FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
001-32892
MUELLER WATER PRODUCTS,
INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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20-3547095
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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1200 Abernathy Road N.E.
Suite 1200
Atlanta, GA 30328
(Address of Principal Executive Offices)
Registrants telephone number:
(770) 206-4200
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Series A Common Stock, par value $0.01
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New York Stock Exchange
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Series B Common Stock, par value $0.01
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
x Yes o No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
o Yes x No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.
x Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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x Large
accelerated filer
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o Accelerated
filer
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o Non-accelerated
filer
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o Smaller
reporting company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). o Yes x No
There were 115,433,798 shares of common stock of the
registrant outstanding at November 14, 2008, composed of
29,588,878 shares of Series A common stock and
85,844,920 shares of Series B common stock. At
March 31, 2008, the aggregate market value of the voting
and non-voting common stock held by nonaffiliates was
approximately $0.9 billion based on the closing prices per
share as reported on the New York Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Applicable portions of the Proxy Statement for the Annual
Meeting of Stockholders of the Company to be held
January 28, 2009 are incorporated by reference into
Part III of this
Form 10-K.
Introductory
Note
In this annual report on
Form 10-K
(the annual report), the Company,
we, us or our refer to
Mueller Water Products, Inc. and subsidiaries or their
management. With regard to the Companys segments,
we, us or our may also refer
to the segment being discussed or its management.
Certain of the titles and logos of our products referenced in
this annual report are our intellectual property. Each trade
name, trademark or servicemark of any other company appearing in
this annual report is the property of its holder.
Unless the context indicates otherwise, whenever we refer in
this annual report to a particular fiscal year, we mean the
fiscal year ending September 30 in that particular calendar
year. We manage our businesses and report operations through
three segments: Mueller Co., U.S. Pipe and Anvil, based
largely on the products sold and the customers served.
Industry
and Market Data
In this annual report, we rely on and refer to information and
statistics regarding economic conditions and trends, the demand
for our water infrastructure, flow control and piping component
system products and the competitive conditions we face in
serving our customers and end users.
Some, but not all of the companies that compete in our
particular industry segments are publicly traded as of the date
of this annual report. Accordingly, other than certain data with
respect to fire hydrants, ductile iron pipe and water valves, no
current public information is available with respect to the size
of such markets or our relative strength or competitive
position. Our statements in this annual report about our
relative market strength and competitive position with respect
to other products are based on our beliefs, internal studies and
our judgments concerning industry trends.
Forward-Looking
Statements
This annual report contains certain statements that may be
deemed forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and Section 27A of
the Securities Act of 1933, as amended (the Securities
Act). All statements, other than statements of historical
fact, that address activities, events or developments that we
intend, expect, project, believe or anticipate will or may occur
in the future are forward-looking statements. Such statements
are based upon certain assumptions and assessments made by us in
light of our experience and our perception of historical trends,
current conditions and expected future developments. Actual
results and the timing of events may differ significantly from
those projected in such forward-looking statements due to a
number of factors, including those set forth in the section
entitled RISK FACTORS in Item 1A of
Part I of this annual report.
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All or a portion of the referenced sections have been
incorporated by reference from our definitive
proxy statement issued in connection with the Annual
Meeting of Stockholders to be held on January 28, 2009. |
PART I
Our
Company
We are a leading North American manufacturer and marketer of a
broad range of water infrastructure, flow control and piping
component system products for use in water distribution networks
and treatment facilities. We also act as a distributor,
especially in Canada, for our products and products that are
manufactured by other companies. Our broad product portfolio
includes engineered valves, fire hydrants, pipe fittings, water
meters and ductile iron pipe, which are used by municipalities,
as well as the non-residential and residential construction,
heating, ventilation and air conditioning (HVAC),
fire protection and oil & gas industries. Our products
enjoy leading positions due to their broad brand recognition and
a reputation for quality and service for the customers we serve.
We believe we have one of the largest installed bases of iron
gate valves and fire hydrants in the United States, and, as of
September 30, 2008, our installed products included
approximately three million fire hydrants and approximately nine
million iron gate valves. Because of the strength of our brands
and products, our products are specified for use in all of the
top 50 metropolitan areas in the United States. Our large
installed base, broad product range and well-known brands have
led to long-standing relationships with the key distributors of
our products. Approximately 75% of our net sales during fiscal
2008 came from products for which we believe we have a
leadership position. For fiscal 2008, our net sales were
$1,859.3 million and income from operations was
$146.1 million.
We manage our businesses and report operations through three
business segments, based largely on the products they sell and
the customers they serve: Mueller Co., U.S. Pipe and Anvil.
Mueller
Co.
Sales of Mueller Co. products are driven principally by spending
on water and wastewater infrastructure upgrade, repair and
replacement and new water and wastewater infrastructure, which
is typically associated with new residential construction. We
estimate that a majority of Mueller Co.s fiscal 2008 sales
were for infrastructure upgrade, repair and replacement, with
the remainder for new infrastructure.
U.S.
Pipe
U.S. Pipe products are sold primarily to waterworks
distributors, contractors, municipalities, utilities and other
governmental agencies. A substantial percentage of ductile iron
pipe orders result from contracts that are bid by contractors or
directly issued by municipalities or utilities. We estimate that
a majority of U.S. Pipes fiscal 2008 sales were for
new infrastructure, with the remainder for infrastructure
upgrade, repair and replacement. In January 2007, U.S. Pipe
acquired the assets of Fast Fabricators, Inc. (Fast
Fabricators).
Anvil
Anvil sells products it manufactures and products it sources
from outside parties to a wide variety of end users through a
network of distributors. These distributors are serviced
primarily through distribution centers located in the United
States and Canada. We believe Anvils network of
distributors is the largest such distribution network serving
similar end users. One of Anvils Canadian divisions also
sells directly to contractors.
1
The table below illustrates each segments net sales during
fiscal 2008, major product lines, product positions, selected
brand names and primary end users.
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Mueller Co.
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U.S. Pipe
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Anvil
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Net sales (in millions)
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$718.1
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$546.0
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$595.2
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Major product lines (product position in U.S. and Canada*)
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Fire hydrants (#1)
Iron gate valves (#1)
Butterfly and ball
valves (#1)
Plug valves (#2)
Brass water
products (#2)
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Ductile iron pipe (#1)
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Pipe fittings and couplings (#1)
Grooved products (#2) Pipe hangers (#2)
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Selected brand names
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Mueller®
Pratt®
Millikentm
Jones®
Hersey®
HydroGate®
Canada
Valvetm
Mueller
Servicetm
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U.S.
PIPE®
TYTON®
TYTON
JOINT®
TR
FLEX®
USIFLEX®
FIELD
LOK®
MJ FIELD
LOK®
HP
LOK®
FAST FAB
Catawissatm
TRIM
TYTON®
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Anvil®
AnvilStar®
SPF®
Merit®
Gruvlok®
Becktm
Picomatm
J.B.
Smithtm
Anvil-Strut®
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Primary end users
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Water and wastewater
infrastructure
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Water and wastewater infrastructure
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HVAC, fire protection, industrial, energy
and oil & gas
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Product position information is based on our estimates of our
sales compared to the sales of our principal competitors for
these product categories. Our estimates were based on internal
analyses and information from trade associations and our
distributor networks. |
The
Initial Public Offering and the Spin-off
Mueller Water Products, Inc. is a Delaware corporation that was
incorporated on September 22, 2005 under the name Mueller
Holding Company, Inc., and is the surviving corporation of the
merger on February 2, 2006 of Mueller Water Products, LLC
and Mueller Water Products Co-Issuer, Inc. with and into Mueller
Holding Company, Inc. We changed our name to Mueller Water
Products, Inc. on February 2, 2006. On June 1, 2006,
the Company completed an initial public offering of its
Series A common stock.
On December 14, 2006, Walter Industries, Inc. (Walter
Industries) distributed to its shareholders all of the
outstanding shares of the Companys Series B common
stock (the Spin-off). Prior to the Spin-off, the
Series B common stock represented approximately 75% of our
economic value and approximately 96% of the combined voting
power of our common stock.
Our principal executive offices are located at 1200 Abernathy
Road N.E., Suite 1200, Atlanta, Georgia 30328, and our main
telephone number at that address is
(770) 206-4200.
2
Business
Strategy
Our business strategy is focused on maintaining our market
leadership and competitive differentiation, while growing
revenues and enhancing profitability. Key elements of our
strategy follow.
We
will maintain our leadership positions with our customers and
end users.
We will maintain our leadership positions with our customers and
end users by leveraging our large installed base, the
specification of our products as accepted for use in a majority
of metropolitan areas, our established and extensive
distribution channels and our broad range of leading water
infrastructure, flow control and piping component system
products, as well as by developing and introducing additional
products and services.
We
will continue to enhance operational excellence.
We will continue to pursue superior product engineering, design
and manufacturing by investing in technologically advanced
manufacturing processes such as lost foam casting and automated
molding machinery. We will also seek opportunities to improve
manufacturing efficiency safely, such as through the completion
of a new automated ductile iron pipe operation, increased
utilization of our manufacturing facility in China to produce
additional high quality and cost-effective products and
continuing our cost-reduction and efficiency initiatives. We
will expand our number of LEAN Manufacturing specialists and use
of Six Sigma business improvement methodologies to capture
higher levels of operational efficiencies. We will also continue
to evaluate sourcing products wherever doing so will lower our
costs while maintaining quality.
We
will increase the breadth and depth of our products and
services.
We will continue to seek to provide value to our customers and
end users by increasing the breadth and depth of our products
and services. Further, though acquisition and internal
development, we will continue to develop products and services
recognized for their quality and reliability for our customers
and end users. For example, Mueller Co. has introduced a new
product that blocks reverse flows of water-borne contaminants
from a fire hydrant into a water main. Additionally, with the
acquisition of Fast Fabricators, U.S. Pipe expanded its product
offerings to include fabricated, coated and lined pipe products.
We will continue to seek to add value to our customers and end
users through attractive acquisitions and internal development.
We
will expand internationally.
We will selectively pursue attractive international acquisitions
that enhance our existing product offerings, strengthen our
current competitive positions, enable us to enter new markets,
expand our technological capabilities or provide synergy
opportunities.
Description
of Products
We offer a full line of water infrastructure, flow control and
piping component system products in the United States and
Canada. Our principal products are ductile iron pipe, water and
gas valves, fire hydrants and a complete range of pipe fittings,
couplings, hangers and nipples. Our products are generally
designed, manufactured and tested in compliance with industry
standards.
Mueller
Co.
Water and Gas Valves and Related
Products. Mueller Co. manufactures valves for
water and gas systems, including butterfly, iron gate, tapping,
check, plug and ball valves. Water and gas valves and related
products accounted for approximately $470.5 million,
$503.5 million and $545.7 million of our gross sales
during fiscal 2008, 2007 and 2006, respectively. All of our
valve products are used to control transmission of potable
(drinkable) water, non-potable water or gas. Water valve
products typically range in size from
3/4
inch to 36 inches, but we also manufacture significantly
larger valves as custom orders. Most of these valves are used in
water distribution and water treatment.
3
We also produce small iron valves, meter bars and line stopper
fittings for use in gas systems, and we manufacture machines and
tools for tapping, drilling, extracting, installing and
stopping-off. These machines and tools are designed to work with
our water and gas fittings and valves as an integrated system.
Fire Hydrants. Mueller Co. manufactures
dry-barrel
and
wet-barrel
fire hydrants. Fire hydrants and fire hydrant parts sales
accounted for approximately $175.4 million,
$193.1 million and $197.0 million of our gross sales
in fiscal 2008, 2007 and 2006, respectively. We sell fire
hydrants for new water infrastructure development, fire
protection systems and water infrastructure repair and
replacement projects.
Our fire hydrants consist of an upper barrel and nozzle section
and a lower barrel and valve section that connects to a water
main. In
dry-barrel
hydrants, the valve connecting the barrel of the hydrant to the
water main is located below ground at or below the frost line,
which keeps the hydrant upper barrel dry. We sell
dry-barrel
fire hydrants with the Mueller and U.S. Pipe brand names in
the United States and the Mueller and Canada Valve brand names
in Canada. We also make a limited number of
wet-barrel
hydrants, where the valves are located in the hydrant nozzles
and the barrel contains water at all times.
Wet-barrel
hydrants are made for warm weather climates in locations such as
California and Hawaii and sold under the Jones brand name.
Most municipalities have a limited number of hydrant brands that
are approved for installation within their system due to the
need to minimize inventories of spare parts for repairs and the
desire to ensure a uniform system. We believe that our large
installed base of hydrants throughout the United States and
Canada and our reputation for superior quality and performance,
together with our incumbent specification position, have
contributed to the leading positions of our key products. Our
large installed base of approximately three million hydrants
also leads to recurring sales as components of an installed
hydrant are replaced from time to time.
Other Products and Services. Mueller Co.
manufactures a full line of metering products for the water
industry, marketed under the Hersey brand name. These products
have the capability to measure water from small residential
flows to fire and master meter applications. Other products
include pipe repair products, such as clamps and couplings used
to repair leaks in water and gas distribution systems and
municipal castings, such as manhole covers and street drain
grates. We sell these products under the Mueller and Jones brand
names. We also provide installation, replacement and maintenance
services on new and existing valves, hydrants and service lines
under the Mueller Service brand name. Services include wet taps,
dry installs, line stops and main-to-meter connections with full
excavation and refurbishment.
U.S.
Pipe
U.S. Pipe manufactures a broad line of ductile iron pipe,
restraint joint products, fittings and other ductile cast iron
products. Ductile iron is a cast iron that is heat-treated to
make it less brittle. U.S. Pipes net sales were
$546.0 million, $537.1 million and $594.7 million
during fiscal 2008, 2007 and 2006, respectively. Net sales in
fiscal 2006 include a small amount of sales from valve and
hydrant product lines that were transferred to Mueller Co. in
January 2006.
Our ductile iron pipe typically ranges from 4 inches to
64 inches in diameter and up to 20 feet in length.
Most of our pipe is sold in 18 feet lengths. Ductile iron
pipe is used primarily for potable water distribution systems,
small water system grids, reinforcing distribution systems
(including looping grids and supply lines), major water
transmission mains, wastewater collection systems, sewer force
mains and water and wastewater treatment plants. We believe
ductile iron pipe is preferred for most municipal uses because
of its strength, ductility and long-lasting life.
Fast Fabricators also manufactures and sells a broad line of
fabricated pipe, coated pipe and lined pipe products used
primarily in wastewater treatment facilities.
Anvil
Anvil products include a variety of fittings, couplings,
hangers, nipples, valves and related pipe products. Anvils
net sales were $595.2 million, $555.8 million and
$534.6 million in fiscal 2008, 2007 and 2006, respectively.
Approximately $229.7 million, $200.4 million and
$179.4 million, respectively, of these net
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sales were of purchased products. Our products are principally
used in fire protection systems, oilfield and HVAC applications.
The majority of Anvil products are not specified by an architect
or an engineer, but are required to be manufactured to industry
specifications, which could include material composition,
tensile strength and various other requirements. Many products
carry the Underwriters Laboratory (UL), Factory
Mutual (FM) or other approval ratings.
Fittings and Couplings. Anvil manufactures
threaded and grooved pipe fittings. Pipe fittings and couplings
join two pieces of pipe together. Listed below are the four
primary categories of pipe fittings and couplings that we
manufacture.
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Cast Iron Fittings. Cast iron is the most
economical threaded fittings material and is the standard used
in the United States for low pressure applications such as
sprinkler systems and other fire protection systems. We believe
that the substantial majority of our cast iron products are is
used in the fire protection industry, with the remainder used in
steam and other HVAC applications.
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Malleable Iron Fittings and Unions. Malleable
iron is a cast iron that is heat-treated to make it stronger,
allowing a thinner wall and a lighter product. Malleable iron is
primarily used to join pipe in various gas, plumbing and HVAC
applications.
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Grooved Fittings, Couplings and Valves. Unlike
typical pipe connections where pipes are connected by screwing
them into a fitting or welding them together, grooved products
use a threadless pipe-joining method that does not require
welding. We purchase products, such as grooved copper and
stainless steel fittings, to complement our grooved product
offerings to enable us to better serve our customers
project requirements.
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Threaded Steel Pipe Couplings. Threaded steel
pipe couplings are used by plumbing and electrical end users to
join pipe and conduit and by pipe mills as threaded end
protectors.
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Hangers. Anvil manufactures a broad array of
pipe hangers and supports. Standard pipe hangers and supports
are used in fire sprinkler systems and HVAC applications where
the objective is to provide rigid support from the building
structure. Special order, or engineered, pipe supports are used
in nuclear and fossil power plants and petrochemical plants and
refineries where the objective is to support a piping system
that is subject to thermal, dynamic or seismic movement.
Nipples. Anvil manufactures pipe nipples,
which are used to expand or compress the flow between pipes of
different diameters. The pipe nipple product line is a
complementary product offering and is packaged with cast iron
for fire protection products, with malleable iron for industrial
applications, with our forged steel products for oil &
gas and chemical applications and as a general plumbing item.
Other Products. Anvil also distributes other
products including (a) forged steel pipe fittings, hammer
unions, bull plugs and swage nipples which are used to connect
pipe in oil & gas applications and (b) standard
steel and polyvinyl chloride (PVC) conduit couplings
and elbows used to carry wire and cable in electrical
applications.
Sales,
Marketing and Distribution
Mueller
Co.
Mueller Co. sells its products to a wide variety of customers,
including municipalities, water and wastewater utilities, gas
utilities, fire protection and construction contractors. These
products are usually sold to our distributors, who then sell
them to end users working to construct, replace or upgrade a
water, wastewater, gas or fire protection system. In limited
cases, end users of our products, including municipalities and
utilities, buy products directly from us, most often as part of
a program to repair, replace or upgrade existing infrastructure.
Sales of our products are heavily influenced by the
specifications for the underlying projects. Approximately 19%,
16% and 12% of Mueller Co.s net sales were to Canadian
customers in fiscal 2008, 2007 and 2006 respectively.
5
At September 30, 2008, Mueller Co. had 99 sales
representatives in the field and 116 inside marketing and
sales professionals, as well as 50 non-employee
manufacturers representatives. In addition to calling on
distributors, these representatives also call on municipalities,
water companies and other end users to ensure that the products
specified for their projects are comparable to our products, or
our products are specifically specified. Municipalities often
require contractors to use the same products that have been
historically used by that municipality.
Mueller Co.s large installed base, broad product range and
well-known brands have led to our long-standing relationships
with all of the leading distributors in the industries we serve.
We generally ship our products directly to distributors from our
plants. Our distribution network covers all of the major
locations for our products in the United States and Canada.
Although we have long-term relationships with most of our top
distributors, we typically do not have long-term contracts with
our distributors and we do not have written contracts with our
two largest distributors. These top two distributors accounted
for approximately 36%, 41% and 44% of Mueller Co.s net
sales in fiscal 2008, 2007 and 2006, respectively. The loss of
either of these distributors could have a material adverse
effect on our businesses. See Item 1A. RISK
FACTORSWe depend on a group of major distributors for a
significant portion of our sales; any loss of these distributors
could reduce our sales and continuing consolidation could cause
price pressure.
U.S.
Pipe
U.S. Pipe products are sold primarily to waterworks
distributors, contractors, municipalities, utilities and other
governmental agencies. A substantial percentage of ductile iron
pipe orders result from contracts that are bid by contractors or
directly issued by municipalities or utilities. An increasing
portion of ductile iron pipe sales is made through independent
waterworks distributors. We maintain numerous supply depots in
leased space throughout the United States.
At September 30, 2008, U.S. Pipe had a sales force of
51 sales representatives in the field and in-house and sales
engineers who sell our products throughout the United States. We
have divided the United States into four geographic territories,
each managed by a regional sales manager.
Non-U.S. orders
are taken by our in-house sales personnel and through
third-party representatives.
U.S. Pipes top customer, a distributor with whom we
do not have a written contract, represented approximately 17%,
24% and 29% of U.S. Pipes net sales in fiscal 2008,
2007 and 2006, respectively. We believe the loss of this
customer could have a material adverse effect on our businesses.
See Item 1A. RISK FACTORS We
depend on a group of major distributors for a significant
portion of our sales; any loss of these distributors could
reduce our sales and continuing consolidation could cause price
pressure.
Anvil
Approximately 71%, 72% and 74% of Anvils net sales were to
customers in the United States during fiscal 2008, 2007 and
2006, respectively. Approximately 26% of Anvils net sales
were to Canadian customers during fiscal 2008, 2007 and 2006.
Anvils sales in the United States are primarily to
distributors who then sell the products to a wide variety of end
users including commercial contractors. At September 30,
2008, Anvils sales force in the United States consisted of
157 sales and customer service representatives and 15
independent sales representatives. Anvil products are shipped
primarily from four major regional distribution centers from
which we are generally able to provide
24-hour
turnaround, as typically required by our customers.
In Canada, approximately 80% of Anvils net sales are
directly to contractors and, through Anvils Mueller Flow
Control division, approximately 20% of Anvils net sales
are to distributors. Canadian end users are similar to those in
the United States. Anvils Canadian sales force consists of
100 sales and customer service employees. Products sold to
contractors are shipped from 18 branch locations throughout
Canada. Each of Canadas five major provinces has at least
one branch location for sales to distributors.
6
Anvil generally does not have written contracts with its
distributors, although we have long-term relationships with most
of our top distributors. Our top three distributors together
accounted for approximately 13% of our net sales in each of
fiscal 2008, 2007 and 2006. The loss of any one of these
distributors could have a material adverse effect on our
businesses. See Item 1A. RISK FACTORS We
depend on a group of major distributors for a significant
portion of our sales; any loss of these distributors could
reduce our sales and continuing consolidation could cause price
pressure.
Backlog
Backlog is not significant for the Company, except for
U.S. Pipe and the Henry Pratt division of Mueller Co.
Other Mueller Co. divisions and Anvil generally manufacture
products from raw materials in stock and deliver them to
customers typically within two to four weeks from receipt of the
order, depending upon customer delivery specifications. Henry
Pratt manufactures parts for large projects that typically
require design and build specifications. The delivery lead time
for parts used for these projects can be as long as nine months.
Backlog for U.S. Pipe and Henry Pratt is presented below.
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September 30,
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2008
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2007
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(in millions)
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U.S. Pipe
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$
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67.1
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$
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67.4
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Henry Pratt
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81.5
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74.8
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Manufacturing
See Item 2. PROPERTIES for a description of our
principal manufacturing facilities.
Mueller
Co.
Mueller Co. operates 13 manufacturing facilities in the United
States, Canada and China. Our manufacturing operations include
foundry, machining, fabrication, assembly, testing and painting
operations. Not all facilities perform each of these operations.
Our existing manufacturing capacity is sufficient for near-term
requirements. We have no current plans to expand capacity. We
plan to continue to maximize operational efficiencies throughout
all of our plants through the use of LEAN Manufacturing
techniques, which is a methodology that focuses on improving
process, cost, quality, and safety.
Mueller Co. foundries use two casting techniques, lost foam and
green sand. We utilize lost foam technology for fire hydrant
production in our Albertville, Alabama facility and for iron
gate valve production in our Chattanooga, Tennessee facility.
The lost foam process has several advantages over the green sand
process for high-volume products, including a reduction in the
number of manual finishing operations, lower scrap levels and
the ability to reuse some of the materials. The selection of the
appropriate casting method, pattern, core-making equipment, sand
and other raw materials depends on the final product and its
complexity, specifications, function and intended production
volume.
U.S.
Pipe
U.S. Pipe operates three facilities in the United States
for manufacturing ductile iron pipe. We utilize the DeLavaud
centrifugal casting process, which consists of introducing
molten iron into a rapidly turning steel mold and relying on the
centrifugal force to distribute molten iron around the inner
surface of the mold to produce ductile iron pipe of uniform
quality. Construction and testing of U.S. Pipes new
state-of-the-art
ductile iron pipe manufacturing operation in Bessemer, Alabama
is complete. We plan to continue to expand our use of LEAN
Manufacturing and Six Sigma techniques to improve process, cost,
quality, and safety.
In November 2007, we announced our intent to cease our ductile
iron pipe manufacturing operations in Burlington, New Jersey.
These manufacturing operations ceased during the year ended
September 30, 2008. This facility continues to be used as a
full-service distribution center for customers in the Northeast.
7
Fast Fabricators operates a small number of relatively small
facilities throughout the United States that primarily
fabricate, coat and line ductile iron pipe.
Anvil
Anvil operates 11 manufacturing facilities in the United States
and Canada. Our manufacturing operations include foundry, heat
treating, machining, fabricating, assembling, testing and
painting operations. Not all facilities perform each of these
operations. Our foundry operations employ automated vertical and
horizontal green sand molding equipment. Our products are made
in a high volume production environment using high-speed
computer controlled machines and other automated equipment. We
expect to continue to invest in modern manufacturing technology
to maintain our competitiveness in quality and productivity.
Raw
Materials and Purchased Components
Our products are made using several basic raw materials,
including scrap steel and iron, sand, resin, brass ingot, steel
pipe, coke and various purchased components. These materials
have been and are expected to be readily available and
competitively priced.
We generally do not hedge our exposure to raw material price
changes. Our businesses have been and could continue to be
adversely affected by increases in the cost of our raw
materials, as we may not be able to fully or timely pass cost
increases on to our customers. We estimate that raw materials
and purchased components used in manufacturing processes as a
percentage of cost of sales for fiscal 2008 were 13% and 43%,
respectively, for Mueller Co., 23% and 44%, respectively, for
Anvil and 46% and 8%, respectively, for U.S. Pipe. For the
purpose of these estimates, raw materials exclude electricity,
natural gas, water, oxygen and other ancillary items.
Scrap iron prices paid by U.S. Pipe peaked in July 2008 and
were approximately 240% of July 2007 prices. Prices paid
throughout fiscal 2008 were higher than corresponding prices
paid 12 months earlier. Scrap iron prices have since
decreased significantly. The price paid by U.S. Pipe in
October 2008 was approximately 60% lower than the price paid in
July 2008 and approximately 20% lower than the price paid in
October 2007.
Brass prices have moved directionally similar to scrap iron
prices, but brass price changes have not been as extreme as
scrap iron price changes since the beginning of fiscal 2008. For
example, brass prices did not increase as much as scrap iron and
decreased approximately 20% during October 2008 compared to July
2008.
We can give no assurances that the price of raw materials will
remain at current levels or that we will be able to increase
prices to our customers to offset any future cost increases. See
Item 1A. RISK FACTORSOur businesses are subject
to risk of price increases and fluctuations and delay in the
delivery of raw materials and purchased components.
Research
and Development
Our research and development (R&D) facilities
are located in Smithfield, Rhode Island and Bessemer, Alabama.
The primary focus of these groups is to develop new products,
improve and refine existing products, and obtain and assure
compliance with industry approval certifications or standards
(such as American Water Works Association, UL, FM and NSF
International). At September 30, 2008, we employed
38 people dedicated to R&D activities, of which 20
were degreed engineers. We actively seek patent protection where
possible to prevent copying of our proprietary products.
Ideas are generated by manufacturing, marketing or R&D
personnel. In order for development of a project to begin, all
three of these disciplines must agree on the suitability of the
project and determine an estimated return on investment. After
approval, it typically takes 6 to 12 months to tool, test
and start production. The R&D team typically works on
various products simultaneously.
R&D expenses were $5.7 million, $4.6 million and
$5.7 million during fiscal 2008, 2007 and 2006,
respectively.
8
Patents,
Licenses and Trademarks
We have active patents and trademarks relating to the design of
our products and trademarks for our brands and products. Most of
the patents for technology underlying our products have been in
the public domain for many years, and existing third-party
patents are not considered, either individually or in the
aggregate, to be material to our businesses. However, the pool
of proprietary information, consisting of know-how and trade
secrets relating to the design, manufacture and operations of
our products is considered particularly important and valuable.
We generally own the rights to the products that we manufacture
and sell and are not dependent in any material way upon any
license or franchise to operate. U.S. Pipe has granted
numerous trademark licenses around the world with respect to its
uniform family of ductile iron pipe accessories, such as joint
restraint systems.
Seasonality
See Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSEffect of
Inflation; Seasonality.
Competition
The U.S. and
non-U.S. markets
for water infrastructure, flow control and piping component
system products are competitive. However, for most of our
product offerings, there are only a few competitors. Although
many of our competitors are well-established companies with
strong brand recognition, we believe that each of our key
product offerings is competitive. We consider our installed
base, product quality, service, brand recognition, price,
effectiveness of distribution and technical support to be
primary competitive factors.
The competitive environment for Mueller Co. products is mature
and most end users are slow to transition to brands other than
the historically preferred brand. It is difficult to increase
market share in this environment. We believe that Mueller Co.
fire hydrants and valves enjoy strong competitive positions
based largely on their quality, dependability and strong brand
names. The principal competitors for hydrants and iron gate
valves are McWane, Inc. and American Cast Iron Pipe Company. The
primary competitors for our brass products are The Ford Meter
Box Company, Inc. and A.Y. McDonald Mfg. Co. Many brass valves
are interchangeable among different manufacturers.
The ductile iron pipe industry is highly competitive with a
small number of manufacturers of ductile iron pipe and fittings.
Our major competitors are McWane, Inc., Griffin Ductile Iron
Pipe Company and American Cast Iron Pipe Company. Additional
competition for ductile iron pipe comes from pipe composed of
other materials, such as PVC, high-density polyethylene
(HDPE), concrete, fiberglass, reinforced plastic and
steel. Although ductile iron pipe is typically more expensive to
purchase than competing forms of pipe, ductile iron pipe has the
advantages of longevity, strength, ease of installation, lack of
maintenance problems and environmental sustainability.
The competitive environment for Anvils products is highly
competitive, price sensitive and vulnerable to the increased
acceptance of products produced in perceived low-cost countries,
such as China and India. We compete primarily on the basis of
availability, service and price. Our primary competitors in the
United States are Ward Manufacturing L.L.C. for cast iron and
malleable iron fittings, Victaulic Company and the Tyco
Engineered Products and Services segment of Tyco International
Ltd. for ductile grooved fittings and ERICO International
Corporation, NIBCO INC. and Carpenter & Paterson, Inc.
for pipe hangers. Our mechanical and industrial customers have
been slower to accept products manufactured outside the United
States than our fire protection customers.
Environmental
Matters
We are subject to a wide variety of laws and regulations
concerning the protection of the environment, both with respect
to the construction and operation of many of our plants and with
respect to remediating environmental conditions that may exist
at our own and other properties. We strive to maintain
substantial compliance with federal, state and local
environmental laws and regulations. We accrue for environmental
expenses resulting from existing conditions that relate to past
operations when the costs are probable and
9
reasonably estimable. These expenses were $6.8 million,
$8.0 million and $2.3 million during fiscal 2008, 2007
and 2006, respectively. We capitalize environmental expenditures
that increase the life or efficiency of property or reduce or
prevent environmental contamination. Capital expenditures for
environmental requirements are anticipated to be approximately
$3.2 million during fiscal 2009. Capitalized
environmental-related expenditures were $2.9 million,
$16.2 million and $4.7 million during fiscal 2008,
2007 and 2006, respectively.
In September 1987, we implemented an Administrative Consent
Order (ACO) for our Burlington, New Jersey
plant that was required under the New Jersey Environmental
Cleanup Responsibility Act (now known as the Industrial Site
Recovery Act). The ACO required soil and ground water cleanup,
and we have completed, and have received final approval on, the
soil cleanup required by the ACO. U.S. Pipe continues to
pump and treat ground water at this site. Further remediation
could be required. We expect any such remediation costs to be
minimal. Long-term ground water monitoring is also required to
verify natural attenuation. We do not know how long ground water
monitoring will be required, and do not believe monitoring or
further cleanup costs, if any, will have a material adverse
effect on our financial condition or results of operations.
In June 2003, Solutia, Inc. and Pharmacia Corporation
(collectively Solutia) filed suit against
U.S. Pipe and a number of co-defendant foundry-related
companies in the U.S. District Court for the Northern
District of Alabama for contribution and cost recovery allegedly
incurred and to be incurred by Solutia in performing remediation
of polychlorinated biphenyls (PCBs) and heavy metals
in Anniston, Alabama, pursuant to a partial consent degree with
the Environmental Protection Agency (EPA).
U.S. Pipe and certain co-defendants subsequently reached a
settlement with the EPA concerning their liability for certain
contamination in and around Anniston, which was memorialized in
an Administrative Order and Order on Consent (AOC)
that became effective in January 2006. U.S. Pipe has
reached a settlement agreement whereby Phelps Dodge Industries,
Inc., a co-defendant and co-respondent on the AOC, has assumed
U.S. Pipes obligation to perform the work required
under the AOC.
U.S. Pipe and the other settling defendants contend that
the legal effect of the AOC extinguishes Solutias claims
and they filed a motion for summary judgment to that effect.
Discovery in this matter was stayed while the motion for summary
judgment was pending. The court recently issued a summary
judgment order, holding that plaintiffs claims for
contribution are barred by the AOC but giving plaintiffs the
right to seek to recover cleanup costs they voluntarily
incurred. The court granted a motion for immediate appeal to the
Eleventh Circuit Court of Appeals, but the Eleventh Circuit
Court of Appeals declined to take the appeal. We currently have
no basis to form a view with respect to the probability or
amount of liability in this matter.
U.S. Pipe and a number of co-defendant foundry-related
companies were named in a putative civil class action case
originally filed in April 2005 in the Circuit Court of Calhoun
County, Alabama, and removed by defendants to the
U.S. District Court for the Northern District of Alabama
under the Class Action Fairness Act. The putative
plaintiffs in the case filed an amended complaint with the
U.S. District Court in December 2006. The amended complaint
alleged state law tort claims (negligence, failure to warn,
wantonness, nuisance, trespass and outrage) arising from the
creation and disposal of foundry sand alleged to
contain harmful levels of PCBs and other toxins, including
arsenic, cadmium, chromium, lead and zinc. The plaintiffs
originally sought damages for real and personal property and for
other unspecified personal injury. On June 4, 2007, a
motion to dismiss was granted to U.S. Pipe and certain
co-defendants as to the claims for negligence, failure to warn,
nuisance, trespass and outrage. The remainder of the complaint
was dismissed with leave to file an amended complaint. On
July 6, 2007, plaintiffs filed a second amended complaint,
which dismissed prior claims relating to U.S. Pipes
former facility located at 2101 West
10th Street
in Anniston, Alabama and no longer alleges personal injury
claims. Plaintiffs filed a third amended complaint on
July 27, 2007. U.S. Pipe and the other defendants have
moved to dismiss the third amended complaint. On
September 24, 2008, the court issued an order on the
motion, dismissing the claims for trespass and permitting the
plaintiffs to move forward with their claims of nuisance,
wantonness and negligence. We believe that numerous procedural
and substantive defenses are available. At present, we have no
reasonable basis to form a view with respect to the probability
or amount of liability in this matter.
Environmental advocacy groups, relying on standards established
by Californias Proposition 65, are seeking to eliminate or
reduce the content of lead in water infrastructure products
offered for sale in California and other jurisdictions. Some of
our subsidiaries previously entered into settlement agreements
with these environmental
10
advocacy groups to modify products or offer substitutes for sale
in California. California recently passed Assembly Bill
No. 1953 that redefines, as of January 1, 2010, the
term lead free to refer to a weighted average lead
content
of the wetted surface area of the pipes, fittings and fixtures
of not more than 0.25%. Mueller Co. intends to reduce shipments
of brass products containing lead to customers in California in
fiscal 2009. Legislation to substantially restrict lead content
in water infrastructure products also has been introduced in the
U.S. Congress. Congress or state jurisdictions may enact
similar legislation to restrict the content of lead in water
products. Although Mueller Co. now produces no-lead brass
products, most of Mueller Co.s brass valve products
contain small amounts of lead.
In March 2004, Anvil entered into a Consent Order with the
Georgia Department of Natural Resources regarding alleged
hazardous waste violations at Anvils former foundry
facility in Statesboro, Georgia. Pursuant to the Consent Order,
we agreed to pay a monetary fine of $50,000 and pay an
additional $50,000 to fund a supplemental environmental project.
We have also agreed to perform various investigatory and
remedial actions at our foundry and landfill. These total
estimated costs have been accrued.
During fiscal 2008 and 2007, we incurred a total of
approximately $1.0 million and $10.4 million,
respectively, of capital expenditures at our iron foundries to
comply with the EPAs National Emissions Standards for
Hazardous Air Pollutants, which were issued in April 2004.
Although no assurances can be given that we will not be required
in the future to make material expenditures relating to
environmental laws or legally mandated site cleanup, we do not
believe at this time that the compliance and cleanup costs, if
any, associated with the current laws and sites for which we
have cleanup liability or any other future sites will have a
material adverse effect on our financial condition or results of
operations.
In fiscal 2007 and 2005, we entered into settlement and release
agreements with a former insurer whereby the former insurer
agreed to pay $1.6 million and $5.1 million,
respectively, net of legal fees, to us for historical insurance
claims we had previously expensed as incurred. Such claims had
not previously been submitted to the insurance company for
reimbursement. We released the insurer of both past and future
claims.
In the acquisition agreement pursuant to which a predecessor to
Tyco International Ltd. (Tyco) sold our Mueller Co.
and Anvil businesses to the prior owners of these businesses in
August 1999, Tyco agreed to indemnify us and our affiliates,
among other things, for all Excluded Liabilities.
Excluded Liabilities include, among other things, substantially
all liabilities relating to the time prior to August 1999. The
indemnity survives indefinitely. However, we may be responsible
for these liabilities in the event that Tyco ever becomes
financially unable to or otherwise fails to comply with the
terms of the indemnity. In addition, Tycos indemnity does
not cover liabilities to the extent caused by us or the
operation of our businesses after August 1999, nor does it cover
liabilities arising with respect to businesses or sites acquired
after August 1999. In June 2007, Tyco was separated into
three separate publicly traded companies. Should the entity or
entities that assumed Tycos obligations under the
acquisition agreement ever become financially unable or fail to
comply with the terms of the indemnity, we may be responsible
for such obligations or liabilities.
See Item 3. LEGAL PROCEEDINGS.
Safety
We continuously strive to improve on injury reduction to reduce
recordable injuries and days away from work injuries. In fiscal
2008, our total recordable injury rate decreased by 36% to 4.3
injuries per 100 employees and our days away from work rate
decreased by 43% to 0.80 cases per 100 employees compared
to fiscal 2007. This translates into 191 fewer total cases and
46 fewer days away from work cases in fiscal 2008 compared to
fiscal 2007. We estimate that our injury and illness prevention
programs saved us approximately $0.8 million of costs in
fiscal 2008 compared to our costs in fiscal 2007.
Regulatory
Matters
The production and marketing of our products is subject to the
rules and regulations of various federal, state and local
agencies, including laws governing our relationships with
distributors. Regulatory compliance has not had a material
effect on our results to date. We are not aware of any pending
legislation that is likely to have a material adverse effect on
our operations. See Item 3. LEGAL PROCEEDINGS,
and Item 1A. RISK FACTORSOur brass valve
products contain lead, which may be replaced in the future.
11
Employees
At September 30, 2008, we employed approximately
6,500 people, of whom approximately 90% work in the United
States, and approximately 72% of our hourly workforce was
covered by collective bargaining agreements. Our locations with
employees covered by such agreements are presented below.
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Expiration of
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Location
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current agreement(s)
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Albertville, AL
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September 2011
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Bessemer, AL
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October 2010
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North Birmingham, AL
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January 2009
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Union City, CA
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January 2011
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Aurora, IL
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August 2011
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Decatur, IL
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June 2012
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University Park, IL
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April 2010
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Bloomington, MN
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March 2009
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Cincinnati, OH
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June 2011
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Columbia, PA
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May 2011
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Chattanooga, TN
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September 2010, July 2011 and October 2011
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Henderson, TN
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December 2011
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Houston, TX
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January 2009
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St. Jerome, Canada
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November 2011
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Simcoe, Canada
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November 2009
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British Columbia, Canada
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December 2008
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Montreal, Quebec, Canada
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November 2007*
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* Employees continue working under the terms of this
agreement in lieu of a new agreement.
We believe that relations with our employees, including those
represented by unions, are good.
Geographic
Information
Geographic net sales information is presented below.
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United
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States
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Canada
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Other
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Total
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(in millions)
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Net sales:
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Year ended September 30, 2008
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$
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1,543.8
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$
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292.3
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$
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23.2
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$
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1,859.3
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Year ended September 30, 2007
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1,560.4
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265.4
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23.2
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1,849.0
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Risks
Relating to Our Business
Our
businesses may suffer as a result of the downturn in new
residential construction.
New water and wastewater infrastructure spending, which is
dependent upon residential construction, is important to our
businesses. Since January 2006, there have been steep declines
in the construction of new homes, which have adversely impacted
our volume in recent periods. Although residential construction
activity is cyclical, it is unclear when the current decline
will subside. An extended downtown in residential construction
activity will negatively affect our sales, profitability and
cash flows and could impair our ability to conduct our
businesses as they have historically been conducted.
12
A
portion of our business relies on local, state and federal
spending related to infrastructure upgrade, repair and
replacement.
A portion of our business depends on local, state and federal
spending on water and wastewater infrastructure upgrade, repair
and replacement. A significant percentage of our products are
ultimately used by municipalities or other governmental agencies
in water transmission and collection systems. As a result, our
sales could decline as a result of declines in the number of
projects planned by water agencies, government spending cuts,
general budgetary constraints, difficulty in obtaining necessary
permits or the inability of customers or end users to obtain
financing. It is not unusual for water projects to be delayed
and rescheduled for a number of reasons, including changes in
project priorities and difficulties in complying with
environmental and other government regulations. Spending growth
in the infrastructure upgrade, repair and replacement sector may
slow in the future if state and local governments budgets
are negatively impacted by downturns in the economy. Even if
favorable economic conditions exist, state and local governments
may choose not to address deferred infrastructure needs among
competing budget priorities. A decline in local, state and
federal spending on infrastructure could lead to a further
decline in our sales, profitability and cash flows.
A recent report of the U.S. Conference of Mayors estimates
that state and local government funding generally provides 99%
and 95% of the investment in drinking water and wastewater
infrastructure, respectively. Funds for water infrastructure
repair and replacement typically come from taxes or water rates.
The ability of state and local governments to increase taxes or
water rates may be limited. In addition, state and local
governments that do not budget for capital depreciation in
setting tax rates and water rates may be unable to pay for water
infrastructure repair and replacement if they do not have other
funding sources.
A
portion of our business relies on cyclical non-residential
construction.
A portion of our business depends on non-residential
construction. Non-residential construction activity is cyclical
and may lag general market downturns. We expect decreased
non-residential construction activity in fiscal 2009 compared to
fiscal 2008, especially in the latter part of the year.
Independent forecasts of 2009 non-residential construction
activity indicated a decline of 5% to 6% compared to 2008. Our
products are used typically towards the end of a construction
project, so the demand for our products in the earlier part of
fiscal 2009 will be influenced by projects already underway at
the end of fiscal 2008 that will be completed in fiscal 2009.
Our
business is subject to risk of cost increases and fluctuations
and delays in the delivery of raw materials and purchased
components.
Our business is subject to the risk of cost increases and
fluctuations and periodic delays in the timely delivery of raw
materials and purchased components that are beyond our control.
During fiscal 2008, we experienced unprecedented increases in
scrap metal costs. Our operations require substantial amounts of
raw materials or purchased components, such as scrap steel and
iron, brass ingot, sand, resin, steel pipe and coke, as well as
purchased components. Management estimates that raw materials
and purchased components used in the manufacturing processes as
a percentage of cost of sales for fiscal 2008 were 13% and 43%,
respectively, for Mueller Co., 23% and 44%, respectively, for
Anvil and 46% and 8%, respectively, for U.S. Pipe. For the
purposes of these estimates, raw materials exclude electricity,
natural gas, water, oxygen, and other ancillary items. In
addition, if any of our supply arrangements cannot be continued,
the availability of raw materials could be reduced or the price
of raw materials could increase.
The availability and cost of certain raw materials, such as
brass ingot and scrap steel, as well as purchased components are
subject to economic forces largely beyond our control, including
North American and international demand, freight costs,
speculation and foreign currency exchange rates. We generally
purchase raw materials at current market costs and do not hedge
our exposure to cost changes. We are not always able, and may
not be able
in the future, to pass on increases in the cost of these raw
materials to our customers. In particular, when raw material
costs increase rapidly or to significantly higher than normal
levels, we may not be able to pass cost increases through to our
customers on a timely basis, if at all, which could lead to
reductions of our income from operations, operating margins and
cash flows. Any increases in the cost of raw materials and
purchased components or decreases in their availability could
impair our profitability.
13
We
depend on a group of major distributors for a significant
portion of our sales; any loss of these distributors could
reduce our sales and continuing consolidation could cause price
pressure.
Approximately 31% of our fiscal 2008 net sales were to our
ten largest distributors, and approximately 24% of our fiscal
2008 net sales were to our three largest distributors: HDS
IP Holding, LLC (HD Supply), Ferguson Enterprises,
Inc. and American Water Works Supply. HD Supply accounted for
20% and 17% of net sales for Mueller Co. and U.S. Pipe,
respectively. We do not have written contracts with any of our
major distributors.
While our relationships with our ten largest distributors have
been long-lasting, distributors in our industry have experienced
consolidation in recent years. For example, The Home Depot, Inc.
acquired National Waterworks Holdings, Inc. in 2005 and then
acquired Hughes Supply, Inc. in March 2006. These acquired
businesses along with the related business from The Home Depot
Inc. have been merged into one entity operating as HD Supply,
which became an independent company in August 2007. As a result,
two of our three historically largest distributors have been
combined under common control. In addition, our distributors
could be acquired by other distributors who buy products from
our competitors. If consolidation among distributors continues,
pricing pressure may result, which could lead to a decline in
our sales and profitability. Further, our ability to retain our
customers in the face of competition generally depends on a
variety of factors, including the quality and price of our
products and services and our ability to market our products
effectively. The loss of any one of our top distributors could
reduce our levels of sales and profitability.
Our
industry is very competitive and some of our products are
similar to those manufactured by our competitors.
The U.S. and
non-U.S. markets
for water infrastructure, flow control and piping component
system products are competitive. While there are only a few
competitors for most of our product offerings, many of our
competitors are well-established companies with strong brand
recognition. Anvils products in particular compete on the
basis of price and are sold in fragmented markets with low
barriers to entry. Also, competition for ductile iron pipe sold
by U.S. Pipe comes not only from ductile iron pipe produced
by a concentrated number of manufacturers, but also from pipe
composed of other materials, such as polyvinyl chloride
(PVC), high-density polyethelyne (HDPE),
concrete, fiberglass, reinforced plastic and steel.
Competition
from
non-U.S.
companies could increase and could harm our sales, profitability
and cash flows.
In addition to competition from U.S. companies, we face the
threat of competition from
non-U.S. companies.
The intensity of competition from
non-U.S. companies
is affected by fluctuations in the value of the U.S. dollar
against their local currencies, by the cost to ship competitive
products into North America and by the availability of trade
remedies. Competition may also increase as a result of
U.S. competitors shifting their operations or otherwise
reducing their expenses by utilizing
non-U.S. facilities
or suppliers.
Interruption
of normal operations at our key manufacturing facilities may
impair our production capabilities.
Some of our key products, including fire hydrants, valves and
ductile iron pipe, are manufactured at large manufacturing
facilities. The operations at our major manufacturing facilities
may be impaired by various operating risks, including, but not
limited to:
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catastrophic events such as fires, explosions, floods,
earthquakes or other similar occurrences;
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interruptions in raw materials or other manufacturing inputs;
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adverse government regulations;
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equipment breakdowns or failures;
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violations of our permit requirements or revocation of permits;
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releases of pollutants and hazardous substances to air, soil,
surface water or ground water;
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14
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shortages of equipment or spare parts; and
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labor disputes.
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The occurrence of any of these events could impair our cash
flows and results of operations.
Our
brass valve products contain lead, which may be replaced in the
future.
Environmental advocacy groups, relying on standards established
by Californias Proposition 65, are seeking to eliminate or
reduce the content of lead in water infrastructure products
offered for sale in California and other jurisdictions. Some of
our subsidiaries previously have entered into settlement
agreements with these environmental advocacy groups to modify
products or offer substitutes for sale in California. California
recently passed Assembly Bill No. 1953 that redefines, as
of January 1, 2010, the term lead free to refer
to a weighted average lead content of the wetted surface area of
the pipes, fittings and fixtures of not more than 0.25%. Mueller
Co. intends to reduce shipments of brass products containing
lead to customers in California in fiscal 2009. Legislation to
substantially restrict lead content in water infrastructure
products also has been introduced in the U.S. Congress.
Congress or state jurisdictions may enact similar legislation to
restrict the content of lead in water products. Although Mueller
Co. now produces no-lead brass products, most of
Mueller Co.s brass valve products contain small
amounts of lead.
We
have limited experience operating as a stand-alone
company.
We became a stand-alone publicly-traded company as a result of
Walter Industries, Inc (Walter Industries)
distributing our Series B common stock to the shareholders
of Walter Industries on December 14, 2006 (the
Spin-off). Our operating as a stand-alone
publicly-traded company may place significant demands on our
management, operational and technical resources. Our successful
future performance will depend on our ability to function as a
stand-alone publicly-traded company, to finance our operations
and to adapt our information systems to changes in our
businesses. Some of the financial information included in this
annual report for the period prior to the Spin-off may not
reflect what the operating results would have been had we been a
stand-alone publicly-traded company.
We are
subject to certain risks inherent in managing a decentralized
organization.
We currently have three distinct business segments and operate
under a decentralized organizational structure. The application
of consistent accounting policies, internal controls, procedures
and compliance programs across all of our operations may enhance
efficiency and operating effectiveness and improve corporate
information flows. We continue to communicate such policies,
controls, procedures and programs and it could take time for
such implementation to be complete. Further, we may need to
modify existing compliance programs and processes to increase
efficiency and operating effectiveness and improve corporate
visibility into our decentralized operations and it could take
time for any such modifications to be implemented across our
operations. During the implementation periods, our decentralized
operating approach could result in inconsistent management
practices and procedures, which could adversely affect our
businesses.
The
financial and credit liquidity crisis may adversely affect our
ability to borrow money or raise capital.
If the financial and credit liquidity crisis were to continue or
become more severe it may impact our ability to obtain money
under our credit facility. Although our lenders have made
commitments to make funds available to us in a timely fashion,
if the current financial and credit liquidity crisis continues
or worsens, our lenders may be unable or unwilling to lend money
pursuant to our line of credit. In addition, if we determine
that it is appropriate or necessary to raise capital in the
future, the future cost of raising funds through the debt or
equity markets may be more expensive or those markets may be
unavailable. If we were unable to use our line of credit or
raise funds through debt or equity markets, it could materially
and adversely affect our liquidity or our ability to follow our
key growth strategies.
15
We may
be unsuccessful in identifying, acquiring or integrating
suitable acquisitions.
A part of our growth strategy depends on expansion, which we
expect to occur primarily through acquisitions of businesses
that can be successfully integrated into our existing businesses
and that will provide us with complementary manufacturing
capabilities, products, services, customers or end users.
However, we may be unable to identify targets that will be
suitable for acquisition. In addition, if we identify a suitable
acquisition candidate, our ability to complete the acquisition
will depend on a variety of factors, including our ability to
finance the acquisition. Our ability to finance our acquisitions
is subject to a number of factors, including the availability of
adequate cash, cash flows from operations or acceptable
financing terms and the terms of our debt instruments. In
addition, there are many challenges to integrating acquired
companies and businesses in our Company, including eliminating
redundant operations, facilities and systems, coordinating
management and personnel, retaining key employees, managing
different corporate cultures and achieving cost reductions and
cross-selling opportunities. We may not be able to meet these
challenges in the future.
Our
goodwill and identifiable intangible assets are subject to
possible impairment charges.
At September 30, 2008, we had $871.5 million of
goodwill and $789.8 million of identifiable intangible
assets on our balance sheet. Goodwill and certain identifiable
intangible assets are reviewed at least annually for impairment.
Impairment may result from, among other things, deterioration in
our performance, adverse market conditions, adverse changes in
applicable laws or regulations, including changes that restrict
the activities of or affect the products and services sold by
our businesses, and a variety of other factors. Any identified
impairment must be expensed immediately as a charge to results
of operations.
We
have substantial debt and we may incur additional debt in the
future.
At September 30, 2008, our total debt was
$1,095.5 million. The level of our debt could have
important consequences, including:
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|
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|
|
making it more difficult for us to satisfy our obligations under
our debt instruments;
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|
|
limiting cash flow available for general corporate purposes,
including capital expenditures and acquisitions, because a
substantial portion of our cash flows from operations must be
dedicated to servicing our debt;
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|
limiting our ability to obtain additional debt financing in the
future for working capital, capital expenditures or acquisitions;
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|
limiting our flexibility to react to competitive and other
changes in our industry and economic conditions
generally; and
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|
exposing us to risks inherent in interest rate fluctuations
because a substantial portion of our borrowings is at variable
rates of interest, which could result in higher interest expense
in the event of increases in interest rates.
|
We may
not be able to generate sufficient cash to service all of our
debt and may be forced to take other actions to satisfy our
obligations under our debt, which may not be
successful.
Our ability to pay or to refinance our debt will depend upon our
future operating performance, which will be affected by our
ability to succeed in carrying out our business plans and by
general economic, financial, competitive, legislative,
regulatory, business and other factors beyond our control. Our
businesses may not generate sufficient cash flows from
operations or future borrowings may not be available to us in an
amount sufficient to enable us to pay our indebtedness or to
fund our other liquidity needs. We cannot assure that we will
maintain a level of liquidity from operating activities
sufficient to permit us to pay the principal and interest on our
indebtedness.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to reduce
investments, dividends and capital expenditures, or to sell
assets, seek additional capital or restructure or refinance our
indebtedness. However, we may not be able to accomplish these
actions on satisfactory terms, or at all. In addition, these
actions, if accomplished, could affect the operation and growth
of our businesses and may not permit us to meet our debt service
obligations.
16
We may
not be able to satisfy our debt covenants.
Our senior credit facilities require the maintenance of
specified financial ratios on a quarterly basis. In addition,
our debt instruments require us to provide regular financial
information to our lenders and bondholders. Such requirements
generally may be satisfied by our timely filing with the
Securities and Exchange Commission (SEC) of periodic
reports under the Securities Exchange Act of 1934, as amended
(the Exchange Act). Our ability to satisfy those
financial ratios or covenants can be affected by events beyond
our control, and there is a risk that we will not meet those
tests. A breach of any of these covenants could result in a
default under our debt instruments. If an event of default is
not remedied after the delivery of notice of default and lapse
of any relevant grace period, the holders of our debt would be
able to declare it immediately due and payable. Upon the
occurrence of an event of default under our senior credit
facilities, the lenders could also terminate all commitments to
extend further credit. If we were unable to repay those amounts,
the lenders could proceed against the collateral granted to them
to secure the indebtedness under our senior credit facilities.
We have pledged substantially all of our assets (including our
intellectual property), other than the assets of our foreign
subsidiaries, as security under the senior credit facilities. If
the lenders under our senior credit facilities or holders of our
outstanding notes accelerate the repayment of borrowings, we may
not have sufficient assets to repay our senior credit facilities
and our other indebtedness, which could negatively impact the
value of our common stock and our ability to operate as a going
concern. Further, the covenants in our debt instruments could
limit our ability to engage in certain transactions.
Our
business may be harmed by work stoppages and other labor
relations matters.
We are subject to a risk of work stoppages and other labor
relations matters because a large portion of our hourly
workforce is represented by collective bargaining agreements. At
September 30, 2008, approximately 72% of our hourly
workforce was covered by these agreements. These employees are
represented by locals from six different unions, including the
Glass, Molders, Pottery, Plastics and Allied Workers
International Union, which represents the largest number of our
employees. Our labor agreements will be negotiated as they
expire at various times through June 2012. Work stoppages for an
extended period of time could impair our businesses. Labor costs
are a significant element of the total costs involved in our
manufacturing process, and an increase in the costs of labor
could therefore harm our businesses. In addition, the freight
companies that deliver our products to our customers generally
use truck drivers represented by collective bargaining
agreements, and our businesses could suffer if these truck
drivers face work stoppages or support other work stoppages.
If the
Employee Free Choice Act is adopted, it would be easier for our
employees to obtain union representation and our businesses
could suffer.
In 2007, the Employee Free Choice Act of 2007: H.R. 800
(EFCA) was passed in the U.S. House of
Representatives. This bill or a variation of it could be enacted
in the future and could have an adverse impact on our
businesses. The EFCA aims to amend the National Labor Relations
Act, by making it easier for workers to obtain union
representation and increasing the penalties employers may incur
if they engage in labor practices in violation of the National
Labor Relations Act. The EFCA requires the National Labor
Relations Board (NLRB) to review petitions filed by
employees for the purpose of creating a labor organization and
to certify a bargaining representative without directing an
election if a majority of the bargaining unit employees have
authorized designation of the representative. The EFCA also
requires the parties to begin bargaining within 10 days of
the receipt of the petition, or longer time if mutually agreed
upon. In addition, if the union and employer cannot agree upon
the terms of a first collective bargaining agreement within
90 days, which can be extended by mutual agreement, either
party can request federal mediation, which could lead to binding
arbitration if an agreement still cannot be reached after an
additional 30 days which can be extended by mutual
agreement. EFCA would also require the NLRB to seek a federal
injunction against an employer whenever there is reasonable
cause to believe that the employer has discharged or
discriminated against an employee to encourage or discourage
membership in the labor organization, threatened to discharge or
otherwise discriminate against an employee in order to interfere
with, restrain, or coerce employees in the exercise of
guaranteed collective bargaining rights, or engaged in any other
related unfair labor practice that significantly interferes
with, restrains, or coerces employees in the exercise of such
guaranteed rights. The EFCA adds additional remedies for such
violations, including back pay plus liquidated damages and civil
penalties to be determined by the NLRB not to exceed $20,000 per
infraction.
17
Our
sales are influenced by weather conditions and the level of
construction activity at different times of the year; we may not
be able to generate sales that are sufficient to cover our
expenses during certain periods of the year.
Some of our products, including ductile iron pipe, are
moderately seasonal, with lower sales in our first and second
quarters when weather conditions throughout most of North
America tend to be cold or wet resulting in lower levels of
construction activity. This seasonality in demand has resulted
in fluctuations in our sales and operating results. In order to
satisfy demand during peak periods, we may incur costs
associated with inventory
build-up,
and there can be no assurance that our projections as to future
needs will be accurate. We have a backlog of orders for some
products for which we have inadequate inventories, or which are
made-to-order. Because many of our expenses are fixed, seasonal
trends can cause reductions in our income from operations,
profit margins and deterioration of our financial condition
during periods of lower production or sales activity.
We may
be subject to product liability or warranty claims that could
require us to make significant payments.
We are exposed to product liability claims in the event that the
use of our products results, or is alleged to result, in bodily
injury or property damage. There is a risk that we will
experience product liability or warranty losses in the future or
that we will incur expenses to defend such claims. Such losses
and expenses may be material. While we currently have product
liability insurance, our product liability insurance coverage
may not be adequate for any liabilities that may ultimately be
incurred or the coverage may not continue to be available on
terms acceptable to us. A successful claim brought against us in
excess of our available insurance coverage could require us to
make significant payments or a requirement to participate in a
product recall may harm our reputation or profitability. Any
such product claims can include costs to access and repair
installed products, which can exceed our sales related to these
products.
We
rely on a predecessor to Tyco International Ltd.
(Tyco) to indemnify us for certain liabilities and
there is a risk that Tyco may become unable or fail to fulfill
its obligations.
Under the terms of the acquisition agreement relating to the
August 1999 sale by Tyco of the Mueller Co. and Anvil businesses
to the prior owner of these businesses, we are indemnified by
Tyco for all liabilities arising in connection with the
operation of these businesses prior to their sale by Tyco,
including with respect to products manufactured or sold prior to
the closing of that transaction. The indemnity survives forever
and is not subject to any dollar limits. In the past, Tyco has
made substantial payments
and/or
assumed defense of claims pursuant to this indemnification
provision. However, we may be responsible for these liabilities
in the event that Tyco ever becomes financially unable or fails
to comply with, the terms of the indemnity. In addition,
Tycos indemnity does not cover product liabilities to the
extent caused by our products manufactured after that
transaction. In June 2007, Tyco was separated into three
separate publicly traded companies. Should the entity or
entities that assumed Tycos obligations under the
acquisition agreement ever become financially unable or fail to
comply with the terms of the indemnity, we may be responsible
for such obligations or liabilities. For more information about
our potential product liabilities, see Item 3. LEGAL
PROCEEDINGS.
We are
subject to environmental, health and safety laws and regulations
that could subject us to liability for fines,
clean-ups
and other damages, require us to incur significant costs to
modify our operations and increase our manufacturing
costs.
We are subject to various laws and regulations relating to the
protection of the environment and human health and safety and
must incur capital and other expenditures to comply with these
requirements. Failure to comply with any environmental, health
or safety requirements could result in the assessment of
damages, or imposition of penalties, suspension of production, a
required upgrade or change to equipment or processes or a
cessation of operations at one or more of our facilities.
Because these laws are complex, constantly changing and may be
applied retroactively, there is a risk that these requirements,
in particular as they change in the future, may impair our
businesses profitability and results of operations.
In addition, we incurred costs to comply with the National
Emissions Standards for Hazardous Air Pollutants for iron and
steel foundries and for our foundries painting operations
issued by the Environmental Protection Agency (EPA).
See Item 1. BUSINESSEnvironmental
Matters. We may be required to
18
conduct investigations and perform remedial activities that
could require us to incur material costs in the future. Our
operations involve the use of hazardous substances and the
disposal of hazardous wastes. We may incur costs to manage these
substances and wastes and may be subject to claims for damage
for personal injury, property damages or damage to natural
resources.
Our U.S. Pipe segment has been identified as a potentially
responsible party liable under federal environmental laws for a
portion of the cleanup costs with regard to two sites, one in
Alabama and one in California, and is currently subject to an
administrative consent order requiring certain monitoring and
cleanup with regard to a New Jersey facility. Such cleanup costs
could be substantial and could have a negative effect on our
profitability and cash flows in any given reporting period. For
more information about our environmental compliance and
potential environmental liabilities, see Item 1.
BUSINESSEnvironmental Matters.
Compliance
with the securities laws and regulations is likely to make it
more difficult and expensive for us to maintain directors and
officers liability insurance and to attract and retain qualified
members of our Board of Directors.
We expect the Sarbanes-Oxley Act and the rules and regulations
subsequently implemented by the SEC and the Public Company
Accounting Oversight Board to continue to impose compliance
burdens and costs on us. Those rules and regulations may make it
more difficult and expensive for us to maintain director and
officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to maintain
coverage. These rules and regulations could also make it more
difficult for us to attract and retain qualified members of our
Board of Directors, particularly to serve on our audit
committee, and executive officers.
Our
businesses and ability to compete could suffer if we fail to
protect our intellectual property.
Our businesses depend upon our technology and know-how, which is
largely developed internally. While we believe that none of our
operating units is substantially dependent on any single patent,
trademark, copyright or other form of intellectual property, we
rely on a combination of patent protection, copyright and
trademark laws, trade secrets protection, employee and third
party confidentiality and nondisclosure agreements and technical
measures to protect our intellectual property rights. There is a
risk that the measures we take to protect our intellectual
property rights may not be adequate to deter infringement,
misappropriation or independent third-party development of our
technology or to prevent an unauthorized third party from
obtaining or using information or intellectual property that we
regard as proprietary or to keep others from using brand names
similar to our own. The disclosure, misappropriation or
infringement of our intellectual property could harm our
competitive position. In addition, our actions to enforce our
rights may result in substantial costs and diversion of
management and other resources. We may also be subject to
intellectual property infringement claims from time to time,
which may result in our incurring additional expenses and
diverting our resources to respond to these claims.
Our
ability to sell our products could suffer if transportation for
our products becomes unavailable or uneconomic for our
customers.
Transportation costs are a critical factor in a customers
purchasing decision. Increases in transportation costs could
make our ductile iron pipe and other products less competitive
with the same or alternative products from competitors.
We typically depend upon rail, barge and trucking systems to
deliver our products to customers. While our customers typically
arrange and pay for transportation from our factory to the point
of use, disruption of these transportation services because of
weather-related problems, strikes, lock-outs or other events
could temporarily impair our ability to supply our products to
our customers thereby resulting in lost sales and reduced
profitability.
Our
required pension contributions may increase.
A significant portion of the assets invested in our defined
benefit pension plans are invested in equity securities. A large
majority of equity securities have declined in value during the
general timeframe of late September through the latter part of
November 2008 in response to general economic turmoil and the
credit crisis in particular. The level of pension plan assets
compared to pension plan liabilities at various
19
measurement dates influences the level of future contributions
to be made to these pension plans. The reduced value of pension
plan assets could increase future pension plan contributions.
Risks
Relating to Our Relationship with Walter Industries
We may
have substantial additional liability for federal income tax
allegedly owed by Walter Industries.
Each member of a consolidated group for federal income tax
purposes is severally liable for the federal income tax
liability of each other member of the consolidated group for any
year in which it is a member of the group at any time during
such year. Each member of the Walter Industries consolidated
group, which included us (including our subsidiaries) through
December 14, 2006, is also jointly and severally liable for
pension and benefit funding and termination liabilities of other
group members, as well as certain benefit plan taxes.
Accordingly, we could be liable under such provisions in the
event any such liability is incurred, and not discharged, by any
other member of the Walter Industries consolidated group for any
period during which we were included in the Walter Industries
consolidated group.
A dispute exists with regard to federal income taxes for fiscal
years 1980 to 1994 and 1999 to 2001 allegedly owed by the Walter
Industries consolidated group, which included U.S. Pipe
during these periods. According to Walter Industries
quarterly report on
Form 10-Q
for the period ended September 30, 2008, Walter
Industries management estimates that the amount of tax
claimed by the IRS is approximately $34.0 million for
issues currently in dispute in bankruptcy court for matters
unrelated to us. This amount is subject to interest and
penalties. In addition, the Internal Revenue Service has issued
a Notice of Proposed Deficiency assessing additional tax of
$82.2 million for the Walter Industries tax years ended
May 31, 2000, December 31, 2000 and December 31,
2001. As a matter of law, we are jointly and severally liable
for any final tax determination, which means that in the event
Walter Industries is unable to pay any amounts owed, we would be
liable. Walter Industries disclosed in the above mentioned
Form 10-Q
that they believe their filing positions have substantial merit
and that they intend to defend vigorously any claims asserted.
The
tax allocation agreement between us and Walter Industries
allocates to us certain tax risks associated with the
Spin-off.
Walter Industries effectively controlled all of our tax
decisions for periods during which we were a member of the
Walter Industries consolidated federal income tax group and
certain combined, consolidated or unitary state and local income
tax groups. Under the terms of the income tax allocation
agreement between Walter Industries and us dated May 26,
2006, we generally compute our tax liability on a stand-alone
basis, but Walter Industries has sole authority to respond to
and conduct all tax proceedings (including tax audits) relating
to our federal income and combined state returns, to file all
such returns on behalf of us and to determine the amount of our
liability to (or entitlement to payment from) Walter Industries
for such periods. This arrangement may result in conflicts of
interests between us and Walter Industries. In addition, the tax
allocation agreement provides that if the Spin-off is determined
not to be tax-free pursuant to Section 355 of the Internal
Revenue Code of 1986, as amended, we generally will be
responsible for any taxes incurred by Walter Industries or its
shareholders if such taxes result from certain of our actions or
omissions and for a percentage of any such taxes that are not a
result of our actions or omissions or Walter Industries
actions or omissions or taxes based upon our market value
relative to Walter Industries market value. Additionally,
to the extent that Walter Industries was unable to pay taxes, if
any, attributable to the Spin-off and for which it is
responsible under our tax allocation agreement, we could be
liable for those taxes as a result of being a member of the
Walter Industries consolidated group for the year in which the
Spin-off occurred.
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Item 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
20
Our principal properties are listed below.
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|
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Size
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Owned or
|
Location
|
|
Activity
|
|
(sq. ft.)
|
|
|
leased
|
|
Mueller Co.:
|
|
|
|
|
|
|
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Albertville, AL
|
|
Manufacturing
|
|
|
422,481
|
|
|
Leased
|
Aurora, IL
|
|
Manufacturing
|
|
|
146,880
|
|
|
Owned
|
Decatur, IL
|
|
Manufacturing and selling, general and
administration
|
|
|
467,044
|
|
|
Owned
|
Hammond, IN
|
|
Manufacturing
|
|
|
51,160
|
|
|
Owned
|
Cleveland, NC
|
|
Manufacturing
|
|
|
190,000
|
|
|
Owned
|
Bethlehem, PA
|
|
Manufacturing
|
|
|
104,000
|
|
|
Leased
|
Chattanooga, TN
|
|
Manufacturing
|
|
|
525,000
|
|
|
Owned
|
Cleveland, TN
|
|
Manufacturing
|
|
|
40,000
|
|
|
Owned
|
Murfreesboro, TN
|
|
Manufacturing
|
|
|
11,400
|
|
|
Owned
|
Murfreesboro, TN
|
|
Manufacturing
|
|
|
12,000
|
|
|
Leased
|
Brownsville, TX
|
|
Manufacturing
|
|
|
50,000
|
|
|
Leased
|
Calgary, Alberta
|
|
Distribution
|
|
|
11,000
|
|
|
Leased
|
Barrie, Ontario
|
|
Distribution
|
|
|
50,000
|
|
|
Leased
|
St. Jerome, Quebec
|
|
Manufacturing
|
|
|
55,000
|
|
|
Owned
|
Jingmen, China
|
|
Manufacturing
|
|
|
154,377
|
|
|
Owned
|
|
|
|
|
|
|
|
|
|
U.S. Pipe:
|
|
|
|
|
|
|
|
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Bessemer, AL
|
|
Manufacturing
|
|
|
962,000
|
|
|
Owned
|
Birmingham, AL
|
|
Selling, general and administration
|
|
|
66,000
|
|
|
Owned
|
North Birmingham, AL
|
|
Manufacturing
|
|
|
360,000
|
|
|
Owned
|
Union City, CA
|
|
Manufacturing
|
|
|
139,000
|
|
|
Owned
|
Burlington, NJ
|
|
Distribution
|
|
|
329,000
|
|
|
Owned
|
|
|
|
|
|
|
|
|
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Anvil:
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|
|
|
|
|
|
|
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Santa Fe Springs, CA
|
|
Distribution
|
|
|
37,815
|
|
|
Leased
|
University Park, IL
|
|
Distribution
|
|
|
192,000
|
|
|
Leased
|
Sparks, NV
|
|
Distribution
|
|
|
124,500
|
|
|
Leased
|
Portsmouth, NH
|
|
Selling, general and administration
|
|
|
13,740
|
|
|
Leased
|
Aurora, OH
|
|
Manufacturing
|
|
|
39,650
|
|
|
Leased
|
Columbia, PA
|
|
Manufacturing and distribution
|
|
|
663,000
|
|
|
Owned
|
Greencastle, PA
|
|
Manufacturing
|
|
|
132,743
|
|
|
Owned
|
Pottstown, PA
|
|
Manufacturing
|
|
|
46,000
|
|
|
Owned
|
Waynesboro, PA
|
|
Manufacturing
|
|
|
53,051
|
|
|
Owned
|
North Kingstown, RI
|
|
Manufacturing
|
|
|
136,868
|
|
|
Leased
|
Henderson, TN
|
|
Manufacturing
|
|
|
167,700
|
|
|
Owned
|
Grand Prairie, TX
|
|
Distribution
|
|
|
167,375
|
|
|
Leased
|
Houston, TX
|
|
Manufacturing and distribution
|
|
|
57,600
|
|
|
Owned
|
Houston, TX
|
|
Manufacturing
|
|
|
45,988
|
|
|
Owned
|
Longview, TX
|
|
Manufacturing
|
|
|
114,000
|
|
|
Owned
|
Simcoe, Ontario
|
|
Manufacturing and distribution
|
|
|
145,000
|
|
|
Owned
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
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Atlanta, GA
|
|
Corporate headquarters
|
|
|
24,728
|
|
|
Leased
|
We consider our facilities to be well-maintained and believe we
have sufficient capacity to meet our anticipated needs through
fiscal 2009. All of our U.S. facility leases and leasehold
interests are encumbered by liens securing our obligations under
our senior credit facilities. Our leased properties have terms
expiring at various dates through September 2017.
21
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
We are involved in various legal proceedings that have arisen in
the normal course of operations, including the proceedings
summarized below. The effect of the outcome of these matters on
our future results of operations cannot be predicted with
certainty as any such effect depends on future results of
operations and the amount and timing of the resolution of such
matters. Other than the litigation described below, we do not
believe that any of our outstanding litigation would have a
material adverse effect on our businesses, operations or
prospects.
Environmental. We are subject to a wide
variety of laws and regulations concerning the protection of the
environment, both with respect to the construction and operation
of many of our plants and with respect to remediating
environmental conditions that may exist at our own and other
properties. We strive to maintain substantial compliance with
federal, state and local environmental laws and regulations. We
accrue for environmental expenses resulting from existing
conditions that relate to past operations when the costs are
probable and reasonably estimable. These expenses were
$6.8 million, $8.0 million and $2.3 million
during fiscal 2008, 2007 and 2006, respectively. We capitalize
environmental expenditures that increase the life or efficiency
of property or reduce or prevent environmental contamination.
Capital expenditures for environmental requirements are
anticipated to be approximately $3.2 million during fiscal
2009. Capitalized environmental-related expenditures were
$2.9 million, $16.2 million and $4.7 million
during fiscal 2008, 2007 and 2006, respectively.
In September 1987, we implemented an Administrative Consent
Order (ACO) for our Burlington, New Jersey
plant that was required under the New Jersey Environmental
Cleanup Responsibility Act (now known as the Industrial Site
Recovery Act). The ACO required soil and ground water cleanup,
and we have completed, and have received final approval on, the
soil cleanup required by the ACO. U.S. Pipe continues to
pump and treat ground water at this site. Further remediation
could be required. We expect any such remediation costs to be
minimal. Long-term ground water monitoring is also required to
verify natural attenuation. We do not know how long ground water
monitoring will be also required, and do not believe monitoring
or further cleanup costs, if any, will have a material adverse
effect on our financial condition or results of operations.
In June 2003, Solutia Inc. and Pharmacia Corporation
(collectively, Solutia) filed suit against
U.S. Pipe and a number of co-defendant foundry-related
companies in the U.S. District Court for the Northern
District of Alabama for contribution and cost recovery allegedly
incurred and to be incurred by Solutia in performing remediation
of polychlorinated biphenyls (PCBs) and heavy metals
in Anniston, Alabama, pursuant to a partial consent degree with
the Environmental Protection Agency (EPA).
U.S. Pipe and certain co-defendants subsequently reached a
settlement with the EPA concerning their liability for certain
contamination in and around Anniston, which was memorialized in
an AOC that became effective in January 2006. U.S. Pipe has
reached a settlement agreement whereby Phelps Dodge Industries,
Inc., a co-defendant and co-respondent on the AOC, has assumed
U.S. Pipes obligation to perform the work required
under the AOC.
U.S. Pipe and the other settling defendants contend that
the legal effect of the Administrative Order and Order on
Consent (AOC) extinguishes Solutias claims and
they filed a motion for summary judgment to that effect.
Discovery in this matter was stayed while the motion for summary
judgment was pending. The court recently issued a summary
judgment order, holding that plaintiffs claims for
contribution are barred by the AOC but giving plaintiffs the
right to seek to recover cleanup costs they voluntarily
incurred. The court granted a motion for immediate appeal to the
Eleventh Circuit Court of Appeals, but the Eleventh Circuit
Court of Appeals declined to take the appeal. We currently have
no basis to form a view with respect to the probability or
amount of liability in this matter.
U.S. Pipe and a number of co-defendant foundry-related
companies were named in a putative civil class action case
originally filed in April 2005 in the Circuit Court of Calhoun
County, Alabama, and removed by defendants to the
U.S. District Court for the Northern District of Alabama
under the Class Action Fairness Act. The putative
plaintiffs in the case filed an amended complaint with the
U.S. District Court in December 2006. The amended
complaint alleged state law tort claims (negligence, failure to
warn, wantonness, nuisance, trespass and outrage) arising from
the creation and disposal of foundry sand alleged to
contain harmful levels of PCBs and other toxins, including
arsenic, cadmium, chromium, lead and zinc. The plaintiffs
originally sought damages for real and personal property and for
other unspecified personal injury. On June 4, 2007, a
motion to dismiss was granted to U.S. Pipe and certain
co-defendants as to the claims for
22
negligence, failure to warn, nuisance, trespass and outrage. The
remainder of the complaint was dismissed with leave to file an
amended complaint. On July 6, 2007, plaintiffs filed a
second amended complaint, which dismissed prior claims relating
to U.S. Pipes former facility located at
2101 West
10th Street
in Anniston, Alabama and no longer alleges personal injury
claims. Plaintiffs filed a third amended complaint on
July 27, 2007. U.S. Pipe and the other defendants have
moved to dismiss the third amended complaint. On
September 24, 2008, the court issued an order on the
motion, dismissing the claims for trespass and permitting the
plaintiffs to move forward with their claims of nuisance,
wantonness and negligence. We believe that numerous procedural
and substantive defenses are available. At present, we have no
reasonable basis to form a view with respect to the probability
or amount of liability in this matter.
Environmental advocacy groups, relying on standards established
by Californias Proposition 65, are seeking to eliminate or
reduce the content of lead in water infrastructure products
offered for sale in California and other jurisdictions. Some of
our subsidiaries previously entered into settlement agreements
with these environmental advocacy groups to modify products or
offer substitutes for sale in California. California recently
passed Assembly Bill No. 1953 that redefines, as of
January 1, 2010, the term lead free to refer to
a weighted average lead content of the wetted surface area of
the pipes, fittings and fixtures of not more than 0.25%.
Legislation to substantially restrict lead content in water
infrastructure products also has been introduced in the
U.S. Congress. Congress or state jurisdictions may enact
similar legislation to restrict the content of lead in water
products. Although Mueller Co. now produces no-lead brass
products, most of Mueller Co.s brass valve products
contain small amounts of lead.
In March 2004, Anvil entered into a Consent Order with the
Georgia Department of Natural Resources regarding alleged
hazardous waste violations at Anvils former foundry
facility in Statesboro, Georgia. Pursuant to the Consent Order,
we agreed to pay a monetary fine of $50,000 and pay an
additional $50,000 to fund a supplemental environmental project.
We have also agreed to perform various investigatory and
remedial actions at our foundry and landfill. These total
estimated costs have been accrued.
During fiscal 2008 and 2007, we incurred a total of
approximately $11.4 million of capital expenditures at our
iron foundries to comply with the EPAs National Emissions
Standards for Hazardous Air Pollutants, which were issued in
April 2004.
Although no assurances can be given that we will not be required
in the future to make material expenditures relating to
environmental laws or legally mandated site cleanup, we do not
believe at this time that the compliance and cleanup costs, if
any, associated with the current laws and sites for which we
have cleanup liability or any other future sites will have a
material adverse effect on our financial condition or results of
operations.
In fiscal 2007 and 2005, we entered into settlement and release
agreements with a former insurer whereby the former insurer
agreed to pay $1.6 million and $5.1 million,
respectively, net of legal fees, to us for historical insurance
claims we had previously expensed as incurred. Such claims had
not previously been submitted to the insurance company for
reimbursement. We released the insurer of both past and future
claims.
In the acquisition agreement pursuant to which a predecessor to
Tyco International Ltd. (Tyco) sold our Mueller Co.
and Anvil businesses to the prior owners of these businesses in
August 1999, Tyco agreed to indemnify us and our affiliates,
among other things, for all Excluded Liabilities.
Excluded Liabilities include, among other things, substantially
all liabilities relating to the time prior to August 1999. The
indemnity survives indefinitely and is not subject to any
deductibles or caps. However, we may be responsible for these
liabilities in the event that Tyco ever becomes financially
unable to or otherwise fails to comply with the terms of the
indemnity. In addition, Tycos indemnity does not cover
liabilities to the extent caused by us or the operation of our
businesses after August 1999, nor does it cover liabilities
arising with respect to businesses or sites acquired after
August 1999. In June 2007, Tyco was separated into three
separate publicly traded companies. Should the entity or
entities that assumed Tycos obligations under the
acquisition agreement ever become financially unable or fail to
comply with the terms of the indemnity, we may be responsible
for such obligations or liabilities.
Other Litigation. We are parties to a number
of other lawsuits arising in the ordinary course of our
businesses, including product liability cases for products
manufactured by us or third parties. We provide for costs
relating to these matters when a loss is probable and the amount
is reasonably estimable. Administrative costs related to these
matters are expensed as incurred. The effect of the outcome of
these matters on our
23
future results of operations cannot be predicted with certainty
as any such effect depends on future results of operations and
the amount and timing of the resolution of such matters. While
the results of litigation cannot be predicted with certainty, we
believe that the final outcome of such other litigation is not
likely to have a materially adverse effect on our consolidated
financial statements.
|
|
Item 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the quarter ended September 30, 2008.
PART II
|
|
Item 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our Series A common stock has been listed on the New York
Stock Exchange under the trading symbol MWA since May 26,
2006. Our Series B common stock has been listed on the New
York Stock Exchange under the trading symbol MWA.B since
December 14, 2006. Covenants contained in certain of the
debt instruments referred to in Note 7 of Notes to
Consolidated Financial Statements may restrict the amount
we can pay in cash dividends. Future dividends will be declared
at the discretion of our Board of Directors and will depend on
our future earnings, financial condition and other factors.
The shares of Series A and Series B common stock have
identical rights except that the Series A common stock has
one vote per share and the Series B common stock has eight
votes per share. The range of high and low sales prices of the
Series A and Series B common stock and the dividends
declared per share is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Dividends
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
per share
|
|
|
Year ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4th quarter
|
|
$
|
12.71
|
|
|
$
|
7.12
|
|
|
$
|
11.71
|
|
|
$
|
5.48
|
|
|
$
|
0.0175
|
|
3rd quarter
|
|
|
10.53
|
|
|
|
7.50
|
|
|
|
10.05
|
|
|
|
7.32
|
|
|
|
0.0175
|
|
2nd quarter
|
|
|
9.60
|
|
|
|
6.64
|
|
|
|
10.12
|
|
|
|
7.50
|
|
|
|
0.0175
|
|
1st quarter
|
|
|
14.18
|
|
|
|
8.98
|
|
|
|
11.98
|
|
|
|
8.35
|
|
|
|
0.0175
|
|
Year ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4th quarter
|
|
$
|
16.73
|
|
|
$
|
11.77
|
|
|
$
|
15.00
|
|
|
$
|
10.47
|
|
|
$
|
0.0175
|
|
3rd quarter
|
|
|
19.35
|
|
|
|
13.56
|
|
|
|
15.99
|
|
|
|
13.25
|
|
|
|
0.0175
|
|
2nd quarter
|
|
|
16.06
|
|
|
|
13.63
|
|
|
|
15.87
|
|
|
|
13.39
|
|
|
|
0.0175
|
|
1st quarter
|
|
|
16.34
|
|
|
|
13.16
|
|
|
|
15.03
|
|
|
|
14.61
|
|
|
|
0.0175
|
|
At September 30, 2008, there were 23 stockholders of record
for our Series A common stock and 122 stockholders of
record for our Series B common stock.
Equity
Compensation Plan Information
The information regarding our compensation plans under which
equity securities are authorized for issuance is set forth in
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCHOLDER MATTERS.
Sale of
Unregistered Securities
We did not issue any unregistered securities during the year
ended September 30, 2008.
24
Issuer
Purchases of Equity Securities
During the three months ended September 30, 2008, we
repurchased shares of our Series A common stock as
presented below.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of shares
|
|
|
number of
|
|
|
|
|
|
|
|
|
|
purchased as
|
|
|
shares that may
|
|
|
|
Number of
|
|
|
Average
|
|
|
part of publicly
|
|
|
yet be purchased
|
|
|
|
shares
|
|
|
price paid
|
|
|
announced plans
|
|
|
under the plans
|
|
Period
|
|
purchased (1)
|
|
|
per share
|
|
|
or programs
|
|
|
or programs
|
|
|
July 1-31, 2008
|
|
|
774
|
|
|
$
|
9.10
|
|
|
|
-
|
|
|
|
-
|
|
August 1-31, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
September 1-30, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(1) |
|
Consists of shares surrendered to the Company to pay the tax
withholding obligations in connection with the vesting of
restricted stock units issued to employees. |
Stock
Price Performance Graphs
The following line graphs compare the cumulative quarterly stock
market performance of our Series A common stock and our
Series B common stock with the Russell 2000 Stock Index
(Russell 2000) and the Dow Jones U.S. Building
Materials & Fixtures Index (DJ Building
Materials & Fixtures). Our Series A common
stock first traded on May 30, 2006 and our Series B
common stock first traded on December 15, 2006.
Total return values were calculated based on cumulative total
return assuming (i) the investment of $100 in our common
stock, the Russell 2000 and the DJ Building Materials &
Fixtures on the dates indicated and (ii) reinvestment of
all dividends.
25
Comparison
of Cumulative Total Returns
Assumes Initial Investment of $100
Total Return since May 26, 2006
Series A Common Stock
26
Comparison
of Cumulative Total Returns
Assumes Initial Investment of $100
Total Return since December 14, 2006
Series B Common Stock
27
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
On October 3, 2005, Walter Industries Inc. (Walter
Industries) acquired all outstanding shares of capital
stock representing the Mueller Co. and Anvil businesses and
contributed its U.S. Pipe business to form the Company as
it currently exists. U.S. Pipe was deemed the acquirer of
Mueller Co. and Anvil. Accordingly, U.S. Pipes
historical financial information is used for the Company prior
to October 3, 2005. The Companys results of
operations include Mueller Co. and Anvil beginning
October 3, 2005. Net income (loss) per share was determined
using 85.8 million shares outstanding for all periods prior
to our initial public offering in June 2006. Effective
September 30, 2005, the Company changed its fiscal year end
to September 30. This change resulted in a nine month
fiscal period in 2005. The nine months ended September 30,
2004 (unaudited) are shown for comparative purposes only. The
selected financial and other data presented below should be read
in conjunction with, and are qualified by reference to,
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and the
consolidated financial statements and notes thereto included
elsewhere in this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Year ended
|
|
|
|
Year ended September 30,
|
|
|
September 30,
|
|
|
Dec. 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(in millions, except per share data)
|
|
|
Statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,859.3
|
|
|
$
|
1,849.0
|
|
|
$
|
1,933.4
|
|
|
$
|
598.1
|
|
|
$
|
456.9
|
|
|
$
|
437.2
|
|
|
$
|
578.4
|
|
Cost of sales (a)
|
|
|
1,420.3
|
|
|
|
1,385.8
|
|
|
|
1,525.7
|
|
|
|
530.7
|
|
|
|
402.2
|
|
|
|
402.9
|
|
|
|
531.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
439.0
|
|
|
|
463.2
|
|
|
|
407.7
|
|
|
|
67.4
|
|
|
|
54.7
|
|
|
|
34.3
|
|
|
|
47.0
|
|
Selling, general and administrative expenses (b)
|
|
|
274.6
|
|
|
|
253.2
|
|
|
|
250.1
|
|
|
|
46.4
|
|
|
|
31.3
|
|
|
|
30.7
|
|
|
|
45.9
|
|
Restructuring charges (c)
|
|
|
18.3
|
|
|
|
-
|
|
|
|
28.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
146.1
|
|
|
|
210.0
|
|
|
|
129.0
|
|
|
|
21.0
|
|
|
|
23.4
|
|
|
|
3.5
|
|
|
|
1.0
|
|
Interest expense, net
|
|
|
72.4
|
|
|
|
86.8
|
|
|
|
107.4
|
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Interest expense due to Walter Industries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21.1
|
|
|
|
15.2
|
|
|
|
13.0
|
|
|
|
18.9
|
|
Loss on early extinguishment of debt
|
|
|
-
|
|
|
|
36.5
|
|
|
|
8.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
73.7
|
|
|
|
86.7
|
|
|
|
13.1
|
|
|
|
(0.5
|
)
|
|
|
7.9
|
|
|
|
(9.9
|
)
|
|
|
(18.4
|
)
|
Income tax expense (benefit)
|
|
|
31.7
|
|
|
|
38.5
|
|
|
|
8.0
|
|
|
|
3.9
|
|
|
|
2.8
|
|
|
|
(3.9
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
42.0
|
|
|
$
|
48.2
|
|
|
$
|
5.1
|
|
|
$
|
(4.4
|
)
|
|
$
|
5.1
|
|
|
$
|
(6.0
|
)
|
|
$
|
(15.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per share
|
|
$
|
0.36
|
|
|
$
|
0.42
|
|
|
$
|
0.05
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
93.1
|
|
|
$
|
101.4
|
|
|
$
|
96.9
|
|
|
$
|
25.9
|
|
|
$
|
19.4
|
|
|
$
|
20.0
|
|
|
$
|
26.5
|
|
Capital expenditures
|
|
|
88.1
|
|
|
|
88.3
|
|
|
|
71.1
|
|
|
|
24.4
|
|
|
|
16.5
|
|
|
|
12.4
|
|
|
|
20.4
|
|
Balance sheet data (at September 30):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (d)
|
|
|
183.9
|
|
|
|
98.9
|
|
|
|
81.4
|
|
|
|
-
|
|
|
|
|
|
|
|
0.1
|
|
|
|
-
|
|
Working capital
|
|
|
755.6
|
|
|
|
709.7
|
|
|
|
680.0
|
|
|
|
188.7
|
|
|
|
|
|
|
|
176.6
|
|
|
|
163.5
|
|
Property, plant and equipment, net
|
|
|
356.8
|
|
|
|
351.8
|
|
|
|
337.0
|
|
|
|
149.2
|
|
|
|
|
|
|
|
152.2
|
|
|
|
152.9
|
|
Total assets
|
|
|
3,090.2
|
|
|
|
3,009.2
|
|
|
|
2,989.9
|
|
|
|
514.7
|
|
|
|
|
|
|
|
491.6
|
|
|
|
473.5
|
|
Amount due to Walter Industries
|
|
|
-
|
|
|
|
-
|
|
|
|
3.6
|
|
|
|
443.6
|
|
|
|
|
|
|
|
435.4
|
|
|
|
422.8
|
|
Total liabilities
|
|
|
1,761.3
|
|
|
|
1,698.2
|
|
|
|
1,762.9
|
|
|
|
669.9
|
|
|
|
|
|
|
|
626.7
|
|
|
|
618.6
|
|
Total equity (deficit)
|
|
|
1,328.9
|
|
|
|
1,311.0
|
|
|
|
1,227.0
|
|
|
|
(155.2
|
)
|
|
|
|
|
|
|
(135.1
|
)
|
|
|
(145.1
|
)
|
|
|
|
(a)
|
|
The year ended September 30,
2006 includes $70.2 million of adjustments related to
valuing Mueller Co. and Anvil inventory acquired on
October 3, 2005 at fair value and $21.3 million of
inventory write-offs and higher per unit overhead costs
resulting from the closure of U.S. Pipes Chattanooga,
Tennessee plant.
|
|
(b)
|
|
Includes:
|
|
|
|
- Credits for
environmental-related insurance settlement benefits of
$1.6 million during the year ended September 30, 2007,
$5.1 million during the year and nine months ended
September 30, 2005 and $1.9 million during the year
ended December 31, 2004;
|
|
|
|
- Accrued expenses of
$4.0 million relating to environmental liabilities during
the year ended December 31, 2004 and a reversal of
$1.0 million of that accrual during the year ended
September 30, 2006; and
|
|
|
|
- Related party corporate
charges from Walter Industries of $1.6 million,
$8.0 million, $7.3 million, $5.4 million,
$5.7 million, and $7.7 million during the years ended
September 30, 2007, 2006, and 2005, the nine months ended
September 30, 2005 and 2004, and the year ended
December 31, 2004, respectively.
|
|
(c)
|
|
The year ended September 30,
2008 includes $18.3 million to cease manufacturing
operations at U.S. Pipes Burlington, New Jersey facility.
The year ended September 30, 2006 includes
$28.6 million to close U.S. Pipes Chattanooga,
Tennessee plant and transfer the valve and fire hydrant
production of that plant to Mueller Co.s Chattanooga,
Tennessee and Albertville, Alabama plants.
|
|
(d)
|
|
Prior to October 3, 2005, the
Companys cash and cash equivalents were transferred daily
to Walter Industries, effectively reducing the Companys
cash to virtually zero on a daily basis. Subsequent to
October 3, 2005, daily cash transfers to Walter Industries
ceased.
|
28
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read in conjunction with
the audited consolidated financial statements and notes thereto
that appear elsewhere in this annual report. This report
contains certain statements that may be deemed
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as
amended. All statements, other than statements of historical
fact, that address activities, events or developments that the
Companys management intends, expects, projects, believes
or anticipates will or may occur in the future are
forward-looking statements. Such statements are based upon
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 significantly from
those projected in such forward-looking statements due to a
number of factors, including those set forth in the section
entitled RISK FACTORS in Item 1A of
Part I of this annual report.
Overview
Organization
On October 3, 2005, Walter Industries Inc. (Walter
Industries) 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 as it currently exists. In December 2006, Walter
Industries distributed to its shareholders all of its equity
interests in the Company, consisting of all of the
Companys outstanding shares of Series B common stock.
References to a fiscal year refer to the 12 months ended
September 30 of that calendar year.
Business
The Company is a leading North American manufacturer and
marketer of a broad range of water infrastructure, flow control
and piping component system products for use in water
distribution networks and treatment facilities. We manage our
businesses and report operations through three segments based
largely on the products they sell and the customers they serve:
Mueller Co., U.S. Pipe and Anvil.
Mueller Co. Mueller Co. produces and sells
valves, fire hydrants and related products primarily to the
water and wastewater infrastructure markets. Mueller Co.s
sales are driven principally by spending on water and wastewater
infrastructure upgrade, repair and replacement and new water and
wastewater infrastructure. Effective January 1, 2006,
U.S. Pipe transferred its valve and hydrant business to
Mueller Co. Management estimates that a majority of Mueller
Co.s fiscal 2008 sales was for infrastructure upgrade,
repair and replacement and the remainder for new infrastructure.
A significant portion of Mueller Co.s sales are made
through its distributors. For most of Mueller Co.s
products, end-users choose the brand or establish product
specifications. Management believes Mueller Co.s
reputation for quality, extensive distributor relationships,
brand, installed base and coordinated marketing approach have
helped Mueller Co. products to be specified as an
approved product for use in most major metropolitan areas
throughout the United States. Approximately 19%, 16% and 12% of
Mueller Co.s net sales were to Canadian customers in
fiscal 2008, 2007 and 2006 respectively.
U.S. Pipe. U.S. Pipe produces
ductile iron pipe, restraint joints and related products and
sells these products and fittings to water infrastructure and
wastewater customers. U.S. Pipe products are sold primarily
to waterworks distributors, contractors, municipalities,
utilities and other governmental agencies. A substantial
percentage of ductile iron pipe orders result from contracts
that are bid by contractors or directly issued by municipalities
or utilities. To support its customers inventory and
delivery requirements, U.S. Pipe uses numerous storage
depots throughout the country. Management estimates that a
majority of U.S. Pipes fiscal 2008 sales were for new
infrastructure, with the remainder for infrastructure upgrade,
repair and replacement. U.S. Pipe acquired the assets of
Fast Fabricators, Inc. (Fast Fabricators) in January
2007.
Anvil. Anvil produces or sources pipe,
fittings, pipe hangers and pipe nipples and a variety of related
products and sells these products to a wide variety of end
users, including non-residential construction contractors,
29
municipalities, water and wastewater utilities and gas
utilities. Sales of Anvil products are driven principally by
spending on non-residential construction, including commercial,
industrial, institutional and energy projects. Approximately
71%, 72% and 74% of Anvils net sales were to customers in
the United States during fiscal 2008, 2007 and 2006,
respectively. Approximately 26% of Anvils net sales were
to Canadian customers during fiscal 2008, 2007 and 2006.
Developments
and Trends
We have identified the following significant developments,
trends and factors that may impact our future results:
|
|
|
|
|
We anticipate residential construction conditions will continue
to be poor. New privately-owned housing starts declined 31% in
fiscal 2008 compared to fiscal 2007. A continued downturn in new
residential construction is likely to impact our operations
negatively.
|
|
|
|
We believe we will benefit from projected spending increases for
water infrastructure repair and replacement. A survey conducted
by the American Water Works Association indicated that utility
capital spending to replace or upgrade infrastructure will
increase 17% in 2009. This survey was conducted prior to the
economic turmoil in the fall of 2008, so it may be unreliable.
However, we believe this survey is indicative of the long-term
growth prospects for water infrastructure repair and replacement
spending. Several states and other local jurisdictions have
recently passed referendums that could result in increased
funding for water infrastructure spending.
|
|
|
|
A portion of our business depends on non-residential
construction. Non-residential construction activity is cyclical.
We expect decreased non-residential construction activity in
fiscal 2009 compared to fiscal 2008 especially in the latter
part of the year. Our products are typically used towards the
completion of a construction project, so the demand for our
products in the earlier part of fiscal 2009 will be influenced
by projects already underway at the end of fiscal 2008 that will
be completed in fiscal 2009.
|
|
|
|
Anvils management expects to continue to increase sourcing
of products from outside the United States and Canada. These
sourced products typically have lower gross margins.
|
|
|
|
As a result of reduced demand for our products, many
manufacturing facilities are operating at volumes less than
their optimal capacity. These and similar inefficiencies result
in higher per unit labor and overhead costs than under optimal
operating conditions. These higher per unit costs adversely
affect gross profit amounts and gross margin rates. These
conditions may continue until there is significant improvement
in demand for our products or we take further steps to reduce
capacity. In November 2008, we announced reductions in our
workforce at the fire hydrant and valve manufacturing facilities
in Albertville, Alabama and Chattanooga, Tennessee.
|
|
|
|
The average costs of scrap iron and brass ingot were
significantly higher in fiscal 2008 compared to fiscal 2007 and
we implemented several price increases during fiscal 2008 in an
attempt to recover higher raw material and purchased component
costs. Only in the fourth quarter of fiscal 2008 did sales price
increases exceed higher raw material and purchased component
costs. Toward the end of fiscal 2008, scrap iron prices in
particular began declining. This may put downward pressure on
sales prices despite higher cost scrap iron still in inventory.
We intend to maintain the sales price increases realized during
fiscal 2008. Raw material costs are expected to remain volatile.
The timing and extent to which we maintain our sales prices and
how these sales prices react to changing raw material costs will
be important factors to our future financial performance.
|
|
|
|
A significant portion of the assets invested in our defined
benefit pension plans are invested in equity securities. A large
majority of equity securities have declined in value during the
general timeframe of late September through the latter part of
November 2008 in response to general economic turmoil and the
credit crisis in particular. The level of pension plan assets
compared to pension plan liabilities at various measurement
dates influences the level of future contributions to be made to
these pension plans. The reduced value of pension plan assets
could increase future pension plan contributions.
|
30
|
|
|
|
|
California has passed legislation that redefines the term
lead free related to the sale of certain
Mueller Co. products in California beginning in 2010.
Mueller Co. intends to reduce shipments of brass products
not meeting this new standard to customers in California in
fiscal 2009. The federal government or other states may enact
similar legislation to restrict the content of lead in water
products. Although Mueller Co. now produces
no-lead
brass products, most of Mueller Co.s brass valve
products contain small amounts of lead.
|
Results
of Operations
Year
Ended September 30, 2008 Compared to Year Ended
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2008
|
|
|
|
Mueller Co.
|
|
|
U.S. Pipe
|
|
|
Anvil
|
|
|
Corporate
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Net sales
|
|
$
|
718.1
|
|
|
$
|
546.0
|
|
|
$
|
595.2
|
|
|
$
|
-
|
|
|
$
|
1,859.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
218.4
|
|
|
$
|
43.8
|
|
|
$
|
176.2
|
|
|
$
|
0.6
|
|
|
$
|
439.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
90.0
|
|
|
|
42.9
|
|
|
|
102.1
|
|
|
|
39.6
|
|
|
|
274.6
|
|
Restructuring
|
|
|
-
|
|
|
|
18.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90.0
|
|
|
|
61.2
|
|
|
|
102.1
|
|
|
|
39.6
|
|
|
|
292.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
128.4
|
|
|
$
|
(17.4
|
)
|
|
$
|
74.1
|
|
|
$
|
(39.0
|
)
|
|
|
146.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73.7
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2007
|
|
|
|
Mueller Co.
|
|
|
U.S. Pipe
|
|
|
Anvil
|
|
|
Corporate
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Net sales
|
|
$
|
756.1
|
|
|
$
|
537.1
|
|
|
$
|
555.8
|
|
|
$
|
-
|
|
|
$
|
1,849.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
235.8
|
|
|
$
|
78.0
|
|
|
$
|
149.6
|
|
|
$
|
(0.2
|
)
|
|
$
|
463.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
81.1
|
|
|
|
44.6
|
|
|
|
92.2
|
|
|
|
35.3
|
|
|
|
253.2
|
|
Restructuring
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.1
|
|
|
|
44.6
|
|
|
|
92.2
|
|
|
|
35.3
|
|
|
|
253.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
154.7
|
|
|
$
|
33.4
|
|
|
$
|
57.4
|
|
|
$
|
(35.5
|
)
|
|
|
210.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.8
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.7
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Consolidated
Analysis
Net Sales. Net sales were
$1,859.3 million for the year ended September 30,
2008, an increase of $10.3 million, or 0.6%, from
$1,849.0 million during fiscal 2007. Net sales increased
principally due to approximately $82 million of higher
pricing and approximately $21 million due to the favorable
impact of Canadian foreign currency exchange rates that
essentially offset approximately $104 million due to
reduced volumes. Several price increases were implemented during
fiscal 2008 affecting all of our principal products in response
to higher raw material and purchased component costs. As a
whole, higher sales prices did not offset higher raw material
and purchased component costs until the fourth quarter of fiscal
2008. Approximately 15% of our net sales during fiscal 2008 and
fiscal 2007 were denominated in Canadian dollars. The Canadian
dollar was stronger than the U.S. dollar during fiscal 2008
compared to fiscal 2007. Sales volumes were lower during fiscal
2008 compared to fiscal 2007 principally due to continued
weakness in residential construction. Volume declines
particularly affected our Mueller Co. and U.S. Pipe
businesses.
Gross Profit. Gross profit was
$439.0 million for the year ended September 30, 2008,
a decrease of $24.2 million, or 5.2%, compared to
$463.2 million during fiscal 2007. Gross margin was 23.6%
for fiscal 2008 compared to 25.1% for fiscal 2007. Gross profit
declined approximately $41 million due to lower volumes.
Cost reductions of approximately $43 million more than
offset approximately $35 million of higher per unit
overhead costs due to reduced production volumes. Gross margin
was diluted to the extent sales price increases were offset by
increased costs for raw materials and purchased components.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses were $274.6 million for the year ended
September 30, 2008, an increase of $21.4 million, or
8.5%, compared to $253.2 million for fiscal 2007. These
expenses as a percentage of net sales were 14.8% for fiscal 2008
compared to 13.7% for fiscal 2007. Mueller Co. expenses
increased approximately $9 million, most of which was due
to higher compensation and other employee-related expenses.
Anvil expenses increased approximately $10 million due
mostly to higher commissions and costs associated with a
realignment of Canadian distribution operations.
Restructuring Charges. In November 2007, we
announced our intention to close U.S. Pipes
manufacturing operations in Burlington, New Jersey while
retaining the facility as a full-service distribution facility
for customers in the Northeast. In connection with this action,
we also announced our intention to record restructuring charges
of approximately $19.0 million. During fiscal 2008, we
recorded $18.3 million of these restructuring charges, of
which $14.8 million were asset impairment charges and
$3.5 million were charges related to employee severance and
other closure costs. We expect to record the remaining charges
in early fiscal 2009.
Interest Expense, Net. The components of
interest expense, net for the years ended September 30,
2008 and 2007 are presented below.
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Interest expense on debt obligations, including interest rate
swap contracts
|
|
$
|
74.2
|
|
|
$
|
86.4
|
|
Other, net
|
|
|
2.3
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76.5
|
|
|
|
90.0
|
|
Interest income
|
|
|
(4.1
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72.4
|
|
|
$
|
86.8
|
|
|
|
|
|
|
|
|
|
|
We benefited for the entirety of fiscal 2008 from our debt
refinancing activities in May 2007. The debt structure following
this refinancing has lower interest rates than the previous
structure, and market interest rates were generally lower during
fiscal 2008 than they were during fiscal 2007. Interest rates
earned on invested cash were also lower in fiscal 2008 than
fiscal 2007, but the level of invested cash was higher during
fiscal 2008 than fiscal 2007. Other, net includes interest on
tax-related matters, amortization of deferred financing fees and
capitalized interest.
32
Loss on Early Extinguishment of Debt. Loss on
early extinguishment of debt was from retiring our outstanding
senior subordinated notes and senior discount notes primarily
with the proceeds from the issuance of $425.0 million of
73/8% Senior
Subordinated Notes and amending our credit agreement in
May 2007.
Income Tax Expense. Income tax expense was
$31.7 million for the year ended September 30, 2008
compared to $38.5 million during fiscal 2007. The effective
tax rates for fiscal 2008 and fiscal 2007 were 43.0% and 44.4%,
respectively. The effective tax rates differ from the
U.S. statutory rate of 35% primarily due to nondeductible
interest, nondeductible compensation, manufacturing production
deductions and state income taxes. In addition, fiscal 2007
included $1.1 million of state income tax expense related
to periods prior to fiscal 2007 with respect to certain matters
associated with the acquisition of Mueller Co. and Anvil.
Segment
Analysis
Mueller Co. Net sales were $718.1 million
for the year ended September 30, 2008, a decrease of
$38.0 million, or 5.0%, compared to $756.1 million
during fiscal 2007. This decline was primarily due to
approximately $72 million of lower volumes partially offset
by approximately $27 million of higher prices and
approximately $7 million due to the favorable impact of
Canadian foreign currency exchange rates. Lower volumes were
principally due to continued weakness in residential
construction. Higher prices resulted from efforts to offset
higher raw material and purchased component costs.
Gross profit was $218.4 million for the year ended
September 30, 2008, a decrease of $17.4 million, or
7.4%, compared to $235.8 million during fiscal 2007. Gross
margin was 30.4% during fiscal 2008 compared to 31.2% during
fiscal 2007. Gross profit declined approximately
$28 million due to lower volumes, approximately $24 million
due to higher raw material and purchased component costs and
approximately $18 million due to higher per unit overhead costs,
which were partially offset by sales price increases and net
cost savings.
Income from operations was $128.4 million for the year
ended September 30, 2008, a decrease of $26.3 million,
or 17.0%, compared to $154.7 million during fiscal 2007. In
addition to the decline in gross profit discussed above,
selling, general and administrative expenses were
$8.9 million higher in fiscal 2008 than fiscal 2007.
Approximately $5 million of these costs were due to higher
compensation and other employee-related expenses.
U.S. Pipe. Net sales were
$546.0 million for the year ended September 30, 2008,
an increase of $8.9 million, or 1.7%, compared to
$537.1 million during fiscal 2007. Net sales increased
primarily due to approximately $33 million of higher
pricing, which was partially offset by approximately
$35 million of lower volumes. Higher prices resulted from
efforts to offset significantly higher scrap iron costs during
fiscal 2008 compared to fiscal 2007.
Gross profit was $43.8 million for the year ended
September 30, 2008, a decrease of $34.2 million, or
43.8%, compared to $78.0 million during fiscal 2007. Gross
profit decreased approximately $18 million due to increased
costs for raw materials in excess of realized sales price
increases and decreased approximately $15 million due to
lower volumes. Higher per unit overhead costs due to lower
production volumes were offset by cost savings. Gross margin was
8.0% during fiscal 2008 compared to 14.5% during fiscal 2007.
The decrease in gross margin was primarily attributable to
increases in raw material costs exceeding sales price increases.
Excluding these increases, gross margin for fiscal 2008 would
have been 13.0%.
Loss from operations was $17.4 million for the year ended
September 30, 2008, a decrease of $50.8 million,
compared to income from operations of $33.4 million during
fiscal 2007. In addition to the $34.2 million decline in
gross profit discussed above, $18.3 million of
restructuring charges were also recorded during fiscal 2008
related to ceasing manufacturing operations in Burlington, New
Jersey.
Anvil. Net sales were $595.2 million for
the year ended September 30, 2008, an increase of
$39.4 million, or 7.1%, compared to $555.8 million
during fiscal 2007. This increase was due primarily to
approximately $22 million of higher sales prices and
approximately $14 million due to the favorable impact of
Canadian currency exchange rates. Higher prices resulted from
efforts to offset higher raw material and purchased component
costs. Approximately 26% of Anvils fiscal 2008 and fiscal
2007 net sales were denominated in Canadian dollars. The
Canadian dollar was stronger than the U.S. dollar during
fiscal 2008 compared to fiscal 2007.
33
Gross profit was $176.2 million for the year ended
September 30, 2008, an increase of $26.6 million, or
17.8%, compared to $149.6 million during fiscal 2007. Gross
margin was 29.6% during fiscal 2008 compared to 26.9%
during fiscal 2007. The increase in both gross profit and gross
margin was primarily attributable to higher sales prices.
Income from operations was $74.1 million for the year ended
September 30, 2008, an increase of $16.7 million, or
29.1%, compared to $57.4 million during fiscal 2007. This
increase was attributable to increased gross profit of
$26.6 million partially offset by $9.9 million of
higher selling, general and administrative expenses. These
expenses were 17.2% of net sales during fiscal 2008 compared to
16.6% of net sales during fiscal 2007. Higher selling, general
and administrative expenses during fiscal 2008 were attributable
to higher commissions and certain administrative costs
associated with a realignment of Canadian distribution
operations.
Corporate. Corporate general and
administrative expenses were $39.6 million for the year
ended September 30, 2008, an increase of $4.3 million,
or 12.2%, compared to $35.3 million during fiscal 2007. The
increase was due to approximately $2 million of additional
compensation expense attributable to stock-based awards and
higher overall costs associated with the Company establishing
itself as a stand-alone publicly-traded company.
Year
Ended September 30, 2007 Compared to Year Ended
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2007
|
|
|
|
Mueller Co.
|
|
|
U.S. Pipe
|
|
|
Anvil
|
|
|
Corporate
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Net sales
|
|
$
|
756.1
|
|
|
$
|
537.1
|
|
|
$
|
555.8
|
|
|
$
|
-
|
|
|
$
|
1,849.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
235.8
|
|
|
$
|
78.0
|
|
|
$
|
149.6
|
|
|
$
|
(0.2
|
)
|
|
$
|
463.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
81.1
|
|
|
|
44.6
|
|
|
|
92.2
|
|
|
|
35.3
|
|
|
|
253.2
|
|
Restructuring
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.1
|
|
|
|
44.6
|
|
|
|
92.2
|
|
|
|
35.3
|
|
|
|
253.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
154.7
|
|
|
$
|
33.4
|
|
|
$
|
57.4
|
|
|
$
|
(35.5
|
)
|
|
|
210.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.8
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.7
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2006
|
|
|
|
Mueller Co.
|
|
|
U.S. Pipe
|
|
|
Anvil
|
|
|
Corporate
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Net sales
|
|
$
|
804.1
|
|
|
$
|
594.7
|
|
|
$
|
534.6
|
|
|
$
|
-
|
|
|
$
|
1,933.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
223.0
|
|
|
$
|
62.5
|
|
|
$
|
122.6
|
|
|
$
|
(0.4
|
)
|
|
$
|
407.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
78.3
|
|
|
|
50.9
|
|
|
|
90.8
|
|
|
|
30.1
|
|
|
|
250.1
|
|
Restructuring
|
|
|
-
|
|
|
|
28.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78.3
|
|
|
|
79.5
|
|
|
|
90.8
|
|
|
|
30.1
|
|
|
|
278.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
144.7
|
|
|
$
|
(17.0
|
)
|
|
$
|
31.8
|
|
|
$
|
(30.5
|
)
|
|
|
129.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107.4
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.1
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Analysis
Net Sales. Consolidated net sales for the year
ended September 30, 2007 were $1,849.0 million, a
decrease of $84.4 million, or 4.4%, from
$1,933.4 million in fiscal 2006. Net sales decreases were
principally caused by a downturn in residential construction
demand. While volume related to repair and replacement work in
the municipal sector increased year-over-year, it did not offset
weakness in residential construction. Volume declines of
approximately $204.0 million were partially offset by
higher pricing of approximately $120.0 million and net
sales from Fast Fabricators, which was acquired in January 2007.
The prior year includes approximately $30.0 million of
ductile iron pipe sales resulting from contractors substituting
ductile iron pipe for plastic pipe in certain construction
projects that were underway immediately after Hurricane Katrina
due to the limited availability of plastic pipe.
Gross Profit. Consolidated gross profit for
the year ended September 30, 2007 was $463.2 million,
an increase of $55.5 million, or 13.6% compared to
$407.7 million in the prior year. Gross margin increased to
25.0% in fiscal 2007 compared to 21.1% in fiscal 2006. Excluding
$91.7 million of prior year costs associated with the
closure of U.S. Pipes Chattanooga, Tennessee plant
and purchase accounting adjustments related to valuing Mueller
Co. and Anvil inventory acquired October 3, 2005 at fair
value, gross margin would have been 25.8% in the prior year.
The decline in margin excluding these adjustments is due
primarily to reduced production and lower shipments of
higher-margin water infrastructure products such as hydrants and
valves, lower ductile iron pipe shipments and increased raw
material and purchased component costs. A decline in sales
volume and an initiative to lower inventory levels drove a
decision to reduce production during the fourth quarter of
fiscal 2007. Overall results were partially offset by higher
pricing and synergy related cost savings associated with plant
consolidations and other expense reduction initiatives.
Selling, General and Administrative
Expenses. Consolidated selling, general and
administrative expenses for the year ended September 30,
2007 were $253.2, an increase of $3.1 million, or 1.2%,
compared to $250.1 million in the prior year. Expenses as a
percentage of net sales increased to 13.7% in fiscal 2007
compared to 12.9% fiscal 2006. The increase is due to higher
overall costs associated with operating the Company on a
stand-alone basis as a public company.
Facility Rationalization, Restructuring and Related
Charges. Restructuring costs of
$28.6 million for the year ended September 30, 2006
were due to the closure of U.S. Pipes Chattanooga,
Tennessee plant. These costs are comprised of fixed asset
impairments of $21.5 million, severance for terminated
hourly and salaried employees of $3.8 million, and other
post-employment benefit costs of $3.3 million.
35
Interest Expense, Net of Interest
Income. Interest expense, net of interest income
for the year ended September 30, 2007 was
$86.8 million, compared to $107.4 million for the year
ended September 30, 2006, as follows.
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Interest expense on debt obligations
|
|
$
|
86.4
|
|
|
$
|
109.5
|
|
Other, net
|
|
|
3.6
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90.0
|
|
|
|
115.2
|
|
Interest income
|
|
|
(3.2
|
)
|
|
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
86.8
|
|
|
$
|
107.4
|
|
|
|
|
|
|
|
|
|
|
Interest expense on the Companys outstanding debt
obligations was $86.4 million, net of interest rate swap
gains of $2.2 million in fiscal 2007, compared to
$109.5 million, net of interest rate swap gains of
$0.4 million in fiscal 2006. The Company refinanced its
debt in May 2007 with lower interest rate debt and repaid
$40.0 million of that debt in July 2007. In the prior year,
the Company used proceeds from its June 2006 initial public
offering to reduce debt. These actions contributed to lower
interest expense in fiscal 2007 as compared to fiscal 2006.
Other, net in fiscal 2007 includes $1.9 million related to
certain state income tax exposure, partially offset by
$0.8 million of capitalized interest. Other, net for fiscal
2006 was comprised primarily of a $2.5 million bridge loan
fee incurred in connection with financing the October 2005
acquisition of Mueller Co. and Anvil. Interest income for fiscal
2006 includes a $2.9 million prepayment penalty and
$1.8 million in interest income earned on a loan to the
Companys former parent.
Loss on Early Extinguishment of Debt. Loss on
early extinguishment of debt for the fiscal year ended
September 30, 2007 was $36.5 million compared to
$8.5 million in the prior year. In May 2007, the Company
retired its outstanding senior subordinated notes and senior
discount notes primarily with the proceeds from the issuance of
$425.0 million of
73/8% Senior
Subordinated Notes and amended its credit agreement. During
fiscal 2006, the Company partially redeemed outstanding debt
using the net proceeds from its initial public offering.
Income Tax Expense. Income tax expense for
fiscal 2007 was $38.5 million as compared to
$8.0 million in fiscal 2006. The effective tax rates for
fiscal year 2007 and fiscal year 2006 were 44.4% and 61.1%,
respectively. The estimated effective tax rates differ from the
statutory rate primarily due to non-deductible interest,
non-deductible compensation, manufacturing production deductions
and state income taxes. In addition, fiscal 2007 included
$1.1 million of state income tax expense with respect to
certain state income tax matters associated with the October
2005 acquisition of Mueller Co. and Anvil.
Segment
Analysis
Mueller Co. Mueller Co. segment net sales for
the year ended September 30, 2007 were $756.1 million,
a decrease of $48.0 million, or 6.0% from
$804.1 million in the prior year. This decline is primarily
due to lower volumes of iron gate valves, hydrants, and brass
products partially offset by the effect of price increases.
These reduced unit volumes were the result of continuing
weakness in residential construction. Distributor orders that
were placed before the effective dates of May and June 2006
price increases also contributed to an overall higher level of
shipments in the fourth quarter of fiscal 2006.
Mueller Co. segment gross profit for the year ended
September 30, 2007 was $235.8 million, an increase of
$12.8 million, or 5.7% compared to $223.0 million in
the prior year. Gross margin increased to 31.2% in the current
year compared to 27.7% in the prior year. Included in cost of
sales in the prior year were $53.1 million of purchase
accounting adjustments related to valuing Mueller Co.s
inventory acquired in October 2005 at fair value. Excluding the
impact of these adjustments, gross margin would have been 34.3%.
The decline in margin excluding these adjustments is due
primarily to volume declines in higher-margin iron gate valves
and hydrants, higher raw material and purchased component costs,
and reduced manufacturing production that led to higher per unit
overhead costs. The effects of these items were partially offset
by higher pricing.
36
Mueller Co. segment income from operations for the year ended
September 30, 2007 was $154.7 million, an increase of
$10.0 million compared to $144.7 million in the prior
year. Excluding $53.1 million of purchase accounting
adjustments discussed above, and the causes of the changes in
gross profit, there was an increase in certain administrative
costs, primarily related to personnel costs that were previously
reported as Corporate costs prior to being a stand-alone public
company.
U.S. Pipe. U.S. Pipe segment net
sales for the year ended September 30, 2007 were
$537.1 million, a decrease of $57.6 million, or 9.7%
from $594.7 million in the prior year. Net sales decreased
primarily due to volume declines during the current year of
approximately $101.0 million, partially offset by higher
selling prices, sales of higher margin products and sales
resulting from the acquisition of Fast Fabricators, which was
acquired in January 2007. Volume declines were attributable to a
weak residential construction market and were partially offset
by increased sales for repair and replacement products. The
prior year includes approximately $30.0 million of sales of
ductile iron pipe that customers substituted for unavailable PVC
pipe as a result of Hurricane Katrina and approximately
$15.4 million of net sales from valves and hydrants
manufactured at U.S. Pipes Chattanooga, Tennessee
plant. Effective January 1, 2006, U.S. Pipe branded
valve and hydrant manufacturing was transferred to the Mueller
Co. segment.
U.S. Pipe segment gross profit for the year ended
September 30, 2007 was $78.0 million, an increase of
$15.5 million, or 24.8%, compared to $62.5 million in
the prior year. Gross margin increased to 14.5% in the current
year compared to 10.5% in the prior year. Excluding
$21.3 million of Chattanooga closure-related costs included
in cost of sales, the prior year gross margin would have been
14.1%. Increased pricing offset higher raw material costs.
U.S. Pipe segment income from operations for the year ended
September 30, 2007 was $33.4 million, an increase of
$50.4 million compared to a loss from operations of
$17.0 million in the prior year. The current year includes
the result of the Fast Fabricators acquisition completed in
January 2007, as well as certain cost reductions in selling,
general and administrative costs. The prior year included
$49.9 million of Chattanooga restructuring and
closure-related costs and an additional $4.2 million in
related party corporate charges.
Anvil. Anvil segment net sales for the year
ended September 30, 2007 were $555.8 million, an
increase of $21.2 million, or 4.0%, from
$534.6 million in the prior year. The increase was due
primarily to higher selling prices.
Anvil segment gross profit for the year ended September 30,
2007 was $149.6 million, an increase of $27.0 million,
or 22.0%, compared to $122.6 million in the prior year.
Gross margin increased to 26.9% in the current year compared to
22.9% in the prior year. Excluding $17.3 million of prior
year purchase accounting adjustments related to the fair value
of Anvils inventory acquired in October 2005, gross margin
in the prior year would have been 26.2%. The increase in margin
excluding these costs is due primarily to higher selling prices.
Anvil segment income from operations for the fiscal year ended
September 30, 2007 was $57.4 million compared to
$31.8 million in the prior year. The current year includes
approximately $2.7 million of anti-dumping duties received
from the federal government. The remaining increase is primarily
related to the $17.3 million of prior year purchase
accounting adjustments discussed above and increased selling
prices.
Corporate. Corporate expenses for the year
ended September 30, 2007 were $35.3 million compared
to $30.1 million in the prior year. The increase is due to
higher overall costs associated with operating the Company on a
stand-alone basis as a public company. On December 14,
2006, the remaining 75% of the Company not already publicly
traded was distributed in a tax-free spin-off from its former
parent company. As a result, a separate corporate headquarters
office was created and established in Atlanta, Georgia during
the first quarter of fiscal 2007. This corporate office provides
functions including, but not limited to, treasury, risk,
management, legal, accounting, human resources, investor
relations, and business planning and analysis. The costs of
these functions as well as costs related to Sarbanes-Oxley
compliance and the annual audit of our consolidated financial
statements are reported as corporate items. Fiscal 2006 expenses
of $8.0 million for services previously provided by its
former parent were recorded by U.S. Pipe. These charges
were discontinued in conjunction with our separation
37
from our former parent in December 2006. The only costs we incur
that are allocated to our segments are personnel and benefit
costs directly attributable to segment employees.
Financial
Condition
Cash and cash equivalents were $183.9 million at
September 30, 2008 compared to $98.9 million at
September 30, 2007. Cash and cash equivalents increased
during fiscal 2008 as a result of cash provided by operating
activities of $182.0 million exceeding the cash used in
investing activities and financing activities of
$78.5 million and $18.1 million, respectively. Cash
and cash equivalents decreased $0.4 million during fiscal
2008 due to changes in currency exchange rates. Other than
commitments in the normal course of business, which are
relatively minor, all of the cash and cash equivalents at
September 30, 2008 can be considered available for general
corporate purposes.
Receivables, net were $298.2 million at September 30,
2008 compared to $302.1 million at September 30, 2007.
Receivables at September 30, 2008 represented approximately
54.6 days sales compared to September 30, 2007
receivables representing approximately 57.9 days sales,
each calculated using the respective fourth quarter sales.
Management considers this variation in days sales in receivables
normal as this measure has typically been in the mid-50s in
recent years.
Inventories were $459.4 million at September 30, 2008
compared to $453.5 million at September 30, 2007. Raw
material costs were higher at the end of fiscal 2008 compared to
fiscal 2007. Although inventory dollar balances were greater at
the end of fiscal 2008, quantities were lower. There was
slightly over three months sales in inventory near the end of
fiscal 2008 compared to approximately four months sales in
inventory at the end of September 2007. Inventory turns near the
end of fiscal 2008 were generally at their highest level over
the past several years as we began tighter management of our
inventory levels in the latter part of fiscal 2007.
Property, plant and equipment, net were $356.8 million at
September 30, 2008 compared to $351.8 million at
September 30, 2007. Capital expenditures were
$88.1 million during fiscal 2008 compared to depreciation
of $62.3 million (depreciation related to other current
assets was $1.3 million) and asset impairment charges of
$11.8 million. Other activity during fiscal 2008 included
some minor disposals and currency translation adjustments. The
majority of capital expenditures during fiscal 2008 were related
to the construction of a new automated ductile iron pipe
manufacturing operation in Bessemer, Alabama. Capital
expenditures for fiscal 2009 are expected to be between
$50 million and $60 million.
Goodwill was $871.5 million at September 30, 2008
compared to $871.1 million at September 30, 2007. The
change during fiscal 2008 resulted from the adoption of new
income tax accounting rules on October 1, 2007. Goodwill is
not amortized. It is reviewed at least annually for possible
impairment. We concluded from our annual review at
September 1, 2008 that the carrying amount of goodwill had
not been impaired. We also concluded that no events occurred
during fiscal 2008 requiring testing for possible impairment at
any other date.
Identifiable intangible assets were $789.8 million at
September 30, 2008 compared to $819.3 million at
September 30, 2007. Finite-lived intangible assets,
$385.3 million of net book value at September 30,
2008, are amortized over their estimated useful lives. Such
amortization expense was $29.5 million during fiscal 2008
and is expected to be a similar amount for each of the next five
years. Indefinite-lived identifiable intangible assets,
$404.5 million at September 30, 2008, are not
amortized, but tested at least annually for possible impairment.
We concluded from our annual review at September 1, 2008
that the carrying amount of its indefinite-life identifiable
intangible assets had not been impaired. We also concluded that
no events occurred during fiscal 2008 requiring testing for
possible impairment at any other date.
Accounts payable and other current liabilities were
$285.0 million at September 30, 2008 compared to
$234.1 million at September 30, 2007. Compared to
quarterly spending activity, these amounts represented
approximately 56 days of purchases at September 30,
2008 compared to approximately 54 days of purchases at
September 30, 2007, each of which is consistent with recent
historical trends. Inventory purchases were significantly higher
during the fourth quarter of fiscal 2008 compared to fiscal
2007. There is significant variability regarding the payment
patterns for various purchases, ranging from payroll which is
very fast to incentive compensation and customer rebates that
might only be paid once per year.
38
Outstanding borrowings were $1,095.5 million at
September 30, 2008 compared to $1,100.5 million at
September 30, 2007. The decrease of $5.0 million
during fiscal 2008 was essentially the quarterly payments due on
the Term Loan B under the 2007 Credit Agreement. Principal
payments due during fiscal 2009 are $9.7 million.
Deferred income taxes were net liabilities of
$247.6 million at September 30, 2008 compared to net
liabilities of $278.1 million at September 30, 2007.
Deferred tax liabilities related to property, plant and
equipment, goodwill and identifiable intangible assets were
$322.2 million and $332.7 million at
September 30, 2008 and 2007, respectively.
Liquidity
and Capital Resources
We had cash and cash equivalents of $183.9 million at
September 30, 2008 and $261.9 million of borrowing
capacity under the revolving credit facility component of our
2007 Credit Agreement. Our operating activities generated
$182.0 million, $155.1 million and $107.6 million
of cash during fiscal 2008, 2007 and 2006, respectively.
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, capital expenditures, pension contributions and debt
service obligations as they become due for at least the next
twelve months. However, our ability to make scheduled payments
of principal of, to pay interest on or to refinance our debt and
to satisfy our other debt obligations will depend upon our
future operating performance, which will be affected by general
economic, financial, competitive, legislative, regulatory,
business and other factors beyond our control.
The 2007 Credit Agreement includes a Term Loan A, a Term Loan B
and a revolving credit facility. The Term Loan A,
$141.6 million owed at September 30, 2008, accrues
interest at LIBOR plus a margin of up to 175 basis points
and is payable $3.5 million per quarter beginning September
2009 with the balance due May 2012. The Term Loan B,
$526.7 million owed at September 30, 2008, accrues
interest at LIBOR plus 175 basis points and is payable
$1.3 million per quarter with the balance due May 2014. The
revolving credit facility provides for borrowings of up to
$300 million, including letters of credit and terminates in
May 2012. At September 30, 2008, letters of credit
outstanding under the revolving credit facility were
$38.1 million. Borrowings under the revolving credit
facility bear interest at LIBOR plus a margin of up to
175 basis points. The margin on Term Loan A borrowings
and the revolving credit facility was 150 basis points at
September 30, 2008.
We pay a commitment fee on the unused portion of the revolving
credit facility. This fee is payable quarterly in arrears and
upon the maturity or termination of the revolving credit
facility. The fee is subject to adjustment based on the leverage
ratio. The fee was 0.375% at September 30, 2008.
The 2007 Credit Agreement is subject to mandatory prepayment
with the net cash proceeds from the sale or other disposition of
any property or assets, subject to permitted reinvestments and
other specified exceptions. All mandatory prepayment amounts are
applied to the prepayment of the term loans pro rata between the
Term Loan A and the Term Loan B to reduce the
remaining amortization payments of each term loan.
All of our material direct and indirect U.S. restricted
subsidiaries are guarantors of the 2007 Credit Agreement. Our
obligations under the 2007 Credit Agreement are secured by:
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a first priority perfected lien on substantially all of our
existing and after-acquired personal property, a pledge of all
of the stock or membership interest of all of our existing or
future U.S. restricted subsidiaries (including of each
guarantor), a pledge of no more than 65% of the voting stock of
any
first-tier
non-U.S.
restricted subsidiary held by us or a guarantor and a pledge of
all intercompany indebtedness in favor of us or any guarantor;
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first-priority perfected liens on all of our material existing
and after-acquired real property fee interests, subject to
customary permitted liens described in the 2007 Credit
Agreement; and
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a negative pledge on all of our assets, including our
intellectual property.
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39
The 2007 Credit Agreement contains customary negative covenants
and restrictions on our ability to engage in specified
activities and contains financial covenants requiring us to
maintain a specified consolidated leverage ratio decreasing over
time and an interest charge coverage ratio on a quarterly basis.
Borrowings under the revolving credit facility are subject to
significant conditions, including compliance with the financial
ratios included in the 2007 Credit Agreement and the absence of
any material adverse change.
We were in compliance with all applicable debt covenants at
September 30, 2008 and anticipate maintaining such
compliance.
We also owed $425.0 million of principal of
73/8% Senior
Subordinated Notes (Senior Notes) at
September 30, 2008. Interest on the Senior Notes is payable
semi-annually and the principal is due June 2017. We may
redeem any portion of the of the Senior Notes after May 2012 at
specified redemption prices or prior to June 2010 we may redeem
up to 35% of the Senior Notes at a redemption price of 107.375%
of the principal amount, plus accrued and unpaid interest with
the net cash proceeds of certain equity offerings. Upon the
occurrence of a change in control, we must offer to repurchase
the Senior Notes at 101% of their principal amount, plus accrued
and unpaid interest. The Senior Notes are secured by the
guarantees of essentially all of our U.S. subsidiaries, but
are subordinate to the borrowings under the 2007 Credit
Agreement.
At September 30, 2008, our credit ratings issued by
Moodys and Standard & Poors were as
follows. Any changes from the ratings at September 30, 2007
have been noted.
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Standard &
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Moodys
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Poors
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Corporate credit rating
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B1
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BB-
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2007 Credit Agreement
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Ba3
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BB+
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73/8% Senior
Subordinated Notes
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B3
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B
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Outlook
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Stable
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(1)
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Stable
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(1) Positive at September 30, 2007
A significant portion of the assets invested in our defined
benefit pension plans are invested in equity securities. A large
majority of equity securities have declined in value during the
general timeframe of late September through the latter part of
November 2008 in response to general economic turmoil and the
credit crisis in particular. The level of pension plan assets
compared to pension plan liabilities at various measurement
dates influences the level of future contributions to be made to
these pension plans. The reduced value of pension plan assets
could increase future pension plan contributions. Our upcoming
pension plan contribution requirements will be determined by an
analysis at January 1, 2009, which will not be concluded
until later in 2009. As a result of the general decline in
equity values and credit crisis, there may be legislative
changes that occur that may change or otherwise provide relief
for pension plan contributions that might otherwise become due
relatively soon. We believe pension plan contributions to be
made during fiscal 2009 will be at least $7.3 million but may
exceed that amount due to both required minimum contributions
and additional voluntary contributions. We anticipate the total
pension plan contributions for fiscal 2009 will be
approximately $20 million.
Off-Balance
Sheet Arrangements
We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes. In addition, we do not have any undisclosed borrowings
or debt or any derivative contracts other than those described
in Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE
ABOUT MARKET RISK or synthetic leases. Therefore, we are
not materially exposed to any financing, liquidity, market or
credit risk that could arise if it had engaged in such
relationships.
We use letters of credit and surety bonds in the ordinary course
of business to ensure its performance of contractual
obligations. At September 30, 2008, we had
$38.1 million of letters of credit and $18.9 million
of surety bonds outstanding.
40
Contractual
Obligations
Our contractual obligations at September 30, 2008 are
presented below.
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Less than
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1-3
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4-5
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After
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1 year
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years
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years
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5 years
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Total
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(in millions)
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Long-term debt:
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Principal payments
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$
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9.7
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$
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40.0
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$
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120.5
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$
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925.3
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$
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1,095.5
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Interest (1)
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70.3
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137.9
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126.4
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144.4
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479.0
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Operating leases
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8.7
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14.5
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6.8
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3.3
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33.3
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Unconditional purchase obligations (2)
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4.7
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0.5
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-
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-
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5.2
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Other noncurrent liabilities (3)
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8.0
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-
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-
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-
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8.0
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$
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101.4
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$
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192.9
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$
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253.7
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$
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1,073.0
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$
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1,621.0
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(1) |
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Interest on the 2007 Credit Facility is calculated using LIBOR
of 4.05%, the rate in effect on September 30, 2008 and
assumes only scheduled principal payments. Actual interest
payments will likely be different. Interest payments do not
include any amounts that will be paid or received under interest
rate swap contracts. These amounts will be dependent on future
interest rates and the extent to which interest rate swap
contracts are utilized in the future. At September 30,
2008, we had a liability of $11.6 million related to
interest rate swap contracts. Each increase or decrease in LIBOR
of 0.125% would result in an increase or decrease in annual
interest payments under the 2007 Credit Facility of less than
$1 million. |
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Includes contractual obligations for purchases of raw materials
and capital expenditures. |
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Other noncurrent liabilities consist of pension plans and other
postretirement benefit plans and represents the estimated
minimum payments required by law for fiscal 2009. Actual
payments may differ. |
Effect of
Inflation; Seasonality
We experience changing price levels related to purchases of raw
materials and purchased components. The average purchased costs
of scrap iron at U.S. Pipe and brass ingot at
Mueller Co. in fiscal 2008 were 42% and 11%, respectively,
higher than in fiscal 2007. We do not believe that changing
prices for other goods had a material impact on our financial
position or results of operations.
Our business is dependent upon the construction industry, which
is seasonal due to the impact of cold and wet weather
conditions. Net sales and operating income have historically
been lowest in the three month periods ending December 31 and
March 31 when the northern United States and all of Canada
generally face weather conditions that restrict significant
construction activity. Inventory levels tend to be highest in
the three month periods ending March 31 and June 30 as
we prepare for our peak selling periods. Receivables tend to be
highest in the three month periods ending June 30 and
September 30 as these are also the highest sales periods.
Critical
Accounting Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, expenses and
related disclosure of contingent assets and liabilities. These
estimates are based upon experience and on various other
assumptions that management believes to be reasonable under the
circumstances. Actual results may differ from these estimates.
We consider an accounting estimate to be critical if changes in
the estimate that are reasonably likely to occur over time or
the use of reasonably different estimates could have a material
impact on our financial condition or results of operations. We
consider the accounting topics presented below to include our
critical accounting estimates.
41
Revenue
Recognition
We recognize revenue when delivery of a product has occurred and
there is persuasive evidence of a sales arrangement, sales
prices are fixed and determinable and collectability from the
customers is reasonably assured. Sales are recorded net of
estimated cash discounts and rebates.
Receivables
The estimated allowance for doubtful receivables is based upon
judgments and estimates of expected losses and specific
identification of problem accounts. Significantly weaker than
anticipated industry or economic conditions could impact
customers ability to pay such that actual losses may be
greater than the amounts provided for in this allowance. The
periodic evaluation of the adequacy of the allowance for
doubtful receivables is based on an analysis of prior collection
experience, specific customer creditworthiness and current
economic trends within the industries served. In circumstances
where a specific customers inability to meet its financial
obligation is known to us (e.g., bankruptcy filings or
substantial downgrading of credit ratings), we record a specific
allowance to reduce the receivable to the amount we reasonably
believe will be collected.
Inventories
We record inventories at the lower of cost using the
first-in,
first-out method or market value. Inventory cost includes an
overhead component that can be affected by levels of production
and actual costs incurred. We evaluate the need to record
adjustments for impairment of inventory at least quarterly. This
evaluation includes such factors as anticipated usage, inventory
turnover, inventory levels and ultimate product sales value.
Inventory that, in the judgment of management, is obsolete or in
excess of our normal usage is written-down to its estimated
market value, if less than its cost. Significant judgments must
be made when establishing the reserve for obsolete and excess
inventory.
Income
Taxes
We recognize deferred tax liabilities and deferred tax assets
for the expected future tax consequences of events that have
been included in the financial statements or tax returns.
Deferred tax liabilities and assets are determined based on the
differences between the financial statements and the tax basis
of assets and liabilities, using tax rates in effect for the
years in which the differences are expected to reverse. A
valuation allowance is provided to offset any net deferred tax
assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be
realized. If we were to reduce our estimates of future taxable
income, we could be required to record additional valuation
allowances against our deferred tax assets. Our tax balances are
based on our expectations of future operating performance, tax
planning strategies, interpretation of the tax regulations
currently enacted and rulings in numerous tax jurisdictions.
We only record tax benefits for positions that we believe are
more likely than not of being sustained under audit examination
based solely on the technical merits of the associated tax
position. The amount of tax benefit recognized for any position
that meets the more likely than not threshold is the largest
amount of the tax benefit that we believe is greater than 50%
likely of being realized.
Accounting
for the Impairment of Long-Lived Assets Including Goodwill and
Other Intangible Assets
We test long-lived assets, including goodwill and intangible
assets that have an indefinite life, for impairment annually (or
more frequently if events or circumstances indicate possible
impairments). Finite-lived intangible assets are amortized over
their respective estimated useful lives and reviewed if events
or circumstances indicate possible impairment. We perform our
annual impairment testing at September 1.
We test goodwill for possible impairment by first determining
the fair value of the related reporting unit and comparing this
value to the recorded net assets of the reporting unit,
including goodwill. Fair value is determined using a combination
of a discounted cash flow model and stock market comparable
valuations for a peer group of companies. Significant judgments
and estimates must be made when estimating
42
future cash flows, determining the appropriate discount rate and
identifying appropriate stock market comparable companies. We
concluded that our goodwill had not been impaired at
September 1, 2008.
We also evaluated the reasonableness of our determination of
fair values for our reporting units compared to our the stock
market capitalization at September 1, 2008 and during the
period thereafter. These stock market capitalizations were
significantly lower than the fair values determined by
management. The fair value of an entity can be greater than its
market capitalization for various reasons, one of which is the
concept of a control premium. Substantial value may arise from
the ability to take advantages of synergies and other benefits
that flow from control over another entity. We also believe the
general downturn in U.S. equity markets resulting from the
recent credit and liquidity crisis, which we believe has also
affected our stock market valuation, is not representative of
any fundamental change in our businesses. We cannot predict with
any reasonable degree of confidence when the effects of these
recent economic events will subside or when the price of our
common stock will be more representative of what we believe to
be the Companys fair value. Changes in our assumptions
underlying our estimates of fair value, which will be a function
of our future financial performance and changes in economic
conditions, could result in a future impairment charge.
Litigation,
Investigations and Claims
We are involved in litigation, investigations and claims arising
out of the normal conduct of its business. We estimate and
accrue liabilities resulting from such matters based on a
variety of factors, including outstanding legal claims and
proposed settlements; assessments by internal counsel of pending
or threatened litigation; and assessments of potential
environmental liabilities and remediation costs. We believe we
have adequately accrued for these potential liabilities;
however, facts and circumstances may change and could cause the
actual liability to exceed the estimates, or may require
adjustments to the recorded liability balances in the future.
Workers
Compensation, Defined Benefit Pension and Other Postretirement
Benefits, Environmental and Other Long-term
Liabilities
We are obligated for various liabilities that will ultimately be
determined over what could be a very long future time period. We
established the recorded liabilities for such items at
September 30, 2008 using estimates for when such amounts
will be paid and what the amounts of such payments will be.
These estimates are subject to change based on numerous factors,
including among others, regulatory changes, technology changes,
the investment performance of related assets, the lifespan of
plan participants and other individuals and changes to plan
designs.
Recently
Issued Accounting Standards
The items discussed below are not all-inclusive of standards
required to be adopted by us after September 30, 2008. Only
such standards reasonably expected to have a material impact on
our accounting or financial reporting are discussed below.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements, which defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. We do not believe the adoption of this standard,
which became effective for us on October 1, 2008, will have
a material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
which permits entities to elect to measure many financial
instruments and certain other items at fair value. Since we have
elected not to apply the fair value measurement option, we do
not believe the adoption of this standard, which became
effective for us on October 1, 2008, will have a material
impact on our consolidated financial statements.
43
In March 2008, the SFAS issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, which requires enhanced disclosures about an
entitys derivative and hedging activities. Entities will
be required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted
for and (c) how derivative instruments and related hedged
items affect an entitys financial position, financial
performance and cash flows. Adoption of this standard will be
required by us effective January 1, 2009.
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
We are exposed to various market risks, which are potential
losses arising from adverse changes in market rates and prices,
such as interest rates and foreign exchange fluctuations. We do
not enter into derivatives or other financial instruments for
trading or speculative purposes.
Our primary financial instruments are cash and cash equivalents.
This includes cash in banks and highly rated, liquid money
market investments. We believe that those instruments are not
subject to material potential near-term losses in future
earnings from reasonably possible near-term changes in market
rates or prices.
Interest
Rate Risk
At September 30, 2008, we had fixed rate debt, including
the effect of interest rate swap agreements, of
$900.0 million and variable rate debt of
$195.5 million. The pre-tax earnings and cash flow impact
resulting from a 100 basis point increase in interest rates
on variable rate debt, holding other variables constant would be
approximately $2.0 million per year.
We use interest rate swap contracts to hedge against cash-flow
variability arising from changes in LIBOR rates in conjunction
with its LIBOR-indexed variable rate borrowings. We also had
forward-starting swap contracts that will replace existing swap
contracts upon their expiration. These swap contracts were
accounted for as effective cash flow hedges. We recorded an
unrealized loss from our swap contracts, net of tax, of
$5.9 million at September 30, 2008 in accumulated
other comprehensive income. These swap contracts had a liability
fair value of $11.6 million at September 30, 2008,
which was included in other noncurrent liabilities. Details
regarding the outstanding swap contracts at September 30,
2008 are presented below.
|
|
|
|
|
|
|
Hedged amount
|
|
Maturity date
|
|
Receive
|
|
Pay
|
|
$50 million
|
|
October 2008
|
|
LIBOR
|
|
4.740%
|
$50 million
|
|
June 2009
|
|
LIBOR
|
|
2.983%
|
$50 million
|
|
October 2009
|
|
LIBOR
|
|
4.800%
|
$50 million
|
|
June 2010
|
|
LIBOR
|
|
3.398%
|
$100 million
|
|
October 2010
|
|
LIBOR
|
|
4.815%
|
$50 million
|
|
June 2011
|
|
LIBOR
|
|
3.719%
|
$50 million
|
|
October 2011
|
|
LIBOR
|
|
4.915%
|
$50 million
|
|
* May
2012
|
|
LIBOR
|
|
4.993%
|
$50 million
|
|
* May
2012
|
|
LIBOR
|
|
5.134%
|
$100 million
|
|
* May 2012
|
|
LIBOR
|
|
5.039%
|
$75 million
|
|
September 2012
|
|
LIBOR
|
|
4.960%
|
* Denotes forward-starting swap contract.
We regularly evaluate the desirability of entering into
additional interest rate swap contracts or other interest rate
hedging instruments to protect against interest rate
fluctuations on our variable rate debt.
Currency
Risk
We maintain assets and operations in Canada and, to a much
lesser extent, China and Europe. The functional currency for
these operations is their local currency. The assets and
liabilities of
non-U.S. subsidiaries
are translated into U.S. dollars at currency exchange rates
in effect at the end of each period, with the effect of such
translation reflected in other comprehensive income. Our
stockholders equity will fluctuate
44
depending upon the weakening or strengthening of the
U.S. dollar against these
non-U.S. currencies.
Net sales and expenses of
non-U.S. subsidiaries
are translated into U.S. dollars at the average currency
exchange rate during the period. At September 30, 2008,
$113.1 million of our net assets were denominated in
Canadian dollars.
We have receivables and payables denominated in currencies other
than an entitys functional currency. Changes in currency
exchange rates between when these balances originate and when
they are settled result in foreign exchange gains and losses.
We have entered into Canadian dollar forward exchange contracts
to reduce its exposure to currency fluctuations from its
Canadian dollar-denominated intercompany loans. Gains and losses
on these contracts are included in selling, general and
administrative expenses. We recorded a net gain of
$1.3 million in fiscal year 2008 on foreign currency
exchange contracts; this gain was offset by transaction losses
on the intercompany loans themselves.
Raw
Materials Risk
Our products are made using several basic raw materials,
including scrap steel and iron, brass ingot, sand, resin, steel
pipe, coke and various purchased components. Product margins and
the level of profitability can fluctuate if we do not pass
changes in raw material and purchased component costs to its
customers.
We estimate that raw materials and purchased components, as a
percentage of cost of sales for fiscal 2008, were 13% and 43%,
respectively, for Mueller Co., 23% and 44%, respectively, for
Anvil and 46% and 8% respectively for U.S. Pipe. For the
purpose of these estimates, raw materials exclude electricity,
natural gas, water, oxygen and other ancillary items.
Historically, we have been able to obtain an adequate supply of
raw materials and purchased components and management does not
anticipate any shortage of these materials, which are generally
purchased at market prices.
The average purchase costs of scrap iron at U.S. Pipe and brass
ingot at Mueller Co. were 42% and 11% higher in fiscal 2008 than
in fiscal 2007, respectively. These prices are expected to
fluctuate based on marketplace demand. Mueller Co. and Anvil
were generally able to pass increased costs of raw materials and
purchased components to their customers during fiscal 2008.
U.S. Pipe did not pass all of its increased raw material
costs to its customers during fiscal 2008.
Commodities
Risk
We use natural gas to fuel some of our ductile iron pipe
foundries. Natural gas is generally purchased at prices fixed
each month based on NYMEX market rates for specified volumes. We
are exposed to price changes from month to month.
We use natural gas swap contracts to hedge against cash flow
variability arising from changes in natural gas prices for our
anticipated purchases of natural gas. These contracts fix our
purchase price for a portion of our natural gas purchases at
prices between $9.235 and $10.040 per MMBtu through September
2009. All of the above swap contracts are accounted for as
effective hedges and have a total liability fair value of
$1.2 million at September 30, 2008, which is included
in other noncurrent liabilities. We recorded an unrealized loss
from our swap contracts, net of tax, of $0.6 million at
September 30, 2008 in accumulated other comprehensive
income.
45
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our consolidated financial statements and supplementary data are
filed as part of this annual report beginning on
page F-1
and incorporated by reference in this Item 8.
|
|
|
|
|
Index to Financial
Statements
|
|
Reference
|
|
|
|
|
F-1
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the
reports we file or submit under the Securities Exchange Act of
1934, as amended (the Exchange Act) is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission (SEC) and that such information is
accumulated and communicated to our management, including the
Chief Executive Officer and the Chief Financial Officer as
appropriate, to allow timely decisions regarding required
disclosure.
Our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act) as of the end of the period covered by this
annual report. Based on this evaluation, those officers have
concluded that our disclosure controls and procedures were
effective at September 30, 2008.
Changes
in Internal Control over Financial Reporting
There were no changes in internal control over financial
reporting during the quarter ended September 30, 2008 that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
of the Exchange Act). Internal control over financial reporting
is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
46
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over
financial reporting at September 30, 2008. In making this
assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated
Framework. Management has concluded that, at
September 30, 2008, our internal control over financial
reporting was effective.
Our assessment of the effectiveness of our internal control over
financial reporting at September 30, 2008, has been audited
by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report which is included in
this annual report on
Form 10-K.
Item 9B. OTHER
INFORMATION
None
47
PART III
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The name, age as of November 25, 2008 and position of each
of our executive officers and directors are presented below.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Gregory E. Hyland
|
|
|
57
|
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer
|
Robert Barker
|
|
|
51
|
|
|
Executive Vice President, General Counsel, Chief Compliance
Officer and Corporate Secretary
|
Robert D. Dunn
|
|
|
51
|
|
|
Senior Vice President, Human Resources
|
Thomas E. Fish
|
|
|
54
|
|
|
President, Anvil
|
Evan L. Hart
|
|
|
43
|
|
|
Senior Vice President and Chief Financial Officer
|
Robert P. Keefe
|
|
|
54
|
|
|
Senior Vice President and Chief Information Officer
|
Robert G. Leggett
|
|
|
49
|
|
|
Chief Operating Officer
|
Kevin G. McHugh
|
|
|
50
|
|
|
Vice President and Controller
|
Dale B. Smith
|
|
|
63
|
|
|
Chief Executive Officer, Mueller Co.
|
Raymond P. Torok
|
|
|
62
|
|
|
President, U.S. Pipe
|
Marietta Edmunds Zakas
|
|
|
49
|
|
|
Senior Vice President, Strategic Planning and Investor Relations
|
Donald N. Boyce
|
|
|
70
|
|
|
Director
|
Howard L. Clark
|
|
|
64
|
|
|
Director
|
Jerry W. Kolb
|
|
|
72
|
|
|
Director
|
Joseph B. Leonard
|
|
|
65
|
|
|
Director
|
Mark J. OBrien
|
|
|
65
|
|
|
Director
|
Bernard G. Rethore
|
|
|
67
|
|
|
Director
|
Neil A. Springer
|
|
|
70
|
|
|
Director
|
Lydia W. Thomas
|
|
|
64
|
|
|
Director
|
Michael T. Tokarz
|
|
|
58
|
|
|
Director
|
Gregory E. Hyland has served as Chairman of the Board of
Directors since October 2005 and as President and Chief
Executive Officer since January 2006. Mr. Hyland served as
Chairman, President and Chief Executive Officer of Walter
Industries, Inc. (Walter Industries) a homebuilding,
financial services and natural resources company, from September
2005 to December 2006. Prior to that time, Mr. Hyland
served as President, U.S. Fleet Management Solutions of
Ryder System, Inc. (Ryder), a transportation and
logistics company, from June 2005 to September 2005. He served
as Executive Vice President, U.S. Fleet Management
Solutions of Ryder from October 2004 to June 2005. From December
2003 to September 2004, Mr. Hyland was not employed. He was
President of the Industrial Products Segment for Textron, Inc.,
a multi-industry company, from February 2002 to August 2003 and
Chairman and Chief Executive Officer of Textron Golf, Turf and
Specialty Products from January 2001 to January 2002. From
September 1997 to December 2000, Mr. Hyland served as
President of the Engineered Products Group, Flow Control
Division of Tyco International Ltd (Tyco), a
diversified manufacturing conglomerate. Mr. Hyland earned
Bachelor and Master of Business Administration degrees from the
University of Pittsburgh,.
Robert Barker has served as our Executive Vice President,
General Counsel, Corporate Secretary and Chief Compliance
Officer since November 2006. Previously, he was a partner with
the law firm of Powell Goldstein LLP in Atlanta, Georgia since
August 2001. Mr. Barker earned an A.B. in History and
Political Science from Stanford University and earned a Juris
Doctor from the University of Virginia School of Law.
Robert D. Dunn has served as our Senior Vice President,
Human Resources since November 2007. Previously, he served as
Senior Vice President, Human Resources of Dean Foods Company
(formerly Suiza Foods Corporation), a dairy processor and
organic food manufacturer, since 1999. From 1979 to 1984,
Mr. Dunn was an officer in the United States Army.
Mr. Dunn earned a Bachelor of Science degree from Murray
State University and a Master of Business Administration degree
from Embry Riddle Aeronautical University.
48
Thomas E. Fish has served as President of our Anvil
segment since 2000. From January 2005 through November 2005,
Mr. Fish served as Mueller Co.s Interim Chief
Financial Officer. Mr. Fish served as Vice President of
Manufacturing for Grinnell Corp. (a predecessor of Anvil), a
manufacturer of threaded and grooved pipe fittings, pipe hangers
and sprinkler heads, from 1996 to 1999, Vice President of
Finance and Administration for Grinnell Corp. from 1992 to 1996,
Corporate Controller for Grinnell Corp. from 1984 to 1992 and
Director of Internal Audit for Grinnell Fire Protection Systems,
a manufacturer of fire protection systems, from 1982 to 1984.
Mr. Fish was employed by Price Waterhouse & Co.
from 1976 to 1982. Mr. Fish earned a Bachelor of Science
degree in Accounting and is a certified public accountant.
Evan L. Hart has served as our Senior Vice President and
Chief Financial Officer since July 2008, as our Controller from
December 2007 to July 2008 and as Vice President of Financial
Planning and Analysis from September 2006 to December 2007.
Previously, Mr. Hart had been Vice President, Controller
and Treasurer for Unisource Worldwide, Inc., a marketer and
distributor of commercial printing & business imaging
papers, packaging systems and facility supplies and equipment
from 2002 to 2006. He served in such roles as
Division Controller, Senior Manager of Financial Reporting
and Internal Audit Supervisor with Georgia-Pacific Corporation
from 1992 to 2002. Mr. Hart began his career with Price
Waterhouse & Co. in Birmingham, Alabama and Atlanta,
Georgia where he served audit clients in the manufacturing and
health care industries. Mr. Hart earned a Bachelor of
Science degree in Accounting and Economics from
Birmingham-Southern College and is a certified public accountant.
Robert P. Keefe has served as our Senior Vice President
and Chief Information Officer since March 2007. Previously,
Mr. Keefe was Corporate Vice President and Chief
Information Officer at Russell Corporation, an athletic apparel,
footwear and equipment company, from August 2002 to August 2006.
Prior to that, Mr. Keefe was Vice President and Chief
Information Officer for ConAgra Refrigerated Foods, a processor
and marketer of refrigerated food products, from 1996 to 2002.
He also held progressively responsible systems positions with
Kraft Foods Inc. and Wyeth Pharmaceuticals, a pharmaceutical and
health care products company. Mr. Keefe is a director of
the Society for Information Management, International (SIM), a
non-profit trade organization. Mr. Keefe earned a Bachelor
degree from the State University of New York at Oswego and a
Master of Business Administration degree from Pace University.
Robert G. Leggett has served as our Chief Operating
Officer since September 2008. Mr. Leggett served from 2002
to 2008 as a Senior Vice President for Armstrong World
Industries, a global leader in the design manufacture of floors,
ceilings, and cabinets, primarily leading the Americas
Building Products business. From 2000 to 2002, Mr. Leggett
was President and Chief Operating Officer for AIFOtec Inc., a
fiber-optic start-up company. From 1999 to 2000,
Mr. Leggett served as Vice President of the Fiber Optic
Division of Tyco Electronics Corp. From 1981 to 1999,
Mr. Leggett held various engineering and leadership
positions at AMP Inc., a global leader of electrical devices and
systems. Mr. Leggett earned a Bachelor of Science degree in
mechanical engineering from the Pennsylvania State University.
Kevin G. McHugh has served as our Vice President and
Controller since July 2008 and our Vice President, Financial
Reporting from January 2008 to July 2008. Previously, he was
Corporate Controller at Unisource Worldwide, Inc. from 2003 to
2007. He was Corporate Controller of Roper Industries, Inc., a
provider of engineered products and solutions for global niche
markets, including water, energy, radio frequency,
research/medical and general industry applications from 1997 to
2002. Mr. McHugh earned a Bachelor of Business
Administration degree from the University of Notre Dame and is a
certified public accountant.
Dale B. Smith has been Chief Executive Officer of Mueller
Co. since November 2007. From August 1999 to October 2007, he
was Chief Executive Officer of Mueller Group. He was also Chief
Operating Officer of the Company from January 2006 to October
2007. Mr. Smith served as Executive Vice President of
Mueller Co. from June 1994 to August 1999, Executive Vice
President of Finance for Tyco Europe from 1992 to 1994, Director
of Mergers and Acquisitions for Tyco from 1988 to 1992, Director
of Mergers and Acquisitions for Grinnell Corp. from 1986 to
1988, Chief Financial Officer of Ludlow Corp. (a Tyco Company)
from 1983 to 1986 and Corporate Controller for Grinnell Corp.
from 1981 to 1983. From 1971 to 1981, Mr. Smith was
employed by Price Waterhouse & Co. Mr. Smith
earned an A.B. in Economics from Middlebury College and
49
received a Master of Business Administration degree in Finance
and Accounting from the University of Rochester. Mr. Smith is a
certified public accountant.
Raymond P. Torok has been President of our U.S. Pipe
segment since July 2004. Previously he was interim President at
Golden Casting Corporation, a foundry operation producing highly
engineered precision castings from May 2003 to December 2003,
and he was President and Chief Executive Officer of Cold Metal
Products, a steel production company from October 1998 to
February 2003. Mr. Torok earned a Bachelor degree from John
Carroll University and a Master of Business Administration
degree from Butler University.
Marietta Edmunds Zakas has been Senior Vice President,
Strategic Planning and Investor Relations, since November 2006.
Previously Ms. Zakas served in various positions at Russell
Corporation, an athletic apparel, footwear and equipment company
from September 2001 to August 2006, culminating in her role as
Corporate Vice President, Chief of Staff, Business Development
and Treasurer. Ms. Zakas served as Corporate Vice
President, Director of Investor Relations, Corporate Secretary
and Treasurer, as well as Executive Assistant to the Chairman
and CEO for Equifax, Inc., a consumer and commercial credit
reporting agency, from 1993 to 2000. Ms. Zakas earned a
Bachelor degree from Randolph-Macon Womans College, a
Master of Business Administration degree from the Colgate-Darden
Graduate School of Business Administration at the University of
Virginia, and a Juris Doctor from the University of Virginia
School of Law.
Donald N. Boyce has been a member of our Board of
Directors since April 2006. He was a director of Walter
Industries, from August 1998 to April 2006. Mr. Boyce
served as Chairman of the Board of Walter Industries from
November, 2000 to March, 2002 and as Chairman of the Board,
President and Chief Executive Officer of Walter Industries from
August, 2000 to November, 2000. During this time, Walter
Industries owned U.S. Pipe. Mr. Boyce was Chairman of
the Board of Directors of IDEX Corporation, a proprietary
engineered industrial products manufacturing company, from April
1999 to March 2000, Chairman of the Board of Directors and Chief
Executive Officer of IDEX Corporation from March 1998 to March
1999, and Chairman of the Board of Directors, President and
Chief Executive Officer of IDEX Corporation from
January 1988 to March 1998.
Howard L. Clark, Jr. has been a member of our Board
of Directors since April 2006. He has been a director of Walter
Industries since March 1995. Mr. Clark has been a Vice
Chairman in the Investment Banking Division at Barclays Capital,
an investment banking firm, since September 2008. He previously
served as Vice Chairman of Lehman Brothers Inc., an investment
banking firm, from February 1993 to September 2008 and, before
that, as Chairman and Chief Executive Officer of Shearson Lehman
Brothers Inc. Mr. Clark also is a director of United
Rentals, Inc., an equipment rental company, and White Mountains
Insurance Group, Ltd., a financial services holding company.
Jerry W. Kolb has been a member of our Board of Directors
since April 2006. He has been a director of Walter Industries
since June 2003. Mr. Kolb previously served as a Vice
Chairman of Deloitte & Touche LLP, a registered public
accounting firm, since 1986.
Joseph B. Leonard has been a member of our Board of
Directors since April 2006. He has been a director of Walter
Industries since June 2005. Mr. Leonard was Chairman of
AirTran Holdings, Inc., from November 2007 to June 2008,
Chairman and Chief Executive Officer of AirTran Holdings, Inc.
from January 1999 to November 2007 and President of AirTran
Holdings, Inc. from January 1999 to January 2001. Previously,
Mr. Leonard served in various executive capacities for
AlliedSignal, Inc., an aerospace, automotive and engineering
company, and its aerospace division. Mr. Leonard previously
served in various executive positions for Eastern Airlines, Inc.
and prior to that he served maintenance and quality control
positions for Northwest Airlines, Inc. and American Airlines.
Mr. Leonard is a director of Air Canada, a full service
airline company
Mark J. OBrien has been a member of our Board of
Directors since April 2006. He has been a director of Walter
Industries since June 2005. Since March 2006,
Mr. OBrien has served as Chairman and Chief Executive
Officer of Walter Industries Homes and Finance Business.
Mr. OBrien has served as President and Chief
Executive Officer of Brier Patch Capital and Management, Inc., a
real estate investment firm, since September 2004.
Mr. OBrien served in various executive capacities at
Pulte Homes, Inc., a home building company, for 21 years,
retiring as President and Chief Executive Officer in June 2003.
50
Bernard G. Rethore has been a member of our Board of
Directors since April 2006. He has been a director of Walter
Industries since March 2002. He has been Chairman of the Board
Emeritus of Flowserve Corporation, a manufacturer of
pumps, valves, seals and components, since April 2000. From
January 2000 to April 2000, he served as Flowserve
Corporations Chairman. He had previously served as
Chairman, Chief Executive Officer and President of Flowserve
Corporation. Mr. Rethore is a director of Belden, Inc., a
manufacturer of specialty signal-transmission products, and
Dover Corp., a diversified manufacturer of a wide range of
proprietary products.
Neil A. Springer has been a member of our Board of
Directors since April 2006. He was a director of Walter
Industries from August 2000 to April 2006. Mr. Springer has
been managing director of Springer & Associates LLC, a
board consulting and executive recruitment company, since 1994.
Mr. Springer is also a director of IDEX Corporation.
Lydia W. Thomas has been a member of our Board of
Directors since January 2008. She served as President and Chief
Executive Officer of Mitretek Systems, Inc., a public interest
research and development company, from 1996 to September 2007.
She was previously with The MITRE Corporation, Center for
Environment, Resources and Space, serving as Senior Vice
President and General Manager from 1992 to 1996, Vice President
from 1989 to 1992 and Technical Director from 1982 to 1989. She
is a director of Cabot Corporation.
Michael T. Tokarz has been a member of our Board of
Directors since April 2006. He has served as non-executive
Chairman of the Board of Walter Industries since December 2006.
In 2006, Mr. Tokarz established Tokarz Group Advisers, an
investment advisory firm. Since February 2002, he has been a
member of the Tokarz Group, LLC, a venture capital investment
company. From January 1996 to February 2002, Mr. Tokarz was
a member of the limited liability company that serves as the
general partner of Kohlberg Kravis Roberts & Co. L.P.,
a private equity company. Mr. Tokarz also is a director of
IDEX Corporation, Conseco, Inc., an insurance provider, and MVC
Capital, Inc., a registered investment company.
Additional
Information
Except for the information disclosed above and below, the
information required by this item will be contained in our
definitive proxy statement issued in connection with the 2009
annual meeting of stockholders filed with the Securities and
Exchange Commission (SEC) within 120 days after
September 30, 2008 and is incorporated herein by reference.
Our website address is www.muellerwaterproducts.com. You
may obtain free electronic copies of our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports from the investors section
of our website. These reports are available on our website as
soon as reasonably practicable after we electronically file them
with the SEC. These reports should also be available through the
SECs website at www.sec.gov.
We have adopted a written code of conduct that applies to all
directors, officers and employees, including a separate code
that applies only to our principal executive officer and senior
financial officers in accordance with Section 406 of the
Sarbanes-Oxley Act of 2002 and the rules of the SEC promulgated
thereunder. Our Code of Business Conduct and Ethics is available
in the corporate governance section of our website. In the event
that we make changes in, or provide waivers from, the provisions
of this Code of Business Conduct and Ethics that the SEC
requires us to disclose, we intend to disclose these events on
the corporate governance section of our website.
We have adopted corporate governance guidelines. The guidelines
and the charters of our board committees are available in the
corporate governance section of our website. Copies of the Code
of Business Conduct and Ethics, corporate governance guidelines
and board committee charters are also available in print upon
written request to the Corporate Secretary, Mueller Water
Products, Inc., 1200 Abernathy Road NE, Suite 1200,
Atlanta, GA 30328.
51
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this item will be contained in our
definitive proxy statement issued in connection with the 2009
annual meeting of stockholders is incorporated herein by
reference.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Except for the information set forth below and the information
set forth in Part II, Item 5. MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES, the information required
by this item will be contained in our definitive proxy statement
issued in connection with the 2009 annual meeting of
stockholders and is incorporated herein by reference.
Securities
Authorized for Issuance under Equity Compensation
Plans
We have two compensation plans under which our equity securities
are authorized for issuance. The 2006 Employee Stock Purchase
Plan was approved by our sole stockholder in May 2006 and the
2006 Stock Incentive Plan was approved by our stockholders in
January 2008. The following table sets forth certain information
relating to these equity compensation plans, which relate only
to Series A common stock, at September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities to be
|
|
|
Weighted
|
|
|
|
|
|
|
issued upon
|
|
|
average
|
|
|
Number of
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
securities
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
remaining
|
|
|
|
options,
|
|
|
options,
|
|
|
available
|
|
|
|
warrants
|
|
|
warrants
|
|
|
for future
|
|
|
|
and rights
|
|
|
and rights
|
|
|
issuance
|
|
|
Equity compensation plans approved by stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mueller Water Products, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Stock Incentive Plan
|
|
|
3,946,709
|
(1)
|
|
$
|
12.37
|
|
|
|
3,593,927
|
(2)
|
Mueller Water Products, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Employee Stock Purchase Plan
|
|
|
60,115
|
(3)
|
|
|
5.95
|
|
|
|
3,588,128
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,006,824
|
|
|
|
|
|
|
|
7,182,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of shares to be issued upon exercise of outstanding
options granted under the Mueller Water Products, Inc. 2006
Stock Incentive Plan. Excludes phantom shares issuable to
non-employee directors pursuant to the Mueller Water Products,
Inc. Directors Deferred Fee Plan. |
|
(2) |
|
The number of shares available for future issuance under the
Mueller Water Products, Inc. 2006 Stock Incentive Plan is equal
to 8,000,000 shares authorized for issuance under the plan
less the cumulative number of awards granted under the plan plus
the cumulative number of awards cancelled under the plan. |
|
(3) |
|
Consists of shares issued on October 31, 2008 for which
employee contributions in the form of payroll deductions were
made from August 1, 2008 to October 31, 2008. |
|
(4) |
|
The number of shares available for future issuance under the
Mueller Water Products, Inc. 2006 Stock Purchase Plan is equal
to 4,000,000 shares authorized for issuance under the plan
less the cumulative number of shares issued under the plan
through October 31, 2008. |
52
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by this item will be contained in our
definitive proxy statement issued in connection with the 2009
annual meeting of stockholders is incorporated herein by
reference.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by this item will be contained in our
definitive proxy statement issued in connection with the 2009
annual meeting of stockholders is incorporated herein by
reference.
PART IV
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
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|
Page
|
Index to Financial
Statements
|
|
Number
|
|
Reports of Independent Registered Public Accounting Firms
|
|
|
F-1
|
|
Consolidated Balance Sheets at September 30, 2008 and 2007
|
|
|
F-4
|
|
Consolidated Statements of Operations for the years ended
September 30, 2008, 2007 and 2006
|
|
|
F-5
|
|
Consolidated Statements of Stockholders Equity for the
years ended September 30, 2008, 2007 and 2006
|
|
|
F-6
|
|
Consolidated Statements of Cash Flows for the years ended
September 30, 2008, 2007 and 2006
|
|
|
F-7
|
|
Notes to Consolidated Financial Statements
|
|
|
F-8
|
|
|
|
(b) |
Financial Statement Schedules
|
Except for Schedule II, Valuation and Qualifying Accounts,
the schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and, therefore, have been omitted. The information
required by Schedule II is included in the notes to the
consolidated financial statements.
53
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger dated as of June 17, 2005
among Mueller Water Products, Inc., Walter Industries, Inc., JW
MergerCo, Inc. and DLJ Merchant Banking II, Inc., as
stockholders representative. Incorporated by reference to
Exhibit 2.1 to Mueller Water Products
Form 8-K
(File no. 333-116590)
filed on June 21, 2005.
|
|
2
|
.1.1
|
|
Letter Agreement dated as of February 23, 2006 between
Walter Industries, Inc. and Mueller Water Products, Inc.
Incorporated by reference to Exhibit 10.1 to Mueller Water
Products, Inc.
Form 8-K
(File
no. 333-131521)
filed February 27, 2006.
|
|
2
|
.2
|
|
Agreement and Plan of Merger, dated as of January 31, 2006,
by and among Mueller Holding Company, Inc., Mueller Water
Products, LLC and Mueller Water Products Co-Issuer, Inc.
Incorporated by reference to Exhibit 2.1 Mueller Water
Products
Form 8-K
(File
no. 333-116590)
filed on February 3, 2006.
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of Mueller Water Products,
Inc. Incorporated by reference to Exhibit 3.1 to Mueller
Water Products, Inc.
Form 8-K
(File
no. 001-32892)
filed on May 30, 2006.
|
|
3
|
.1.1
|
|
Certificate of Merger, dated February 2, 2006, of Mueller
Water Products, LLC and Mueller Water Products Co-Issuer, Inc.
with and into Mueller Holding Company, Inc. Incorporated by
reference to Exhibit 3.1.2 to Mueller Water Products Inc.
Form 8-K
(File
no. 333-116590)
filed on February 3, 2006.
|
|
3
|
.2
|
|
Amended and Restated Bylaws of Mueller Water Products, Inc.
Incorporated by reference to Exhibit 3.1 to Mueller Water
Products, Inc.
Form 8-K
(File
no. 001-32892)
filed on August 22, 2008.
|
|
4
|
.1
|
|
Indenture, dated as of April 29, 2004, between Mueller
Holdings (N.A.), Inc. and Law Debenture Trust Company of
New York for the 14.75% Senior Discount Notes due 2014.
Incorporated by reference to Exhibit 4.1 to Mueller Water
Products, LLC Registration Statement on
Form S-1
(File no. 333-116590)
filed on June 17, 2004.
|
|
4
|
.1.1
|
|
Supplemental Indenture, dated as of October 3, 2005, by and
among Mueller Water Products, LLC, Mueller Water Products
Co-Issuer, Inc. and Law Debenture Trust Company of New
York. Incorporated by reference to Exhibit 4.1 to Mueller
Water Products, Inc.
Form 10-Q
(File no. 333-131521)
filed on February 22, 2006.
|
|
4
|
.1.2
|
|
Second Supplemental Indenture, dated as of February 2,
2006, between, by and among Mueller Holding Company, Inc.,
Mueller Water Products, LLC, Mueller Water Products Co-Issuer,
Inc. and Law Debenture Trust Company of New York.
Incorporated by reference to Exhibit 10.1 to Mueller Water
Products, Inc.
Form 8-K
(File
no. 333-116590)
filed on February 3, 2006.
|
|
4
|
.1.3
|
|
Third Supplemental Indenture, dated as of May 14, 2007, to
the Indenture dated as of April 29, 2004 among Mueller
Water Products, Inc. and Law Debenture Trust Company of New
York, as trustee. Incorporated by reference to
Exhibit 4.1.3 to Mueller Water Products
Form 8-K
(File
no. 001-32892)
filed on May 17, 2007.
|
|
4
|
.2
|
|
Indenture, dated as of April 23, 2004, among Mueller Group,
Inc., the Guarantors party thereto and Law Debenture
Trust Company of New York for the 10% Senior
Subordinated Notes due 2012. Incorporated by reference to
Exhibit 4.3 to Mueller Water Products, LLC Registration
Statement on
Form S-1
(File
no. 333-116590)
filed on June 17, 2004.
|
|
4
|
.2.1
|
|
Supplemental Indenture, dated as of October 3, 2005, among
Mueller Group Co-Issuer, Inc., Mueller Group, LLC, the certain
guarantors defined therein and Law Debenture Trust Company
of New York for the 10% Senior Subordinated Notes due 2012.
Incorporated by reference to Exhibit 10.6 to Mueller Water
Products, LLC Registration Statement on
Form S-1
(File
no. 333-116590)
filed on February 3, 2006.
|
54
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
4
|
.2.2
|
|
Second Supplemental Indenture, dated as of May 14, 2007, to
the Indenture dated as of April 23, 2004, among Mueller
Group, LLC (formerly Mueller Group, Inc.) and Mueller Group
Co-Issuer, Inc., the guarantors listed on the signature pages
thereto and Law Debenture Trust Company of New York,
as trustee. Incorporated by reference to Exhibit 4.7 to
Mueller Water Products
Form 8-K
(File
no. 001-32892)
filed on May 17, 2007.
|
|
4
|
.3
|
|
Indenture dated as of May 24, 2007 among Mueller Water
Products, Inc., the guarantors named on the signature pages
thereto and The Bank of New York (including form of global
notes). Incorporated by reference to Exhibit 4.6 to Mueller
Water Products Inc.
Form 8-K
(File no. 001-32892)
filed on May 30, 2007.
|
|
10
|
.1
|
|
Amended and Restated Credit Agreement among Mueller Water
Products, Inc., as Borrower, Mueller Group, LLC, as prior
borrower, Bank of America, N.A., as Administrative Agent, Swing
Line Lender, and an L/C Issuer, JPMorgan Chase Bank, N.A., as
Syndication Agent, and an L/C Issuer and the lenders named on
the signature pages thereto. Incorporated by reference to
Exhibit 10.17 to Mueller Water Products Inc.
Form 8-K
(File
no. 001-32892)
filed on May 30, 2007.
|
|
10
|
.1.1
|
|
Amendment No. 1 to Amended and Restated Credit Agreement,
dated as of June 21, 2007, among Mueller Water Products,
Inc., Bank of America, N.A., and each of the guarantors named on
the signature pages thereto. Incorporated by reference to
Exhibit 10.20 to Mueller Water Products Inc.
Form 10-Q
(File
no. 001-32892)
for the quarter ended June 30, 2007.
|
|
10
|
.2
|
|
Corporate Agreement by and between Walter Industries, Inc. and
Mueller Water Products, Inc. Incorporated by reference to
Exhibit 10.1 to Mueller Water Products, Inc.
Form 8-K
(File no. 001-32892)
filed on May 30, 2006.
|
|
10
|
.3
|
|
Income Tax Allocation Agreement by and among Walter Industries,
Inc., the Walter Affiliates (as defined therein), Mueller Water
Products, Inc. and the Mueller Affiliates (as defined therein).
Incorporated by reference to Exhibit 10.2 to Mueller Water
Products, Inc.
Form 8-K
(File no. 001-32892)
filed on May 30, 2006.
|
|
10
|
.4
|
|
Transition Services Agreement by and between Walter Industries,
Inc. and Mueller Water Products, Inc. Incorporated by reference
to Exhibit 10.3 to Mueller Water Products, Inc.
8-K
(File no. 001-32892)
filed on May 30, 2006.
|
|
10
|
.5**
|
|
Mueller Water Products, Inc. Amended and Restated 2006 Stock
Incentive Plan.
|
|
10
|
.6
|
|
Mueller Water Products, Inc. Form of Notice of Stock Option
Grant. Incorporated by reference to Exhibit 10.5.2 to
Mueller Water Products, Inc.
Form 10-Q
for the quarter ended December 31, 2007 (File
no. 001-32892)
filed on February 11, 2008.
|
|
10
|
.7
|
|
Mueller Water Products, Inc. Form of Restricted Stock Unit Award
Agreement. Incorporated by reference to Exhibit 10.5.3 to
Mueller Water Products, Inc.
Form 10-Q
for the quarter ended December 31, 2007 (File
no. 001-32892)
filed on February 11, 2008.
|
|
10
|
.8
|
|
Mueller Water Products, Inc. 2006 Employee Stock Purchase Plan,
as amended September 27, 2006. Incorporated by reference to
Exhibit 10.5 to Mueller Water Products, Inc.
Form 10-K
(File no. 001-32892)
filed on December 21, 2006.
|
|
10
|
.9
|
|
Mueller Water Products, Inc. Directors Deferred Fee Plan.
Incorporated by reference to Exhibit 10.7 to Mueller Water
Products, Inc.
8-K (File
no. 001-32892)
filed on May 30, 2006.
|
|
10
|
.10
|
|
Form of Mueller Water Products, Inc. Director Indemnification
Agreement. Incorporated by reference to Exhibit 99.2 to
Mueller Water Products, Inc.
8-K (File
no. 001-32892)
filed on October 31, 2008.
|
|
10
|
.11
|
|
Executive Incentive Plan of Mueller Water Products, Inc.
Incorporated by reference to Exhibit 10.6 to Mueller Water
Products, Inc.
8-K (File
no. 001-32892)
filed on May 30, 2006.
|
|
10
|
.12
|
|
Mueller Water Products, Inc. Executive Deferred Compensation
Plan. Incorporated by reference to Exhibit 99.3 to Mueller
Water Products, Inc.
8-K (File
no. 001-32892)
filed on October 31, 2008.
|
|
10
|
.13
|
|
Employment Agreement, dated September 15, 2008 between
Mueller Water Products, Inc. and Gregory E. Hyland. Incorporated
by reference to Exhibit 99.1 to Mueller Water Products,
Inc.
Form 8-K
(File
no. 001-32892)
filed on October 6, 2008.
|
55
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Document
|
|
|
10
|
.13.1
|
|
Amendment, dated as of March 2, 2006, to Executive
Employment Agreement dated September 9, 2005 between Walter
Industries, Inc. and Gregory E. Hyland. Incorporated by
reference to Exhibit 10.1 to Mueller Water Products, Inc.
Form 8-K
(File
no. 333-131521)
filed on March 3, 2006.
|
|
10
|
.13.2
|
|
Mueller Water Products, Inc. Supplemental Defined Contribution
Plan, effective April 1, 2007. Incorporated by reference to
Exhibit 10.01 to Mueller Water Products, Inc.
Form 8-K
(File no. 001-32892)
filed on March 27, 2007.
|
|
10
|
.14
|
|
Executive Employment Agreement, dated January 23, 2006,
between Mueller Holding Company, Inc. and Dale B. Smith.
Incorporated by reference to Exhibit 10.2 to Mueller Water
Products, LLC
Form 8-K
(File
no. 333-116590)
filed on January 27, 2006.
|
|
10
|
.14.1
|
|
Amendment dated as of November 1, 2007 to Employment
Agreement with Dale B. Smith dated January 23, 2006.
Incorporated by reference to Exhibit 99.2 to Mueller Water
Products, Inc.
Form 8-K
(File
no. 001-32892)
filed on November 2, 2007.
|
|
10
|
.14.2
|
|
Amendment No. 2 dated as of October 1, 2008 to
Employment Agreement with Dale B. Smith dated January 23,
2006. Incorporated by reference to Exhibit 99.1 to Mueller
Water Products, Inc.
Form 8-K
(File
no. 001-32892)
filed on October 31, 2008.
|
|
10
|
.15
|
|
Employment Agreement, dated as of September 15, 2008,
between Mueller Water Products, Inc. and Robert Leggett.
Incorporated by reference to Exhibit 99.1 to Mueller Water
Products, Inc.
Form 8-K
(File
no. 001-32892)
filed on September 30, 2008.
|
|
10
|
.16
|
|
Executive Employment Agreement, dated as of July 16, 2008,
between Mueller Water Products, Inc. and Evan L. Hart.
Incorporated by reference to Exhibit 10.18 to Mueller Water
Products, Inc.
Form 10-Q
for the quarter ended June 30, 2008 (File
001-32892)
filed on August 11, 2008.
|
|
10
|
.17
|
|
Employment Agreement, dated as of July 31, 2006, between
Mueller Water Products, Inc. and Thomas E. Fish. Incorporated by
reference to Exhibit 10.2 to Mueller Water Products, Inc.
Form 8-K
(File
no. 001-32892)
filed on August 3, 2006.
|
|
10
|
.17.1
|
|
Mueller Water Products, Inc. Special Bonus, Incentive Award and
Termination Protection Program. Incorporated by reference to
Exhibit 10.18 to Mueller Water Products, Inc.
Form 8-K
(File no. 001-32892)
filed on December 14, 2007.
|
|
10
|
.18
|
|
Employment Agreement, dated September 15, 2008, between
Mueller Water Products, Inc and Raymond P. Torok. Incorporated
by reference to Exhibit 99.2 to Mueller Water Products,
Inc.
Form 8-K
(File
no. 001-32892
filed on October 6, 2008.
|
|
10
|
.19
|
|
Joint Litigation Agreement dated December 14, 2006 between
Walter Industries, Inc. and Mueller Water Products, Inc.
Incorporated by reference to Exhibit 10.3 to Mueller Water
Products, Inc.
Form 8-K
(File
no. 001-32892)
filed on December 19, 2006.
|
|
10
|
.20
|
|
Form of Executive
Change-in-Control
Severance Agreement. Incorporated by reference to
Exhibit 99.3 to Mueller Water Products, Inc.
Form 8-K
(File
no. 001-32892)
filed on October 6, 2008.
|
|
12
|
.1**
|
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
14
|
.1**
|
|
Code of Business Conduct and Ethics for Mueller Water Products,
Inc.
|
|
21
|
.1**
|
|
Subsidiaries of Mueller Water Products, Inc.
|
|
23
|
.1**
|
|
Consent of Ernst & Young LLP.
|
|
23
|
.2**
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
31
|
.1**
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2**
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1**
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2**
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
** |
|
Filed with this report |
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 25, 2008
MUELLER WATER PRODUCTS, INC.
|
|
|
|
By:
|
/s/ Gregory
E. Hyland
|
Name: Gregory E. Hyland
|
|
|
|
Title:
|
Chairman, President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1934, as
amended, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gregory
E. Hyland
Gregory
E. Hyland
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer (principal executive officer)
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Evan
L. Hart
Evan
L. Hart
|
|
Senior Vice President and Chief Financial Officer
(principal financial officer)
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Kevin
G. Mchugh
Kevin
G. McHugh
|
|
Vice President and Controller
(principal accounting officer)
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Donald
N. Boyce
Donald
N. Boyce
|
|
Director
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Howard
L. Clark
Howard
L. Clark
|
|
Director
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Jerry
W. Kolb
Jerry
W. Kolb
|
|
Director
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Joseph
B. Leonard
Joseph
B. Leonard
|
|
Director
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Mark
J. Obrien
Mark
J. OBrien
|
|
Director
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Bernard
G. Rethore
Bernard
G. Rethore
|
|
Director
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Neil
A. Springer
Neil
A. Springer
|
|
Director
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Lydia
W. Thomas
Lydia
W. Thomas
|
|
Director
|
|
November 25, 2008
|
|
|
|
|
|
/s/ Michael
T. Tokarz
Michael
T. Tokarz
|
|
Director
|
|
November 25, 2008
|
57
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mueller Water
Products, Inc.
We have audited the accompanying consolidated balance sheet of
Mueller Water Products, Inc. and subsidiaries as of
September 30, 2008, and the related consolidated statements
of operations, stockholders equity, and cash flows for the
year then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Mueller Water Products, Inc. and
subsidiaries as of September 30, 2008, and the results of
their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 6 to the consolidated financial
statements, on October 1, 2007, the Company adopted FASB
Interpretation No. 48 related to the accounting for
uncertain tax positions. Also, as discussed in Note 10 to
the consolidated financial statements, in fiscal year 2008 the
Company adopted the measurement date related provisions of
Statement of Financial Accounting Standards No. 158 related
to its defined benefit pension and other postretirement plans.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Mueller Water Products, Inc.s internal control over
financial reporting as of September 30, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
November 25, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 25, 2008
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mueller Water
Products, Inc.
We have audited Mueller Water Products, Inc.s internal
control over financial reporting as of September 30, 2008,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Mueller Water Products, Inc.s management is responsible
for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assumed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Mueller Water Products, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2008, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of Mueller Water Products, Inc. as of
September 30, 2008 and the related consolidated statements
of operations, stockholders equity and cash flows for the
period ended September 30, 2008 of Mueller Water Products,
Inc. and our report dated November 25, 2008 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 25, 2008
F-2
Report of
Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Mueller Water Products, Inc.
In our opinion, the accompanying consolidated balance sheet as
of September 30, 2007 and the related consolidated
statements of operations, of stockholders equity and of
cash flows for each of the two years in the period ended
September 30, 2007 present fairly, in all material
respects, the financial position of Mueller Water Products, Inc.
and its subsidiaries at September 30, 2007, and the results
of their operations and their cash flows for each of the two
years in the period ended September 30, 2007, in conformity
with accounting principles generally accepted in the United
States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 10 to the consolidated financial
statements, the Company changed the manner in which it accounts
for defined benefit pension and other postretirement benefit
plans as of September 30, 2007.
/s/ PricewaterhouseCoopers
LLP
Atlanta, Georgia
November 28, 2007
F-3
MUELLER
WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
183.9
|
|
|
$
|
98.9
|
|
Receivables, net
|
|
|
298.2
|
|
|
|
302.1
|
|
Inventories
|
|
|
459.4
|
|
|
|
453.5
|
|
Deferred income taxes
|
|
|
48.2
|
|
|
|
29.2
|
|
Other current assets
|
|
|
60.6
|
|
|
|
66.3
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,050.3
|
|
|
|
950.0
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
356.8
|
|
|
|
351.8
|
|
Goodwill
|
|
|
871.5
|
|
|
|
871.1
|
|
Identifiable intangible assets
|
|
|
789.8
|
|
|
|
819.3
|
|
Other noncurrent assets
|
|
|
21.8
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,090.2
|
|
|
$
|
3,009.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
9.7
|
|
|
$
|
6.2
|
|
Accounts payable
|
|
|
156.0
|
|
|
|
112.3
|
|
Other current liabilities
|
|
|
129.0
|
|
|
|
121.8
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
294.7
|
|
|
|
240.3
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,085.8
|
|
|
|
1,094.3
|
|
Deferred income taxes
|
|
|
295.8
|
|
|
|
307.3
|
|
Other noncurrent liabilities
|
|
|
85.0
|
|
|
|
56.3
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,761.3
|
|
|
|
1,698.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Series A: 400,000,000 shares authorized,
29,528,763 shares
and 29,006,267 shares outstanding at September 30,
2008
and 2007, respectively
|
|
|
0.3
|
|
|
|
0.2
|
|
Series B: 200,000,000 shares authorized;
85,844,920 shares
outstanding at September 30, 2008 and 2007
|
|
|
0.9
|
|
|
|
0.9
|
|
Additional paid-in capital
|
|
|
1,428.9
|
|
|
|
1,422.0
|
|
Accumulated deficit
|
|
|
(81.6
|
)
|
|
|
(124.8
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(19.6
|
)
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,328.9
|
|
|
|
1,311.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,090.2
|
|
|
$
|
3,009.2
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
MUELLER
WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions, except per share amounts)
|
|
|
Net sales
|
|
$
|
1,859.3
|
|
|
$
|
1,849.0
|
|
|
$
|
1,933.4
|
|
Cost of sales
|
|
|
1,420.3
|
|
|
|
1,385.8
|
|
|
|
1,525.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
439.0
|
|
|
|
463.2
|
|
|
|
407.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
274.6
|
|
|
|
253.2
|
|
|
|
250.1
|
|
Restructuring
|
|
|
18.3
|
|
|
|
-
|
|
|
|
28.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
292.9
|
|
|
|
253.2
|
|
|
|
278.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
146.1
|
|
|
|
210.0
|
|
|
|
129.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
72.4
|
|
|
|
86.8
|
|
|
|
107.4
|
|
Loss on early extinguishment of debt
|
|
|
-
|
|
|
|
36.5
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
73.7
|
|
|
|
86.7
|
|
|
|
13.1
|
|
Income taxes
|
|
|
31.7
|
|
|
|
38.5
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
42.0
|
|
|
$
|
48.2
|
|
|
$
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per share
|
|
$
|
0.36
|
|
|
$
|
0.42
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
115.1
|
|
|
|
114.7
|
|
|
|
95.5
|
|
Diluted
|
|
|
115.5
|
|
|
|
115.3
|
|
|
|
95.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
During the year ended September 30, 2006, the Company
declared dividends of $456.5 million to its owner at that
time, Walter Industries, Inc. |
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
MUELLER
WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Common
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
|
|
|
|
stock
|
|
|
capital
|
|
|
deficit
|
|
|
income (loss)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at September 30, 2005
|
|
$
|
-
|
|
|
$
|
68.3
|
|
|
$
|
(178.1
|
)
|
|
$
|
(45.4
|
)
|
|
$
|
(155.2
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
5.1
|
|
|
|
-
|
|
|
|
5.1
|
|
Walter Industries, Inc. investment in subsidiary
|
|
|
-
|
|
|
|
932.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
932.1
|
|
Dividends to Walter Industries, Inc.
|
|
|
-
|
|
|
|
(456.5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(456.5
|
)
|
Forgiveness of payable to Walter Industries, Inc.
|
|
|
-
|
|
|
|
443.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
443.6
|
|
Sale of common stock in initial public offering
|
|
|
1.1
|
|
|
|
427.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
428.9
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
2.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2.2
|
|
Net unrealized gain on derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.0
|
|
|
|
1.0
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Minimum pension liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24.0
|
|
|
|
24.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
1.1
|
|
|
|
1,417.5
|
|
|
|
(173.0
|
)
|
|
|
(18.6
|
)
|
|
|
1,227.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
48.2
|
|
|
|
-
|
|
|
|
48.2
|
|
Dividends declared
|
|
|
-
|
|
|
|
(8.0
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8.0
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
10.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10.7
|
|
Stock issued under stock compensation plans
|
|
|
-
|
|
|
|
1.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.8
|
|
Net unrealized loss on derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2.1
|
)
|
|
|
(2.1
|
)
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8.2
|
|
|
|
8.2
|
|
Minimum pension liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10.0
|
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply SFAS No. 158, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15.2
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
1.1
|
|
|
|
1,422.0
|
|
|
|
(124.8
|
)
|
|
|
12.7
|
|
|
|
1,311.0
|
|
Adjustment to adopt FASB Interpretation No. 48
|
|
|
-
|
|
|
|
-
|
|
|
|
0.6
|
|
|
|
-
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2007
|
|
|
1.1
|
|
|
|
1,422.0
|
|
|
|
(124.2
|
)
|
|
|
12.7
|
|
|
|
1,311.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
42.0
|
|
|
|
-
|
|
|
|
42.0
|
|
Effect of changing pension plans and other postretirement
benefit plans measurement dates pursuant to
SFAS No. 158, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
0.6
|
|
|
|
-
|
|
|
|
0.6
|
|
Dividends declared
|
|
|
-
|
|
|
|
(8.1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8.1
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
13.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13.2
|
|
Stock issued under stock
compensation plans
|
|
|
0.1
|
|
|
|
1.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.9
|
|
Net unrealized loss on derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6.5
|
)
|
|
|
(6.5
|
)
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2.7
|
)
|
|
|
(2.7
|
)
|
Minimum pension liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23.1
|
)
|
|
|
(23.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
1.2
|
|
|
$
|
1,428.9
|
|
|
$
|
(81.6
|
)
|
|
$
|
(19.6
|
)
|
|
$
|
1,328.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
MUELLER
WATER PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
42.0
|
|
|
$
|
48.2
|
|
|
$
|
5.1
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
63.6
|
|
|
|
72.3
|
|
|
|
68.8
|
|
Amortization
|
|
|
29.5
|
|
|
|
29.1
|
|
|
|
28.1
|
|
Provision for doubtful receivables
|
|
|
3.7
|
|
|
|
0.8
|
|
|
|
1.8
|
|
Write-off of premium on notes
|
|
|
-
|
|
|
|
(22.8
|
)
|
|
|
(14.3
|
)
|
Write-off of deferred financing fees
|
|
|
-
|
|
|
|
11.1
|
|
|
|
4.1
|
|
Stock-based compensation expense
|
|
|
13.2
|
|
|
|
10.7
|
|
|
|
3.1
|
|
Accretion on debt
|
|
|
-
|
|
|
|
7.1
|
|
|
|
12.9
|
|
Deferred income taxes (benefit)
|
|
|
(4.2
|
)
|
|
|
29.6
|
|
|
|
(9.5
|
)
|
Amortization of deferred financing fees
|
|
|
1.7
|
|
|
|
2.5
|
|
|
|
3.1
|
|
Loss (gain) on disposal of property, plant and equipment
|
|
|
(0.9
|
)
|
|
|
2.6
|
|
|
|
2.1
|
|
Asset impairments
|
|
|
14.8
|
|
|
|
-
|
|
|
|
21.5
|
|
Other, net
|
|
|
1.2
|
|
|
|
(5.5
|
)
|
|
|
(3.2
|
)
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(11.3
|
)
|
|
|
28.1
|
|
|
|
(27.0
|
)
|
Inventories
|
|
|
(18.2
|
)
|
|
|
15.0
|
|
|
|
70.4
|
|
Other assets
|
|
|
11.4
|
|
|
|
(0.4
|
)
|
|
|
(1.3
|
)
|
Accounts payable and other liabilities
|
|
|
35.5
|
|
|
|
(73.3
|
)
|
|
|
(58.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
182.0
|
|
|
|
155.1
|
|
|
|
107.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(88.1
|
)
|
|
|
(88.3
|
)
|
|
|
(71.1
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
9.6
|
|
|
|
0.8
|
|
|
|
3.6
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
-
|
|
|
|
(26.2
|
)
|
|
|
(15.6
|
)
|
Increase in amounts due Walter Industries, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(78.5
|
)
|
|
|
(113.7
|
)
|
|
|
(81.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in outstanding checks
|
|
|
(6.9
|
)
|
|
|
3.1
|
|
|
|
10.0
|
|
Debt borrowings
|
|
|
-
|
|
|
|
1,140.0
|
|
|
|
1,105.9
|
|
Debt payments
|
|
|
(5.0
|
)
|
|
|
(1,151.1
|
)
|
|
|
(1,087.8
|
)
|
Common stock issuance
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
428.9
|
|
Deferred financing fee payments
|
|
|
-
|
|
|
|
(11.4
|
)
|
|
|
(21.6
|
)
|
Dividend payments
|
|
|
(8.1
|
)
|
|
|
(8.0
|
)
|
|
|
(456.5
|
)
|
Contribution from Walter Industries, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
76.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(18.1
|
)
|
|
|
(25.6
|
)
|
|
|
55.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of currency exchange rate changes on cash
|
|
|
(0.4
|
)
|
|
|
1.7
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
85.0
|
|
|
|
17.5
|
|
|
|
81.4
|
|
Cash and cash equivalents at beginning of year
|
|
|
98.9
|
|
|
|
81.4
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
183.9
|
|
|
$
|
98.9
|
|
|
$
|
81.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
MUELLER
WATER PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Mueller Water Products, Inc., a Delaware corporation, together
with its consolidated subsidiaries (the Company)
operates in three business segments: Mueller Co., U.S. Pipe
and Anvil. Mueller Co. manufactures and sells fire hydrants,
valves and related products used in residential water and gas
systems. U.S. Pipe manufactures and sells a broad line of
ductile iron pipe, restrained joint products, fittings and other
products. Anvil manufactures and sells a variety of pipe
fittings, couplings, pipe hangers, pipe nipples and related
products.
On October 3, 2005, Walter Industries, Inc. (Walter
Industries) acquired all outstanding shares of a
predecessor company comprising the current Mueller Co. and Anvil
businesses (the Mueller Acquisition) and contributed
them to its U.S. Pipe business to form the Company as it
currently exists. The acquired businesses are included in the
Consolidated Results of Operations beginning October 3,
2005. The Company completed an initial public offering of its
Series A common stock (NYSE: MWA) on June 1, 2006 and
on December 14, 2006, Walter Industries, Inc. (Walter
Industries) distributed all of the Companys
outstanding Series B common stock (NYSE: MWA.B) to the
shareholders of Walter Industries (the Spin-off).
The Company completed several other business acquisitions since
the beginning of fiscal 2006, each of which has been included in
the Consolidated Results of Operations as of its respective
acquisition date.
The consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United
States of America, which require management to make certain
estimates and assumptions that affect the reported amounts of
assets, liabilities, sales and expenses and the disclosure of
contingent assets and liabilities for the reporting periods.
Actual results could differ from those estimates. All
significant intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to
previously reported amounts to conform to the current year
presentation.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Revenue RecognitionThe Company recognizes revenue
when delivery of products has occurred or services have been
rendered and there is persuasive evidence of a sales
arrangement, selling prices are fixed or determinable and
collectibility from the customer is reasonably assured. Revenue
is recorded net of estimated cash discounts and rebates.
Shipping and HandlingCosts to ship products to
customers are included in cost of sales in the accompanying
Consolidated Statements of Operations. Amounts billed to
customers, if any, to cover shipping and handling costs are
included in net sales.
Stock-based CompensationThe Company records
compensation expense for stock-based awards granted to employees
based on the fair value at the grant dates. The Company records
stock-based compensation expense as a selling, general and
administrative expense.
Cash and Cash EquivalentsThe Company considers all
highly liquid investments with original maturities of
90 days or less when purchased to be cash equivalents.
Outstanding checks are netted against cash when there is a
sufficient balance of cash available in the Companys
accounts at the bank to cover the outstanding checks and the
right of offset exists. Where there is no right of offset
against cash balances, outstanding checks are included in
accounts payable. At September 30, 2008 and 2007, checks
issued but not yet presented to the banks for payment (i.e., the
net dollar value of bank checks outstanding) were
$6.2 million and $13.1 million, respectively, and were
included in accounts payable.
F-8
ReceivablesReceivables relate primarily to amounts
due from customers located in North America. To reduce credit
risk, credit investigations are generally performed prior to
accepting orders from new customers and, when necessary, letters
of credit are required to ensure payment.
The estimated allowance for doubtful receivables is based upon
judgments and estimates of expected losses and specific
identification of problem accounts. Significantly weaker than
anticipated industry or economic conditions could impact
customers ability to pay such that actual losses may be
greater than the amounts provided for in this allowance. The
periodic evaluation of the adequacy of the allowance for
doubtful receivables is based on an analysis of prior collection
experience, specific customer creditworthiness and current
economic trends within the industries served. In circumstances
where a specific customers inability to meet its financial
obligation is known to the Company (e.g., bankruptcy filings or
substantial downgrading of credit ratings), the Company records
a specific allowance to reduce the receivable to the amount
management reasonably believes will be collected.
The following table summarizes information concerning the
Companys allowance for doubtful receivables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
4.9
|
|
|
$
|
4.8
|
|
|
$
|
0.9
|
|
Balance of acquired businesses
|
|
|
-
|
|
|
|
-
|
|
|
|
5.0
|
|
Provision charged to expense
|
|
|
3.7
|
|
|
|
0.8
|
|
|
|
1.8
|
|
Balances written off, net of recoveries
|
|
|
(1.9
|
)
|
|
|
(0.7
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
6.7
|
|
|
$
|
4.9
|
|
|
$
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
InventoriesInventories are recorded at the lower of
cost
(first-in,
first-out method) or market value. Additionally, the Company
evaluates its inventory in terms of excess and obsolete
exposures. This evaluation includes such factors as anticipated
usage, inventory turnover, inventory levels and ultimate product
sales value. Inventory cost includes an overhead component that
is affected by levels of production and actual costs incurred.
Management periodically evaluates the effects of production
levels and costs capitalized as part of inventory.
The following table summarizes information concerning the
Companys reserves for excess and obsolete inventories and
to reduce inventory balances to the lower of cost or market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
32.3
|
|
|
$
|
29.0
|
|
|
$
|
4.3
|
|
Balance of acquired businesses
|
|
|
-
|
|
|
|
-
|
|
|
|
22.8
|
|
Provision charged to expense
|
|
|
3.3
|
|
|
|
9.4
|
|
|
|
16.1
|
|
Amounts written off
|
|
|
(3.4
|
)
|
|
|
(10.1
|
)
|
|
|
(14.7
|
)
|
Other adjustments
|
|
|
(0.2
|
)
|
|
|
4.0
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
32.0
|
|
|
$
|
32.3
|
|
|
$
|
29.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid ExpensesPrepaid expenses include
maintenance supplies and tooling inventory costs. Costs for
perishable tools and maintenance items are expensed when put
into service. Costs for more durable items are amortized over
their estimated useful lives, ranging from 3 to 10 years.
Property, plant and equipmentProperty, plant and
equipment is recorded at cost, less accumulated depreciation and
amortization. Depreciation is recorded using the straight-line
method over the estimated useful lives of the assets. Estimated
useful lives are 10 to 20 years for land improvements, 10
to 40 years for buildings and 3 to 15 years for
machinery and equipment. Leasehold improvements are amortized
using the
F-9
straight-line method over the lesser of the useful life of the
improvement or the remaining lease term. Gains and losses upon
disposition are reflected in operating results in the period of
disposition.
The Company capitalizes interest costs associated with large
asset construction projects. Capitalized interest is treated as
a component of the related assets cost and depreciated
accordingly.
Direct internal and external costs to implement computer systems
and software are capitalized as incurred. Capitalized costs are
depreciated over the estimated useful life of the system or
software, generally 3 to 5 years, beginning when site
installation or module development is complete and ready for use.
Liabilities are recognized at fair value for asset retirement
obligations related to plant and landfill closures in the period
in which they are incurred and the carrying amounts of the
related long-lived assets are correspondingly increased. Over
time, the liabilities are accreted to their estimated future
values. At September 30, 2008 and 2007, asset retirement
obligations were $3.0 million and $4.0 million,
respectively.
Accounting for the Impairment of Long-Lived
AssetsManagement tests long-lived assets, including
goodwill and intangible assets that have an indefinite life, for
impairment annually (or more frequently if events or
circumstances indicate possible impairments). Finite-lived
intangible assets are amortized over their respective estimated
useful lives and reviewed if events or circumstances indicate
possible impairment. We perform our annual impairment testing at
September 1.
Management tests goodwill for possible impairment by first
determining the fair value of the related reporting unit and
comparing this value to the recorded net assets of the reporting
unit, including goodwill. Fair value is determined using a
combination of a discounted cash flow model and stock market
comparable valuations for a peer group of companies. Significant
judgments and estimates must be made when estimating future cash
flows, determining the appropriate discount rate and identifying
appropriate stock market comparable companies. Management
concluded that the Companys goodwill had not been impaired
at September 1, 2008.
Management also evaluated the reasonableness of its
determination of fair values for the Companys reporting
units compared to the stock market capitalization at
September 1, 2008 and during the period thereafter. These
stock market capitalizations were significantly lower than the
fair values determined by management. The fair value of an
entity can be greater than its market capitalization for various
reasons, one of which is the concept of a control premium.
Substantial value may arise from the ability to take advantages
of synergies and other benefits that flow from control over
another entity. Management also believes the general downturn in
U.S. equity markets resulting from the recent credit and
liquidity crisis, which management believes has also affected
the Companys stock market valuation, is not representative
of any fundamental change in the Companys businesses.
Management cannot predict with any reasonable degree of
confidence when the effects of these recent economic events will
subside or when the price of the Companys common stock
will be more representative of what management believes to be
the Companys fair value. Changes in managements
assumptions underlying its estimates of fair value, which will
be a function of the Companys future financial performance
and changes in economic conditions, could result in a future
impairment charge.
Workers CompensationThe Companys exposure to
workers compensation claims is generally limited to
$1 million per incident. Liabilities, including those
related to claims incurred but not reported, are recorded
principally using annual valuations based on discounted future
expected payments and using historical data or combined with
insurance industry data when historical data is limited. The
Company is indemnified by a predecessor to Tyco International
Ltd. (Tyco) for all workers compensation liabilities
related to incidents that occurred prior to August 16,
1999. See Note 19. On an undiscounted basis, workers
compensation liabilities were $25.4 million and
$25.2 million at September 30, 2008 and 2007,
respectively. On a discounted basis, workers compensation
liabilities were $22.2 million and $21.8 million at
September 30, 2008 and 2007, respectively.
The Company applies a discount rate at a risk-free interest
rate, generally a U.S. Treasury bill rate, for each policy
year. The rate used is one with a duration that corresponds to
the weighted average expected payout period for each policy
year. Once a discount rate is applied to a policy year, it
remains the discount
F-10
rate for that policy year until all claims are paid. The use of
this method decreases the volatility of the liability related
solely to changes in the discount rate.
Warranty CostsThe Company accrues for warranty
expenses that can include customer costs of repair
and/or
replacement, including labor, materials, equipment, freight and
reasonable overhead costs. The Company accrues for the estimated
cost of product warranties at the time of sale if such costs are
determined to be reasonably estimable at that time. Warranty
cost estimates are revised throughout applicable warranty
periods as better information regarding warranty costs becomes
available.
Activity in accrued warranty, reported as part of other current
liabilities, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
3.7
|
|
|
$
|
2.7
|
|
|
$
|
4.7
|
|
Balance at acquired businesses
|
|
|
-
|
|
|
|
-
|
|
|
|
1.6
|
|
Warranty expense
|
|
|
8.2
|
|
|
|
6.3
|
|
|
|
3.1
|
|
Warranty payments
|
|
|
(5.4
|
)
|
|
|
(5.3
|
)
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
6.5
|
|
|
$
|
3.7
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Financing FeesCosts of debt financing are
charged to expense over the life of the related financing
agreements, which range from 5 to 10 years. Remaining costs
and the future period over which they would be charged to
expense are reassessed when amendments to the related financing
agreements or prepayments occur.
Derivative Instruments and Hedging
ActivitiesChanges in the fair value of derivative
instruments that are accounted for as effective hedges are
recorded to accumulated other comprehensive income and changes
in the fair value of derivative instruments that are not
accounted for as effective hedges are recorded to operating
results as incurred.
The Company uses interest rate swap agreements, natural gas swap
contracts and foreign currency forward contracts to hedge
against certain risks. The interest rate and natural gas
contracts are accounted for as effective cash flow hedges.
Income TaxesDeferred tax liabilities and deferred
tax assets are recognized for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Such liabilities and assets are
determined based on the differences between the financial
statement basis and the tax basis of assets and liabilities,
using tax rates in effect for the years in which the differences
are expected to reverse. A valuation allowance is provided if,
based upon the available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.
In accordance with Financial Accounting Standards Board
Interpretation No. 48 Accounting for Uncertainty in
Income Taxes an Interpretation of
SFAS No. 109 (FIN 48), the
Company only records tax benefits for positions that management
believes are more likely than not of being sustained under audit
examination based solely on the technical merits of the
associated tax position. The amount of tax benefit recognized
for any position that meets the more likely than not threshold
is the largest amount of the tax benefit that we believe is
greater than 50% likely of being realized. The Company includes
any related interest as interest expense, net and any penalties
are recorded as income tax expense.
Environmental ExpendituresThe Company capitalizes
environmental expenditures that increase the life or efficiency
of property or that reduce or prevent environmental
contamination. The Company accrues for environmental expenses
resulting from existing conditions that relate to past
operations when the costs are probable and reasonably estimable.
The Company is indemnified by Tyco for all environmental
liabilities that existed at August 16, 1999. See
Note 19.
Research and DevelopmentResearch and development
costs are expensed as incurred.
AdvertisingAdvertising costs are expensed as
incurred.
F-11
Translation of Foreign CurrencyAssets and
liabilities of the Companys businesses whose functional
currency is other than the U.S. dollar are translated into
U.S. dollars using year end currency exchange rates.
Revenues and expenses are translated at average currency
exchange rates during the year. Foreign currency translation
gains and losses are reported as a component of accumulated
other comprehensive income. Gains and losses resulting from
foreign currency transactions are included in operating results
as incurred.
Related Party TransactionsThe Company purchases
foundry coke from Sloss Industries, Inc. (Sloss),
which was an affiliate of the Company until the Spin-off.
Purchases from Sloss were $4.5 million during the portion
of the year ended September 30, 2007 through the date of
the Spin-off and were $21.2 million for the year ended
September 30, 2006.
Sloss also provided other services to the Company, including the
delivery of electrical power to one of the Companys
facilities, rail car switching and the leasing of a distribution
facility. Income from operations includes expenses of
$0.3 million for the portion of the year ended
September 30, 2007 through the date of the Spin-off and
$1.9 million for the year ended September 30, 2006
related to these other services provided by Sloss.
Walter Industries allocated $0.5 million and
$2.0 million for the years ended September 30, 2007
and 2006, respectively, for certain costs such as insurance,
executive salaries, professional service fees, human resources,
transportation, healthcare and other centralized business
functions to U.S. Pipe. Walter Industries allocated other
indirect costs of $1.6 million and $8.0 million during
the years ended September 30, 2007 and 2006, respectively,
to U.S. Pipe. All of these allocations from Walter
Industries were recorded in selling, general and administrative
expenses. Subsequent to the Spin-off, Walter Industries was no
longer considered a related party and the allocation of these
costs to the Company ceased.
Certain of the Companys employees had been granted Walter
Industries restricted stock units and stock options under Walter
Industries share-based compensation plans. The Company had
$0.6 million and $0.8 million in expenses related to
this stock-based compensation allocated from Walter Industries
for the years ended September 30, 2007 and 2006,
respectively. In connection with the Spin-off, Walter Industries
cancelled these instruments and the Company replaced them with
restricted stock units and options to acquire shares of the
Companys Series A common stock under a predecessor to
the Mueller Water Products, Inc. Amended and Restated 2006 Stock
Incentive Plan.
Year
ended September 30, 2007
Fast Fabricators, Inc. On January 4,
2007, the Company acquired the net assets of Fast Fabricators,
Inc. (Fast Fabricators), a ductile iron pipe
fabricator based in Connecticut, for $23.0 million in cash,
net of cash acquired. The purchase price was subject to an
earnout adjustment based on calendar 2007 operating results.
None of the earnout amount was earned. The identifiable
intangible assets acquired represented customer relationships,
which are amortized over a
12-year life
and a trade name and trademark, which has an indefinite life.
Star Pipe, Inc. As part of the January 2004
acquisition of Star Pipe, Inc. (Star), the purchase
price was subject to an earnout adjustment based on a target
gross profit amount. During the year ended September 30,
2007, $3.7 million was paid as the final payment for the
earnout adjustment.
F-12
The purchase price allocations for these acquisitions are
presented below.
|
|
|
|
|
|
|
|
|
|
|
Estimated fair values
|
|
|
|
of net assets acquired
|
|
|
|
Fast
|
|
|
|
|
|
|
Fabricators
|
|
|
Star
|
|
|
|
(in millions)
|
|
|
Current assets
|
|
$
|
10.5
|
|
|
$
|
-
|
|
Property, plant and equipment
|
|
|
1.8
|
|
|
|
-
|
|
Goodwill
|
|
|
0.5
|
|
|
|
3.7
|
|
Identifiable intangible assets
|
|
|
13.1
|
|
|
|
-
|
|
Current liabilities
|
|
|
(2.9
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
23.0
|
|
|
$
|
3.7
|
|
|
|
|
|
|
|
|
|
|
Year
ended September 30, 2006
CCNE, L.L.C. On January 27, 2006, the
Company acquired the operating assets of CCNE, L.L.C.
(CCNE), a manufacturer of check valves based in
Connecticut, for $8.8 million in cash. The identifiable
intangible assets acquired represented purchased technology and
are being amortized over an estimated useful life of
55 months.
Hunt Industries, Inc. On January 4,
2006, the Company acquired Hunt Industries, Inc.
(Hunt), a manufacturer of meter pits and meter yokes
based in Tennessee, for $6.8 million in cash.
Mueller Acquisition On October 3, 2005,
Walter Industries completed the Mueller Acquisition by paying
$944.0 million in cash and assuming $1.05 billion of
indebtedness. Transaction costs included in the acquisition
price were $15.4 million. In February 2006, Walter
Industries received $10.5 million based on the final
closing cash and working capital, adjusting the total purchase
price to $933.5 million.
The purchase price allocations for these acquisitions are
presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair values of
|
|
|
|
net assets acquired
|
|
|
|
|
|
|
|
|
|
Mueller
|
|
|
|
CCNE
|
|
|
Hunt
|
|
|
Acquisition
|
|
|
|
(in millions)
|
|
|
Current assets
|
|
$
|
2.1
|
|
|
$
|
0.2
|
|
|
$
|
550.6
|
|
Property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
214.2
|
|
Goodwill
|
|
|
-
|
|
|
|
6.8
|
|
|
|
802.1
|
|
Identifiable intangible assets
|
|
|
6.7
|
|
|
|
-
|
|
|
|
856.9
|
|
Other assets
|
|
|
-
|
|
|
|
-
|
|
|
|
350.7
|
|
Current liabilities
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
|
-
|
|
Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,572.7
|
)
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(268.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
8.8
|
|
|
$
|
6.8
|
|
|
$
|
933.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
|
|
Note 4.
|
Goodwill
and Identifiable Intangible Assets
|
Goodwill activity is presented below.
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
871.1
|
|
|
$
|
866.0
|
|
Acquisition of Fast Fabricators
|
|
|
-
|
|
|
|
0.5
|
|
Earnout payment from acquisition of Star Pipe
|
|
|
-
|
|
|
|
3.7
|
|
Reversal of restructuring accruals
|
|
|
-
|
|
|
|
(1.2
|
)
|
Adoption of FIN 48
|
|
|
0.4
|
|
|
|
-
|
|
Other tax adjustments
|
|
|
-
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
871.5
|
|
|
$
|
871.1
|
|
|
|
|
|
|
|
|
|
|
Other tax adjustments of $2.1 million during the year ended
September 30, 2007 primarily represented state tax matters
that related to periods prior to the Mueller Acquisition.
F-14
Identifiable intangible assets are presented below.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Finite lived intangible assets:
|
|
|
|
|
|
|
|
|
Technology
|
|
$
|
63.0
|
|
|
$
|
63.0
|
|
Customer relationships
|
|
|
409.2
|
|
|
|
409.2
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Trade names and trademarks
|
|
|
404.5
|
|
|
|
404.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
876.7
|
|
|
|
876.7
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Technology
|
|
|
20.9
|
|
|
|
13.8
|
|
Customer relationships
|
|
|
66.0
|
|
|
|
43.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.9
|
|
|
|
57.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
789.8
|
|
|
$
|
819.3
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, the remaining weighted-average
amortization period for the finite-lived intangible assets was
17.2 years. Amortization expense related to finite-lived
intangible assets was $29.5 million, $29.1 million and
$28.1 million for the years ended September 30, 2008,
2007 and 2006, respectively. Amortization expense for each of
the next five years ending September 30 is scheduled to be
$29.6 million in 2009, $29.6 million in 2010,
$29.3 million in 2011, $28.1 million in 2012 and
$28.1 million in 2013.
|
|
Note 5.
|
Restructuring
Activities
|
Activity in accrued restructuring is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
0.9
|
|
|
$
|
3.1
|
|
|
$
|
-
|
|
Additions charged against operations
|
|
|
18.3
|
|
|
|
-
|
|
|
|
28.6
|
|
Additions (reductions) charged to goodwill
|
|
|
-
|
|
|
|
(0.6
|
)
|
|
|
9.0
|
|
Reductions credited against operations
|
|
|
(0.3
|
)
|
|
|
-
|
|
|
|
-
|
|
Reductions credited against assets
|
|
|
(14.8
|
)
|
|
|
-
|
|
|
|
(21.5
|
)
|
Payments
|
|
|
(3.2
|
)
|
|
|
(1.6
|
)
|
|
|
(13.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
$
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November 2007, the Company announced its intent to cease
U.S. Pipes ductile iron pipe manufacturing operations
in Burlington, New Jersey, eliminating approximately 180 jobs.
These manufacturing operations ceased during the year ended
September 30, 2008. This facility continues to be used as a
full-service distribution center for customers in the Northeast.
In connection with this action, total restructuring charges of
approximately $19 million are expected, consisting of
approximately $15 million of asset impairment charges and
approximately $4 million of employee-related and other
charges. The $18.3 million in restructuring charges
recorded during the year ended September 30, 2008 consisted
of $14.8 million of asset impairment charges and
$3.5 million of employee-related and other charges,
$2.8 million of which was paid during the year ended
September 30, 2008. Future related restructuring charges
are not expected to be material.
F-15
In November 2006, the Company announced its intent to relocate
Anvils pipe nipple and merchant coupling production in its
Canvil manufacturing facility in Ontario, Canada to its Beck
facility in Pennsylvania, eliminating approximately 90 jobs. The
consolidation of these product lines in the Beck facility was
completed during the year ended September 30, 2007.
Severance of $1.8 million was recorded as an adjustment to
goodwill during the year ended September 30, 2006. During
the year ended September 30, 2007, the Company revised its
estimate of severance and decreased goodwill and accrued
severance by $0.6 million. The Company paid
$0.4 million and $0.9 million of the above-mentioned
severance during the years ended September 30, 2008 and
2007, respectively.
In October 2006, the Company announced its intent to close
Mueller Co.s James Jones manufacturing facility in El
Monte, California, eliminating approximately 155 jobs. This
facilitys production of brass products and hydrants was
transferred to Decatur, Illinois and Albertville, Alabama plants
during the year ended September 30, 2007. Total costs
related to this closure were $2.5 million, of which
$0.2 million of severance and $0.5 million of asset
impairment charges were recorded as adjustments to goodwill
during the year ended September 30, 2006. Other costs of
approximately $1.8 million associated with relocating the
El Monte inventory and equipment were expensed as incurred.
In April 2006, the Company announced its intent to close Mueller
Co.s valve and hydrant manufacturing facility in Milton,
Ontario, Canada. This facility closed during the year ended
September 30, 2006, resulting in the elimination of
approximately 130 jobs. Total costs related to this closure were
$4.5 million, including $2.5 million of severance,
$0.2 million of asset impairment charges and
$0.6 million of lease run-out costs recorded as adjustments
to goodwill during the year ended September 30, 2006. Other
costs of $1.2 million to relocate the Milton inventory and
equipment were expensed as incurred.
In January 2006, the Company announced its intent to close
Mueller Co.s Henry Pratt valve manufacturing facility in
Dixon, Illinois. This facility was closed during the year ended
September 30, 2007. Total costs related to this closure
were $3.7 million, including $1.0 million of severance
and $1.7 million of asset impairment charges recorded as
adjustments to goodwill during the year ended September 30,
2006. Other costs of $1.0 million to relocate equipment and
temporary outsourcing of manufacturing were expensed as
incurred. The Company paid $0.5 million of the
above-mentioned severance during the year ended
September 30, 2007.
In October 2005, Walter Industries announced its intent to close
U.S. Pipes Chattanooga, Tennessee plant and transfer
the valve and hydrant production of that plant to Mueller
Co.s Chattanooga, Tennessee and Albertville, Alabama
plants. This facility was closed during the year ended
September 30, 2006, resulting in the elimination of
approximately 340 jobs. Total costs related to this closure were
$49.9 million of which $28.6 million for severance and
asset impairment charges were reported as restructuring charges
during the year ended September 30, 2006. Other costs of
$21.3 million included $11.4 million of inventory
write-downs, $9.0 million of unabsorbed overhead costs
written off and $0.9 million of other costs and were
reported as cost of sales during the year ended
September 30, 2006. The Company paid $0.5 million of
the above-mentioned severance during the year ended
September 30, 2007.
The components of income before taxes are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
U.S.
|
|
$
|
68.7
|
|
|
$
|
83.4
|
|
|
$
|
6.8
|
|
Non-U.S.
|
|
|
5.0
|
|
|
|
3.3
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
73.7
|
|
|
$
|
86.7
|
|
|
$
|
13.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
Income tax expense (benefit) is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in millions)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
25.3
|
|
|
$
|
5.5
|
|
|
$
|
23.6
|
|
State and local
|
|
|
4.8
|
|
|
|
2.2
|
|
|
|
7.0
|
|
Non-U.S.
|
|
|
5.8
|
|
|
|
1.2
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.9
|
|
|
|
8.9
|
|
|
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(4.4
|
)
|
|
|
24.7
|
|
|
|
(19.0
|
)
|
State and local
|
|
|
2.6
|
|
|
|
4.9
|
|
|
|
(5.7
|
)
|
Non-U.S.
|
|
|
(2.4
|
)
|
|
|
-
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.2
|
)
|
|
|
29.6
|
|
|
|
(24.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
31.7
|
|
|
$
|
38.5
|
|
|
$
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation between the U.S. federal statutory
income tax rate and the effective tax rate is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Adjustments to reconcile to the effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
6.5
|
|
|
|
5.3
|
|
|
|
6.4
|
|
Nondeductible interest
|
|
|
-
|
|
|
|
1.6
|
|
|
|
20.3
|
|
Nondeductible compensation
|
|
|
2.0
|
|
|
|
3.1
|
|
|
|
-
|
|
U.S. manufacturing deduction
|
|
|
(2.3
|
)
|
|
|
(0.6
|
)
|
|
|
(7.8
|
)
|
Foreign income taxes
|
|
|
1.6
|
|
|
|
0.4
|
|
|
|
2.5
|
|
Other nondeductible expenses
|
|
|
1.0
|
|
|
|
-
|
|
|
|
4.3
|
|
Other
|
|
|
(0.8
|
)
|
|
|
(0.4
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
43.0
|
%
|
|
|
44.4
|
%
|
|
|
61.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Deferred income tax assets (liabilities) are presented below.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Allowances for losses on receivables
|
|
$
|
3.7
|
|
|
$
|
1.8
|
|
Inventories
|
|
|
16.0
|
|
|
|
18.1
|
|
Accrued expenses
|
|
|
24.6
|
|
|
|
23.8
|
|
Pension and other postretirement benefits
|
|
|
16.3
|
|
|
|
10.9
|
|
Stock compensation
|
|
|
8.7
|
|
|
|
-
|
|
All other
|
|
|
10.1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79.4
|
|
|
|
54.6
|
|
Valuation allowance
|
|
|
(4.3
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
75.1
|
|
|
|
54.6
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
(282.0
|
)
|
|
|
(288.6
|
)
|
Property, plant and equipment
|
|
|
(40.2
|
)
|
|
|
(44.1
|
)
|
Other
|
|
|
(0.5
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(322.7
|
)
|
|
|
(332.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities
|
|
$
|
(247.6
|
)
|
|
$
|
(278.1
|
)
|
|
|
|
|
|
|
|
|
|
A valuation allowance has been provided on deferred tax assets
at September 30, 2008 since management believes it is more
likely than not that a portion of the Companys deferred
tax asset associated with the Mueller Water Products, Inc.
Amended and Restated 2006 Stock Incentive Plan will not be
realized due to limitation on deductibility of executive
compensation provided in Internal Revenue Code
Section 162(m). Management has estimated that
$4.3 million of the stock compensation deferred tax asset
will be subject to this limitation based on projected executive
compensation subject to the annual limitation and the restricted
stock unit vesting schedule. Management believes that it will be
able to recover all other deferred tax assets through taxable
earnings from operations.
Activity in the valuation allowance for deferred tax assets is
described below.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Balance at beginning of year
|
|
$
|
-
|
|
|
$
|
-
|
|
Additions
|
|
|
4.3
|
|
|
|
-
|
|
Deductions
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
4.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
For federal income tax purposes, through December 15, 2006,
the Company was included in the consolidated income tax return
with Walter Industries and its subsidiaries. The income tax
provision for the year ended September 30, 2007 has been
presented as if the Company filed on a stand alone basis for the
period included in the Walter Industries returns. For the year
ended September 30, 2008, the Company will file a
consolidated U.S. corporate income tax return, combined or
unitary state income tax returns where required, and separate
company income tax returns in Canada, China and most
U.S. states.
The Company has state net operating loss carryforwards of
approximately $81.7 million expiring beginning 2010. These
loss carryforwards are subject to limitations in certain
jurisdictions under Section 382 of the Internal Revenue
Code. State net operating loss carryforwards of
$73.3 million expire after 2012, and management believes
that all net operating loss carryforwards will be utilized
before they expire.
The cumulative amount of undistributed earnings of foreign
subsidiaries for which United States income taxes have not been
provided was approximately $103.5 million at
September 30, 2008. It is not currently practical to
F-18
estimate the amount of unrecognized deferred United States
income taxes that might be payable on the repatriation of these
earnings.
On October 1, 2007, the Company adopted the provisions
FIN 48. As a result, the Company recorded a net increase of
$1.0 million in the liability for unrecognized income tax
benefits, a $0.6 million increase in the accumulated
deficit and an increase of $0.4 million to goodwill.