MWA

Business Context and Reporting Period

Company: Mueller Water Products, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company operates in three segments: Mueller Co. (fire hydrants, valves), U.S. Pipe (ductile iron pipe), and Anvil (pipe fittings). Operations are heavily dependent on residential and municipal water infrastructure construction, which has been severely impacted by the U.S. economic downturn and a decline in housing starts.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 31% year-over-year for the three months ended June 30, 2009, and 23% for the nine-month period. This was driven primarily by lower shipment volumes due to the economic downturn and unfavorable Canadian currency exchange rates, partially offset by price increases.
• Significant Impairments: The Company recorded a massive non-cash impairment charge of $970.9 million during the nine months ended June 30, 2009. This included the full write-off of remaining goodwill ($376.8 million for Mueller Co., $92.7 million for Anvil) and a $101.4 million impairment of trade names at Mueller Co., triggered by a decline in market capitalization.
• Restructuring: Restructuring charges totaled $45.9 million for the nine months ended June 30, 2009, compared to $17.9 million in the prior year. This included a $38.5 million non-cash charge for the impairment of property, plant, and equipment at the U.S. Pipe North Birmingham facility and severance costs related to a ~17% headcount reduction.
• Profitability: The Company swung from a net income of $24.4 million in the prior year nine-month period to a net loss of $985.8 million, primarily due to the impairment charges. Excluding impairments, operating results were still significantly lower due to volume declines and higher per-unit overhead costs.

Guidance, Outlook, and Risks

• Outlook: Management expects residential construction to remain at historically low levels for the near term. Municipal spending is expected to be influenced by higher credit costs and budget constraints. The Company anticipates taking additional steps to reduce inventories and manage resources.
• Liquidity: As of June 30, 2009, the Company had $80.1 million in cash and approximately $55 million in available borrowing capacity under its amended 2007 Credit Agreement. Management believes existing cash and borrowing capacity will be sufficient to meet obligations for the next 12 months.
• Debt Covenants: The Company amended its 2007 Credit Agreement in June 2009, resulting in higher interest rates (margin increased to 550 basis points) but increased covenant flexibility. The Company was in compliance with all financial covenants at June 30, 2009.
• Risks: Key risks include the continuing downturn in residential construction, potential inability to satisfy debt covenants if operating performance deteriorates further, and increased pension contribution requirements due to poor equity market performance affecting plan assets.

Investor Verification Checklist

• Impairment Validity: Verify the assumptions used in the goodwill and intangible asset impairment tests, particularly given the volatility in the Company's stock price.
• Covenant Compliance: Monitor the Company's ability to maintain the consolidated leverage ratio and interest coverage ratio under the amended credit agreement, especially given the high fixed costs and low sales volumes.
• Pension Funding: Review the funded status of pension plans and the potential for increased cash contributions in fiscal 2009 and beyond due to market losses on plan assets.
• Segment Performance: Analyze the specific performance of the U.S. Pipe segment, which reported a gross loss for the quarter, compared to the more resilient Mueller Co. and Anvil segments.
• Working Capital: Assess the trend in receivables and inventory levels to ensure the Company is effectively managing cash conversion cycles amidst lower demand.