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MWA > SEC Filings for MWA > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for MUELLER WATER PRODUCTS, INC.

Form 10-Q for MUELLER WATER PRODUCTS, INC.


12-May-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. Activity related to U.S. Pipe is presented as discontinued operations for 2013.
Business
We expect Mueller Co.'s 2014 net sales will be about 10% higher than its 2013 net sales driven by continued growth in residential construction and municipal spending. We also anticipate shipments of iron gate valves and hydrants in the second half of the year will benefit as a result of the timing of this year's price increase, which resulted in three fewer weeks in this year's second quarter to ship orders received before the price increase. Further, we expect Mueller Co.'s 2014 operating income as a percent of net sales to improve compared to the prior year due to sales growth and economic efficiencies from increased production.
At Anvil, we expect 2014 net sales will improve modestly over 2013 net sales based on our current expectations of increased demand in our oil & gas and nonresidential construction end markets. However, we expect 2014 operating income to be less than the comparable prior year, primarily as a result of the costs associated with some operational inefficiencies at its largest manufacturing facility. Most of these costs, approximately $3.5 million, will be expensed in the third quarter of 2014.


Results of Operations
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
                                                       Three months ended March 31, 2014
                                         Mueller Co.           Anvil           Corporate         Total
                                                                 (in millions)
Net sales                            $       191.3          $       96.8     $          -     $     288.1
Gross profit                         $        55.1          $       27.1     $          -     $      82.2
Operating expenses:
Selling, general and administrative           27.3                  18.5              8.4            54.2
Restructuring                                  1.6                   1.1                -             2.7
                                              28.9                  19.6              8.4            56.9
Operating income (loss)              $        26.2          $        7.5     $       (8.4 )          25.3
Interest expense, net                                                                                12.5
Income before income taxes                                                                           12.8
Income tax expense                                                                                    3.1
Net income                                                                                    $       9.7

                                                       Three months ended March 31, 2013
                                         Mueller Co.            Anvil          Corporate          Total
                                                                 (in millions)
Net sales                            $       188.1          $       95.0     $          -     $     283.1
Gross profit                         $        50.5          $       26.8     $          -     $      77.3
Operating expenses:
Selling, general and administrative           27.0                  17.6              8.0            52.6
Restructuring                                  0.3                   0.1                -             0.4
                                              27.3                  17.7              8.0            53.0
Operating income (loss)              $        23.2          $        9.1     $       (8.0 )          24.3
Interest expense, net                                                                                12.8
Loss on early extinguishment of debt                                                                  1.4
Income before income taxes                                                                           10.1
Income tax expense                                                                                    2.5
Income from continuing operations                                                                     7.6
Loss from discontinued operations                                                                    (1.4 )
Net income                                                                                    $       6.2

Consolidated Analysis
Net sales for the quarter ended March 31, 2014 increased to $288.1 million from $283.1 million in the prior year period. Net sales increased primarily due to higher pricing of $4.8 million, mostly at Mueller Co., and increased shipment volumes of $2.0 million, mostly at Anvil.
Gross profit for the quarter ended March 31, 2014 increased to $82.2 million from $77.3 million in the prior year period. Gross margin increased 120 basis points to 28.5% in the quarter ended March 31, 2014 from 27.3% in the prior year period. Gross profit and gross margin benefited primarily from higher sales pricing and increased shipment volumes.
Selling, general and administrative expenses ("SG&A") for the quarter ended March 31, 2014 increased to $54.2 million from $52.6 million in the prior year period. SG&A as a percentage of net sales was 18.8% in the quarter ended March 31, 2014 and 18.6% in the prior year period.


Restructuring increased in the quarter ended March 31, 2014 compared to the prior year period due to an impairment of production equipment at Mueller Co. and the withdrawal from a multi-employer pension plan at Anvil. Mueller Co. changed its approach to the production of certain sizes of iron gate valves and recorded a charge of $1.5 million. Anvil sold the production equipment and certain inventory at its Bloomington, Minnesota location and recorded a reserve for our estimated pension plan withdrawal liability of $1.0 million. Interest expense, net decreased in the quarter ended March 31, 2014 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
                                            March 31,
                                         2014          2013
                                          (in millions)
7.375% Senior Subordinated Notes     $     7.7       $  7.8
8.75% Senior Unsecured Notes               4.0          4.3
Deferred financing fees amortization       0.5          0.5
ABL Agreement                              0.3          0.3
Other interest expense                     0.1          0.1
                                          12.6         13.0
Interest income                           (0.1 )       (0.2 )
                                     $    12.5       $ 12.8

During the quarter ended March 31, 2013, 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 $1.4 million includes the premium paid and the deferred financing costs and original issue discount that were written off.
During the quarter ended March 31, 2014, we completed an updated analysis of our income tax apportionment by state. This analysis identified changes in the state tax apportionment primarily due to the sale of U.S. Pipe in 2012 and the adoption of either a weighted sales factor or single sales factor apportionment method by states that historically had used a 3-factor (property, payroll and sales) apportionment method. As a result of these changes, we reduced our marginal state income tax rate, used in calculations of our deferred tax assets and liabilities, by 0.52%. This resulted in a decrease in income tax expense of $2.0 million.
The components of income tax expense in continuing operations are provided below.

                                                      Three months ended
                                                           March 31,
                                                      2014           2013
                                                         (in millions)
Expense from income before income taxes            $    5.1       $    3.9
State tax rate change                                  (2.0 )            -
Deferred tax asset valuation allowance adjustments        -           (1.3 )
Other discrete items                                      -           (0.1 )
                                                   $    3.1       $    2.5


Segment Analysis
Mueller Co.

Net sales for the quarter ended March 31, 2014 increased to $191.3 million from $188.1 million in the prior year period. Net sales increased primarily due to $4.3 million of higher pricing. Net sales from our core domestic iron gate valves, hydrants and brass products grew 7% year-over-year. However, we believe 2014 second quarter iron gate valve and hydrant shipments were adversely affected by the timing of price increases between years and the current quarter's harsh winter experienced in many parts of the United States. Net sales declined for our Pratt product line, in Canada and in our other international markets. Net sales of metering systems were essentially the same compared to the prior year period.


Gross profit for the quarter ended March 31, 2014 increased to $55.1 million from $50.5 million in the prior year period primarily due to higher sales pricing and improved product mix. Gross margin increased to 28.8% for the quarter ended March 31, 2014 compared to 26.8% in the prior year period primarily due to higher sales pricing and improved product mix.
SG&A in the quarter ended March 31, 2014 increased to $27.3 million from $27.0 million in the prior year period primarily due to expenses associated with higher employee-related costs. SG&A was 14.3% and 14.4% of net sales for the quarter ended March 31, 2014 and 2013, respectively.
Restructuring increased in the quarter ended March 31, 2014 compared to the prior year period due to an impairment of production equipment. Mueller Co. changed its approach to the production of certain sizes of iron gate valves and recorded a charge of $1.5 million in the quarter ended March 31, 2014. Anvil
Net sales in the quarter ended March 31, 2014 increased to $96.8 million from $95.0 million in the prior year period. Net sales increased primarily due to higher shipment volumes, particularly to the oil & gas market.
Gross profit in the quarter ended March 31, 2014 increased to $27.1 million from $26.8 million in the prior year period. Gross margin declined to 28.0% in the quarter ended March 31, 2014 compared to 28.2% in the prior year period. The decline was due primarily to its largest manufacturing facility experiencing production issues related to unplanned outages of its melting and heat treating operations.
SG&A increased to $18.5 million in the quarter ended March 31, 2014 from $17.6 million in the prior year period primarily due to higher employee-related costs and costs to relocate one of its distribution centers. SG&A was 19.1% of net sales for the quarter ended March 31, 2014 and 18.5% in the prior year period. Restructuring increased in the quarter ended March 31, 2014 compared to the prior year period because it recorded a $1.0 million reserve for our estimated liability for withdrawal from a multi-employer pension plan in the current quarter.
Corporate
SG&A increased to $8.4 million in March 31, 2014 from $8.0 million in the prior year period primarily due to higher professional fees.


Six Months Ended March 31, 2014 Compared to Six Months Ended March 31, 2013

                                                Six months ended March 31, 2014
                                      Mueller Co.     Anvil       Corporate       Total
                                                         (in millions)
Net sales                            $   356.3       $  189.2    $         -     $  545.5
Gross profit                         $    96.8       $   52.5    $         -     $  149.3
Operating expenses:
Selling, general and administrative       53.0           36.6           17.6        107.2
Restructuring                              1.7            1.1              -          2.8
                                          54.7           37.7           17.6        110.0
Operating income (loss)              $    42.1       $   14.8    $     (17.6 )       39.3
Interest expense, net                                                                25.1
Income before income taxes                                                           14.2
Income tax expense                                                                    3.4
Net income                                                                       $   10.8

                                                Six months ended March 31, 2013
                                      Mueller Co.      Anvil       Corporate       Total
                                                         (in millions)
Net sales                            $   339.2       $  189.0    $         -     $  528.2
Gross profit                         $    83.4       $   51.0    $         -     $  134.4
Operating expenses:
Selling, general and administrative       51.1           35.9           15.1        102.1
Restructuring                              1.0            0.1              -          1.1
                                          52.1           36.0           15.1        103.2
Operating income (loss)              $    31.3       $   15.0    $     (15.1 )       31.2
Interest expense, net                                                                26.3
Loss on early extinguishment of debt                                                  1.4
Income before income taxes                                                            3.5
Income tax expense                                                                    0.9
Income from continuing operations                                                     2.6
Income from discontinued operations                                                  10.6
Net income                                                                       $   13.2

Consolidated Analysis
Net sales for the six months ended March 31, 2014 increased to $545.5 million from $528.2 million in the prior year period. Net sales increased due to $10.2 million of higher pricing and $10.0 million of increased shipment volumes, both of which were primarily at Mueller Co.
Gross profit for the six months ended March 31, 2014 increased to $149.3 million from $134.4 million in the prior year period. Gross margin increased 200 basis points to 27.4% in the six months ended ended March 31, 2014 from 25.4% in the prior year period. Gross profit and gross margin benefited primarily from higher sales pricing and increased shipment volumes.
SG&A for the six months ended ended March 31, 2014 increased to $107.2 million from $102.1 million in the prior year period primarily due to higher expenses associated with increased shipment volumes and higher professional fees. SG&A was 19.7% of net sales in the six months ended March 31, 2014 and 19.3% in the prior year period.
Restructuring increased in the six months ended March 31, 2014 compared to the prior year period due to an impairment of production equipment at Mueller Co. and the withdrawal from a multi-employer pension plan at Anvil. Mueller Co. changed its approach to the production of certain sizes of iron gate valves and recorded a charge of $1.5 million. Anvil sold the production equipment and certain inventory at its Bloomington, Minnesota location and recorded a reserve for its estimated pension plan withdrawal liability of $1.0 million.


Interest expense, net decreased in the six months ended March 31, 2014 compared to the prior year period due to a lower level of total debt outstanding. The components of interest expense, net are detailed below.

                                        Six months ended
                                           March 31,
                                        2014         2013
                                         (in millions)
7.375% Senior Subordinated Notes     $   15.4      $ 15.5
8.75% Senior Unsecured Notes              8.0         8.8
Deferred financing fees amortization      1.0         1.1
ABL Agreement                             0.6         0.8
Other interest expense                    0.3         0.3
                                         25.3        26.5
Interest income                          (0.2 )      (0.2 )
                                     $   25.1      $ 26.3

During the six months ended March 31, 2013, 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 $1.4 million includes the premium paid and the deferred financing costs and original issue discount that were written off.
During the six months ended March 31, 2014, we completed an updated analysis of our income tax apportionment by state. This analysis identified changes in the state tax apportionment primarily due to the sale of U.S. Pipe in 2012 and the adoption of either a weighted sales factor or single sales factor apportionment method by states that historically had used a 3-factor (property, payroll and sales) apportionment method. As a result of these changes, we reduced our marginal state income tax rate, used in calculations of our deferred tax assets and liabilities, by 0.52%. This resulted in a decrease in income tax expense of $2.0 million.
The components of income tax expense in continuing operations are provided below.

                                                      Six months ended
                                                         March 31,
                                                      2014         2013
                                                       (in millions)
Expense from income before income taxes            $    5.6       $ 1.5
Deferred tax asset valuation allowance adjustments        -        (0.5 )
State tax rate change                                  (2.0 )         -
Other discrete items                                   (0.2 )      (0.1 )
                                                   $    3.4       $ 0.9


Segment Analysis
Mueller Co.

Net sales for the six months ended March 31, 2014 increased to $356.3 million from $339.2 million in the prior year period. Net sales increased primarily due to $9.8 million of increased shipment volumes and $9.4 million of higher pricing.
Gross profit for the six months ended March 31, 2014 increased to $96.8 million from $83.4 million in the prior year period primarily due to higher sales pricing and increased shipment volumes. Gross margin increased to 27.2% for the six months ended March 31, 2014 compared to 24.6% in the prior year period primarily due to higher sales pricing and higher shipment volumes. SG&A in the six months ended March 31, 2014 increased to $53.0 million from $51.1 million in the prior year period primarily due to expenses associated with increased shipment volumes. SG&A was 14.9% and 15.1% of net sales for the six months ended March 31, 2014 and 2013, respectively.


Restructuring increased in the six months ended March 31, 2014 compared to the prior year period due to an impairment of production equipment. Mueller Co. changed its approach to the production of certain sizes of iron gate valves and recorded a charge of $1.5 million in the quarter ended March 31, 2014. Anvil
Net sales in the six months ended March 31, 2014 increased to $189.2 million from $189.0 million in the prior year period. Improved pricing was offset by adverse currency translation effects.
Gross profit in the six months ended March 31, 2014 increased to $52.5 million from $51.0 million in the prior year period. Gross profit increased primarily due to higher sales pricing. Gross margin increased to 27.7% in the six months ended March 31, 2014 compared to 27.0% in the prior year period. SG&A increased to $36.6 million in the six months ended March 31, 2014 from $35.9 million in the prior year period. SG&A was 19.3% of net sales for the six months ended March 31, 2014 and 19.0% in the prior year period.
Restructuring increased in the six months ended March 31, 2014 compared to the prior year period because it recorded a $1.0 million reserve for its liability for withdrawal from a multi-employer pension plan in the current period. Corporate
SG&A increased to $17.6 million in March 31, 2014 from $15.1 million in the prior year period primarily due to higher professional fees. Liquidity and Capital Resources
We had cash and cash equivalents of $105.1 million at March 31, 2014 and $171.4 million of additional borrowing capacity under our ABL Agreement based on March 31, 2014 data. Undistributed earnings from our subsidiaries in Canada and China are considered to be permanently invested outside of the United States. At March 31, 2014, cash and cash equivalents included $29.3 million and $5.3 million in Canada and China, respectively.
On April 1, 2012, we sold our former U.S. Pipe segment. 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.

                                                       Six months ended
                                                          March 31,
                                                       2014        2013
                                                        (in millions)
Collections from customers                          $  535.4     $ 517.5
Disbursements, other than interest and income taxes   (503.4 )    (496.1 )
Interest payments, net                                 (23.9 )     (25.0 )
Income tax payments, net                                (0.5 )         -
Cash provided by (used in) operating activities     $    7.6     $  (3.6 )

Collections from customers were higher during the six months ended March 31, 2014 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 six months ended March 31, 2014 reflect higher purchasing activity associated with higher net sales and timing differences.
Capital expenditures were $18.3 million in the six months ended March 31, 2014 compared to $14.9 million in the prior year period. We estimate 2014 capital expenditures to be $34 million to $36 million.
We expect to make $0.7 million of 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 also expect to contribute approximately $1 million to our Canadian pension plans in 2014.


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 March 31, 2015. 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 March 31, 2014, 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 March 31, 2014, the applicable LIBOR-based margin was 175 basis points. . . .

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