Good morning, and thank you for standing by. I would 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.
Good morning, everyone. Welcome to Mueller Water Products' 2018 third quarter conference call. We issued our press release reporting results of operations for the quarter ended June 30, 2018 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 2. 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 3 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 2 and 3 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 30 days at 1-888-566-0438. The archived webcast and corresponding slides will be available for at least 90 days in the investor relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. I will now turn the call over to Scott.
Thanks, Whit. Thank you for joining us today to discuss our 2018 third quarter results. I will give you a quick overview of the quarter, and Marty will follow with additional commentary on our financial results. I will then provide some further color on key areas later in the call. Finally, we will 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%.
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&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. We expect to have some additional expense in the fourth quarter. At Technologies, we recorded a $14.1 million 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 charge is 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 2018 and into next year, I am 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.
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 2018 third quarter increased $18 million or 7.8% to $250.2 million, driven by higher volumes at both Infrastructure and Technologies, as well as higher pricing at Infrastructure. Gross profit was $74.5 million in the quarter with a gross profit margin of 29.8%. Gross profit, excluding the $14.1 million warranty charge, was $88.6 million 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 $41.3 million in the quarter and $38.4 million in the third quarter last year. The increase was primarily due to the timing of personnel-related expenses, including share-based compensation.
SG&A as a % of net sales was 16.5% in both the third quarter and the prior year quarter. On a trailing 12-month basis, SG&A as a % of net sales was 18.7%. Operating income was $30.6 million in the third quarter. Adjusted operating income increased 5.1% to $47.3 million in the 2018 third quarter, compared with $45 million in the prior year. Our adjusted results this quarter exclude the $14.1 million warranty charge and $2.6 million 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&A expenses. Adjusted EBITDA for the 2018 third quarter increased 5.7% to $57.9 million, compared with $54.8 million in 2017. For the trailing 12 months, adjusted EBITDA was $176 million, or 19.8% of net sales.
For the 2018 third quarter, we reported a net income tax expense of $6 million, 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. I'll turn to our segment performance, starting with Infrastructure. Infrastructure net sales grew 7.9% to $224.1 million in the third quarter due to higher shipment volumes and pricing.
Adjusted operating income for the third quarter increased $2.8 million, or 5.2%, to $57 million, as compared with $54.2 million, 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&A expenses. Adjusted EBITDA for the 2018 third quarter increased $3.2 million, or 5.1%, to $66.2 million versus $63 million in the 2017 third quarter. Moving on to Technologies. Technologies net sales increased 6.1% to $26.1 million 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 $14.1 million in the quarter. To put this in context, this charge represents approximately $1.5 million per year of costs we expect to incur for the warranty periods between 2019 and 2027 relating to products sold between 2009 and 2017. When you consider the cumulative sales for these products during the historical period, this charge reflects a very small % of those sales. Adjusted operating loss, which excludes this charge, was $2 million for the third quarter as compared with $1.6 million 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. We'll review our liquidity. Free cash flow, which is cash flow from operating activities of continuing operations less capital expenditures, increased $21.8 million to $56 million for the 2018 third quarter, compared to $34.2 million for the prior year quarter. Through the first nine months of the year, we have generated $43.2 million of free cash flow, compared with $3.8 million 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 $12.5 million 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 30, 2018, we had total debt of $445 million, a decrease of $34 million since the end of the second quarter. During the third quarter, we issued $450 million of 5.5% senior notes due in 2026, which extended our debt maturities and fixed our interest rate. We retired $484 million of term loan debt with proceeds from the offering and cash on hand. This retirement resulted in a one-time non-cash loss on the early extinguishment of debt of $6.2 million from the write-off of the related deferred debt issuance costs. In addition, we terminated our interest rate swap contracts and realized a one-time cash gain of $2.4 million. 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 million.
Scott will now talk more about our results and updated outlook for full year 2018.
Thanks, Marty. 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 detects leaks. In July, at Singapore International Water Week, we showcased the deployment of our EchoShore-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 million of free cash flow after investing $27 million in capital. Over the same period, we have repaid $36 million of debt and returned $42 million 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%-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 9% and 11% 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. Marty will provide some final comments on our 2018 outlook.
Thanks, Scott. Turning now to some of the other expectations for our 2018 performance. Corporate SG&A expenses are expected to be between $33 million and $35 million. We anticipate that depreciation and amortization will be approximately $44 million, and net interest expense will be around $21 million. Additionally, we refined our range for capital expenditures to be between $52 million and $58 million. We anticipate that our adjusted effective income tax rate for the full year will be between 26% and 28%, excluding any one-time impacts from the new tax legislation. With that, operator, please open this call for questions.
Thank you. At this time, we will begin the question and answer session. If you would like to ask a question, please press star followed by one. Please ensure your phone is unmuted and record your name clearly when prompted. Again, that is star followed by one to ask a question. One moment, please, while we wait for questions to come in. Our first question comes from Brian Lee with Goldman Sachs. You may go ahead.
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&A timing, can you elaborate a bit as to what those issues were exactly and then the outlook for those items normalizing?
Sure. I'll do the downtime and what happened with performance in the quarter, and then Marty will handle the SG&A one. 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. Those two things combined to take us-- We'd been running right around $4.5 million-$5 million of favorable performance. I think year to date, we're at $1.8 million.
We basically had about a $3.5 million-$4 million swing in the quarter associated with losing a holding furnace. 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 a 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 mold.
When we lost the furnace in Chattanooga, we had to go from melting furnaces directly to flask, and that slowed us down. It impacted throughput, it impacted cycle times. It was just a freak accident where we lost some refractory inside in the furnace. Long story short, that probably hurt performance to the tune of $3 million-$4 million. The SG&A timing, Marty?
Yes. Brian, to address that, it was largely the timing of certain SG&A 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.
No, that's helpful color. I guess, if I take your comments at face value, Scott, the $3 million-$4 million impact, if I flow that back, it would seem like your contribution margin in the quarter would've been sort of in that 25%-30% range that you had talked about last quarter. I guess first question, is that right? Secondly, I'm just trying to foot your comments around pricing covering inflation, cost inflation, also later in the call, you sort of suggested that the cost inflation had negatively impacted your contribution margin. Is that relative to what you were thinking coming into the quarter or coming into the year?
I guess, when you're saying that price covered inflation and you have some of these sort of temporary issues, I'm trying to ferret out what was the bigger impact on contribution margins here?
Well, price covered inflation in the quarter. Inflation, just to give you some facts and figures, full year, where we stand nine months in, scrap metal's right around 18% inflation, and brass is right at 18% or 18.5%. Relative to conversion margin that I gave you, that would say that price would have to cover inflation by about 25% in order to make the margin on the increased price. We are not at that level. 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. 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.
Yeah, I guess, I can take this offline. 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 2019 versus some of these SG&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 2019, that those will be behind you?
Yeah, 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, at the same time, we try to have a culture around countermeasures and around finding ways to reduce costs in other areas. 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 made those products when we weren't as efficient. It'll be a little bit, no, I expect performance 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.
To do your math, I just did it really quick, I think I'm right around 29% conversion. As I've said before, if you ignore the bad guys, the good guys are all good. It's not where we expect it to be because of manufacturing performance.
Okay, fair enough. Last one from 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?
I reiterate that. Go ahead, Marty.
Just to be clear, yes. What we said, Brian, that 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. That may not necessarily happen on an annual or certainly on a quarterly basis. Yes, over time, our long-term goal is to have free cash flow be greater than adjusted net income.
Okay, fair enough. Thank you.
Thank you, Brian.
Thank you. Our next question comes from Michael Wood with Nomura Instinet. You may go ahead.
This is Mason Marion on for Mike. 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?
Yeah, 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. 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.
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. 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%.
Okay. All right. Thank you. That is helpful. Then, on the warranty charges and Technologies, was this driven by increased material cost inflation, or was there something else there? Then any color you can give us on your backlog in the segment?
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. I think we're continuing to be encouraged by the number of second looks we're getting at medium-sized cities for meters. Our backlog is growing. We're not going to disclose % anymore. I think that just opens the door for maybe of interest, but doesn't really drive a lot of value. I think it's very interesting to our competitors. I think we'll cease that. As for the change in estimate and warranty, I'll hand it over to Marty.
Yes. From time to time, what we do is we will look at warranty. We've engaged third party, as we looked at sort of historical experience as to what the rates are as well as what our expectations are going forward, I think the other key point that you referenced as well is what is that cost to repair or replace the product or remediate?
With the updated study that we just completed, we did take a warranty cost of $14.1 million in the quarter. 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 the warranty period that goes through 2026, and that averages out to about a million and a half dollars a year.
Great. Thank you.
Thank you. The next question comes from Seth Weber with RBC Capital Markets. You may go ahead.
Hey, thanks. Good morning.
Good morning, Seth.
Morning. A couple questions. Scott, in your remarks, you 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 million or so over the last couple quarters. Can you just give us an update on where buyback kind 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.
What I can share, I'm not going to say we're closing in on any deals. I think what happened, though, is we had 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. More on the side of prudence as we explored those items, we basically got through the whole quarter in blackout.
We were not able to exercise share buybacks. 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 nickel a quarter 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's waiting for is the acquisition piece. We're working the opportunity set hard, but we're going to be responsible. We're going to be value seekers. 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. The reason we didn't get into the buyback was the debt offering.
Right. Okay. That's helpful. Thanks. Just on the CapEx number as it relates to the equipment issues, the downtime, your CapEx has been creeping up over the last year or so. 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. Are we at a new kind of run rate here for CapEx going forward or?
Well, I think we are for some medium-term window. I don't think it's at this level. If you think about how it's inflated, it's around large casting foundry, it's around many years of catch-up on the machining front. 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. 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 math, I've warned everybody.
Where we are is that basically post 2008 through 2014, we were running in actual new equipment, somewhere sub $12 million in what is the legacy business now, somewhere around $20 million with maintenance capital in there, all in. If you ever see us get kind of down to that $12 million-$15 million range again, then you know we're consuming equipment. We're not in a healthy replacement cycle. I think probably a healthy replacement cycle post the reinvestment period is going to be somewhere around $25 million-$30 million. I think that's what I would use going forward.
Perfect. Okay. It's very helpful. Thank you, guys. Appreciate it.
Thank you, Seth.
Thank you. The next question comes from Zane Karimi with D.A. Davidson. You may go ahead.
Hey, good morning. Zane on for Brent today. I was just hoping to get some more color on where you guys see the momentum and demand for Infrastructure products in housing, municipality, et cetera.
Obviously, we're very happy with where demand has been. 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 home builders are actually being, instead of inexplicable exuberance, they're being a lot more measured in this boom. Not that it is a boom, it's growing at a steady pace, and lots are getting consumed at a steady pace. 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. I don't want anybody to misconstrue as we think about the future is, 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.
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.
That is completely dependent on how we feel availability of funds and municipal willingness to spend is.
Got you. Thank you. Then on to trade uncertainty, I heard you mention that. Can you kind 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?
Yeah. 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. That yielded price can take the form of real price increases or removal of freight terms or all sorts of things.
The economics and the value chain remain in place for both the distributor, the municipality, and the manufacturer. Basically, the profit pools remain healthy even in an inflationary time. We philosophically believe that we have to be a leader in trying to push price as material costs go up. We've been tracking since the inflection, let's call it calendar Q3 of 2016 is the inflection where raw materials bottomed out and started increasing. We've been tracking price versus inflation since that time.
As we've said, we're on about a 90-day lag, and we're almost back to par from the inflection. We're still slightly behind through the whole cycle. We will continue to try and get price and yield in order to cover that inflation. 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.
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.
That's great. I appreciate the color, guys. Have a good rest of your call.
Thanks, Zane.
Thank you. The next question comes from Ryan Connors with Boenning & Scattergood. You may go ahead.
Great. Thank you. I 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. I know some peers have talked about project delays in the metering side and things like that. You mentioned the backlog build is pretty solid, but can you just comment on the project cadence and what maybe they're
Yes.
Yeah.
We should have been giving you more growth in the quarter. 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. 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. When you lose test stands and you lose the ability to monitor, we're not going to ship them. That was crystal clear, and so we didn't ship. With that said, everything we did make, we got to ship this quarter.
It is a timing issue, but you're right in saying we would've 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.
Okay. You don't believe there's any read-through there for the broader market as such?
No, I think we're actually doing really well. Our projects, as you pointed out, they come and they go kind of in wane, 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. 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.
Okay.
More than 20, less than 40. How's that?
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. We did have the charge last year specific to the radios. You did say at that time you felt you were pretty well reserved around the radio issue. Is this something different from the radios themselves? Is this physical meters, or is there any more color you can give us about exactly what the functional issue is here in terms of product issue?
Sure. I'll remind everybody, a year ago, we took a $9.8 million charge basically related to what we call a version 3 radio. 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 an early failure mode on the radio or an early battery drain so that the unit would become inoperable prior to its 10th year. You're correct in saying that I said we were basically well reserved with that $9.8 for that issue. Of this $14, I think there is a piece, maybe $1 million 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 10-year period from 2019 through 2027. Have I got that right, Marty? Is there more you want to add? Am I going to get my accounting degree?
Ryan, hopefully that is helpful with your question.
No, it is. Thanks so much for your time.
Thank you.
Thank you. Our next question comes from Joseph Giordano with Cowen and Company. You may go ahead.
Hey, guys. This is Tristan in for Joseph. Thanks for taking the question. Have you increased your R&D spend at Technologies given the new products you have introduced in the last few months? If that's the case, what's the pipeline? What can we expect going forward?
Tristan, I think, I'm not sure. Tell me if I'm answering this correct. Aside from the campaign, the 9.8 that we talked about, take that and hold it to the side. We're not experiencing any higher frequency rates in the meter business than anybody else.
Yeah. Your question is more around our R&D spend, I think, as we're looking at the investments that we're making in and around Technologies.
Correct.
Okay. I think overall in terms of R&D spend, 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
Okay, fair enough.
I think as we've talked, we've talked in and around some of the higher SG&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.
Right. The other thing I would say is we're spending it in technology, like you would see, we were talking about the American Water Works Association, where we launched the hydrant that has both leak detection and pressure detection. When you get into Hydro-Guard and some of those products, those are products that basically the burden of development is in the Technologies segment. If there is sales in the future, there will be some small piece that would end up in the Technologies business. The bulk of that hydrant revenue and all of the pieces would end up in Infrastructure. That's why, you've been asked, I'll reiterate it, we've been asked 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. I think that this convergence is going on as we think about our engineering spend and that pipeline, we have to continue to invest.
Yeah, thanks for the color. That's very useful. Then I don't know if I missed it, could you just parse out the sales growth at Infrastructure in terms of volume versus pricing for the quarter?
I don't know if I can.
Yeah. 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. Volume was more contribution to sales growth this quarter than pricing at Infrastructure.
That makes sense. Thank you.
Thank you. As a reminder to participants, if you would like to ask a question, please press star followed by one. Our next question comes from Jose Garza with GAMCO Asset Management. You may go ahead.
Hey, good morning, everyone.
Good morning, Jose. How are you?
Good, thanks. Just, Marty, I wonder if you could maybe just break down kind of the free cash flow, third quarter, and then any unusual items and kind of anything that we should look out for in the fourth quarter as we think about the full year.
Yeah. 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. Again, I think free cash flow is probably easier to look at on a year-to-date basis than in any given quarter. I would certainly look at performance as a factor associated with that. I think the other piece is the performance year-to-date is also somewhat reflective of just the timing of certain payments that we had for the quarter.
Okay.
Certainly with the higher sales, helps on the receivables front. Payables would be up a little bit, then I think, inventory, then the timing of just some of the other components.
Okay.
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.
Okay. I guess in terms of expectations in the fourth quarter, anything unusual we should just kind of think about?
No, I'd say nothing to call out specifically in the fourth quarter.
Okay. 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 of expectations that you guys have?
Yeah. Just let me give a quick little bit of background, 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 7 bankruptcy, and it remains in the 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 proofs of claim. However, 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 we'll be able to reach any resolution with the parties. As we have said, we would also vigorously assert any and all defenses that we would have if needed.
Okay. Okay. I guess my question was.
To answer the second part of your question, I don't think we're at a point where we can estimate yet, because there's still too many unknowns. 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 are involved in this. I think that it's hard to estimate a time or an amount, and we'll keep you informed as we learn more.
Okay. Appreciate it, guys. Thank you.
Thank you. There are no further questions. I will turn it back to the speakers for closing remarks.
Okay. Thank you, operator. All in all, I think if I've done my job here this morning, I'm very encouraged by the demand environment, encouraged, continue 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 underperforming, but still underlying productivity at the remaining facilities. Kind of a mixed bag operationally.
Last but not least, the reception at AWWA of the pressure monitoring fire hydrant that integrated the leak detection from Echologics, 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. I think that we're making progress with our One Mueller culture shift and trying to drive to a culture of execution. 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. I think how we react to those will determine our future success. All in all, a good quarter, and fairly pleased with where we ended up. I want to thank everybody for joining us this morning.
Operator, you can take it away.
Thank you. That concludes today's conference. Thank you all for participating. You may now disconnect.