Mueller Water Products - Earnings Call - Q3 2018
August 7, 2018
Transcript
Speaker 0
Good morning and thank you for standing by. I'd like to inform all participants that your lines have been placed on a listen only mode until the question and answer session of today's conference. Today's call is also being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Whit Kincaid.
Thank you. You may begin.
Speaker 1
Good morning, everyone. Welcome to Mueller Water Products twenty eighteen third quarter conference call. We issued our press release reporting results of operations for the quarter ended June 3038, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Discussing the third quarter's results and our outlook for full year are Scott Hall, our President and CEO and Marty Zakas, our CFO.
This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results as well as to address forward looking statements and our non GAAP disclosure requirements. At this time, please refer to Slide two. This slide identifies non GAAP financial measures referenced in our press release, on our slides and on this call and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website.
Slide three addresses forward looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward looking statements. Please review Slides two and three in their entirety. During this call, all references to a specific year or quarter, unless specified otherwise, refer to our fiscal year, which ends September 30. A replay of this morning's call will be available for thirty days at 806638.
The archived webcast and corresponding slides will be available for at least ninety days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form eight ks later this morning. I'll now turn the call over to Scott.
Speaker 2
Thanks, Whit. Thank you for joining us today to discuss our twenty eighteen third quarter results. I'll give you a quick overview of the quarter and then Marty will follow with additional commentary on our financial results. I'll then provide some further color on key areas later in the call. And finally, we'll conclude with an update of our 2018 outlook.
Overall, I am pleased with our 7.8% net sales growth this quarter, especially after growing net sales 16.8% in the second quarter. Both infrastructure and technologies generated solid volume growth in the quarter. In addition, we are benefiting from the price increases we implemented in the second quarter, which more than covered inflation. In the quarter, our adjusted operating income increased 5% and adjusted net income grew 18%. However, our conversion margin lagged in the quarter due to higher costs associated with inflation, some unexpected equipment downtime and repairs and the timing of certain SG and A expenses, which Marty will address.
While we were able to more than offset inflation in the third quarter, we continue to feel the impacts of the rapid rise in material costs. Material costs increased approximately 5% year over year in the quarter and have increased about 6% year over year through the first nine months of this year. Performance at Infrastructure and Technologies was impacted by equipment downtime and repairs for key machines at some of our plants. We have taken steps to fix these issues. However, we expect to have some additional expense in the fourth quarter.
At Technologies, we recorded a $14,100,000 warranty charge. During the quarter, we completed a new study of our historical warranty experience for products produced and sold through 2017. We assess our warranty liabilities periodically and adjust amounts as necessary using new information to update our estimates. The charges for warranty costs we expect to incur in periods between 2019 and 2027, reflecting our standard warranty terms for such products. Based on our experience to date and current expectations, the reserve is expected to be adequate and sufficient to cover our obligations for these products over the remaining periods of warranty.
Initiatives are underway to continuously improve product quality and further enhance customer satisfaction. As we move toward the end of fiscal twenty eighteen and into next year, I'm excited about the opportunities ahead of us as we focus on improving our conversion margin and executing key initiatives to drive operational excellence. With that, I'll turn the call over to Marty.
Speaker 3
Thanks, Scott, and good morning, everyone. I will start with our third quarter consolidated financial results, then review our segment performance. Consolidated net sales for the twenty eighteen third quarter increased $18,000,000 or 7.8% to 250,200,000 driven by higher volumes at both Infrastructure and Technologies as well as higher pricing at Infrastructure. Gross profit was $74,500,000 in the quarter with a gross profit margin of 29.8%. Gross profit, excluding the $14,100,000 warranty charge, was $88,600,000 with an adjusted gross profit margin of 35.4%.
As Scott mentioned earlier, the benefits of volume growth and higher pricing were partially offset by higher costs associated with inflation and unexpected equipment downtime and repairs. Selling, general and administrative expenses were $41,300,000 in the quarter and $38,400,000 in the third quarter last year. The increase was primarily due to the timing of personnel related expenses, including share based compensation. SG and A as a percent of net sales was 16.5% in both the third quarter and the prior year quarter. On a trailing twelve months basis, SG and A as a percent of net sales was 18.7%.
Operating income was $30,600,000 in the third quarter. Adjusted operating income increased 5.1% to $47,300,000 in the twenty eighteen third quarter compared with $45,000,000 in the prior year. Our adjusted results this quarter exclude the $14,100,000 warranty charge and 2,600,000 of other charges. Operating performance was favorably impacted by higher volumes and higher pricing, which were partially offset by higher costs associated with inflation, unexpected equipment downtime and repairs and timing of certain SG and A expenses. Adjusted EBITDA for the twenty eighteen third quarter increased 5.7% to $57,900,000 compared with $54,800,000 in 2017.
For the trailing twelve months, adjusted EBITDA was $176,000,000 or 19.8% of net sales. For the twenty eighteen third quarter, we reported a net income tax expense of $6,000,000 or 28.2% of income before income taxes. This rate differs from the statutory rate primarily due to the effects of state income taxes, manufacturing deductions and discrete items. Our adjusted net income per share was $0.19 for the quarter compared to $0.16 in 2017. 2018 quarterly adjusted EPS excludes the warranty charge, items related to our debt offering and other charges.
Now I'll turn to our segment performance, starting with Infrastructure. Infrastructure net sales grew 7.9 to $224,100,000 in the third quarter due to higher shipment volumes and pricing. Adjusted operating income for the third quarter increased $2,800,000 or 5.2% to $57,000,000 as compared with $54,200,000 primarily due to higher pricing and higher shipment volumes, which were partially offset by higher costs associated with inflation, unexpected equipment downtime and repairs and timing of certain SG and A expenses. Adjusted EBITDA for the twenty eighteen third quarter increased 3,200,000 or 5.1% to $66,200,000 versus $63,000,000 in the twenty seventeen third quarter. Moving on to Technologies.
Technologies net sales increased 6.1% to $26,100,000 in the quarter, primarily driven by higher volumes at Mueller Systems. As Scott mentioned, we assess the adequacy of our recorded warranty liabilities periodically and adjust amounts as necessary. As part of this process, we estimate the liability based on our standard warranty terms, the historical and expected failure rates and the cost to repair or replace our products under warranty. During the quarter, we completed a new analysis of our historical warranty experience relating to products produced through 2017. We revised our warranty cost and failure rate expectations using the new information.
As a result, we recorded a warranty charge of $14,100,000 in the quarter. To put this in context, this charge represents approximately $1,500,000 per year of costs we expect to incur for the warranty periods between 2019 and 2027 relating to products sold between 02/2009 2017. When you consider the cumulative sales for these products during the historical period, this charge reflects a very small percentage of those sales. Adjusted operating loss, which excludes this charge, was $2,000,000 for the third quarter as compared with $1,600,000 in the prior year quarter. The adjusted operating loss increased primarily due to higher costs associated with unexpected equipment downtime and repairs and inflation, partially offset by higher volumes.
Now we'll review our liquidity. Free cash flow, which is cash flow from operating activities of continuing operations less capital expenditures, increased 21,800,000 to $56,000,000 for the twenty eighteen third quarter compared to $34,200,000 for the prior year quarter. Through the first nine months of the year, we have generated $43,200,000 of free cash flow compared with $3,800,000 in the prior year. The improvement in free cash flow is due to an increase in cash flow from operating activities, primarily driven by improved operations and timing of expenses. We invested $12,500,000 in the quarter for capital expenditures, largely to upgrade our equipment and manufacturing capabilities, which will further drive cost productivity improvements and efficiencies across the organization.
At June 3038, we had total debt of $445,000,000 a decrease of $34,000,000 since the end of the second quarter. During the third quarter, we issued $450,000,000 of 5.5% senior notes due in 2026, which extended our debt maturities and fixed our interest rate. We retired $484,000,000 of term loan debt with proceeds from the offering and cash on hand. This retirement resulted in a onetime noncash loss on the early extinguishment of debt of $6,200,000 from the write off of the related deferred debt issuance costs. In addition, we terminated our interest rate swap contracts and realized a onetime cash gain of $2,400,000 At the end of the third quarter, our net debt leverage ratio was less than one, and our excess availability under the ABL agreement was approximately $112,000,000 Scott will now talk more about our results and updated outlook for full year 2018.
Speaker 2
Thanks, Murti. I'd like to address a few key areas and then discuss our updated full year outlook. We remain focused on executing our key initiatives to grow and enhance our business as we accelerate new product development, drive operational excellence and improve our go to market strategies as a more customer focused organization. We are pleased with our 10.4% net sales growth through the first nine months as we execute our go to market strategies and accelerate new product development. Our new product development efforts are gaining momentum.
At the American Water Works Association Annual Conference in June, we introduced a smart fire hydrant that monitors pressure and detect leaks. In July, at Singapore International Water Week, we showcased the deployment of our Echosure TX leak detection monitoring system being used by Singapore's National Water Agency, PUB. As a leading water infrastructure company, we believe that it's critical for us to be at the forefront of integrating technologies into products to help our customers. While we were able to more than offset inflation with price in the third quarter, we continue to feel the impacts of the rapid rise in raw material costs, particularly brass and scrap metal. We anticipate that material costs will continue to rise in the fourth quarter.
Despite this increase, we expect our price realization to be favorable for the fourth quarter and full year. We have seen improvement in the price inflation relationship throughout 2018. However, inflation has negatively impacted our conversion margin this year. Going forward, we are focused on improving our conversion margin through price realization and productivity initiatives. During the quarter, we further strengthened our balance sheet with a debt refinancing to extend our maturities and fix our interest rate in a rising rate environment.
The unsecured senior notes give us additional flexibility to support our capital allocation strategies and longer term growth initiatives. In addition, our strong free cash flow enables us to reinvest and grow our business while returning cash to shareholders. Through the first nine months of the year, we have generated $43,000,000 of free cash flow after investing $27,000,000 in capital. Over the same period, we have repaid $36,000,000 of debt and returned $42,000,000 of cash to shareholders through dividends and share repurchases. I'd like to review our current full year expectations for consolidated results.
We continue to be very encouraged by the healthy demand in both municipal and residential end markets. The residential construction market percentage growth is expected to be in the mid to high single digit range with municipal spending growth in the low to mid single digit range. For full year 2018, we expect our consolidated net sales growth to be at the high end of the 7% to 9% range we provided last quarter. Despite the headwinds we have faced this year, primarily from higher than expected inflation, we anticipate that our adjusted operating income will grow between 911% for full year 2018. I am excited about where we are with our strategic initiatives and the contributions they should provide to our performance going forward.
Looking into next year, we are focused on executing our key initiatives to grow net sales and adjusted operating income, Accelerating new product development and improving our go to market strategies will help increase our sales growth above the market. We continue to evaluate opportunities for capital investments that will help us expand our product portfolio, broaden manufacturing capabilities and drive efficiencies. Our growth strategies are supported by our free cash flow and a strong balance sheet with a debt structure that provides flexibility to support our capital allocation strategies and long term growth initiatives. Now, Martie will provide some final comments on our 2018 outlook.
Speaker 3
Thanks, Scott. Turning now to some of the other expectations for our 2018 performance. Corporate SG and A expenses are expected to be between 33,000,000 and $35,000,000 We anticipate the depreciation and amortization will be approximately $44,000,000 and net interest expense will be around $21,000,000 Additionally, we refined our range for capital expenditures to be between $52,000,000 and $58,000,000 We anticipate that our adjusted effective income tax rate for the full year will be between 2628%, excluding any onetime impacts from the new tax legislation. With that, operator, please open this call for questions.
Speaker 0
Thank you. At this time, we will begin the question and answer session. Our first question comes from Brian Lee with Goldman Sachs. You may go ahead.
Speaker 4
Hey, everyone. Good morning. Thanks for taking the questions. Maybe just first off, you mentioned it several times throughout the call, but the downtime issues and also the SG and A timing, can you elaborate a bit as to what those issues were exactly and then the outlook for those items normalizing?
Speaker 2
Sure. I'll do the downtime and what we have what happened with performance in the quarter and then Marty will handle the SG and A one. So Brian, basically what happened in the quarter is we lost a holding furnace for probably almost six weeks and at the same time we lost a holding furnace due to a malfunction. We also had some challenges in the Cleveland, North Carolina facility. And those two things combined to take us we've been running right around $4,500,000.05000000 dollars of favorable performance.
I think year to date, we're at $1,800,000 So we basically had about a $3,500,000.04000000 dollars swing in the quarter associated with losing a holding furnace. And just not to go on and on about it, but a holding furnace, you don't melt in it. You basically melt in your melting furnaces and then you transfer it to holding furnace and you can efficiently pour flasks from your holding furnace so that you kind of have a continuous flow of material into your molds. And when we lost the furnace in Chattanooga, we had to go from melting furnaces directly Chattanooga, to fill ask and that slowed us down. It impacted throughput.
It impacted cycle times. It impacted so it was just kind of a freak accident where we lost some refractory inside the furnace. But long story short, that probably hurt performance to the tune of $3,000,000 $4,000,000 The SG and A timing, Marty?
Speaker 3
Yes. Brian, to address that, it was largely the timing of certain SG expenses that hit in the quarter, and it largely related to some personnel and specifically some stock based compensation just when you look at it on a year over year basis where we were third quarter last year and where we are for third quarter of this year.
Speaker 4
Okay. No, no, that's helpful color. I guess, so if I take your comments at face value, Scott, the 3,000,000 to $4,000,000 impact, if I flow that back, it would seem like your contribution margin in the quarter would have been in that 25% to 30% range that you had talked about last quarter. So I guess first question is that right? And then secondly, I'm just trying to foot your comments around pricing covering inflation, cost inflation, but then also later in the call, you sort of suggested that the cost inflation had negatively impacted your contribution margin.
So is that relative to what you were thinking coming into the quarter or coming into the year? Because I guess when you're saying that price covered inflation and you have some of these sort of temporary issues, I'm trying to figure it what was the bigger impact on contribution margins here?
Speaker 2
Well, covered inflation in the quarter, but inflation just to give you some facts and figures, full year where we stand nine months in, scrap metal is right around 18% inflation and brass is right at 18% or 18.5%. So relative to conversion margin that I gave you, we need to make that would say that price would have to cover inflation by about 25% in order to make the margin on the increased price. And we are not at that level. So we're barely covering our inflated costs, but as sales inflate and it's just covering costs, you're actually having a dilution of your gross margin because we're not getting enough price to make the margin on the increased inflation. So it is a dual thing there.
I'm not sure if that clears it up or makes it more confusing, but that's what's going on.
Speaker 4
Yes. I guess, I can take this offline. Mean, if we just drill down into the moving pieces around the shift in conversion margin here for the second half of the year, how much of this would you anticipate is sort of more permanent and structural as you move into fiscal 'nineteen versus some of these SG and A timing and downtime issues, which I would imagine it sounds like you have a little bit of that in the fourth quarter. But by the time you get into next year fiscal 'nineteen, those would be behind you?
Speaker 2
Yes, I would expect that the I expect manufacturing performance to turn positive again in the fourth quarter and to be positive throughout next year. I understand when something like this happens, but at the same time, try to have a culture around countermeasures and around finding ways to reduce costs in other areas. So while I'm understanding, this is certainly a bigger piece of the problem this quarter was manufacturing than the other. As you rightly pointed out, as we purge the inventory that we created through these inefficiencies, that's going to impact some of Q4 At the higher cost, we've made those products when we weren't as efficient. So there will be a little bit, but no, I expect performance to go to turn to a net contributor again in Q4 and manufacturing to overcome some of the challenges they face.
I would think the conversion margin should get back. And to do your math, I just did it really quick. I think I'm right around 29% conversion. But as I've said before, if you ignore the bad guys, the good guys are all good. So it's not where we expected to be because of manufacturing performance.
Speaker 4
Okay, fair enough. Last one for me, I'll pass it on. I didn't hear any targets for the free cash flow for the year. I think last quarter you had said 100% conversion was the target. Is that still intact here?
Speaker 2
I'll reiterate that.
Speaker 3
Yes. Just to be clear, yes, what we said, Brian, that is when you look at it over time, we certainly look and when I'm saying over time, I'm sort of looking over a number of years. Our long term goal is certainly to have free cash flow be higher than our adjusted net income. You can clearly we don't that may not necessarily happen on an annual or certainly on a quarterly basis. But yes, over time, our long term goal is to have free cash flow be greater than adjusted net income.
Speaker 4
Our
Speaker 0
next question comes from Michael Wood with Nomura Instinet. You may go ahead.
Speaker 5
Hi, this is Mason Marion on for Mike. So the high end of your sales guidance implied about 5% sales growth in the fourth quarter. We estimate price around 4% in the quarter. Is there any reason why you're taking such a conservative view on volume growth for the quarter? Is it perhaps pre buying activity or something in 3Q?
Speaker 2
Yes. I think what's going on and I've seen some of the commentary about that is that there are two things. One, where is actual sell through demand with distribution? We still haven't seen all of the inventories come back. So after a 16.8% growth quarter and then an 8% growth quarter, it's reasonable to expect there'll be some tapering because there probably is some product in the channel.
But I think what's more important for everybody on the call is, while your estimates are close on price in Q3, you can't assume that going forward in Q4 because certain price increases anniversary from the previous year. So as we have these anniversaries of the brass price increase and separately the Canadian price increase and things like that, the actual effect in Q4 for price increase won't be at 4%.
Speaker 5
Okay. All right. Thank you. That is helpful. And then on the warranty charges in Technologies, was this driven by increased material cost inflation or was there something else there?
And then any color you can give us on your backlog in the segment?
Speaker 2
I think that on the backlog, we continue to be encouraged by the amount of distribution sales we're getting in our meter business. We continue to be encouraged by the number of traditional, what I will call Mueller co salespeople now getting credit for what was the old Mueller systems, but metrology sales. And I think we're continuing to be encouraged by the number of second looks we're getting at medium sized cities for meter. So our backlog is growing. We're not going to disclose percentages anymore.
I think that that just opens the door for maybe of interest, but doesn't really drive a lot of value. But I think it's very interesting to our competitors. So I think we'll seize that. And as for the change in estimate and warranty, I'll hand it over to Marty.
Speaker 3
Yes. From time to time, what we do is we will look at warranty. We've engaged third party. And as we looked at sort of historical experience as to what the rates are as well as what our expectations are going forward, and I think the other key point that you referenced as well is what is that cost to repair or replace the product to remediate. So with the updated study that we just completed, we did take a warranty cost of $14,100,000 in the quarter.
And I'll just sort of remind you, as you put this in context, this is referencing sort of products that we sold through 2017, largely looking at our standard warranty terms for that for the warranty period that goes through 2026 and that averages out to about 1,000,000 point dollars a year.
Speaker 5
Great. Thank you.
Speaker 0
Thank you. The next question comes from Seth Weber with RBC Capital Markets. You may go ahead.
Speaker 6
Hey, thanks. Good morning. Morning. A couple of questions. Scott, in your remarks, talked about growth initiatives and investing for growth and things like that.
I did not hear anything about share buyback. And I noticed this quarter, there was no share repurchase after $10,000,000 or so over the last couple of quarters. Can you just give us an update on where buyback
Speaker 5
kind
Speaker 6
of ranks? Did you pause it this quarter because you're closing in on some deals? Or is there anything you could share there? Thanks.
Speaker 2
What can share, I'm not going to say we're closing in on any deals. Think what happened though is we've been contemplating the debt offering for a while. And by our terms, we go into our blackout when we feel something material is about to happen, we thought that was. And so more on the side of prudence as we explored those items, we basically got through the whole quarter in blackout. So we were not able to exercise share buybacks.
But the share buyback remains just as I talk about a balanced capital allocation approach, balanced around dividend, balanced around share buyback, around capital expenditure and around acquisition, nothing has changed. We're on the same path. I think the dividend at a $0 is right there where we want it. I think that the share buyback authorization that the Board has given us in that range that we have been active in is right there. I think the piece that everybody is waiting for is the acquisition piece.
And we're working the opportunity set hard, but we're going to be responsible and we're going to be value seekers. And nothing's changed. We're exactly on the path. I wish I had something that I could say to you, Seth, that yes, it's imminent, but not there yet. But the reason we didn't get into the buyback was the debt offering.
Speaker 6
Right. Okay. That's helpful. Thanks. And then just on the CapEx number, as it relates to the equipment issues, the downtime, I mean, should we and your CapEx has been creeping up over the last year or so.
I mean, should we just assume that CapEx is now structurally higher versus old Mueller Co? And I don't know, I think it's maybe 6% of revenue or something this year. Is that are we at a new kind of run rate here for CapEx going forward or
Speaker 2
Well, I think we are for some medium term window. I don't think it's at this level. If think about how it's inflated, it's around large casting foundry. It's around many, many years of catch up on the machining front. So I don't want to put an end to it, but it's probably three years or four years where we're going to have elevated CapEx spending as we look at modernizing foundries and machine shops.
But then once you get into a more regular method, I think you should expect it to drop back to more normal times. I think where we are and I've done some of this, so these aren't Marty numbers, this is Scott, I warn everybody. But where we are is that basically post-two thousand and eight through 2014, we were running in actual new equipment somewhere sub-twelve million dollars in what is the legacy business now and somewhere around $20,000,000 with maintenance capital in there, all in. And if you ever see us get kind of down to that 12,000,000 to $15,000,000 range again, then you know we're consuming equipment. We're not actually we're not in a healthy replacement cycle.
So I think probably a healthy replacement cycle post the reinvestment period is going to be somewhere around 30,000,025 million $30,000,000 I think that's what I would use going forward.
Speaker 6
Perfect. Okay. It's very helpful. Thank you, guys. Appreciate it.
Speaker 2
Thank you, Seth.
Speaker 0
Thank you. The next question comes from Zane Karimi with D. A. Davidson. You may go ahead.
Speaker 5
Hey, good morning. Zane on for Brent today.
Speaker 6
I was just hoping to get some more color on where you guys see the momentum in demand for infrastructure products and housing, municipality, etcetera?
Speaker 2
Yes. We're obviously, we're very happy with where demand has been. We was very happy with the 7.8%, not so much 7.8%, but on the heels of the 16.8%, I think was really encouraging. I think the resi market in that mid to high single digits is going to continue to drive really good growth for us. I think land development is actually a healthy story because homebuilders are actually being instead of kind of inexplicable exuberance, they're being a lot more measured in this boom and not that it is a boom, it's growing at a steady pace and lots are getting consumed at a steady pace.
So we remain bullish on the residential market. On the municipal market, we still think we're going to be in that kind of low single digit range, but I don't want anybody to misconstrue as we think about the future is, you know, we need to understand what's going to happen with some of this trade uncertainty and where we're going from a monetary policy point of view. I think that the Fed rate increases haven't quelled any muni bond offerings or taken cities and made them consider because we're still in the midst of a fairly healthy growth cycle. But too rapid a rise in rates, I think, will cool muni spending. I think those are some of the inherent risks in that part of the business.
Where we stand right now, based on the best information we have, we're kind of in that low, maybe low mid single digits for muni going forward. But that is completely dependent on how we feel availability of funds and municipal willingness to spend this.
Speaker 5
Got you. And then on to trade uncertainty, I heard you mentioned that. Can you kind
Speaker 6
of talk about the material cost inflation through the quarter and how you're kind of trying to deal with that and such pressures moving forward?
Speaker 2
Yes. We've said that healthy markets, and we believe this to be healthy markets should absorb material cost increases like true inflation, not inefficiencies, but true inflation through a steady adjustment of yielded price. And that yielded price can take the form of real price increases or removal of freight terms or all sorts of things. I mean, the economics, the value chain remain in place for both the distributor, the municipality and the manufacturer. And basically, the profit pools remain healthy even in an inflationary time.
So we philosophically believe that we have to be a leader in trying to push price as material costs go up. And so we've been tracking since the inflection, let's call it calendar Q3 twenty sixteen is the inflection where raw materials bottomed out and started increasing. We've been tracking price versus inflation since that time. And we're as we've said, we're on about a ninety day lag and we're almost back to par from the inflection. We're still slightly behind through the whole cycle.
But we will continue to try and get price and yield in order to cover that inflation. And then we think about manufacturing performance as something that we're in control of that part of it has to flow through to the shareholder and part of it has to flow back into reinvestment in the business in the form of product development, engineering services and things of that nature. So none of the tenets that we laid out a year ago have changed. We still believe in that. And we still believe that execution and driving a culture of execution around those areas is where we will create shareholder value for Mueller shareholders.
Speaker 6
Great. I appreciate the color, guys. Have a good rest of your call.
Speaker 2
Thanks, Deane.
Speaker 0
Thank you. The next question comes from Ryan Connors with Boenning and Scattergood. You may go ahead.
Speaker 7
Great. Thank you. Want to start off with a quick question on the technology side. The top line growth was a little bit light when you consider the comp was relatively easy on a year over year basis. And I know some peers have talked about project delays in the metering side and things like that.
So you mentioned that the backlog build is pretty solid. But can you just kind of comment on the project cadence and what maybe the yes.
Speaker 2
So we should have been giving you more growth in the quarter. I'm not going to we're going to be we're not going to duck. The issues in the Cleveland, North Carolina facility had us not ship product for basically the last six days of the quarter and those six days of shipments muted our growth. And we had issues. One of the things we are not going to do, I'm sure you'll all be happy to hear is we are not shipping product that hasn't been tested.
And when you lose test stands and you lose the ability to monitor, we're not going to ship them. And that was crystal clear and so we didn't ship. With that said, everything we did make, we got to ship this quarter. So it is a timing issue, but you're right in saying we would have had a little higher growth, Ryan, if we didn't have the manufacturing issues we had in the North Carolina facility at the end of the quarter. It was very disappointing for me.
Speaker 7
Okay. So you don't believe there's any read through there for the broader market as such?
Speaker 2
No, I think we're actually doing really well. Our projects, as you pointed out, they come and they go kind of in Wayne and they are a little bit lumpy and I think the market is used to that. I think where we're actually gaining some ground is with distribution. And if you look at our total orders in year over year between what we've shipped and what's the increase in the backlog, we are up well over whatever market rates are. Then my other one $40.20 less than 40, how's that?
Speaker 7
Okay, got it. My other one, I did want to revisit quickly this issue of the warranty charge just because I understand that the product issues are part of the business. And as Marty said, it's relatively reasonable in terms of magnitude. But we did have the charge last year specific to the radios. And you did say at that time you felt you were pretty well reserved around the radio issue.
So is this something different from radios themselves? Is this physical meters? Or is there anything any more color you can give us about exactly what the functional issue is here in terms of product issue?
Speaker 2
Sure. So I'll remind everybody, a year ago, we took a $9,800,000 charge basically related to what we call a version three radio. And it had a potting issue. Basically in that potting issue, whenever you put it in a pit and it was humid and warm, the encapsulant would break down and have either early failure mode on the radio or an early battery drain, so that the unit would become inoperable prior to its tenth year. And you're correct in saying that I said we were basically well reserved with that 9,800,000.0 for that issue.
Of this 14,000,000 I think there is a piece, maybe $1,000,000 or something. I don't know what the number is, but there is a piece that is fixing whatever the cost overruns in that campaign has been. Everything else, basically the rest of the money that Marty has talked about has nothing to do with any issue that's going to be campaigned. I think if I'm to use the correct accounting terms and everybody forgive me, I'm not an accountant, but they would say it's a change in estimate for what the expense will be based on information around the cost to remediate and the frequency of remediation for the ten year period from 2019 through 2027. Now, I got that right, Marty, is there more you want to add?
Am I going to get my accounting degree?
Speaker 3
Ryan, hopefully that is helpful with your question.
Speaker 7
No, it is. It is. Thanks so much for your time.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from Joe Giordano with Cowen and Company. You may go ahead.
Speaker 8
Hey guys, this is Tristan in for Joe. Thanks for taking the question. Have you increased your R and D spend at technologies given the new products you have introduced in the last few months? And if that's the case, what's the pipeline? What can we expect going forward?
Speaker 2
Tristan, I think I'm not sure. Tell me if I'm answering this correctly. We are not experiencing, aside from the campaign, the 9.8 that we talked about, take that and hold it aside. We're not experiencing any higher frequency rates in the meter business than anybody else.
Speaker 3
Yes. Your question is more around our R and D spend, I think, as we're looking at the investments that we're making in and around technologies?
Speaker 8
Correct.
Speaker 3
Okay. So I think overall in terms of R and D spend, think we've got generally, when we look at it on a consolidated basis, I think we're looking a little bit higher this year than we were last year.
Speaker 8
Fair
Speaker 3
enough. I And think as we've talked and we've talked in and around some of the higher SG and A expense, I'm now not talking just quarter, talking sort of year to date, we are investing more in and around our engineering resources.
Speaker 2
Right. And the other thing I would say is we're spending it in technology, but like you would see, we're talking about the American Water Works Association where we launched the hydrant that has both leak detection and pressure detection. So when you get into Hydro Guard and some of those products, those are products that basically the burden of development is in the technology segment. But if there is sales in the future, there will be some small piece that would end up in the technologies business. But the bulk of that hydrant revenue and all of the pieces would end up in infrastructure.
And that's why you've been asked and I'll reiterate it. We've been asked that the why stay in the technologies business? We believe that we are converging technology into infrastructure products. There will be sensors in valves, there will be radios and sensors in fire hydrants, there will be heavy water detection in the infrastructure, not heavy water, but heavy metals in water, in the infrastructure. So I think that this convergence is going on as we think about our engineering spend and that pipeline, we have to continue to invest.
Speaker 8
Okay. Thanks for the color. That's very useful. And I don't know if you can I don't know if I missed it, but could you just parse out the sales growth at infrastructure in terms of volume versus pricing for the quarter?
Speaker 2
I don't know if I can.
Speaker 3
Yes. I think we just generally said when you go back and you look at infrastructure, I'd say we saw better pricing this quarter, sort of if you look at it sequentially, I think we saw higher pricing, but volume was more a contribution to sales growth this quarter than pricing at infrastructure.
Speaker 8
That makes sense. Thank you.
Speaker 0
Thank you. Our next question comes from Jose Garza with Gabelli Asset Management. You may go ahead.
Speaker 6
Hey, good morning everyone.
Speaker 2
Good morning Jose. How are you?
Speaker 6
Good, thanks. Marty, I wonder if you could maybe just break down kind of the free cash flow in the third quarter and then if any unusual items and kind of anything that we should look out for in the fourth quarter as we think about the full year?
Speaker 3
Yes. I mean, I think, overall, looking at our third quarter free cash flow, I think, certainly, as we look at it, a component of it is going to be the performance that we had during the third quarter. And again, I think these are free cash flow. It's probably easier to look at on a year to date basis than in any given quarter. But I would certainly look at performance as a factor associated with that.
I think the other piece is it does it is the performance year to date is also somewhat reflective of just the timing of certain payments that we had
Speaker 2
for the quarter.
Speaker 3
Certainly, with the higher sales, helps on the receivables front, payables would be up a little bit. And I think inventories and the timing of just some of the other components.
Speaker 6
Okay.
Speaker 3
And then certainly, the other free cash flow definition is after capital expenditures. We'll also point out that if you look at certainly in the third quarter or year to date, our capital expenditures are higher on a year over year basis.
Speaker 6
Okay. I guess in terms of expectations in the fourth quarter, anything unusual we should just kind of think about as we frame out?
Speaker 3
No, I'd say nothing to call out specifically in the fourth quarter.
Speaker 6
Okay. And it looks like there is some progress being made on the IRS liability. Wondering if you have any updates and any comments there and perhaps maybe a range expectations that you guys have?
Speaker 3
Yes. Just let me give a quick little bit of background. Just for those just as a reminder, we were part of Walter Industries, and as a result of that, are jointly and severally liable for any of the federal income taxes that they might owe. Walter has gone through a Chapter 11 bankruptcy that was converted to a Chapter seven bankruptcy, and it remains in bankruptcy court today. We have been working constructively, I'd say, with the parties involved to reach an agreement with respect to any of the alleged tax liabilities.
You've probably seen in our filings that the IRS has filed proofs of claim with respect to amounts owed. I'd say based on the work to date, we believe that when you look at the taxpayer refunds for certain of the years and you apply them against any of the asserted income tax liabilities for the other years, that we think that the net tax liabilities of Walter Energy will be substantially less than those claimed by the IRS and their proof of claim. However, absent until there's further progress, we really are not in a position to predict the amount or the extent to which we will be responsible. And we also don't know if there will we'll be able to reach any resolution with the parties. And as we have said, we would also vigorously assert any and all defenses that we would have if needed.
Speaker 6
So okay. I guess my
Speaker 2
Yes, I think to answer the second part of your question, don't think we're at a point where we can estimate yet because there's still too many unknowns. But I think of note, what people should take from Marty's comments is what's added here is we are working constructively with the parties that involved in this. And I think that it's hard to estimate a time or an amount, and we'll keep you informed as we learn more.
Speaker 6
Okay. Appreciate it, guys. Thank you.
Speaker 0
Thank you. There are no further questions. I will turn it back to the speakers for closing remarks.
Speaker 2
Okay. Thank you, operator. So all in all, I think if I've done my job here this morning, I'm very encouraged by the demand environment, encouraged, continued to see the sales integration and the change to sales comp, the change to how we go to market, partnering with fewer but more important distributors, driving direct relationships with the largest MSAs and their water authorities. I feel like the growth is atypical and we're having some success. On the other side, tempered a little bit with trying to have what was a difficult operational environment with two big plants kind of underperforming, but still underlying productivity at the remaining facilities, so kind of a mixed bag operationally.
And then last but not least, the reception at AWWA of the pressure monitoring fire hydrant that integrated the leak detection from Echo along with what was a fairly good reception, leaks located in Singapore actually during the show, which helped, also helpful on the product development front. And then I think that we're making progress with our One Mueller culture shift and trying to drive to a culture of execution. So if you look at those four strategic priorities, pretty good quarter and happy with the progress we're making. We're going to face challenges from time to time as a management team and as a company. And I think how we react to those will determine our future success.
So all in all, a good quarter and fairly pleased So I want to thank everybody for joining us this morning. And operator, you can take it away.
Speaker 0
Thank you. That concludes today's conference. Thank you all for participating. You may now disconnect.