,549235,095 shares of common stock to settle restricted stock units vested during the three and six months ended March 31, 2022, respectively. Finally, we issued 45,517 and 108,950no shares of common stock to settle stock options exercised during the three andmonths ended March 31, 2022; however, we issued 24,153 shares of common stock to settle stock options exercised during the six months ended March 31, 2021, respectively.2022.

Operating income included stock-based compensation expense of $2.5 million and $1.3 million duringin each of the three months ended March 31, 20212022 and 2020, respectively, and $5.02021. Operating income included stock-based compensation expense of $5.1 million and $3.2$5.0 million during the six months ended March 31, 20212022 and 2020,2021, respectively. At March 31, 2021,2022, there was approximately $13.2$13.3 million of unrecognized compensation expense related to stock-based compensation arrangements and there were 199,99458,139 PRSUs that have been awarded for the 2021 and 2022 performance periodsperiod for which performance goal achievement cannot yet be determined.

We excluded 664,082944,631 and 267,697664,082 stock-based compensation instruments from the calculations of diluted earnings per share forin the three months ended March 31, 20212022 and 2020,2021, respectively, and 447,086563,299 and 184,296447,086 for the six months ended March 31, 20212022 and 2020,2021, respectively, since their inclusion would have been antidilutive.