The following discussion should be read in conjunction with the audited consolidated financial statements and notes thereto that appear in the Company's Annual Report on Form 10-K for the year ended September 30, 2008 and with the condensed consolidated financial statements that appear elsewhere in this 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 (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 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, expected future developments and other factors they believe to be appropriate. The forward-looking statements included in this report are also subject to a number of material risks and uncertainties, including but not limited to economic, competitive, governmental and technological factors affecting our operations, markets, products, services and prices, Such forward-looking statements are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements. 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 the Annual Report on Form 10-K and this Quarterly Report on Form 10-Q.

Mueller Water Products, Inc., a Delaware corporation, together with its consolidated subsidiaries operates in three business segments: Mueller Co., U.S. Pipe and Anvil. Mueller Co. manufactures and sells fire hydrants and various valves and related products used in residential water and gas systems. U.S. Pipe manufactures and sells a broad line of ductile iron pressure 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.

The "Company," "we," "us" or "our" refers to Mueller Water Products, Inc. and subsidiaries or their management. With regard to the Company's segments, "we," "us" or "our" may also refer to the segment being discussed or its management.

Except as otherwise noted, all financial and operating data has been presented on a fiscal year and fiscal quarter basis. Our fiscal year ends on September 30, and our fiscal quarters end on December 31, March 31 and June 30.

Business Developments and Trends

The impact of the overall weakness of the U.S. economy on our end markets continues to affect our operations adversely. Net sales have decreased significantly from fiscal 2008 levels. Our manufacturing operations include significant fixed costs. As shipment volumes decline, these fixed costs represent a relatively higher percentage of total costs to manufacture our products and our profitability is reduced. Reduced profitability consumes our available capital, weakens our financial position and adversely affects compliance with the financial covenants contained in our credit agreements. See "Liquidity and Capital Resources" for a detailed description of these financial covenants.

We are dependent upon residential and municipal water infrastructure construction activities, which are seasonal due to the impact of cold weather conditions. Net sales and operating results 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 experience weather that significantly restricts construction activity.

A significant portion of our net sales is directly related to residential construction, municipal water infrastructure and non-residential construction activity in the United States. Various external sources forecast annualized housing starts will drop 35% to 40% in calendar 2009 compared to calendar 2008. We expect residential construction to remain at historically low levels for the near term. In addition, we expect municipal water infrastructure spending in the near term to be influenced adversely by the relatively recent events related to
(a)

As a result of the economic downturn, most of our manufacturing facilities are operating significantly below their optimal capacities. Since the end of fiscal 2008, we have reduced headcount, consolidated facilities, reduced operating days and reduced overall spending activities in response to lower demand for our products. During the three months ended June 30, 2009, however, we increased production compared to the previous three month period due to a seasonal uptick in demand at Mueller Co. and U.S. Pipe. We continually monitor our production activities in response to evolving business conditions and expect to take additional steps to reduce inventories further and best manage our available resources. Restructuring actions at U.S. Pipe's North Birmingham facility resulted in lower fixed costs, reduced capacity and a $38.5 million non-cash restructuring charge, primarily for impairment of property, plant and equipment, during the nine months ended June 30, 2009.

In addition to reduced demand in water infrastructure markets, we also believe our distributors have reduced their inventory levels in response to current economic conditions. We do not expect our distributors to maintain higher inventory levels until their confidence in an economic recovery improves.

At December 31, 2008, we reported estimated goodwill impairment charges of $59.5 million for U.S. Pipe, completely impairing its goodwill, and $340.5 million against Mueller Co.'s prior goodwill balance of $718.4 million, subject to additional fair value analysis. Any additional impairment charge was not expected to exceed $200 million. During the three months ended March 31, 2009, however, our common stock began trading at prices significantly lower than prior periods, especially since early February. Our lower market capitalization prompted us to perform a second interim impairment assessment at March 31, 2009. This testing led to the conclusion that all of our remaining goodwill was fully impaired. During the three months ended March 31, 2009, we recorded additional goodwill impairment charges of $376.8 million for Mueller Co. and $92.7 million for Anvil.

In conjunction with the testing of goodwill for impairment, we also compared the estimated fair values of our identified other intangible assets to their respective carrying values and determined that the carrying amount of trade names at Mueller Co. had been impaired. At March 31, 2009, we recorded an impairment charge against these assets of $101.4 million. Mueller Co.'s trade names have a remaining carrying value of $263.0 million at June 30, 2009.

A significant portion of our pension plan assets is invested in equity securities. The overall deterioration of U.S. and international equity markets has caused the fair market value of these assets to decline. If equity markets continue to perform poorly, we will reduce our estimated long-term rate of return on these assets, which will cause pension expense to increase and require higher levels of Company contributions to these plans. Changes in pension expense and contribution requirements may be spread over many years. Our estimated long-term rate of return on pension plan assets is based on historical data over many years, forward-looking information and the investment allocations of the pension plan assets. The total market values of our U.S. pension plan assets were $226.3 million and $270.9 million at June 30, 2009 and September 30, 2008, respectively. During the three months ended June 30, 2009, the investment performance of these assets was a gain of $22.7 million and, for the three months ended March 31, 2009 and December 31, 2008, the investment performance of these assets were losses of $16.2 million and $33.4 million, respectively.

We amended our 2007 Credit Agreement in June 2009. The amendment resulted in, among other things, increased covenant flexibility and increased interest rates. We prepaid $125 million of borrowings under the 2007 Credit Agreement in June and incurred a loss on early extinguishment of debt of $2.3 million. As part of our ongoing efforts to reduce leverage, we expect to prepay approximately $25 million on August 14, 2009 from cash available to us. At June 30, 2009, the applicable margin on outstanding borrowings under the 2007 Credit Agreement was 550 basis points, which was 375 basis points higher than the applicable margin immediately prior to the date of the amendment. Interest expense is expected to be significantly higher under the amended 2007 Credit Agreement.

Results of Operations

Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30,
2008



                                                            Three months ended June 30, 2009
                                          Mueller Co.       U.S. Pipe         Anvil      Corporate         Total
                                                                      (in millions)
Net sales                               $         154.6    $      96.7       $ 111.9    $        -        $ 363.2


Gross profit (loss)                     $          35.8    $      (6.0 )     $  28.1    $      (0.1 )     $  57.8

Operating expenses:
Selling, general and administrative                22.2           10.8          21.4            8.0          62.4
Impairment                                           -              -             -              -             -
Restructuring                                       0.7            1.5           1.7             -            3.9

Total operating expenses                           22.9           12.3          23.1            8.0          66.3

Income (loss) from operations           $          12.9    $     (18.3 )     $   5.0    $      (8.1 )        (8.5 )

Interest expense, net                                                                                        17.2
Loss on early extinguishment of debt                                                                          2.3


Loss before income taxes                                                                                    (28.0 )
Income tax benefit                                                                                           (9.0 )


Net loss                                                                                                  $ (19.0 )


                                                            Three months ended June 30, 2008
                                          Mueller Co.       U.S. Pipe         Anvil      Corporate         Total
                                                                      (in millions)
Net sales                               $         203.0    $     167.7       $ 157.8    $        -        $ 528.5


Gross profit                            $          63.9    $      13.5       $  46.0    $        -        $ 123.4

Operating expenses:
Selling, general and administrative                23.5           10.4          24.1           11.6          69.6
Restructuring                                        -             0.2            -              -            0.2

Total operating expenses                           23.5           10.6          24.1           11.6          69.8

Income (loss) from operations           $          40.4    $       2.9       $  21.9    $     (11.6 )        53.6

Interest expense, net                                                                                        17.5


Income before income taxes                                                                                   36.1
Income tax expense                                                                                           15.8


Net income                                                                                                $  20.3

Consolidated Analysis

Net sales for the three months ended June 30, 2009 were $363.2 million compared to $528.5 million in the prior year period. Net sales decreased $176.0 million due to lower shipment volumes and $9.3 million due to unfavorable changes in Canadian currency exchange rates. These declines were partially offset by $20.0 million from price increases.

Selling, general and administrative expenses for the three months ended June 30, 2009 and 2008 were $62.4 million and $69.6 million, respectively. Selling, general and administrative expenses declined primarily due to lower shipment volumes and cost saving actions. Selling, general and administrative expenses during the three months ended June 30, 2009 included bad debt expense of $3.9 million related to a specific customer.

During the three months ended June 30, 2009, we recorded restructuring charges of $3.9 million related primarily to headcount reductions.

Interest expense, net was $17.2 million during the three months ended June 30, 2009 compared to $17.5 million during the three months ended June 30, 2008. The components of interest expense, net for the three months ended June 30, 2009 and 2008 are detailed below.

                                                          Three months ended June 30,
                                                          2009                     2008
                                                                 (in millions)
2007 Credit Agreement interest, including swap
contracts                                             $         8.6              $     9.3
7 3/8% Senior Subordinated Notes interest                       7.8                    7.8
Deferred financing fee amortization                             0.4                    0.4
Other interest expense                                          0.7                    0.9
Interest income                                                (0.3 )                 (0.9 )


                                                      $        17.2              $    17.5

Interest expense declined as a result of lower base interest rates and lower average debt outstanding, although these were partially offset by increased borrowing rates subsequent to the June 2009 amendment of the 2007 Credit Agreement. Interest income declined due to lower interest rates, despite higher invested cash balances during the current period.

The June 2009 amendment to our 2007 Credit Agreement resulted in a write off of unamortized deferred financing fees of $2.3 million as a loss on the early extinguishment of debt.

The income tax benefit of $9.0 million recorded during the three months ended June 30, 2009 represented an effective income tax rate of 32.1%. This rate differed from the federal statutory rate of 35% due primarily to writing off deferred tax assets that would not be realized for restricted stock units that vested during the three months ended June 30, 2009 at stock prices less than those when granted.

Mueller Co.

Net sales for the three months ended June 30, 2009 were $154.6 million compared to $203.0 million in the prior year period. Net sales decreased $55.5 million due to lower shipment volumes and $3.3 million due to lower Canadian currency exchange rates, partially offset by $10.4 million due to higher prices. Lower shipment volumes occurred for iron gate valves, fire hydrants and brass service products.

Gross profit for the three months ended June 30, 2009 was $35.8 million compared to $63.9 million in the prior year period. Gross profit decreased $21.6 million due to lower shipment volumes, $18.1 million due to higher per-unit overhead costs on products sold due to lower production and $5.7 million due to higher raw material costs. These decreases were partially offset by $10.4 million of higher sales prices and $5.8 million due to manufacturing cost saving actions. Gross margin was 23.2% for the three months ended June 30, 2009 compared to 31.5% in the prior year period. Gross margin decreased primarily due to higher per-unit overhead costs on products sold and a lower proportion of shipments of higher-margin products such as iron gate valves and fire hydrants in the current period.

Excluding restructuring charges, income from operations during the three months ended June 30, 2009 was $13.6 million compared to $40.4 million in the prior year period. This decline was primarily due to decreased gross profit. Selling, general and administrative expenses were $1.3 million lower in the three months ended June 30, 2009 compared to the prior year period primarily due to cost saving actions and lower shipment volumes. Selling, general and administrative expenses for the three months ended June 30, 2009 included $0.9 million of bad debt expense related to a specific customer.

U.S. Pipe

Net sales for the three months ended June 30, 2009 were $96.7 million compared to $167.7 million in the prior year period. Net sales decreased $70.1 million due to lower shipment volumes and $0.9 million due to lower prices.

Gross loss for the three months ended June 30, 2009 was $6.0 million compared to gross profit of $13.5 million in the prior year period. Gross profit decreased $17.9 million due to lower shipment volumes and $8.8 million due to higher per-unit overhead costs on products sold due to lower production. These factors were partially offset primarily by $4.2 million of manufacturing cost saving actions and $1.2 million of lower raw material costs. Gross margin was (6.2)% for the three months ended June 30, 2009 compared to 8.1% in the prior year period. Gross margin decreased primarily due to a lower proportion of shipments of higher-margin products and higher per-unit overhead costs on products sold in the current period.

During the three months ended June 30, 2009, we continued to reduce headcount in response to reduced demand for our products. We recorded restructuring charges of $1.5 million, mostly for severance.

Excluding the restructuring charges, the loss from operations was $16.8 million during the three months ended June 30, 2009 compared to income from operations of $3.1 million in the prior year period. This decrease was due to $19.5 million of lower gross profit and $0.4 million of higher selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended June 30, 2009 included $3.0 million of bad debt expense related to a specific customer. Otherwise, these expenses declined $2.6 million due to cost saving actions and lower shipment volumes.

Anvil

Net sales for the three months ended June 30, 2009 were $111.9 million compared to $157.8 million during the prior year period. Net sales decreased $50.4 million due to lower shipment volumes and $6.0 million due to unfavorable changes in Canadian currency exchange rates. These factors were partially offset by $10.5 million of higher prices.

During the three months ended June 30, 2009, we continued to reduce headcount in response to reduced demand for our products. We recorded restructuring charges of $1.7 million for severance.

Excluding the restructuring charges, income from operations for the three months ended June 30, 2009 was $6.7 million compared to $21.9 million in the prior year period. This decrease was due to $17.9 million of lower gross profit, partially offset by $2.7 million of lower selling, general and administrative expenses due to cost saving actions and lower shipment volumes.

Corporate

Corporate selling, general and administrative expenses were $8.0 million during the three months ended June 30, 2009 compared to $11.6 million during the prior year period. Lower corporate expenses reflect cost saving actions.

Nine Months Ended June 30, 2009 Compared to the Nine Months Ended June 30, 2008



                                                                Nine months ended June 30, 2009
                                         Mueller Co.         U.S. Pipe         Anvil         Corporate          Total
                                                                         (in millions)
Net sales                               $       389.0       $     305.6       $ 358.5       $        -        $  1,053.1

Gross profit (loss)                     $        89.3       $      (6.3 )     $ 104.8       $      (0.1 )     $    187.7

Operating expenses:
Selling, general and administrative              64.6              27.9          64.7              27.5            184.7
Impairment                                      818.7              59.5          92.7                -             970.9
Restructuring                                     1.4              41.4           2.9               0.2             45.9

Total operating expenses                        884.7             128.8         160.3              27.7          1,201.5

Loss from operations                    $      (795.4 )     $    (135.1 )     $ (55.5 )     $     (27.8 )       (1,013.8 )

Interest expense, net                                                                                               51.1
Loss on early extinguishment of debt                                                                                 2.3
Gain on repurchase of debt                                                                                          (1.5 )

Loss before income taxes                                                                                        (1,065.7 )
Income tax benefit                                                                                                 (79.9 )

Net loss                                                                                                      $   (985.8 )

--------------------------------------------------------------------------------
                                                            Nine months ended June 30, 2008
                                        Mueller Co.      U.S. Pipe         Anvil      Corporate          Total
                                                                     (in millions)
Net sales                              $       533.5    $     392.6       $ 436.3    $        -        $ 1,362.4

Gross profit                           $       159.3    $      33.4       $ 123.3    $       0.6       $   316.6

Operating expenses:
Selling, general and administrative             66.7           30.7          72.6           30.7           200.7
Restructuring                                     -            17.9            -              -             17.9

Total operating expenses                        66.7           48.6          72.6           30.7           218.6

Income (loss) from operations          $        92.6    $     (15.2 )     $  50.7    $     (30.1 )          98.0

Interest expense, net                                                                                       54.8

Income before income taxes                                                                                  43.2
Income tax expense                                                                                          18.8

Net income                                                                                             $    24.4

Consolidated Analysis

Net sales for the nine months ended June 30, 2009 were $1,053.1 million compared to $1,362.4 million in the prior year period. Net sales decreased to $380.4 million due to lower shipment volumes and $25.7 million due to unfavorable changes in Canadian currency exchange rates, partially offset by $96.8 million due to higher prices.

Gross profit for the nine months ended June 30, 2009 was $187.7 million compared to $316.6 million in the prior year period. Gross profit decreased $120.5 million due to lower shipment volumes, $80.2 million due to higher per-unit overhead costs on products sold due to lower production and $59.0 million due to higher raw material costs. These decreases were partially offset by $96.8 million of higher sales prices and $30.6 million of manufacturing cost saving actions. Gross margin was 17.8% for the nine months ended June 30, 2009 compared to 23.2% in the prior year period. Gross margin decreased primarily due to higher per-unit overhead costs on products sold. This decrease was partially offset by a higher proportion of shipments of higher margin products at Mueller Co. and Anvil.

Selling, general and administrative expenses for the nine months ended June 30, 2009 and 2008 were $184.7 million and $200.7 million, respectively. Anvil recognized a $3.5 million gain from the sale of a building, we recognized bad debt expense of $3.9 million related to a specific customer and we incurred non-recurring professional fees of $1.2 million related to the conversion of Series B common stock into Series A common stock during the nine months ended June 30, 2009. Selling, general and administrative expenses otherwise decreased for the nine months ended June 30, 2009 compared to the prior year period due to lower shipment volumes and cost saving actions.

During the nine months ended June 30, 2009, we recorded impairment charges of $970.9 million.

We suspended production throughout the Company for varying time periods during the nine months ended June 30, 2009 in response to reduced demand for our products, implemented temporary wage reductions, furloughs and reduced work weeks for certain employees. Since September 30, 2008, we have reduced headcount . . .