MWA

Business Context and Reporting Period

Company: Mueller Water Products, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 non-residential construction, which have declined significantly due to the economic downturn.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 23.6% year-over-year for the quarter (from $421.6M to $322.2M) and 17.3% for the six-month period. This was driven primarily by lower shipment volumes ($124.4M impact in Q1) and unfavorable currency exchange rates, partially offset by price increases.
• Significant Impairments: The Company recorded a total impairment charge of $570.9 million for the quarter and $970.9 million for the six months. This included the full write-off of remaining goodwill ($376.8M for Mueller Co., $92.7M for Anvil) and a $101.4M impairment of Mueller Co. trade names.
• Restructuring: Restructuring charges were $42.2 million for the quarter, including a $38.5 million non-cash charge for the impairment of property, plant, and equipment at the U.S. Pipe North Birmingham facility. Headcount was reduced by approximately 600 people in the quarter.
• Profitability: The Company swung from a net income of $5.7 million in the prior year quarter to a net loss of $566.8 million. Operating loss was $(618.2) million for the quarter compared to operating income of $28.0 million in the prior year.

Outlook, Risks, and Management Commentary

• Debt Covenant Compliance: Management states that while the Company was in compliance with financial covenants under its 2007 Credit Agreement as of March 31, 2009, it expects to be non-compliant in the near future. Negotiations are underway to modify these covenants by June 30, 2009.
• Market Conditions: Management expects residential construction to remain at historically low levels. Municipal infrastructure spending is uncertain due to credit costs and fiscal conditions. Distributors are reducing inventory levels, further dampening demand.
• Liquidity: The Company holds $153.1 million in cash and has $259.5 million of borrowing capacity under its revolving credit facility. Management anticipates sufficient liquidity to meet obligations for the next 12 months, though this depends on future operating performance.
• Pension Obligations: Due to equity market declines, pension plan assets have decreased. The Company estimates pension contributions for fiscal 2009 will be between $30 million and $35 million.
• Legal Contingencies: The Company faces potential liability related to Walter Industries' tax disputes (joint and several liability) and ongoing environmental litigation regarding PCBs and foundry sand in Anniston, Alabama, though no material adverse effect is currently expected.

Investor Verification Checklist

• Covenant Amendment Status: Verify the outcome of negotiations to amend the 2007 Credit Agreement financial covenants, as failure to amend could trigger a default.
• Impairment Finalization: Confirm if the impairment charges recorded ($970.9M for six months) are final or subject to adjustment upon completion of fair value analysis in Q2 2009.
• Construction Volume Trends: Monitor leading indicators for residential and municipal construction to assess the sustainability of the current revenue decline.
• Pension Funding Requirements: Review the results of the Pension Protection Act analysis (expected in Q4) to determine if contribution estimates ($30M-$35M) will increase.
• Walter Industries Tax Liability: Assess the status of the IRS dispute regarding Walter Industries' tax liabilities, for which Mueller Water Products could be jointly and severally liable.