UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007.

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32892


MUELLER WATER PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

Delaware

 

20-3547095

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

identification No.)

 

1200 Abernathy Road

Atlanta, GA 30328

(Address of principal executive offices)

(770) 206-4200

(Registrant’s telephone number, including area code)

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. Yes  x  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer   x

Accelerated Filer   o

Non-accelerated Filer   o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No  x

There were 114,829,497 shares of common stock of the Registrant outstanding as of July 31, 2007, comprised of 28,984,577 shares of Series A common stock and 85,844,920 shares of Series B common stock.

 




PART I.   FINANCIAL INFORMATION

ITEM 1.                FINANCIAL STATEMENTS

MUELLER WATER PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

June 30,
2007

 

September 30,
2006

 

 

 

(dollars in millions)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57.0

 

 

$

81.4

 

 

Receivables, net of allowance for doubtful accounts of $5.1 million and $4.8 million at June 30, 2007 and September 30, 2006, respectively

 

305.6

 

 

322.9

 

 

Inventories

 

484.1

 

 

454.6

 

 

Deferred income taxes

 

72.6

 

 

42.6

 

 

Prepaid expenses

 

33.3

 

 

33.7

 

 

Total current assets

 

952.6

 

 

935.2

 

 

Property, plant and equipment, net

 

350.0

 

 

337.0

 

 

Deferred financing fees and other long-term assets

 

17.3

 

 

16.8

 

 

Identifiable intangible assets, net

 

826.6

 

 

835.4

 

 

Goodwill

 

869.1

 

 

865.5

 

 

Total assets

 

$

3,015.6

 

 

$

2,989.9

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

6.5

 

 

$

9.0

 

 

Accounts payable

 

107.1

 

 

129.9

 

 

Accrued expenses and other liabilities

 

97.2

 

 

116.3

 

 

Total current liabilities

 

210.8

 

 

255.2

 

 

Long-term debt

 

1,135.5

 

 

1,118.3

 

 

Accrued pension liability, net

 

46.3

 

 

43.7

 

 

Accumulated postretirement benefits obligation

 

44.0

 

 

46.3

 

 

Deferred income taxes

 

286.2

 

 

278.5

 

 

Other long-term liabilities

 

24.4

 

 

20.9

 

 

Total liabilities

 

1,747.2

 

 

1,762.9

 

 

Common stock, $.01 par value per share:

 

 

 

 

 

 

 

Series A—400,000,000 shares authorized. 28,964,350 and 28,750,000 shares issued at June 30, 2007 and September 30, 2006

 

0.3

 

 

0.3

 

 

Series B—200,000,000 shares authorized and 85,844,920 shares issued at both June 30, 2007 and September 30, 2006

 

0.8

 

 

0.8

 

 

Capital in excess of par value

 

1,420.5

 

 

1,417.5

 

 

Accumulated deficit

 

(139.4

)

 

(173.0

)

 

Accumulated other comprehensive loss

 

(13.8

)

 

(18.6

)

 

Total shareholders’ equity

 

1,268.4

 

 

1,227.0

 

 

Total liabilities and shareholders’ equity

 

$

3,015.6

 

 

$

2,989.9

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

2




MUELLER WATER PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 

 

Three months ended June 30,

 

 

 

        2007        

 

        2006        

 

 

 

(dollars in millions, except
per share amounts)

 

Net sales

 

 

$

502.5

 

 

 

$

500.0

 

 

Cost of sales

 

 

383.0

 

 

 

365.5

 

 

Gross profit

 

 

119.5

 

 

 

134.5

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

62.1

 

 

 

62.6

 

 

Related party corporate charges

 

 

 

 

 

2.3

 

 

Facility rationalization, restructuring and related costs

 

 

 

 

 

0.2

 

 

Total operating expenses

 

 

62.1

 

 

 

65.1

 

 

Income from operations

 

 

57.4

 

 

 

69.4

 

 

Interest expense, net of interest income

 

 

23.3

 

 

 

27.8

 

 

Loss on early extinguishment of debt

 

 

36.4

 

 

 

4.1

 

 

(Loss) income before income taxes

 

 

(2.3

)

 

 

37.5

 

 

Income tax benefit

 

 

(1.0

)

 

 

(1.3

)

 

Net (loss) income

 

 

$

(1.3

)

 

 

$

38.8

 

 

Basic and diluted income (loss) per share

 

 

$

(0.01

)

 

 

$

0.41

 

 

 

 

 

Nine months ended June 30,

 

 

 

        2007        

 

        2006        

 

 

 

(dollars in millions, except
per share amounts)

 

Net sales

 

 

$

1,374.1

 

 

 

$

1,415.3

 

 

Cost of sales

 

 

1,029.1

 

 

 

1,142.7

 

 

Gross profit

 

 

345.0

 

 

 

272.6

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

184.1

 

 

 

180.5

 

 

Related party corporate charges

 

 

1.6

 

 

 

6.1

 

 

Facility rationalization, restructuring and related costs

 

 

 

 

 

28.6

 

 

Total operating expenses

 

 

185.7

 

 

 

215.2

 

 

Income from operations

 

 

159.3

 

 

 

57.4

 

 

Interest expense, net of interest income

 

 

64.8

 

 

 

90.1

 

 

Loss on early extinguishment of debt

 

 

36.4

 

 

 

4.1

 

 

Income (loss) before income taxes

 

 

58.1

 

 

 

(36.8

)

 

Income tax expense (benefit)

 

 

24.5

 

 

 

(25.0

)

 

Net income (loss)

 

 

$

33.6

 

 

 

$

(11.8

)

 

Basic and diluted income (loss) per share

 

 

$

0.29

 

 

 

$

(0.13

)

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

3




MUELLER WATER PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME

FOR THE NINE MONTHS ENDED JUNE 30, 2007
(UNAUDITED)

 

 

Common Stock

 

Capital in
Excess of 
Par Value

 

Accumulated
Deficit

 

Comprehensive
Income

 

Accumulated
Other
Comprehensive
Loss

 

Total

 

 

 

(dollars in millions)

 

Balance at September 30,
2006

 

 

$

1.1

 

 

$

1,417.5

 

 

$

(173.0

)

 

 

$

 

 

 

$

(18.6

)

 

$

1,227.0

 

Dividends paid, $0.0525 per share

 

 

 

 

 

(6.0

)

 

 

 

 

 

 

 

 

 

 

 

 

(6.0

)

Share-based compensation

 

 

 

 

 

8.0

 

 

 

 

 

 

 

 

 

 

 

 

 

8.0

 

Stock issued upon exercise of stock options

 

 

 

 

 

1.0

 

 

 

 

 

 

 

 

 

 

 

 

 

1.0

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

33.6

 

 

 

33.6

 

 

 

 

 

 

33.6

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain on derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

1.3

 

 

 

1.3

 

 

1.3

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

3.5

 

 

 

3.5

 

 

3.5

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

$

38.4

 

 

 

 

 

 

 

 

Balance at June 30, 2007

 

 

$

1.1

 

 

$

1,420.5

 

 

$

(139.4

)

 

 

 

 

 

 

$

(13.8

)

 

$

1,268.4

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

4




MUELLER WATER PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

 

Nine months ended
June 30,

 

 

 

2007

 

2006

 

 

 

(dollars in millions)

 

Operating Activities

 

 

 

 

 

Net income (loss)

 

$

33.6

 

$

(11.8

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

53.4

 

51.6

 

Amortization of intangibles

 

21.9

 

21.0

 

Amortization of deferred financing fees

 

1.9

 

7.8

 

Accretion on debt

 

7.1

 

10.3

 

Write-off of deferred financing fees

 

11.1

 

4.1

 

Gain from write-off of premium on notes

 

(22.8

)

 

Stock-based compensation expense

 

8.0

 

1.0

 

Impairments of property, plant and equipment

 

 

21.6

 

Deferred income taxes

 

(23.2

)

(25.8

)

Other, net

 

6.4

 

(5.7

)

Changes in assets and liabilities, net of the effects of acquisitions:

 

 

 

 

 

Receivables

 

20.6

 

(11.6

)

Inventories

 

(22.0

)

58.8

 

Prepaid expenses and other assets

 

1.0

 

1.8

 

Pension and other long-term liabilities

 

2.4

 

2.5

 

Accounts payable

 

(16.4

)

(1.6

)

Accrued expenses and other current liabilities

 

(20.1

)

(31.0

)

Net cash provided by operating activities

 

62.9

 

93.0

 

Investing Activities

 

 

 

 

 

Additions to property, plant and equipment

 

(66.1

)

(48.0

)

Acquisitions of businesses, net of cash acquired

 

(26.2

)

(15.5

)

Decrease in amounts due to Walter

 

 

(12.5

)

Net cash used in investing activities

 

(92.3

)

(76.0

)

Financing Activities

 

 

 

 

 

(Decrease) increase in dollar value of bank checks outstanding

 

(8.8

)

12.0

 

Proceeds from short-term borrowings

 

 

55.9

 

Retirement of short-term debt

 

 

(55.9

)

Proceeds from long-term debt

 

1,140.0

 

1,050.0

 

Retirement of long-term debt

 

(1,109.6

)

(866.9

)

Proceeds from issuance of common stock

 

 

429.3

 

Payment of deferred financing fees

 

(10.8

)

(21.6

)

Dividend to shareholders

 

(6.0

)

(444.5

)

Dividend to Walter for acquisition costs

 

 

(12.0

)

Walter contribution of Predecessor Mueller’s cash

 

 

76.3

 

Net cash provided by financing activities

 

4.8

 

222.6

 

Effect of exchange rate changes on cash

 

0.2

 

0.1

 

Net (decrease) increase in cash and cash equivalents

 

(24.4

)

239.7

 

Cash and cash equivalents at beginning of period

 

81.4

 

 

Cash and cash equivalents at end of period

 

$

57.0

 

$

239.7

 

 

5




MUELLER WATER PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)

Schedule of non-cash investing and financing activities:

On October 3, 2005, the Company’s former parent, Walter Industries, Inc. (“Walter”), purchased all of the outstanding common stock of Predecessor Mueller in the Acquisition (as defined in Note 1 to the Condensed Consolidated Financial Statements).

 

 

(dollars
in millions)

 

Contribution of Predecessor Mueller by Walter

 

 

$

932.9

 

 

Less: Cash of Predecessor Mueller received

 

 

(76.3

)

 

Total net assets received excluding cash

 

 

$

856.6

 

 

 

Subsequent to the Acquisition, Walter forgave an intercompany receivable from U.S. Pipe of $443.6 million.

The accompanying notes are an integral part of the condensed consolidated financial statements.

6




MUELLER WATER PRODUCTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 2007 AND JUNE 30, 2006

(UNAUDITED)

Note 1.   Organization and Basis of Presentation

The registrant is Mueller Water Products, Inc., a Delaware corporation (“Mueller Water” or the “Company”). The Company is the surviving corporation of the merger on February 2, 2006 of Mueller Water Products, LLC (Commission File Number: 333-116590) and Mueller Water Products Co-Issuer, Inc. with and into Mueller Holding Company, Inc., a Delaware corporation. On June 1, 2006, Mueller Water completed its initial public offering of its Series A common stock (NYSE: MWA). On December 14, 2006, Walter Industries, Inc. (“Walter”), a diversified New York Stock Exchange traded company (NYSE:WLT), distributed all of the Company’s outstanding Series B common stock (NYSE: MWA.B) to Walter’s shareholders.

On October 3, 2005, through a series of transactions (the “Acquisition”), Walter, through a wholly-owned subsidiary, acquired all outstanding shares of capital stock of Mueller Water Products, Inc. (“Predecessor Mueller”), which immediately was converted into Mueller Water Products, LLC, a Delaware limited liability company and contributed United States Pipe and Foundry Company, LLC, (“U.S. Pipe”) to the acquired company. The results of operations of Predecessor Mueller are included in the Consolidated Statements of Operations beginning October 3, 2005.

The Company was originally organized as United States Pipe and Foundry Company, Inc. (“Inc.”) and was a wholly owned subsidiary of Walter. On September 23, 2005, Inc. was dissolved and United States Pipe and Foundry Company, LLC was organized in the state of Alabama, and the operations of Inc. were conducted under the form of a limited liability company. The Company has three operating segments, which are named after its leading brands in each segment: Mueller Co., U.S. Pipe, and Anvil.

The condensed 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 for the reporting periods. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated. In the opinion of management, all normal and recurring adjustments that are considered necessary for a fair financial statement presentation have been made. The prior period loss on early extinguishment of debt of $4.1 million has been reclassified from interest expense, net of interest income in the accompanying Condensed Consolidated Statements of Operations and from other, net in the accompanying Condensed Consolidated Statements of Cash Flows to conform to current year presentations. The condensed balance sheet data as of September 30, 2006 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Note 2.   Related Party Transactions

Related Party Transactions—The Company purchases foundry coke from Sloss Industries, Inc., which was an affiliate until December 14, 2006, for an amount that approximates the market value of comparable transactions. Costs included in cost of sales related to purchases from Sloss Industries, Inc. were $4.8 million for each of the three month periods ended June 30, 2007 and 2006, and $13.9 million and $15.6 million for the nine month periods ended June 30, 2007 and 2006, respectively.

7




Sloss Industries, Inc. also provides other services to the Company, including the delivery of electrical power to one of the Company’s facilities, rail car switching and the leasing of a distribution facility. Charges for such services were immaterial for the three months ended June 30, 2007 and $0.5 million for the three months ended June 30, 2006, and $0.3 million and $1.3 million for the nine months ended June 30, 2007 and 2006, respectively.

Related Party Allocations—Certain costs incurred by Walter such as insurance, executive salaries, professional service fees, human resources, transportation, healthcare and other centralized business functions were allocated to its subsidiaries. Certain costs that were considered directly related to the U.S. Pipe segment were charged to the Company and included in selling, general and administrative expenses. As of December 15, 2006, Walter is no longer considered a related party and the allocation of these costs to the Company ceased. These costs were zero and $2.3 million for the three months ended June 30, 2007 and 2006, respectively, and $0.5 million and $3.3 million for the nine months ended June 30, 2007 and 2006, respectively. Costs incurred by Walter that could not be directly attributed to its subsidiaries were allocated to them based on estimated annual revenues. Such costs were allocated to the Company’s U.S. Pipe segment and are recorded in related party corporate charges in the accompanying Consolidated Statements of Operations. While the Company considers the allocation of such costs to be reasonable, the cost of performing such services on its own behalf may vary from historically allocated amounts.

Certain of the Company’s employees had been granted Walter restricted stock units and stock options under Walter’s share-based compensation plans. In connection with Walter’s distribution of all the Company’s Series B common stock to its shareholders on December 14, 2006, Walter cancelled these instruments. The Company had no expenses related to this share-based compensation allocated from Walter for the three months ended June 30, 2007, and expensed $0.2 million for the three months ended June 30, 2006, and $0.5 million each for the nine month periods ended June 30, 2007 and 2006.

Note 3.   Acquisitions

Star Pipe

As part of the acquisition of the assets of Star Pipe, Inc. (“Star”), Anvil agreed to make a contingent earnout payment to the sellers to the extent the gross profit of the acquired business exceeds a targeted gross profit. During the three months ended June 30, 2007, the Company paid $3.7 million to the sellers as the final payment for the contingent earnout. This earnout payment has been recorded as an increase to goodwill.

Fast Fabricators, Inc.

On January 4, 2007, the Company acquired the assets of Fast Fabricators, Inc., a ductile iron pipe fabricator headquartered in Bloomfield, Connecticut, for $23.0 million in cash, net of cash acquired. The purchase price may increase by up to $1.5 million for an earnout holdback. The earnout holdback will be settled by March 15, 2008, based on the 2007 calendar year EBITDA as defined in the purchase agreement with the seller. The Company has deposited $1.5 million into escrow, which is included in cash and cash equivalents in the accompanying Condensed Consolidated Balance Sheet, for the Earnout Holdback. The Company cannot access these funds until the earnout, if any, has been settled.

8




The estimated fair values of the assets acquired and liabilities assumed are as follows (dollars in millions):

Current assets

 

$

10.5

 

Identifiable intangible assets

 

13.1

 

Goodwill

 

0.5

 

Property, plant, and equipment and other noncurrent assets

 

1.8

 

Accounts payable and accrued liabilities

 

(2.9

)

Net assets acquired

 

$

23.0

 

 

Acquisition of Predecessor Mueller by Walter Industries

On October 3, 2005, pursuant to the agreement dated June 17, 2005, Walter acquired all of the outstanding common stock of Predecessor Mueller for $944.0 million and assumed $1.05 billion of indebtedness. Predecessor Mueller was converted into a limited liability company on October 3, 2005 and was merged with and into the Company on February 2, 2006. In conjunction with the acquisition, U.S. Pipe was contributed in a series of transactions to Mueller Group, LLC (“Mueller Group” or “Group”), a wholly owned subsidiary of the Company, on October 3, 2005. On February 23, 2006, Walter received $10.5 million based on the final closing cash and working capital, adjusting the purchase price of Predecessor Mueller to $933.5 million.

Walter’s acquisition of Predecessor Mueller has been accounted for as a business combination with U.S. Pipe considered the acquirer for accounting purposes. The total purchase price is comprised of (dollars in millions):

Acquisition of the outstanding common stock of Predecessor Mueller

 

$

918.1

 

Acquisition-related transaction costs

 

15.4

 

Total purchase price

 

$

933.5

 

 

Acquisition-related transaction costs include investment banking, legal and accounting fees and other external costs directly related to the Acquisition.

The excess of the purchase price over the net tangible and identifiable intangible assets is recorded as goodwill. Based on current fair values, the purchase price was allocated as follows (dollars in millions):

Receivables, net

 

$

177.4

 

Inventory

 

373.2

 

Property, plant and equipment

 

214.2

 

Identifiable intangible assets

 

856.9

 

Goodwill

 

801.7

 

Net other assets

 

350.7

 

Net deferred tax liabilities

 

(267.9

)

Debt

 

(1,572.7

)

Total purchase price allocation

 

$

933.5

 

 

Note 4.   Deferred Financing Fees

In connection with the debt refinancing discussed in Note 7, the Company wrote off $11.1 million in deferred financing fees related to the 2005 Mueller Credit Agreement and capitalized additional financing fees of $10.8 million related to the 2007 Credit Agreement and the 2007 Senior Subordinated Notes during the three months ended June 30, 2007. Deferred fees of $12.4 million as of June 30, 2007 amortize as

9




follows: $2.6 million related to the 2007 Revolver amortize on a straight-line basis over its five-year life; $0.5 million related to the Term A Loan amortize using the effective-interest rate method over its five-year life; $1.7 million related to the Term B Loan amortize using the effective-interest rate method over its seven-year life; and $7.6 million related to the 2007 Senior Subordinated Notes amortize using the effective-interest rate method over a ten-year life.

Note 5.   Facility Rationalization, Restructuring and Related Costs

On October 26, 2005 Walter announced plans to close U.S. Pipe’s Chattanooga, Tennessee plant and transfer the valve and hydrant production of that plant to Mueller Co.’s Chattanooga, Tennessee and Albertville, Alabama plants. The plant closed in 2006, resulting in the termination of approximately 340 employees. Exit costs totaled $49.9 million of which approximately $28.6 million was related to severance and fixed asset write-offs and qualified as restructuring and impairment charges. The remaining exit costs of $21.3 million were comprised of an inventory write-down totaling $11.4 million, a $9.0 million write-off of unabsorbed overhead costs and $0.9 million of other related costs, which were recognized in cost of sales during the year ended September 30, 2006. The Company paid $0.4 million of the above-mentioned severance in the nine months ended June 30, 2007.

On January 26, 2006, the Company announced the closure of the Henry Pratt valve manufacturing facility in Dixon, Illinois, which is included in the Company’s Mueller Co. segment. This facility was closed during the second quarter of fiscal 2007. Total costs related to this closure were $3.7 million, including termination benefits of $1.0 million and property impairment charges of $1.7 million, which were recorded as adjustments to goodwill in the year ended September 30, 2006. These restructuring costs were recorded to goodwill as the overall plan to close the facility was identified prior to the Acquisition. The remaining estimated costs of $1.0 million are for the transfer and installation of equipment and temporary outsourcing of manufacturing and were expensed when incurred. The Company paid $0.5 million of the above-mentioned severance in the nine months ended June 30, 2007, respectively.

On November 18, 2006, the Company announced the relocation of pipe nipple and merchant coupling production in the Canvil manufacturing facility in Ontario, Canada to the Beck facility in Pennsylvania, both of which are included in the Company’s Anvil segment. The consolidation of these product lines in the Beck Facility was completed during the quarter ended March 31, 2007, resulting in the termination of approximately 90 employees. Termination benefits of $1.8 million were recorded as adjustments to goodwill in the year ended September 30, 2006. These restructuring costs were recorded to goodwill as the overall plan to close the facility was identified prior to the Acquisition. In the current fiscal year, the Company revised its severance estimate, and decreased the goodwill balance and accrued severance by $0.4 million. The Company paid $0.2 and $0.7 million of the above-mentioned severance in the three and nine months ended June 30, 2007, respectively.

Activity in accrued restructuring and other severance for the three and nine months ended June 30, 2007 was as follows (dollars in millions):

 

 

For the three
months ended
June 30, 2007

 

For the nine
months ended
June 30, 2007

 

Beginning balance

 

 

$

3.0

 

 

 

$

5.3

 

 

Adjustments to accruals allocated to goodwill for plant closures identified prior to the Acquisition

 

 

 

 

 

(0.4

)

 

Restructuring and other related severance payments

 

 

(0.5

)

 

 

(2.4

)

 

Ending balance

 

 

$

2.5

 

 

 

$

2.5

 

 

 

10




Note 6.   Share-Based Compensation Plans

Certain of the Company’s employees had been granted Walter restricted stock units and stock options under Walter’s share-based compensation plans. The Company has expensed $0.7 million related to the share-based compensation costs allocated from Walter for the nine months ended June 30, 2007. In connection with Walter’s distribution of all the Company’s Series B common stock to its shareholders on December 14, 2006, Walter cancelled these outstanding instruments and the Company replaced them with restricted stock units and options to acquire shares of the Company’s Series A common stock. These equity awards were designed to provide intrinsic value and terms equal to the Walter cancelled instruments as follows:

 

 

Number of
instruments

 

Range of 
exercise prices

 

Weighted
average
exercise price

 

Total
compensation

 

 

 

(millions)

 

 

 

 

 

(dollars in millions)

 

Restricted stock units

 

 

0.4

 

 

 

 

 

$

14.95

 

 

 

$

5.7

 

 

Traditional stock options

 

 

0.5

 

 

$

2.05 - 20.56

 

 

13.45

 

 

 

0.6

 

 

 

 

 

0.9

 

 

 

 

 

 

 

 

 

$

6.3

 

 

 

The Company’s 2006 Stock Incentive Plan provides for grants of Series A common stock-based compensation instruments. The Company granted stock options, restricted stock, and restricted stock units under this plan during the three and nine months ended June 30, 2007 as follows:

 

 

For the three months ended June 30, 2007

 

 

 

Number of
instruments

 

Weighted
average fair
value per
instrument

 

Total
compensation

 

 

 

(millions)

 

 

 

(dollars in millions)

 

Restricted stock and restricted stock units

 

 

0.05

 

 

 

$

15.42

 

 

 

$

0.7

 

 

Traditional stock options

 

 

0.05

 

 

 

5.88

 

 

 

0.3

 

 

Employee stock purchase plan options

 

 

0.03

 

 

 

3.11

 

 

 

0.1

 

 

 

 

 

0.13

 

 

 

 

 

 

 

$

1.1

 

 

 

 

 

For the nine months ended June 30, 2007

 

 

 

Number of
instruments

 

Weighted
average fair
value per
instrument

 

Total
compensation

 

 

 

(millions)

 

 

 

(dollars in millions)

 

Restricted stock and restricted stock units

 

 

0.5

 

 

 

$

15.12

 

 

 

$

7.4

 

 

Traditional stock options

 

 

0.5

 

 

 

5.81

 

 

 

2.5

 

 

Employee stock purchase plan options

 

 

0.1

 

 

 

3.47

 

 

 

0.4

 

 

 

 

 

1.1

 

 

 

 

 

 

 

$

10.3

 

 

 

As of June 30, 2007, there was approximately $26.5 million of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Stock Incentive Plan, including the Walter replacement instruments described above. The Company expensed $2.8 million and $0.7 million related to share-based compensation for the three months ended June 30, 2007 and 2006, respectively, and $8.0 and $1.0 for the nine months ended June 30, 2007 and 2006, respectively.

Note 7.   Borrowing Arrangements

During May 2007, through a series of transactions, the Company refinanced its debt, which resulted in lower overall interest rates and greater covenant flexibility. The new 2007 Credit Agreement and new 2007

11




Senior Subordinated Notes generated cash proceeds of $1,140.0 million. These proceeds were used to pay the 2005 Mueller Term Loan and retire substantially all of the 2004 Senior Subordinated Notes and 2004 Senior Discount Notes. In connection with the refinancing, the Company recorded a loss on early extinguishment of debt of $36.4 million. The components of the Company’s debt are as follows:

 

 

June 30,
2007

 

September 30,
2006

 

 

 

(dollars in millions)

 

2007 Credit Agreement:

 

 

 

 

 

 

 

Term Loan A

 

$

150.0

 

 

$

 

 

Term Loan B

 

565.0

 

 

 

 

2007 Senior Subordinated Notes

 

425.0

 

 

 

 

2005 Mueller Credit Agreement

 

 

 

793.8

 

 

2004 Senior Subordinated Notes

 

 

 

215.1

 

 

2004 Senior Discount Notes

 

0.2

 

 

116.3

 

 

Capital lease obligations

 

1.8

 

 

2.1

 

 

 

 

1,142.0

 

 

1,127.3

 

 

Less current portion

 

(6.5

)

 

(9.0

)

 

 

 

$

1,135.5

 

 

$

1,118.3

 

 

 

2007 Credit Agreement:   On May 24, 2007, the Company entered into a credit agreement (the “2007 Credit Agreement”) consisting of a $300 million senior secured revolving credit facility (the “2007 Revolver”), a $150 million term loan (“Term Loan A”), and a $565 million term loan (“Term Loan B”). The 2007 Credit Agreement contain customary covenants and events of default, including covenants that limit the Company’s ability to incur debt, pay dividends and make investments. The Company is compliant with these covenants as of June 30, 2007 and expects to remain in compliance.

The 2007 Revolver terminates in May 2012 and bears interest at a floating rate equal to LIBOR plus a margin ranging from 1.0%-1.75% depending on the Company’s leverage ratio as defined in the 2007 Credit Agreement. The Company must also pay a commitment fee for any unused portion of the 2007 Revolver which ranges from 0.2% to 0.5%, also depending on the Company’s leverage ratio.  As of June 30, 2007, the margin would be 1.50% and the commitment fee is 0.375%.

The Term A Loan matures in May 2012 and bears interest at a floating rate equal to LIBOR plus a margin ranging from 1.0%-1.75% depending on the Company’s leverage ratio as defined in the 2007 Credit Agreement. Only July 31, 2007, the Company repaid $8.4 million of the Term A Loan. As a result, the remaining principal will be repaid in eleven quarterly payments of $3.5 million commencing September 2009 with the remaining balance paid at maturity. As of June 30, 2007 the weighted average interest rate is 6.82%, including a margin of 1.5%.

The Term B Loan matures in May 2014 and bears interest at a floating rate equal to LIBOR plus 1.75%. On July 31, 2007, the Company repaid $31.6 million of the Term B Loan. As a result, the remaining principal will be repaid in 27 quarterly payments of $1.3 million commencing September 2007 with the remaining balance paid at maturity. As of June 30, 2007 the weighted average interest rate is 7.09%.

12




2007 Senior Subordinated Notes:   On May 24, 2007, the Company completed a private placement of $425 million principal face amount of 73¤8% senior subordinated notes maturing June 1, 2017 (the “Notes”).  The Notes pay interest in arrears on June 1 and December 1 of each year, commencing December 1, 2007. The Notes contain customary covenants and events of default, including covenants that limit the Company’s ability to incur debt, pay dividends and make investments. The Company is compliant with these covenants as of June 30, 2007 and expects to remain in compliance. Substantially all of the Company’s domestic subsidiaries guarantee the Notes. The Company intends to register similar notes with the SEC and issue these registered notes, which will be publicly traded, in exchange for the Notes during the fourth quarter of its fiscal year 2007.

2005 Mueller Credit Agreement:   On October 3, 2005, Group entered into a credit agreement (the “2005 Mueller Credit Agreement”) consisting of a $145 million senior secured revolving credit facility maturing in October 2010 (the “2005 Mueller Revolving Credit Facility”) and a $1,050 million senior secured term loan maturing in October 2012 (the “2005 Mueller Term Loan”). The Company redeemed $245.6 million of the Term Loan on June 1, 2006,  and on May 24, 2007 redeemed $74.7 million of the Term Loan and replaced the 2005 Mueller Term Loan and 2005 Revolving Credit Facility with the 2007 Credit Agreement. The 2005 Mueller Term Loan required quarterly principal payments of $2.0 million through October 3, 2012, at which point in time the remaining principal outstanding was due. The commitment fee on the unused portion of the 2005 Mueller Revolving Credit Facility was 0.375% and the interest rate was a floating interest rate of 1.75% over LIBOR. The 2005 Mueller Term Loan carried a floating interest rate of 2.0% over LIBOR.

2004 Senior Subordinated Notes:   In April 2004, Group issued $315 million principal face amount of 10% senior subordinated notes due 2012, with an effective interest rate of 9.2%. The effective discount on these notes was recorded as part of the Acquisition. The Company redeemed $110.3 million of these notes on July 3, 2006 and $204.7 million of the notes on May 24, 2007.

2004 Senior Discount Notes:   In April 2004, Predecessor Mueller issued 223,000 units, consisting of $223 million principal face amount of 14¾% senior discount notes due 2014 and warrants to purchase 24,487,383 shares of Predecessor Mueller’s common stock, with an effective interest rate of 12.1%. The effective discount on these notes was recorded as part of the Acquisition. The Company redeemed $52.5 million principal amount of these notes on July 3, 2006 and $110.7 million principal amount of these notes on May 24, 2007, resulting in outstanding notes with an accreted value of $0.2 million as of June 30, 2007.

Note 8.   Derivative Financial Instruments

Interest Rate Swaps:—The Company uses interest rate swap contracts with a cumulative total notional amount of $325 million to hedge against cash-flow variability arising from changes in LIBOR rates in conjunction with its LIBOR-indexed variable rate borrowings. These swaps are accounted for as effective hedges, and as a result the Company recorded an unrealized gain from these swap contracts, net of tax, of $2.8 million at June 30, 2007 in accumulated other comprehensive income. These swaps have a fair value of $4.9 million at June 30, 2007, which is included in deferred financing fees and other long-term assets in the accompanying Condensed Consolidated Balance Sheet.

Forward Foreign Currency Exchange Contracts:—The Company uses Canadian dollar forward exchange contracts with a cumulative notional amount of $12.2 million to hedge against cash-flow variability arising from changes in the Canadian dollar-U.S. dollar exchange rate in connection with anticipated transactions, primarily our Canadian subsidiaries’ inventory purchases denominated in U.S. dollars. These forwards are accounted for as effective hedges, and as a result the Company recorded an unrealized loss from these swap contracts of $0.6 million at June 30, 2007 in accumulated other comprehensive income. These forwards have a liability fair value of $1.0 million at June 30, 2007, which is included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet.

13




The Company has also entered into Canadian dollar forward exchange contracts reducing the Company’s exposure to currency fluctuations from its Canadian-denominated intercompany loans.  The instruments have a cumulative notional amount of $33.2 million. With these instruments, the Company sells Canadian dollars for U.S. dollars at a weighted average rate of $0.873. Gains and losses on these instruments are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statement of Operations. The Company recorded net losses of $2.4 million and $1.7 million for the three months and nine months ended June 30, 2007, respectively.

Natural Gas Swaps—The Company uses natural gas swap contracts with a cumulative total notional amount remaining as of June 30, 2007 of approximately 214,000 mmbtu to hedge against cash-flow variability arising from changes in natural gas prices on the NYMEX exchange in conjunction with its anticipated purchases of natural gas. These contracts fix the Company’s purchase price for natural gas at prices ranging from $7.10 to $7.56 per mmbtu through September 30, 2007. The Company entered into an additional natural gas swap contract on June 29, 2007. This contract fixes the Company’s purchase price for natural gas at $8.16 per mmbtu for a total purchased volume of 406,000 mmbtu in fixed monthly settlement increments ranging from 23,000 mmbtu to 41,000 mmbtu commencing with October 2007 through September 2008. All of the above swaps are accounted for as effective hedges and have a total liability fair value of $0.1 million at June 30, 2007, which is included in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheet. The Company recorded an unrealized loss from its swap contracts, net of tax, of $0.1 million at June 30, 2007 in accumulated other comprehensive income.

Note 9.   Pension and Other Postretirement Benefits

The components of net periodic benefit cost for pension and postretirement benefits for the three months and nine months ended June 30, 2007 and 2006 are as follows:

 

 

Pension Benefits

 

Other Benefits

 

 

 

For the three months
ended June 30,

 

For the three months
ended June 30,

 

 

 

    2007    

 

    2006    

 

    2007    

 

    2006    

 

 

 

(dollars in millions)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

1.6

 

 

 

$

2.0

 

 

 

$

0.1

 

 

 

$

0.1

 

 

Interest cost

 

 

5.1

 

 

 

4.7

 

 

 

0.3

 

 

 

0.4

 

 

Expected return on plan assets

 

 

(5.9

)

 

 

(4.9

)

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

0.1

 

 

 

 

 

 

(0.6

)

 

 

(0.7

)

 

Amortization of net loss (gain)

 

 

0.5

 

 

 

1.2

 

 

 

(0.4

)

 

 

(0.3

)

 

Curtailment and termination benefits loss (gain)

 

 

 

 

 

0.1

 

 

 

 

 

 

(0.6

)

 

Net periodic benefit cost (gain)

 

 

$

1.4

 

 

 

$

3.1

 

 

 

$

(0.6

)

 

 

$

(1.1

)

 

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

For the nine months
ended June 30,

 

For the nine months
ended June 30,

 

 

 

    2007    

 

    2006    

 

    2007    

 

    2006    

 

 

 

(dollars in millions)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

$

4.8

 

 

 

$

5.9

 

 

 

$

0.3

 

 

 

$

0.5

 

 

Interest cost

 

 

15.3

 

 

 

14.1

 

 

 

0.9

 

 

 

1.0

 

 

Expected return on plan assets

 

 

(17.7

)

 

 

(14.7

)

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

0.3

 

 

 

0.2

 

 

 

(1.8

)

 

 

(1.9

)

 

Amortization of net loss (gain)

 

 

1.5

 

 

 

3.5

 

 

 

(1.2

)

 

 

(0.7

)

 

Curtailment and termination benefits loss (gain)

 

 

 

 

 

5.0

 

 

 

 

 

 

(1.7

)

 

Net periodic benefit cost (gain)

 

 

$

4.2

 

 

 

$

14.0

 

 

 

$

(1.8

)

 

 

$

(2.8

)

 

 

14




For the three months and nine months ended June 30, 2006, the Company had no contributions to its pension plans. The Company anticipates contributing approximately $19.5 million to fund its pension plans and $2.0 million to its other post-employment benefits plans in fiscal 2007 and may make further discretionary payments.

Note 10.   Supplementary Balance Sheet Information

Selected supplementary balance sheet information is presented below:

 

 

June 30,
2007

 

September 30,
2006

 

 

 

(dollars in millions)

 

Inventories

 

 

 

 

 

 

 

Purchased materials and manufactured parts

 

$

71.2

 

 

$

66.7

 

 

Work in process

 

122.9

 

 

127.7

 

 

Finished goods

 

290.0

 

 

260.2

 

 

 

 

$

484.1

 

 

$

454.6

 

 

Property, plant and equipment

 

 

 

 

 

 

 

Land

 

$

28.6

 

 

$

28.4

 

 

Buildings

 

89.3

 

 

83.4

 

 

Machinery and equipment

 

533.4

 

 

489.9

 

 

Other

 

56.1

 

 

46.4

 

 

 

 

707.3

 

 

648.1

 

 

Accumulated depreciation

 

(357.4

)

 

(311.1

)

 

 

 

$

350.0

 

 

$

337.0

 

 

Accrued expenses and other current liabilities

 

 

 

 

 

 

 

Vacations and holidays

 

$

14.3

 

 

$

13.6

 

 

Workers’ compensation

 

5.8

 

 

6.0

 

 

Accrued payroll and bonus

 

16.2

 

 

23.5

 

 

Accrued sales commissions

 

4.4

 

 

5.0

 

 

Accrued taxes

 

7.0

 

 

7.7

 

 

Accrued warranty claims

 

3.1

 

 

2.7

 

 

Accrued environmental claims

 

0.6

 

 

2.5

 

 

Accrued cash discounts and allowances

 

19.9

 

 

22.1

 

 

Accrued interest

 

5.8

 

 

13.6

 

 

Accrued restructuring and other severance

 

2.5

 

 

5.3

 

 

Accrued medical

 

4.4

 

 

3.7

 

 

Other

 

13.2

 

 

10.6

 

 

 

 

$

97.2

 

 

$

116.3

 

 

 

15




Note 11.   Supplementary Income Statement Information

The components of interest expense, net of interest income are presented below:

 

 

Three months ended

 

Nine months ended

 

 

 

June 30,
2007

 

June 30,
2006

 

June 30,
2007

 

June 30,
2006

 

 

 

(dollars in millions)

 

Interest expense, net of interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

$

24.3

 

 

 

$

28.9

 

 

 

$

68.0

 

 

 

$

87.5

 

 

Deferred financing fee amortization

 

 

0.6

 

 

 

1.2

 

 

 

1.9

 

 

 

3.7

 

 

Write off of bridge loan commitment fees

 

 

 

 

 

 

 

 

 

 

 

2.5

 

 

Interest rate swap gains

 

 

(1.0

)

 

 

 

 

 

(2.7

)

 

 

(0.5

)

 

Total interest expense

 

 

23.9

 

 

 

30.1

 

 

 

67.2

 

 

 

93.2

 

 

Interest income

 

 

(0.6

)

 

 

(2.3

)

 

 

(2.4

)

 

 

(3.1

)

 

Total interest expense, net of interest income

 

 

$

23.3

 

 

 

$

27.8

 

 

 

$

64.8

 

 

 

$

90.1

 

 

 

Note 12.   Income Taxes

The Company calculates its effective tax rate under the principles of Accounting Principles Board Opinion No. 28, which requires that an estimated annual effective tax rate be determined and applied to interim period pre-tax income. The effective income tax rate for the three and nine month periods ended June 30, 2007 is 42%. During the quarter ended June 30, 2006, the Company changed the annual effective tax rate to 68% from 32% based on its most recent earnings projection for fiscal 2006. The Company recorded a favorable tax adjustment related to applying the increased rate to the net loss for the six months ended March 31, 2006. The difference between the federal, state, and foreign statutory tax rates and the effective tax rate is due primarily to the net unfavorable permanent difference for non-deductible interest expense and non-deductible compensation expense, partially offset by a deduction related to domestic manufacturing activity.

16




Note 13.   Segment Information

Segment assets consist primarily of accounts receivable, inventories, property, plant and equipment, goodwill, and identifiable intangibles. Summarized financial information for the Company’s segments follows:

 

 

Three months ended
June 30,

 

Nine months ended
June 30,

 

 

 

   2007   

 

   2006   

 

2007

 

2006

 

 

 

(dollars in millions)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mueller Co. 

 

 

$

208.1

 

 

 

$

225.5

 

 

$

575.5

 

$

599.0

 

U.S. Pipe

 

 

154.5

 

 

 

143.8

 

 

405.2

 

434.6

 

Anvil

 

 

146.2

 

 

 

136.5

 

 

414.1

 

396.7

 

Consolidating eliminations

 

 

(6.3

)

 

 

(5.8

)

 

(20.7

)

(15.0

)

Consolidated

 

 

502.5

 

 

 

500.0

 

 

1,374.1

 

1,415.3

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mueller Co. 

 

 

41.5

 

 

 

56.8

 

 

120.0

 

92.2

 

U.S. Pipe

 

 

8.9

 

 

 

7.6

 

 

22.9

 

(27.4

)

Anvil

 

 

17.4

 

 

 

12.2

 

 

44.0

 

15.7

 

Corporate expense(1)

 

 

(10.4

)

 

 

(7.4

)

 

(27.6

)

(22.7

)

Consolidating eliminations

 

 

 

 

 

0.2

 

 

 

(0.4

)

Consolidated

 

 

57.4

 

 

 

69.4

 

 

159.3

 

57.4

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mueller Co. 

 

 

13.2

 

 

 

13.0

 

 

38.9

 

37.9

 

U.S. Pipe

 

 

6.3

 

 

 

5.4

 

 

18.0

 

17.0

 

Anvil

 

 

5.8

 

 

 

6.2

 

 

17.4

 

17.5

 

Corporate

 

 

0.5

 

 

 

 

 

1.0

 

0.2

 

Consolidated

 

 

25.8

 

 

 

24.6

 

 

75.3

 

72.6

 

Facility rationalization, restructuring and related costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Pipe

 

 

 

 

 

0.2

 

 

 

28.6

 

Consolidated

 

 

 

 

 

0.2

 

 

 

28.6

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mueller Co. 

 

 

4.3

 

 

 

9.7

 

 

16.7

 

24.1

 

U.S. Pipe

 

 

14.3

 

 

 

3.8

 

 

34.2

 

14.3

 

Anvil

 

 

3.4

 

 

 

3.6

 

 

12.2

 

9.5

 

Corporate

 

 

1.6

 

 

 

 

 

3.0

 

0.1

 

Consolidated

 

 

$

23.6

 

 

 

$

17.1

 

 

$

66.1

 

$

48.0

 


(1)          Includes certain expenses not allocated to segments.

Note 14.   Commitments and Contingencies

Income Tax Litigation

A dispute exists with regard to federal income taxes for fiscal years 1980 through 1994  and 1999 through 2001 allegedly owed by the Walter consolidated group, which included the U.S. Pipe segment during these periods. According to Walter’s Quarterly Report on Form 10-Q for the period ended March 31, 2007, Walter management estimates that the amount of tax presently claimed by the Internal Revenue Service is approximately $34.0 million for issues currently in dispute in bankruptcy court for

17




matters unrelated to the Company. This amount is subject to interest and penalties. In addition, the IRS has issued a Notice of Proposed Deficiency assessing additional tax of $80.4 million for the fiscal years ended May 31, 2000, December 31, 2000 and December 31, 2001. As a matter of law, the Company is jointly and severally liable for any final tax determination, which means that in the event Walter is unable to pay any amounts owed, the Company would be liable. Walter 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 Company has concluded the risk of loss to the Company is not probable and accordingly, no liability has been recorded in the Company’s condensed consolidated financial statements.

Environmental Matters

The Company is 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 its plants and with respect to remediating environmental conditions that may exist at its own and other properties. The Company believes that it is in substantial compliance with federal, state and local environmental laws and regulations. The Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.

Solutia Inc. and Pharmacia Corporation (collectively “Solutia”) filed suit against U.S. Pipe and a number of co-defendant foundry-related companies on January 5, 2003 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 decree with the United States Environmental Protection Agency (“EPA”). U.S. Pipe and certain co-defendants subsequently reached a settlement with EPA concerning their liability for certain contamination in and around Anniston, which was memorialized in an Administrative Agreement and Order on Consent (“AOC”) that became effective on January 17, 2006. The settling defendants contend that the legal effect of the AOC extinguishes Solutia’s claims and filed a motion for summary judgment on that ground. Discovery in this matter has been stayed in the interim. On June 21, 2007, the United States Supreme Court decided United States v. Atlantic Research, which affects the law underlying the parties’ contentions on the effect of the AOC. U.S. Pipe has reached a cash-out settlement agreement whereby Phelps Dodge Industries, a co-defendant and co-respondent on the AOC, has assumed U.S. Pipe’s obligation to perform the work required under the AOC. The Company has filed briefs with the court regarding the effects of the Atlantic Research decision, but cannot predict the outcome of this litigation. If the court permits the case to proceed, management will review the claims, but currently has 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 on April 8, 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 on December 15, 2006. The amended complaint alleged state law tort claims (negligence, failure to warn, wantonness, nuisance, trespass and outrage) arising from creation and disposal of “foundry sand” in the Anniston, Alabama area 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. Pipe’s former 10th Street facility and no longer alleges personal injury claims. Plaintiffs filed a third amended complaint on July 27, 2007. Management believes that

18




numerous procedural and substantive defenses are available. At present, management has no reasonable basis to form a view with respect to the probability of liability in this matter.

Although the Company now produces a small amount of no-lead brass products, most of the Company’s brass valve products contain approximately 5.0% lead. Environmental advocacy groups, relying on standards established by California’s Proposition 65, are seeking to eliminate or reduce the content of lead in water infrastructure products offered for sale in California. Some of the Company’s subsidiaries have entered into settlement agreements with these environmental advocacy groups to modify products or offer substitutes for sale in California. Legislation to substantially restrict lead content in water infrastructure products has been introduced in the United States Congress. Congress or state jurisdictions other than California may enact legislation similar to Proposition 65 to restrict the content of lead in water products, which could require the Company to incur additional capital expenditures to modify production. The Company incurred approximately $8.0 million in capital spending during the year ended September 30, 2006 to implement and update a no-lead brass production line. Also, the Company began consolidating its two existing brass foundries into one facility, incurring $2.3 million and $5.8 million in capital spending during the nine months ended June 30, 2007 and the year ended September 30, 2006 and, respectively. The Company expects to complete the foundry consolidation project during fiscal 2007 with total capital spending of approximately $11.7 million.

Note 15.   Subsequent Events

On July 31, 2007, the Company declared a quarterly dividend of $0.0175 per share of the Company’s Series A and Series B common stock, payable on August 20, 2007 to shareholders of record at the close of business on August 10, 2007.

On July 31, 2007, the Company repaid $8.4 million of the Term A Loan and $31.6 million of the Term-B Loan.

19




Note 16.   Consolidating Guarantor and Non-Guarantor Financial Information

The following information is included as a result of the guarantee by certain of the Company’s wholly-owned U.S. subsidiaries (“Guarantor Companies”) of the Notes. None of the Company’s other subsidiaries guarantee the debt. Each of the guarantees is joint and several and full and unconditional. Guarantors include the accounts of the following direct and indirect subsidiaries of the Company:

Name

 

 

 

State of Incorporation
or Organization

 

Anvil 1, LLC

 

 

Delaware

 

 

Anvil 2, LLC

 

 

Delaware

 

 

Anvilstar, LLC

 

 

Delaware

 

 

Anvil International, LP

 

 

Delaware

 

 

Fast Fabricators, LLC

 

 

Delaware

 

 

Henry Pratt Company, LLC

 

 

Delaware

 

 

Henry Pratt International, LLC

 

 

Delaware

 

 

Hersey Meters Co., LLC

 

 

Delaware

 

 

Hunt Industries, LLC

 

 

Delaware

 

 

Hydro Gate, LLC

 

 

Delaware

 

 

James Jones Company, LLC

 

 

Delaware

 

 

J.B. Smith Mfg. Co., LLC

 

 

Delaware

 

 

MCO 1, LLC

 

 

Alabama

 

 

MCO 2, LLC

 

 

Alabama

 

 

Milliken Valve, LLC

 

 

Delaware

 

 

Mueller Co. Ltd.

 

 

Alabama

 

 

Mueller Financial Services, LLC

 

 

Delaware

 

 

Mueller Group, LLC

 

 

Delaware

 

 

Mueller International, Inc.

 

 

Delaware

 

 

Mueller International, L.L.C.

 

 

Delaware

 

 

Mueller International Finance, Inc.

 

 

Delaware

 

 

Mueller International Finance, L.L.C.

 

 

Delaware

 

 

Mueller Service California, Inc.

 

 

Delaware

 

 

Mueller Service Co., LLC

 

 

Delaware

 

 

United States Pipe And Foundry Company, LLC

 

 

Alabama

 

 

 

20




Condensed Consolidating Statements of Operations

For the Three Months Ended June 30, 2007

 

 

Issuer

 

Guarantor
Companies

 

Non-Guarantor
Companies

 

Consolidating
Eliminating

 

Consolidated

 

 

 

(dollars in millions)

 

Net sales

 

$

 

 

$

438.7

 

 

 

$

63.8

 

 

 

$

 

 

 

$

502.5

 

 

Cost of sales

 

 

 

329.4

 

 

 

53.6

 

 

 

 

 

 

383.0

 

 

Gross profit

 

 

 

109.3

 

 

 

10.2

 

 

 

 

 

 

119.5

 

 

Selling, general and administrative

 

 

 

55.0

 

 

 

7.1

 

 

 

 

 

 

62.1

 

 

Related party corporate charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility rationalization, restructuring and related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

54.3

 

 

 

3.1

 

 

 

 

 

 

57.4

 

 

Interest expense, net of interest income

 

23.1

 

 

 

 

 

(0.2

)

 

 

 

 

 

23.3

 

 

Loss on extinguishment of debt

 

36.4

 

 

 

 

 

 

 

 

 

 

 

36.4

 

 

Income (loss) before income tax expense (benefit)

 

(59.5

)

 

54.3

 

 

 

2.9

 

 

 

 

 

 

(2.3

)

 

Income tax expense (benefit)

 

(26.7

)

 

24.5

 

 

 

1.2

 

 

 

 

 

 

(1.0

)

 

Equity in income of subsidiaries

 

31.5

 

 

1.7

 

 

 

 

 

 

(33.2

)

 

 

 

 

Net income

 

$

(1.3

)

 

$

31.5

 

 

 

$

1.7

 

 

 

$

(33.2

)

 

 

$

(1.3

)

 

 

For the Nine Months Ended June 30, 2007

 

 

Issuer

 

Guarantor
Companies

 

Non-Guarantor
Companies

 

Consolidating
Eliminating

 

Consolidated

 

 

 

(dollars in millions)

 

Net sales

 

$

 

 

$

1,221.6

 

 

 

$

152.5

 

 

 

$

 

 

 

$

1,374.1

 

 

Cost of sales

 

 

 

902.9

 

 

 

126.2

 

 

 

 

 

 

1,029.1

 

 

Gross profit

 

 

 

318.7

 

 

 

26.3

 

 

 

 

 

 

345.0

 

 

Selling, general and administrative

 

 

 

163.3

 

 

 

20.8

 

 

 

 

 

 

184.1

 

 

Related party corporate charges

 

 

 

1.6

 

 

 

 

 

 

 

 

 

1.6

 

 

Facility rationalization, restructuring and related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

 

153.8

 

 

 

5.5

 

 

 

 

 

 

159.3

 

 

Interest expense, net of interest income

 

65.1

 

 

0.3

 

 

 

 

 

 

 

 

 

64.8

 

 

Loss on extinguishment of debt

 

36.4

 

 

 

 

 

 

 

 

 

 

 

36.4

 

 

Income (loss) before income tax expense (benefit)

 

(101.5

)

 

154.1

 

 

 

5.5

 

 

 

 

 

 

58.1

 

 

Income tax expense (benefit)

 

(42.8

)

 

65.0

 

 

 

2.3

 

 

 

 

 

 

24.5

 

 

Equity in income of subsidiaries

 

92.3

 

 

3.2

 

 

 

 

 

 

(95.5

)

 

 

 

 

Net income

 

$

33.6

 

 

$

92.3

 

 

 

$

3.2

 

 

 

$

(95.5

)

 

 

$

33.6

 

 

 

21




Condensed Consolidating Balance Sheet
June 30, 2007

 

 

Issuer

 

Guarantor
Companies

 

Non-Guarantor
Companies

 

Consolidating
Eliminations

 

Consolidated

 

 

 

(dollars in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

55.8

 

 

$

(4.9

)

 

 

$

6.1

 

 

 

$

 

 

 

$

57.0

 

 

Receivables, net

 

 

 

263.2

 

 

 

42.4

 

 

 

 

 

 

305.6

 

 

Inventories

 

 

 

419.0

 

 

 

65.1

 

 

 

 

 

 

484.1

 

 

Deferred income taxes

 

 

 

72.6

 

 

 

 

 

 

 

 

 

72.6

 

 

Prepaid expenses

 

 

 

31.2

 

 

 

2.1

 

 

 

 

 

 

33.3

 

 

Total current assets

 

55.8

 

 

781.1

 

 

 

115.7

 

 

 

 

 

 

952.6

 

 

Property, plant and equipment, net

 

2.4

 

 

331.1

 

 

 

16.5

 

 

 

 

 

 

350.0

 

 

Deferred financing fees and other long-term assets

 

17.3

 

 

0.2

 

 

 

(0.2

)

 

 

 

 

 

17.3

 

 

Deferred income taxes

 

 

 

4.7

 

 

 

(4.7

)