MWA

Business Context and Reporting Period

Company: Mueller Water Products, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009
Business Overview: The Company operates in three segments: Mueller Co. (valves and hydrants), U.S. Pipe (ductile iron pipe), and Anvil (pipe fittings and couplings). Operations are heavily dependent on residential and municipal water infrastructure construction, which is seasonal and currently impacted by a weak U.S. economy.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 14.9% year-over-year due to lower shipment volumes and reduced pricing, particularly in the U.S. Pipe and Anvil segments. This was partially offset by higher volumes at Mueller Co. and favorable Canadian currency exchange rates.
• Profitability Improvement: The Net Loss improved significantly from $400.0 million in Q4 2008 to $10.7 million in Q4 2009. The prior year loss was driven by a $400.0 million goodwill impairment charge, which did not recur in the current period.
• Operating Cash Flow: Operating cash flow turned positive ($60.1 million) compared to a negative $17.9 million in the prior year, driven by improved collections and lower disbursements.
• Segment Performance:
  • Mueller Co. reported operating income of $15.9 million (vs. a loss of $332.0 million in 2008).
  • U.S. Pipe reported an operating loss of $12.2 million (vs. a loss of $65.8 million in 2008).
  • Anvil reported operating income of $4.5 million (vs. $21.3 million in 2008).

Outlook, Risks, and Unusual Items

• Restructuring and Plant Closure: In February 2010, the Company announced the closure of the U.S. Pipe plant in North Birmingham, Alabama, eliminating approximately 260 positions. A restructuring charge of approximately $15 million (including $6 million in asset impairments) is expected to be recorded.
• Divestitures: In January 2010, the Company sold the Anvil Mueller Flow Control (MFC) business for $46.4 million. The assets were classified as "held for sale" at period end.
• Debt Management: In January 2010, the Company settled a $50 million interest rate swap (paying $4.0 million) and made $40.0 million in principal payments on term loans. The Company remains in compliance with all debt covenants.
• Market Risks: The Company faces risks related to the cyclical nature of the construction industry, raw material costs, and pension plan funding requirements. Management estimates pension contributions of $23 million to $25 million for fiscal 2010.
• Legal Contingencies: The Company is involved in environmental litigation (Anniston, Alabama) and potential tax liabilities related to its former parent, Walter Energy, though management does not currently believe these will have a material adverse effect.

Investor Verification Checklist

• Covenant Compliance: Verify the Company's ability to maintain the Consolidated Leverage Ratio (actual 7.00:1.00 vs. max 9.50:1.00) and Interest Charge Coverage Ratio (actual 1.53:1.00 vs. min 1.25:1.00) as economic conditions evolve.
• Restructuring Costs: Monitor the actual impact of the $15 million restructuring charge associated with the North Birmingham plant closure on Q1 2010 results.
• Pension Funding: Confirm the final funding requirements for the defined benefit pension plans following the January 1, 2010 analysis, given the volatility in equity markets.
• Debt Refinancing: Assess the timeline for the Term Loan A maturity (May 2012) and the Senior Subordinated Notes (June 2017) in the context of current credit ratings (Moody's B2, S&P B).
• Seasonality: Account for the historical seasonality of the business, where Q1 and Q2 typically show lower sales due to weather restrictions in North America.