Business Context and Reporting Period
Company: Mueller Water Products, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2010
Overview: Mueller Water Products is a leading North American manufacturer of water infrastructure products, including valves, fire hydrants, ductile iron pipe, and piping components. Operations are managed through three segments: Mueller Co., U.S. Pipe, and Anvil. The company serves municipalities, utilities, and the construction industries for water transmission, distribution, and HVAC applications.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Net Sales | $1,337.5 million | $1,427.9 million |
| Gross Profit | $236.4 million | $256.9 million |
| Gross Margin | 17.7% | 18.0% |
| Operating Income (Loss) | $4.0 million | $(1,000.9) million |
| Net Income (Loss) | $(45.2) million | $(996.7) million |
| Cash and Cash Equivalents | $83.7 million | $61.5 million |
| Total Debt | $692.2 million | $740.2 million |
| Working Capital | $452.7 million | $525.3 million |
| Capital Expenditures | $32.8 million | $39.7 million |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by $90.0 million (6.3%) compared to 2009. This was primarily due to the divestiture of two Anvil businesses ($90.0 million impact) and lower pricing at U.S. Pipe ($35.8 million impact). These decreases were partially offset by higher shipment volumes ($20.5 million) and favorable Canadian currency exchange rates ($14.9 million).
- Profitability Improvement: The company returned to a narrow operating profit of $4.0 million in 2010, a significant recovery from the $1,000.9 million operating loss in 2009. The 2009 loss was driven by $970.9 million in non-cash impairment charges related to goodwill and intangible assets, which did not recur in 2010.
- Segment Performance:
- Mueller Co. saw net sales increase to $612.8 million (from $547.1 million) and operating income of $81.0 million, driven by higher volumes and cost savings.
- U.S. Pipe reported a gross loss of $22.7 million (worsening from a $5.7 million loss in 2009) due to a 12% decline in average per-ton sale prices, despite lower raw material costs.
- Anvil net sales decreased to $346.9 million (from $469.9 million) due to divestitures and lower volumes, but maintained an operating income of $22.1 million.
- Debt Reduction: Total debt decreased by $48.0 million to $692.2 million. In August 2010, the company issued $225.0 million in 8 3/4% Senior Unsecured Notes and entered a new Asset Based Lending (ABL) agreement to repay the 2007 Credit Agreement.
Guidance, Outlook, and Risks
- Outlook: Management expects non-residential construction to decrease in calendar 2010 but anticipates a small increase in 2011. Residential construction is expected to remain weak, with housing starts approximately 60% below the 50-year average. Capacity utilization is expected to increase in 2011.
- Restructuring: The company closed U.S. Pipe's North Birmingham facility in 2010, recording a $12.0 million charge. Additional charges of $1 million to $2 million are expected in 2011 related to this closure.
- Capital Expenditures: Estimated to be between $38 million and $42 million for 2011.
- Pension Contributions: Estimated contributions to U.S. pension plans for 2011 are between $16 million and $20 million.
- Key Risks:
- Raw Material Volatility: Scrap iron prices were 42% higher in 2010 than 2009; brass ingot prices were 48% higher. The company may not be able to pass these costs to customers.
- Market Dependence: Sales are heavily dependent on municipal infrastructure spending and construction activity, which are cyclical and sensitive to economic conditions.
- Environmental Liabilities: Ongoing litigation regarding PCBs and heavy metals in Anniston, Alabama, and potential liabilities related to lead content in brass products due to new California regulations.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the new ABL Agreement and Senior Unsecured Notes covenants, particularly regarding leverage ratios and excess availability.
- Raw Material Hedging: Assess the company's ability to pass through increased scrap iron and brass costs to customers in the upcoming fiscal year.
- Construction Market Recovery: Monitor independent forecasts for non-residential and residential construction activity, as these are primary drivers of demand.
- Environmental Litigation: Review the status of the Anniston, Alabama class action settlement and the Rohcan Investments lawsuit in Canada.
- Pension Funding: Confirm the funded status of the U.S. pension plan and the accuracy of the $16-$20 million contribution estimate for 2011.