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MWA > SEC Filings for MWA > Form 10-Q on 7-Aug-2013All Recent SEC Filings

Show all filings for MUELLER WATER PRODUCTS, INC.

Form 10-Q for MUELLER WATER PRODUCTS, INC.


7-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto that appear elsewhere in this report. This report contains certain statements that may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements that address activities, events or developments that the Company's management intends, expects, plans, projects, believes or anticipates will or may occur in the future are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding the general municipal spending environment, the condition of our end markets and the performance of each of Mueller Co. and Anvil over future periods. Forward-looking statements are based on certain assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions and expected future developments. Actual results and the timing of events may differ materially from those contemplated by the forward-looking statements due to a number of factors, including regional, national or global political, economic, business, competitive, market and regulatory conditions and the other factors that are described in the section entitled "RISK FACTORS" in Item 1A. of our annual report on Form 10-K for the year ended September 30, 2012 ("Annual Report"). Undue reliance should not be placed on any forward-looking statements. The Company does not have any intention or obligation to update forward-looking statements, except as required by law.
Overview
Organization
On October 3, 2005, Walter Energy acquired all outstanding shares of capital stock representing the Mueller Co. and Anvil businesses and contributed them to its U.S. Pipe business to form the Company. In June 2006, we completed an initial public offering of 28,750,000 shares of Series A common stock and in December 2006, Walter Energy distributed to its shareholders all of its equity interests in the Company, consisting of all of the Company's outstanding shares of Series B common stock. On January 28, 2009, each share of Series B common stock was converted into one share of Series A common stock and the Series A designation was discontinued.
On April 1, 2012, we sold the businesses comprising our former U.S. Pipe segment. U.S. Pipe's results of operations have been reclassified as discontinued operations for all periods presented.
Unless the context indicates otherwise, whenever we refer to a particular year, we mean the fiscal year ended or ending September 30 in that particular calendar year. We manage our businesses and report operations through two business segments, Mueller Co. and Anvil, based largely on the products sold and the customers served.
Business
Most of the net sales of Mueller Co. are for water infrastructure related directly to municipal spending and residential construction activity in the United States.
Spending on water infrastructure is based on the condition of the infrastructure systems and access to funding from existing resources, the issuance of debt, higher tax rates or higher water rates. According to Thomson Reuters, municipal bond new money issuances increased 1.4% during the six months ended June 30, 2013 compared to the prior year period. According to U.S. Census Bureau data at March 31, 2013, state and local tax receipts during the quarter ended March 31, 2013 grew 5.1% over the prior year period. The U.S. Census Bureau may revise published survey data from time to time. The Bureau of Labor Statistics' Consumer Price Index for water and sewerage maintenance rates increased by 5.0% during the twelve months ended June 30, 2013. We believe the general municipal spending environment continues to improve, although budget pressures, especially healthcare costs and underfunded retirement plans, and economic uncertainty persist, and water infrastructure is only one of many categories competing for municipal funding.
We believe residential construction activity measures indicate the housing market is improving. U.S. Census Bureau data for housing starts, on a seasonally adjusted annualized basis, indicated that housing starts in June 2013 represented the tenth consecutive month of greater than 800,000 units. June 2013 housing starts were 836,000 total units and 591,000 single family units. June 2013 housing starts were down from May 2013 activity for both total units and single family units.
As another potential future indicator, U.S. Census Bureau data showed housing permits in June 2013 above 800,000 units for the twelfth consecutive month. Total and single family permits grew 16% and 25%, respectively, in June 2013 on a year-over-year basis. June 2013 housing permits were also down from May 2013 activity.We believe an improving housing market also bolsters municipalities' fiscal condition, since local governments benefit from increased property taxes as well as connection and other ancillary fees associated with residential construction.


Although the recent increase in mortgage rates appeared to have reduced some short-term housing demand, longer term we believe the key factors driving demand for new housing will be improvements in job growth, household income and household formation.
According to a June 2013 survey by Ivy Zelman and Associates, demand for land and lots hit a record high for their survey, with strong activity especially in the Central and the West regions, although the pace of improvement has slowed slightly. In particular, the survey noted that the supply of raw land has continued to move lower as demand increases.
Overall, these data points support our more positive outlook in our water infrastructure end markets and give us more confidence that our markets have stabilized and we could see continued growth, although we expect municipal markets to be relatively flat in the fourth quarter of 2013.
We expect Mueller Co. net sales to be slightly lower than the third quarter of 2013, but higher than the fourth quarter of 2012, with a growth rate in the mid-single digits, primarily due to shipment volume growth in valves, hydrants and brass products. We expect only modest year-over-year volume growth in sales of our metering product line in the fourth quarter of 2013 compared to the fourth quarter of 2012 primarily because we have passed the one-year anniversary of a significant meter supply agreement.
We expect Mueller Co.'s fourth quarter operating income and operating margin to improve compared to the prior year period across all of its key product categories.
We had previously expected our Mueller Co.'s metering and leak detection products and services to be profitable for 2013, based on the backlog and the expected timing of contracts that we anticipated being awarded. Some of these contracts have yet to be awarded, and though we may not be awarded all of these contracts; most shipments related to these contracts would be delayed into 2014. As a result, we no longer expect that metering and leak detection will be profitable for 2013.
Most of Anvil's net sales are driven by commercial construction. We expect a slight improvement in its end markets in the fourth quarter of 2013. Raw material costs have continued to decline. We expect that average costs for all of 2013 will be slightly lower than to costs for 2012, as we expect lower raw material costs will be only partially offset by higher costs for purchased components.


Results of Operations
Three months ended June 30, 2013 compared to three months ended June 30, 2012
                                                                         2013
                                                Mueller Co.       Anvil         Corporate       Total
                                                                     (in millions)
Net sales                                     $       199.3     $    100.1     $        -     $   299.4
Gross profit                                  $        59.4     $     30.6     $        -     $    90.0
Operating expenses:
Selling, general and administrative                    29.0           18.3            9.6          56.9
Restructuring                                           0.2              -              -           0.2
Total operating expenses                               29.2           18.3            9.6          57.1
Operating income (loss)                       $        30.2     $     12.3     $     (9.6 )        32.9
Interest expense, net                                                                              12.7
Income before income taxes                                                                         20.2
Income tax expense                                                                                  4.2
Income from continuing operations                                                                  16.0
Loss from discontinued operations, net of tax                                                      (1.9 )
Net income                                                                                    $    14.1
                                                                         2012
                                                Mueller Co.        Anvil        Corporate        Total
                                                                     (in millions)
Net sales                                     $       182.6     $     93.3     $        -     $   275.9
Gross profit                                  $        51.6     $     28.0     $        -     $    79.6
Operating expenses:
Selling, general and administrative                    27.0           18.1            8.1          53.2
Restructuring                                           0.7              -              -           0.7
Total operating expenses                               27.7           18.1            8.1          53.9
Operating income (loss)                       $        23.9     $      9.9     $     (8.1 )        25.7
Interest expense, net                                                                              14.9
Loss on early extinguishment of debt                                                                1.5
Income before income taxes                                                                          9.3
Income tax expense                                                                                  3.4
Loss from continuing operations                                                                     5.9
Loss from discontinued operations, net of tax                                                       3.9
Net income                                                                                    $     9.8

Consolidated Analysis
Net sales for the quarter ended June 30, 2013 increased to $299.4 million from $275.9 million in the prior year period. Net sales increased primarily due to $19.0 million of higher shipment volumes.
Gross profit for the quarter ended June 30, 2013 increased to $90.0 million from $79.6 million in the prior year period. Gross margin benefited primarily from improved sales pricing.
Selling, general and administrative expenses ("SG&A") in the quarter ended June 30, 2013 increased to $56.9 million from $53.2 million in the prior year period. SG&A increased primarily due to higher expenses associated with higher shipment volumes and higher stock-based compensation expense. SG&A decreased as a percentage of net sales to 19.0% in the quarter ended June 30, 2013 compared to 19.3% in the prior year period.
Interest expense, net decreased $2.2 million in the quarter ended June 30, 2013 compared to the prior year period due to $1.3 million of non-cash costs for terminated interest rate swap contracts in the quarter ended June 30, 2012 and $0.9 million


due primarily to lower levels of debt outstanding in the quarter ended June 30, 2013. The components of interest expense, net are detailed below.

                                          Three months ended
                                               June 30,
                                            2013           2012
                                            (in millions)
7.375% Senior Subordinated Notes     $      7.7           $  7.7
8.75% Senior Unsecured Notes                4.0              4.8
Deferred financing fees amortization        0.5              0.6
ABL Agreement                               0.3              0.1
Interest rate swap contracts                  -              1.3
Other interest expense                      0.2              0.4
                                     $     12.7           $ 14.9

During the three months ended June 30, 2012, we redeemed $22.5 million principal amount of our 8.75% Senior Unsecured Notes for $23.2 million, plus accrued and unpaid interest. The resulting loss on early extinguishment of debt of $1.5 million included the premium paid and the deferred financing costs and original issue discount that were written off.
The components of income tax expense in continuing operations are provided below.

                                                     Three months ended
                                                          June 30,
                                                     2013           2012
                                                        (in millions)
Expense from pre-tax operating income             $    8.1       $    3.8
Deferred tax asset valuation allowance adjustment     (4.0 )            -
Other discrete items                                   0.1           (0.4 )
                                                  $    4.2       $    3.4

We did not allocate any income tax expense to discontinued operations in the three months ended June 30, 2013. We allocated $4.3 million of income tax benefit to discontinued operations in the three months ended June 30, 2012, which consisted primarily of valuation-allowance related benefits of $4.2 million.
Segment Analysis
Mueller Co.
Net sales in the quarter ended June 30, 2013 increased to $199.3 million from $182.6 million in the prior year period. Net sales increased primarily due to $14.6 million of higher shipment volumes. We believe that most of this net sales growth came from new residential construction and that municipal spending increased only slightly in the quarter ended June 30, 2013 compared to the prior year period.
Gross profit for the quarter ended June 30, 2013 increased to $59.4 million from $51.6 million in the prior year period primarily due to higher shipment volumes. Gross margin increased to 29.8% for the quarter ended June 30, 2013 compared to 28.3% in the prior year period, primarily due to higher sales prices. SG&A in the quarter ended June 30, 2013 increased to $29.0 million from $27.0 million in the prior year period primarily due to expenses associated with higher shipment volumes. SG&A were 14.6% and 14.8% of net sales for the quarters ended June 30, 2013 and 2012, respectively. Anvil
Net sales in the quarter ended June 30, 2013 increased to $100.1 million from $93.3 million in the prior year period. The increase in net sales was primarily due to $4.4 million of higher shipment volumes.
Gross profit in the quarter ended June 30, 2013 increased to $30.6 million from $28.0 million in the prior year period. The increase was primarily due to higher sales pricing. Gross margin increased to 30.6% in the quarter ended June 30, 2013 compared to 30.0% in the prior year period.


SG&A increased to $18.3 million in the quarter ended June 30, 2013 compared to $18.1 million in the prior year period. SG&A were 18.3% and 19.4% of net sales for the quarters ended June 30, 2013 and 2012, respectively. Corporate
SG&A increased to $9.6 million in the quarter ended June 30, 2013 from $8.1 million in the prior year period primarily due to an increase in stock-based compensation expense.
Nine months ended June 30, 2013 compared to nine months ended June 30, 2012

                                                                     2013
                                           Mueller Co.       Anvil         Corporate        Total
                                                                (in millions)
Net sales                                $       538.5     $    289.1     $         -     $   827.6
Gross profit                             $       142.8     $     81.6     $         -     $   224.4
Operating expenses:
Selling, general and administrative               80.1           54.2            24.7         159.0
Restructuring                                      1.2            0.1               -           1.3
Total operating expenses                          81.3           54.3            24.7         160.3
Operating income (loss)                  $        61.5     $     27.3     $     (24.7 )        64.1
Interest expense, net                                                                          39.0
Loss on early extinguishment of debt                                                            1.4
Income before income taxes                                                                     23.7
Income tax expense                                                                              5.1
Income from continuing operations                                                              18.6
Income from discontinued operations, net
of tax                                                                                          8.7
Net income                                                                                $    27.3
                                                                     2012
                                           Mueller Co.        Anvil         Corporate        Total
                                                                (in millions)
Net sales                                $       465.2     $    277.6     $         -     $   742.8
Gross profit                             $       113.7     $     80.8     $         -     $   194.5
Operating expenses:
Selling, general and administrative               75.0           53.1            22.2         150.3
Restructuring                                      1.9            0.2            (0.1 )         2.0
Total operating expenses                          76.9           53.3            22.1         152.3
Operating income (loss)                  $        36.8     $     27.5     $     (22.1 )        42.2
Interest expense, net                                                                          46.1
Loss on early extinguishment of debt                                                            1.5
Loss before income taxes                                                                       (5.4 )
Income tax expense                                                                              4.1
Loss from continuing operations                                                                (9.5 )
Loss from discontinued operations, net
of tax                                                                                       (102.4 )
Net loss                                                                                  $  (111.9 )

Consolidated Analysis
Net sales for the nine months ended June 30, 2013 increased to $827.6 million from $742.8 million in the prior year period. Net sales increased primarily due to $66.8 million of higher shipment volumes at Mueller Co. Gross profit for the nine months ended June 30, 2013 increased to $224.4 million from $194.5 million in the prior year period. Gross margin increased 90 basis points to 27.1% in the nine months ended June 30, 2013 from 26.2% in the prior year period. Gross profit and gross margin benefited primarily from increased shipment volumes and higher sales pricing.


SG&A in the nine months ended June 30, 2013 increased to $159.0 million from $150.3 million in the prior year period. SG&A increased primarily due to higher expenses associated with higher shipment volumes and higher stock-based compensation expense. SG&A as a percentage of net sales decreased to 19.2% in the nine months ended June 30, 2013 compared to 20.2% in the prior year period. Interest expense, net decreased $7.1 million in the nine months ended June 30, 2013 compared to the prior year period due to $4.3 million of non-cash costs for terminated interest rate swap contracts in the nine months ended June 30, 2012 and $2.8 million primarily due to lower levels of debt outstanding in the nine months ended June 30, 2013. The components of interest expense, net are detailed below.

                                        Nine months ended
                                            June 30,
                                         2013         2012
                                          (in millions)
7.375% Senior Subordinated Notes     $    23.2      $ 23.2
8.75% Senior Unsecured Notes              12.8        14.8
Deferred financing fees amortization       1.6         1.8
ABL Agreement                              1.2         1.0
Interest rate swap contracts                 -         4.3
Other interest expense                     0.4         1.2
                                          39.2        46.3
Interest income                           (0.2 )      (0.2 )
                                     $    39.0      $ 46.1

During each of the nine months ended June 30, 2013 and 2012, we redeemed $22.5 million principal amount of our 8.75% Senior Unsecured Notes for $23.2 million, plus accrued and unpaid interest. The resulting losses on early extinguishment of debt of $1.4 million and $1.5 million, respectively, included the premiums paid and the deferred financing costs and original issue discounts that were written off.
The components of income tax expense (benefit) in continuing operations are provided below.

                                                          Nine months ended
                                                              June 30,
                                                          2013          2012
                                                            (in millions)
Expense (benefit) from pre-tax operating income (loss) $    9.6       $ (2.4 )
Deferred tax asset valuation allowance adjustment          (4.5 )        5.9
Other discrete items                                          -          0.6
                                                       $    5.1       $  4.1

We did not allocate any income tax expense to discontinued operations in the nine months ended June 30, 2013. We allocated $26.4 million of income tax benefit to discontinued operations in the nine months ended June 30, 2012, which consisted of a benefit from operations of $50.7 million partially offset by valuation allowance-related expenses of $24.3 million. Segment Analysis
Mueller Co.
Net sales in the nine months ended June 30, 2013 increased to $538.5 million from $465.2 million in the prior year period. Net sales increased primarily due to $66.8 million of higher shipment volumes.
Gross profit for the nine months ended June 30, 2013 increased to $142.8 million from $113.7 million in the prior year period primarily due to higher shipment volumes. Gross margin increased to 26.5% for the nine months ended June 30, 2013 compared to 24.4% in the prior year period primarily due to higher shipment volumes.


SG&A in the nine months ended June 30, 2013 increased to $80.1 million compared to $75.0 million in the prior year period primarily due to expenses associated with higher shipment volumes. SG&A were 14.9% and 16.1% of net sales for the nine months ended June 30, 2013 and 2012, respectively. Anvil
Net sales in the nine months ended June 30, 2013 increased to $289.1 million from $277.6 million in the prior year period. Net sales increased primarily due to $5.8 million of higher shipment volumes.
Gross profit in the nine months ended June 30, 2013 increased to $81.6 million from $80.8 million in the prior year period. The increase in net sales was substantially offset by higher costs of goods sold. Gross margin declined to 28.2% in the nine months ended June 30, 2013 compared to 29.1% in the prior year period.
SG&A increased to $54.2 million in the nine months ended June 30, 2013 from $53.1 million in the prior year period. SG&A were 18.7% and 19.1% of net sales for the nine months ended June 30, 2013 and 2012, respectively. Corporate
SG&A increased to $24.7 million in the nine months ended June 30, 2013 from $22.2 million in the prior year period primarily due to higher stock-based compensation expense.
Liquidity and Capital Resources
We had cash and cash equivalents of $69.2 million at June 30, 2013. We also had $157.8 million of borrowing capacity under our ABL Agreement using June 30, 2013 data.
On April 1, 2012, we sold our former U.S. Pipe segment and received proceeds of $94.0 million in cash, subject to adjustments, and the agreement by the purchaser to reimburse us for expenditures to settle certain previously-existing liabilities estimated at $10.1 million at March 31, 2012. During the quarter ended December 31, 2012, we received an additional $4.5 million in cash for certain purchase price adjustments and reduced our loss on sale of discontinued operations accordingly.
Cash flows from operating activities from continuing operations are categorized below.

                                                      Nine months ended
                                                          June 30,
                                                      2013         2012
                                                        (in millions)
Collections from customers                         $   825.3     $ 733.3
Disbursements other than interest and income taxes    (740.9 )    (672.2 )
Interest payments, net                                 (40.9 )     (43.8 )
Income tax refunds (payments), net                      (0.7 )       7.2
                                                   $    42.8     $  24.5

Collections of receivables were higher during the nine months ended June 30, 2013 compared to the prior year period primarily related to the increased net sales compared to a year ago.
Increased disbursements other than interest and income taxes during the nine months ended June 30, 2013 reflect higher purchasing activity associated with higher net sales and general timing differences of disbursements related to the purchase of material, labor and overhead. Also, we contributed $12.7 million to our pension plans in the nine months ended June 30, 2012 and made no contributions during the nine months ended June 30, 2013.
Interest payments, net declined during the nine months ended June 30, 2013 compared to the prior year period primarily due to lower levels of debt outstanding in the nine months ended June 30, 2013.
Income tax refunds (payments), net received during the nine months ended June 30, 2012 represent the collection of amounts due from the carry back of fiscal 2010 taxable losses that were released upon completion of the IRS audit of tax years 2007 through 2010.
Capital expenditures were $23.0 million during the nine months ended June 30, 2013 compared to $19.5 million in the prior year period. We estimate 2013 full year capital expenditures will be between $32 million and $34 million.

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