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

Show all filings for MUELLER WATER PRODUCTS, INC.

Form 10-Q for MUELLER WATER PRODUCTS, INC.


7-Aug-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 fourth quarter net sales percentage growth to be approximately 10% when compared to the prior year period driven principally by continued growth in municipal spending and residential construction. We also expect Mueller Co.'s 2014 operating income as a percent of net sales to improve compared to the prior year period due to higher shipment volumes, however at a lower rate than that of the 2014 third quarter.
On July 1, 2014, we completed the acquisition of certain of the assets of Lined Valve Company Inc., a privately-held company, which will become part of our Pratt product line, for $10.0 million, subject to a purchase price adjustment. Lined Valve Company Inc. reported net sales of $10.6 million for calendar 2013. At Anvil, we expect its 2014 fourth quarter net sales percentage growth will be in the low single digits when compared to the prior year period. We also expect its 2014 fourth quarter operating income to be slightly better than the prior year period.


Results of Operations
Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013
                                              Three months ended June 30, 2014
                                     Mueller Co.      Anvil       Corporate      Total
                                                        (in millions)
Net sales                           $   214.0        $  104.5    $        -     $ 318.5
Gross profit                        $    70.1        $   27.2    $        -     $  97.3
Operating expenses:
Selling, general and administrative      27.7            17.7           9.9        55.3
Restructuring                             0.2               -             -         0.2
                                         27.9            17.7           9.9        55.5
Operating income (loss)             $    42.2        $    9.5    $     (9.9 )      41.8
Interest expense, net                                                              12.5
Income before income taxes                                                         29.3
Income tax expense                                                                 10.8
Net income                                                                      $  18.5

                                              Three months ended June 30, 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
                                         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                                                  (1.9 )
Net income                                                                      $  14.1

Consolidated Analysis
Net sales for the quarter ended June 30, 2014 increased to $318.5 million from $299.4 million in the prior year period. Net sales increased primarily due to increased shipment volumes of $17.7 million.
Gross profit for the quarter ended June 30, 2014 increased to $97.3 million from $90.0 million in the prior year period. Gross margin increased 40 basis points to 30.5% in the quarter ended June 30, 2014 from 30.1% in the prior year period. Gross profit and gross margin benefited primarily from increased shipment volumes and higher sales pricing, partially offset by higher costs at Anvil. Selling, general and administrative expenses ("SG&A") for the quarter ended June 30, 2014 decreased to $55.3 million from $56.9 million in the prior year period. SG&A as a percentage of net sales was 17.4% in the quarter ended June 30, 2014 and 19.0% in the prior year period. These improvements in SG&A were related primarily to decreased employee-related costs.


Interest expense, net decreased in the quarter ended June 30, 2014 compared to the prior year period. The components of interest expense, net are detailed below.

                                        Three months ended
                                             June 30,
                                         2014          2013
                                          (in millions)
7.375% Senior Subordinated Notes     $     7.8       $   7.7
8.75% Senior Unsecured Notes               4.0           4.0
Deferred financing fees amortization       0.5           0.5
ABL Agreement                              0.3           0.3
Other interest expense                       -           0.2
                                          12.6          12.7
Interest income                           (0.1 )           -
                                     $    12.5       $  12.7

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

                                                      Three months ended
                                                           June 30,
                                                       2014          2013
                                                        (in millions)
Expense from income before income taxes            $    11.9       $  8.1
Deferred tax asset valuation allowance adjustments      (1.1 )       (4.0 )
Other discrete items                                       -          0.1
                                                   $    10.8       $  4.2


Segment Analysis
Mueller Co.

Net sales for the quarter ended June 30, 2014 increased to $214.0 million from $199.3 million in the prior year period. Net sales increased primarily due to $13.7 million of increased shipment volumes. Net sales from our core domestic valves, hydrants and brass products grew 28% year-over-year. We believe 2014 third quarter valve and hydrant shipments were favorably affected by the timing of price increases between years. Net sales declined for our Pratt product line approximately 21%, or $6 million, year-over-year. Net sales of metering systems were essentially the same compared to the prior year period.
Gross profit for the quarter ended June 30, 2014 increased to $70.1 million from $59.4 million in the prior year period primarily due to improved product mix and higher sales pricing. Gross margin increased to 32.8% for the quarter ended June 30, 2014 compared to 29.8% in the prior year period primarily due to improved product mix and higher sales pricing.
SG&A in the quarter ended June 30, 2014 decreased to $27.7 million from $29.0 million in the prior year period primarily due to expenses associated with lower professional fees. SG&A was 12.9% and 14.6% of net sales for the quarter ended June 30, 2014 and 2013, respectively.
Anvil
Net sales in the quarter ended June 30, 2014 increased to $104.5 million from $100.1 million in the prior year period. Net sales increased primarily due to higher shipment volumes, particularly to the oil & gas, commercial and industrial markets.
Gross profit in the quarter ended June 30, 2014 decreased to $27.2 million from $30.6 million in the prior year period. Gross margin declined to 26.0% in the quarter ended June 30, 2014 compared to 30.6% in the prior year period. The decline was due primarily to operational inefficiencies at its largest manufacturing facility.
SG&A decreased to $17.7 million in the quarter ended June 30, 2014 from $18.3 million in the prior year period primarily due to lower employee-related costs. SG&A was 16.9% of net sales for the quarter ended June 30, 2014 and 18.3% in the prior year period.


Corporate
SG&A increased to $9.9 million in June 30, 2014 from $9.6 million in the prior
year period primarily due to higher professional fees offset by lower
employee-related costs.
Nine Months Ended June 30, 2014 Compared to Nine Months Ended June 30, 2013
                                                Nine months ended June 30, 2014
                                      Mueller Co.     Anvil       Corporate       Total
                                                         (in millions)
Net sales                            $   570.3       $  293.7    $         -     $  864.0
Gross profit                         $   166.9       $   79.7    $         -     $  246.6
Operating expenses:
Selling, general and administrative       80.7           54.3           27.5        162.5
Restructuring                              1.9            1.1              -          3.0
                                          82.6           55.4           27.5        165.5
Operating income (loss)              $    84.3       $   24.3    $     (27.5 )       81.1
Interest expense, net                                                                37.6
Income before income taxes                                                           43.5
Income tax expense                                                                   14.2
Net income                                                                       $   29.3

                                                Nine months ended June 30, 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
                                          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                                                   8.7
Net income                                                                       $   27.3

Consolidated Analysis
Net sales for the nine months ended June 30, 2014 increased to $864.0 million from $827.6 million in the prior year period. Net sales increased due to $27.7 million of increased shipment volumes and $13.7 million of higher pricing, both of which were primarily at Mueller Co.
Gross profit for the nine months ended June 30, 2014 increased to $246.6 million from $224.4 million in the prior year period. Gross margin increased 140 basis points to 28.5% in the nine months ended June 30, 2014 from 27.1% in the prior year period. Gross profit and gross margin benefited primarily from increased shipment volumes and higher sales pricing.
SG&A for the nine months ended June 30, 2014 increased to $162.5 million from $159.0 million in the prior year period. SG&A was 18.8% of net sales in the nine months ended June 30, 2014 and 19.2% in the prior year period.
Restructuring increased in the nine months ended June 30, 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 an accrual for its estimated pension plan withdrawal liability of $1.0 million.
Interest expense, net decreased in the nine months ended June 30, 2014 compared to the prior year period due primarily to a lower level of total debt outstanding. The components of interest expense, net are detailed below.

                                        Nine months ended
                                            June 30,
                                         2014         2013
                                          (in millions)
7.375% Senior Subordinated Notes     $    23.2      $ 23.2
8.75% Senior Unsecured Notes              12.0        12.8
Deferred financing fees amortization       1.5         1.6
ABL Agreement                              0.9         1.2
Other interest expense                     0.3         0.4
                                          37.9        39.2
Interest income                           (0.3 )      (0.2 )
                                     $    37.6      $ 39.0

During the nine months ended June 30, 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 nine months ended June 30, 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.

                                                      Nine months ended
                                                          June 30,
                                                       2014         2013
                                                        (in millions)
Expense from income before income taxes            $    17.5       $ 9.6
Deferred tax asset valuation allowance adjustments      (1.1 )      (4.5 )
State tax rate change                                   (2.0 )         -
Other discrete items                                    (0.2 )         -
                                                   $    14.2       $ 5.1


Segment Analysis
Mueller Co.

Net sales for the nine months ended June 30, 2014 increased to $570.3 million from $538.5 million in the prior year period. Net sales increased primarily due to $23.5 million of increased shipment volumes and $12.1 million of higher pricing. Net sales from our core domestic valves, hydrants and brass products grew 17% year-over-year.
Gross profit for the nine months ended June 30, 2014 increased to $166.9 million from $142.8 million in the prior year period primarily due to increased shipment volumes and higher sales pricing. Gross margin increased to 29.3% for the nine months ended June 30, 2014 compared to 26.5% in the prior year period primarily due to higher shipment volumes and higher sales pricing.


SG&A in the nine months ended June 30, 2014 increased to $80.7 million from $80.1 million in the prior year period primarily due to expenses associated with increased shipment volumes. SG&A was 14.2% and 14.9% of net sales for the nine months ended June 30, 2014 and 2013, respectively. Anvil
Net sales in the nine months ended June 30, 2014 increased to $293.7 million from $289.1 million in the prior year period. Net sales increased primarily due to increased shipment volumes.
Gross profit in the nine months ended June 30, 2014 decreased to $79.7 million from $81.6 million in the prior year period. Gross margin declined to 27.1% in the nine months ended June 30, 2014 compared to 28.2% in the prior year period. These declines were due primarily to operational inefficiencies at its largest manufacturing facility.
SG&A increased to $54.3 million in the nine months ended June 30, 2014 from $54.2 million in the prior year period. SG&A was 18.5% of net sales for the nine months ended June 30, 2014 and 18.7% in the prior year period. Corporate
SG&A increased to $27.5 million in the nine months ended June 30, 2014 from $24.7 million in the prior year period primarily due to higher professional fees. Expenses related to our former U.S. Pipe operations represented $2.2 million of the increased expenses in 2014. Liquidity and Capital Resources
We had cash and cash equivalents of $150.9 million at June 30, 2014 and $161.5 million of additional borrowing capacity under our ABL Agreement based on June 30, 2014 data. Undistributed earnings from our subsidiaries in Canada and China are considered to be permanently invested outside of the United States. At June 30, 2014, cash and cash equivalents included $27.9 million and $5.1 million in Canada and China, respectively.
On July 30, 2014, we announced our intention to redeem $55.0 million aggregate principal amount of our 7.375% Senior Subordinated Notes at a redemption price of 101.229% of the principal amount on August 29, 2014. We expect to record a loss on early extinguishment of debt of $1.0 million on the redemption date. We anticipate our annual interest expense will decline by approximately $4 million as a result of the redemption.
On July 1, 2014, we used $10.0 million to acquire certain assets of Lined Valve Company Inc.
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.

                                                       Nine months ended
                                                           June 30,
                                                       2014         2013
                                                         (in millions)
Collections from customers                          $   845.2     $ 825.3
Disbursements, other than interest and income taxes    (743.5 )    (740.9 )
Interest payments, net                                  (39.6 )     (40.9 )
Income tax payments, net                                 (1.1 )      (0.7 )
Cash provided by operating activities               $    61.0     $  42.8

Collections from customers were higher during the nine months ended June 30, 2014 compared to the prior year period primarily related to increased net sales compared to a year ago.
Increased disbursements, other than interest and income taxes, during the nine months ended June 30, 2014 reflect higher purchasing activity associated with higher net sales and timing differences, partially offset by a greater utilization of inventory on hand during 2014.
Capital expenditures were $25.5 million in the nine months ended June 30, 2014 compared to $23.9 million in the prior year period. We estimate 2014 capital expenditures to be $35 million to $36 million.


During the quarter ending September 30, 2014, we expect to make our 2014 contribution to our U.S. pension plan of $0.7 million. 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 expect to exhaust substantially all of our remaining net operating loss carryforwards for U.S. federal income tax purposes by September 30, 2014. After they are exhausted, we expect our federal income tax payments to increase compared to the past several years. Our state net operating loss carryforwards will continue to be available in future years.
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, income tax payments, capital expenditures and debt service obligations as they become due through June 30, 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 June 30, 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 June 30, 2014, 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 June 30, 2014, our commitment fee was 37.5 basis points. As measured using June 30, 2014 data, excess availability as reduced by outstanding letters of credit and accrued fees and expenses of $29.1 million was $161.5 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, due on September 1, 2020, outstanding at June 30, 2014, which was reported net of $1.8 million unamortized discount. After August 31, 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 . . .

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