We grant various forms of stock-based compensation, including market-based restricted stock units (“MRSUs”), restricted stock units, stock options and performance-based restricted stock units (“PRSUs”) under our Amended and Restated 2006 Mueller Water Products, Inc. Stock Incentive Plan (the “2006 Stock Plan”), Phantom Plan instruments under our Mueller Water Products, Inc. 2012 Phantom Plan, and Employee stock purchase plan instruments under our 2006 Employee Stock Purchase Plan. Grants issued during the three months ended December 31, 2023 are as follows:


	Number granted	Weighted average grant date fair value per instrument		Total grant date fair value (in millions)
Quarter ended December 31, 2023
MRSUs	136,983	$	18.11	$	2.5
PRSUs	136,983	13.22		1.8
Restricted stock units	161,943	13.27		2.1
Phantom Plan instruments	230,523	13.22		3.0
Non-qualified stock options	457,356	3.96		1.8
Employee stock purchase plan instruments	31,139	$	3.48	0.1
Total - Quarter ended December 31, 2023				$	11.3

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. Settlements, in our common shares, will range from zero to two times the number of MRSUs granted, depending on our TSR performance relative to that of the peer group.

Compensation expense attributed to MRSUs is based on the fair value of the awards on their respective grant dates, as determined using a Monte Carlo model. For these awards, compensation expense is recognized even if the awards are not earned or vested. The assumptions used to determine the grant date fair value are indicated below for awards granted to date during the current fiscal year.


						November 28, 2023
Variables used in determining grant date fair value:
Dividend yield						2.00%
Risk-free rate						4.50%
Expected term (in years)						2.84

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.

At December 31, 2023, the outstanding Phantom Plan instruments had a fair value of $14.40 per instrument and our liability for Phantom Plan instruments was $2.0 million and is included within Other current and Other noncurrent liabilities.

Stock options generally vest ratably over three years on each anniversary date. Compensation expense attributed to stock options is based on the fair value of the awards on their respective grant dates, using a Black-Scholes model. The assumptions used to determine the grant date fair value are indicated below for awards granted to date during the current fiscal year.


			November 28, 2023
Variables used in determining grant date fair value:
Dividend yield			1.94%
Risk-free rate			4.33%
Expected term (in years)			6.00

A PRSU award consists of a target number of units that may be paid out at the end of a three-year award cycle. Settlements, in our common shares, will range from zero to two times the number of PRSUs granted, depending on our financial performance relative to the targets.

Restricted stock units generally vest ratably over the life of the award, usually three years, on each anniversary date of the original grant. Compensation expense for restricted stock units is recognized between the grant date and the vesting date (or the date on which a participant becomes Retirement-eligible, if sooner) on a straight line basis for each tranche of each award. Fair values of restricted stock units are determined using the closing price of our common stock on the respective grant date.

Employee stock purchase plan instruments are shares of our common stock purchased by employees under the Mueller Water Products Inc. 2006 Employee Stock Purchase Plan (“ESPP”). Generally, all full-time, active employees are eligible to participate in the ESPP, subject to certain restrictions. Employee purchases are funded through payroll deductions, and excess payroll withholdings are returned to the employee. The price for the shares purchased under the ESPP is 85% of the lower of the closing price on the first day or the last day of the offering period.

Additionally, we issued 146,760 shares of common stock to settle restricted stock units vested during the three months ended December 31, 2023. Finally, we issued 3,582 shares of common stock to settle stock options exercised during the three months ended December 31, 2023. Common shares totaling 109,961 were surrendered to us to pay the applicable tax withholding obligations of equity award participants for the three months ended December 31, 2023.

Operating income included stock-based compensation expense of $2.6 million and $2.7 million during the three months ended December 31, 2023 and 2022, respectively. At December 31, 2023, there was approximately $16.8 million of unrecognized compensation expense related to stock-based compensation arrangements, which will be expensed through December 2026.

We excluded 712,164 and 1,274,371 stock-based compensation instruments from the calculations of diluted earnings per share in the three months ended December 31, 2023 and 2022, respectively, since their inclusion would have been antidilutive.