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| MWA > SEC Filings for MWA > Form 10-K on 26-Nov-2008 | All Recent SEC Filings |
26-Nov-2008
Annual Report
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 Company's 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 Company's 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. Pipe's 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,
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 Anvil's net sales were to customers in the United States during fiscal 2008, 2007 and 2006, respectively. Approximately 26% of Anvil's 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.
• Anvil's 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.
• 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
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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
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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. Pipe's 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
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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.
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 Anvil's 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.
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
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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
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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 . . .
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