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MWA > SEC Filings for MWA > Form 10-Q on 7-Feb-2014All Recent SEC Filings

Show all filings for MUELLER WATER PRODUCTS, INC.

Form 10-Q for MUELLER WATER PRODUCTS, INC.


7-Feb-2014

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, 2013 ("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.
Unless the context indicates otherwise, whenever we refer to a particular year, we mean our fiscal year ended or ending September 30 in that particular calendar year. 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.
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 fiscal 2013. Business
We expect Mueller Co.'s 2014 net sales growth rate will be comparable to the 2013 growth rate, based on our current outlook for growth in residential construction and in municipal spending. We expect Mueller Co.'s operating income to improve for the second quarter of 2014 compared to the second quarter of the prior year, although at a slower growth rate than Mueller Co. experienced in the first quarter of 2014 compared to the first quarter of the prior year. In the second quarter, Mueller Co. is changing its approach to the production of certain sizes of iron gate valves. This change is expected to result in a write-down of the related production equipment. We expect Mueller Co. will record an associated $1.5 million non-cash charge during the second quarter and that the project will deliver annual cost savings of $3.0 million to $3.5 million.
At Anvil, while we expect the energy and non-residential construction markets to improve during 2014, we will most likely benefit from these improvements in the second half of 2014. Consequently, we believe Anvil's second quarter net sales and operating income will be essentially flat year-over-year.
On a consolidated basis, we expect that results for the remainder of 2014 will improve year-over-year primarily due to expected growth in our key end markets and the benefits of expected stronger operating leverage.


Results of Operations
Three months ended December 31, 2013 Compared to Three months ended December 31,
2012
                                                  Three months ended December 31, 2013
                                      Mueller Co.        Anvil           Corporate         Total
                                                              (in millions)
Net sales                           $       165.0     $       92.4     $          -     $     257.4
Gross profit                        $        41.7     $       25.4     $          -     $      67.1
Operating expenses:
Selling, general and administrative          25.7             18.1              9.2            53.0
Restructuring                                 0.1                -                -             0.1
                                             25.8             18.1              9.2            53.1
Operating income (loss)             $        15.9     $        7.3     $       (9.2 )          14.0
Interest expense, net                                                                          12.6
Income before income taxes                                                                      1.4
Income tax expense                                                                              0.3
Net income                                                                              $       1.1

                                                  Three months ended December 31, 2012
                                      Mueller Co.         Anvil          Corporate          Total
                                                              (in millions)
Net sales                           $       151.1     $       94.0     $          -     $     245.1
Gross profit                        $        32.9     $       24.2     $          -     $      57.1
Operating expenses:
Selling, general and administrative          24.1             18.3              7.1            49.5
Restructuring                                 0.7                -                -             0.7
                                             24.8             18.3              7.1            50.2
Operating income (loss)             $         8.1     $        5.9     $       (7.1 )           6.9
Interest expense, net                                                                          13.5
Loss before income taxes                                                                       (6.6 )
Income tax benefit                                                                             (1.6 )
Loss from continuing operations                                                                (5.0 )
Income from discontinued operations                                                            12.0
Net income                                                                              $       7.0

Consolidated Analysis
Net sales for the quarter ended December 31, 2013 increased to $257.4 million from $245.1 million in the prior year period. Net sales increased primarily due to $9.6 million of higher shipment volumes and $5.1 million of higher pricing at Mueller Co., which were partially offset by lower shipment volumes at Anvil. Gross profit for the quarter ended December 31, 2013 increased to $67.1 million from $57.1 million in the prior year period. Gross margin increased 280 basis points to 26.1% in the quarter ended December 31, 2013 from 23.3% in the prior year period. Gross profit and gross margin benefited primarily from increased shipment volumes and higher sales pricing.
Selling, general and administrative expenses ("SG&A") for the quarter ended December 31, 2013 increased to $53.0 million from $49.5 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 was 20.6% in the quarter ended December 31, 2013 and 20.2% in the prior year period.


Interest expense, net decreased in the quarter ended December 31, 2013 compared to the prior year period due to a lower level of total debt outstanding. The components of interest expense, net are detailed below.

                                        Three months ended
                                           December 31,
                                         2013          2012
                                          (in millions)
7.375% Senior Subordinated Notes     $     7.7       $   7.7
8.75% Senior Unsecured Notes               4.0           4.5
Deferred financing fees amortization       0.5           0.6
ABL Agreement                              0.3           0.5
Other interest expense                     0.2           0.2
                                          12.7          13.5
Interest income                           (0.1 )           -
                                     $    12.6       $  13.5

The components of income tax expense in continuing operations are provided below.

                                                            Three months ended
                                                               December 31,
                                                            2013          2012
                                                              (in millions)
Expense (benefit) from income (loss) before income taxes $    0.5       $  (2.4 )
Deferred tax asset valuation allowance adjustment               -           0.8
Other discrete items                                         (0.2 )           -
                                                         $    0.3       $  (1.6 )


Segment Analysis
Mueller Co.

Net sales for the quarter ended December 31, 2013 increased to $165.0 million from $151.1 million in the prior year period. Net sales increased primarily due to $9.6 million of higher shipment volumes and $5.1 million of higher pricing. Gross profit for the quarter ended December 31, 2013 increased to $41.7 million from $32.9 million in the prior year period primarily due to higher sales pricing and higher shipment volumes. Gross margin increased to 25.3% for the quarter ended December 31, 2013 compared to 21.8% in the prior year period primarily due to higher sales pricing and higher shipment volumes. SG&A in the quarter ended December 31, 2013 increased to $25.7 million from $24.1 million in the prior year period primarily due to expenses associated with higher shipment volumes. SG&A were 15.6% and 15.9% of net sales for the quarter ended December 31, 2013 and 2012, respectively. Anvil
Net sales in the quarter ended December 31, 2013 decreased to $92.4 million from $94.0 million in the prior year period. Net sales decreased primarily due to lower shipment volumes.
Gross profit in the quarter ended December 31, 2013 increased to $25.4 million from $24.2 million in the prior year period. The decrease in net sales was substantially offset by lower costs of goods sold. Gross margin increased to 27.5% in the quarter ended December 31, 2013 compared to 25.7% in the prior year period.
SG&A decreased to $18.1 million in the quarter ended December 31, 2013 from $18.3 million in the prior year period. SG&A was 19.6% of net sales for the quarter ended December 31, 2013 and 19.5% in the prior year period. Corporate
SG&A increased to $9.2 million in December 31, 2013 from $7.1 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 $106.8 million at December 31, 2013 and $138.5 million of additional borrowing capacity under our ABL Agreement based on December 31, 2013 data. Undistributed earnings from our subsidiaries in Canada and China are considered to be permanently invested outside of the United States. At December 31, 2013, cash and cash equivalents included $35.7 million and $4.8 million in Canada and China, respectively.
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 are categorized below.

                                                       Three months ended
                                                          December 31,
                                                        2013         2012
                                                         (in millions)
Collections from customers                          $   287.2      $ 274.4
Disbursements, other than interest and income taxes    (275.3 )     (257.7 )
Interest payments, net                                  (15.7 )      (16.0 )
Income tax payments, net                                    -         (0.1 )
Cash provided by (used in) operating activities     $    (3.8 )    $   0.6

Collections from customers were higher during the quarter ended December 31, 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 quarter ended December 31, 2013 reflect higher purchasing activity associated with higher net sales and general timing differences of disbursements related to the purchase of material, labor, overhead and other costs.
Capital expenditures were $7.5 million in the quarter ended December 31, 2013 compared to $6.2 million in the prior year period. We estimate 2014 capital expenditures to be $34 million to $36 million.
Our U.S. pension plan was 101% funded at January 1, 2013 (the most recent date this analysis has been performed) under the provisions of the Pension Protection Act. We do not expect to make any contributions to our U.S. pension plan during 2014. The proportion of the assets held by our U.S. pension plan invested in fixed income securities, instead of equity securities, has increased over historical levels. Because of this shift in the strategic asset allocation, the estimated rate of return on these assets has decreased, which could ultimately cause our pension expense and our required contributions to this plan to increase.
We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, capital expenditures and debt service obligations as they become due through December 31, 2014. However, our ability to make these payments will depend partly upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. ABL Agreement
At December 31, 2013, the ABL Agreement consisted of a revolving credit facility for up to $225 million of revolving credit borrowings, swing line loans and letters of credit. The ABL Agreement permits us to increase the size of the credit facility by an additional $150 million in certain circumstances subject to adequate borrowing base availability. We may borrow up to $25 million through swing line loans and may have up to $60 million of letters of credit outstanding.
Borrowings under the ABL Agreement bear interest at a floating rate equal to LIBOR plus a margin ranging from 175 to 225 basis points, or a base rate, as defined in the ABL Agreement, plus a margin ranging from 75 to 125 basis points. At December 31, 2013, the applicable LIBOR-based margin was 175 basis points. The ABL Agreement terminates on the earlier of (1) December 18, 2017 and (2) 60 days prior to the final maturity of our 7.375% Senior Subordinated Notes. We pay a commitment fee for any unused borrowing capacity under the ABL Agreement of either 37.5 basis points per annum or 25 basis points per annum, based on daily average availability during the previous


calendar quarter. At December 31, 2013, our commitment fee was 37.5 basis points. As measured using December 31, 2013 data, excess availability as reduced by outstanding letters of credit and accrued fees and expenses of $30.8 million was $138.5 million.
The ABL Agreement is subject to mandatory prepayments if total outstanding borrowings under the ABL Agreement are greater than the aggregate commitments under the revolving credit facility or if we dispose of overdue accounts receivable in certain circumstances. The borrowing base under the ABL Agreement is equal to the sum of (a) 85% of the value of eligible accounts receivable and
(b) the lesser of (i) 65% of the value of eligible inventory or (ii) 85% of the net orderly liquidation value of the value of eligible inventory, less certain reserves. Prepayments can be made at any time with no penalty. Substantially all of our U.S. subsidiaries are borrowers under the ABL Agreement and are jointly and severally liable for any outstanding borrowings. Our obligations under the ABL Agreement are secured by a first-priority perfected lien on all of our U.S. inventory, accounts receivable, certain cash and other supporting obligations. Borrowings are not subject to any financial maintenance covenants unless excess availability is less than the greater of $22.5 million and 10% of the aggregate commitments under the ABL Agreement. The ABL Agreement contains customary negative covenants and restrictions on our ability to engage in specified activities, such as:
limitations on other debt, liens, investments and guarantees;

restrictions on dividends and redemptions of our capital stock and prepayments and redemptions of debt; and

restrictions on mergers and acquisition, sales of assets and transactions with affiliates.

8.75% Senior Unsecured Notes
We had $180.0 million face value of 8.75% Senior Unsecured Notes outstanding at December 31, 2013, which was reported net of $2.0 million unamortized discount. Interest on the Senior Unsecured Notes is paid semi-annually and the principal is due September 1, 2020. After August 2015, the Senior Unsecured Notes may be redeemed at specified redemption prices. Upon a "Change of Control" (as defined in the indenture securing the Senior Unsecured Notes), we are required to offer to purchase the outstanding Senior Unsecured Notes at a purchase price of 101%. The Senior Unsecured Notes are guaranteed by essentially all of our U.S. subsidiaries, but are subordinate to borrowings under the ABL Agreement. 7.375% Senior Subordinated Notes
We had $420.0 million face value of 7.375% Senior Subordinated Notes outstanding at December 31, 2013. Interest on the Senior Subordinated Notes is payable semi-annually and the principal is due June 1, 2017. We may redeem any portion of the Senior Subordinated Notes at specified redemption prices, subject to restrictions in the Senior Unsecured Notes. Upon a "Change of Control" (as defined in the indenture securing the Senior Subordinated Notes), we are required to offer to purchase the outstanding Senior Subordinated Notes at 101%. The Senior Subordinated Notes are guaranteed by essentially all of our U.S. subsidiaries, but are subordinate to the borrowings under the ABL Agreement and the Senior Unsecured Notes.
Our corporate credit rating and the credit rating for our debt are presented below.

                                             Moody's                   Standard & Poor's
                                   December 31,   September 30,   December 31,   September 30,
                                       2013           2013            2013           2013

Corporate credit rating                 B2             B2             BB-             BB-
ABL Agreement                       Not rated       Not rated      Not rated       Not rated
8.75% Senior Unsecured Notes            B1             B1             BB-             BB-
7.375% Senior Subordinated Notes       Caa1           Caa1             B               B
Outlook                               Stable         Stable          Stable         Stable

Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings


or debt or any derivative contracts or synthetic leases. Therefore, we are not exposed to any financing, liquidity, market or credit risk that could have arisen had we engaged in such relationships.
We use letters of credit and surety bonds in the ordinary course of business to ensure the performance of contractual obligations. At December 31, 2013, we had $30.6 million of letters of credit and $47.3 million of surety bonds outstanding.
Seasonality
Our business is dependent upon the construction industry, which is seasonal due to the impact of cold weather conditions. Net sales and operating income have historically been lowest in the quarterly periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity.

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