UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

 

 

Commission file number: 001-32892

 

 

 

 

MUELLER WATER PRODUCTS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

1200 Abernathy Road N.E.

Suite 1200

Atlanta, GA 30328

(Address of Principal Executive Offices)

 

Registrant’s telephone number: (770) 206-4200

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes     o No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes     x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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

 

There were 115,433,798 shares of common stock of the registrant outstanding at November 14, 2008, composed of 29,588,878 shares of Series A common stock and 85,844,920 shares of Series B common stock. At March 31, 2008, the aggregate market value of the voting and non-voting common stock held by nonaffiliates was approximately $0.9 billion based on the closing prices per share as reported on the New York Stock Exchange.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Applicable portions of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held January 28, 2009 are incorporated by reference into Part III of this Form 10-K.

 

 

Introductory Note

 

In this annual report on Form 10-K (the “annual report”), the “Company,” “we,” “us” or “our” refer to Mueller Water Products, Inc. and subsidiaries or their management. With regard to the Company’s segments, “we,” “us” or “our” may also refer to the segment being discussed or its management.

 

Certain of the titles and logos of our products referenced in this annual report are our intellectual property. Each trade name, trademark or servicemark of any other company appearing in this annual report is the property of its holder.

 

Unless the context indicates otherwise, whenever we refer in this annual report to a particular fiscal year, we mean the fiscal year ending September 30 in that particular calendar year. We manage our businesses and report operations through three segments: Mueller Co., U.S. Pipe and Anvil, based largely on the products sold and the customers served.

 

Industry and Market Data

 

In this annual report, we rely on and refer to information and statistics regarding economic conditions and trends, the demand for our water infrastructure, flow control and piping component system products and the competitive conditions we face in serving our customers and end users.

 

Some, but not all of the companies that compete in our particular industry segments are publicly traded as of the date of this annual report. Accordingly, other than certain data with respect to fire hydrants, ductile iron pipe and water valves, no current public information is available with respect to the size of such markets or our relative strength or competitive position. Our statements in this annual report about our relative market strength and competitive position with respect to other products are based on our beliefs, internal studies and our judgments concerning industry trends.

 

Forward-Looking Statements

 

This annual report contains certain statements that may be deemed “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). All statements, other than statements of historical fact, that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. Such statements are based upon certain assumptions and assessments made by us in light of our experience and our perception of historical trends, current conditions and expected future developments. Actual results and the timing of events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in the section entitled “RISK FACTORS” in Item 1A of Part I of this annual report.

TABLE OF CONTENTS

 

 

 

 

We are a leading North American manufacturer and marketer of a broad range of water infrastructure, flow control and piping component system products for use in water distribution networks and treatment facilities. We also act as a distributor, especially in Canada, for our products and products that are manufactured by other companies. Our broad product portfolio includes engineered valves, fire hydrants, pipe fittings, water meters and ductile iron pipe, which are used by municipalities, as well as the non-residential and residential construction, heating, ventilation and air conditioning (“HVAC”), fire protection and oil & gas industries. Our products enjoy leading positions due to their broad brand recognition and a reputation for quality and service for the customers we serve. We believe we have one of the largest installed bases of iron gate valves and fire hydrants in the United States, and, as of September 30, 2008, our installed products included approximately three million fire hydrants and approximately nine million iron gate valves. Because of the strength of our brands and products, our products are specified for use in all of the top 50 metropolitan areas in the United States. Our large installed base, broad product range and well-known brands have led to long-standing relationships with the key distributors of our products. Approximately 75% of our net sales during fiscal 2008 came from products for which we believe we have a leadership position. For fiscal 2008, our net sales were $1,859.3 million and income from operations was $146.1 million.

 

We manage our businesses and report operations through three business segments, based largely on the products they sell and the customers they serve: Mueller Co., U.S. Pipe and Anvil.

 

Mueller Co.

 

Sales of Mueller Co. products are driven principally by spending on water and wastewater infrastructure upgrade, repair and replacement and new water and wastewater infrastructure, which is typically associated with new residential construction. We estimate that a majority of Mueller Co.’s fiscal 2008 sales were for infrastructure upgrade, repair and replacement, with the remainder for new infrastructure.

 

U.S. Pipe

 

U.S. Pipe products are sold primarily to waterworks distributors, contractors, municipalities, utilities and other governmental agencies. A substantial percentage of ductile iron pipe orders result from contracts that are bid by contractors or directly issued by municipalities or utilities. We estimate that a majority of U.S. Pipe’s fiscal 2008 sales were for new infrastructure, with the remainder for infrastructure upgrade, repair and replacement. In January 2007, U.S. Pipe acquired the assets of Fast Fabricators, Inc. (“Fast Fabricators”).

 

Anvil

 

Anvil sells products it manufactures and products it sources from outside parties to a wide variety of end users through a network of distributors. These distributors are serviced primarily through distribution centers located in the United States and Canada. We believe Anvil’s network of distributors is the largest such distribution network serving similar end users. One of Anvil’s Canadian divisions also sells directly to contractors.

The table below illustrates each segment’s net sales during fiscal 2008, major product lines, product positions, selected brand names and primary end users.

 

 

 

Mueller Water Products, Inc. is a Delaware corporation that was incorporated on September 22, 2005 under the name Mueller Holding Company, Inc., and is the surviving corporation of the merger on February 2, 2006 of Mueller Water Products, LLC and Mueller Water Products Co-Issuer, Inc. with and into Mueller Holding Company, Inc. We changed our name to Mueller Water Products, Inc. on February 2, 2006. On June 1, 2006, the Company completed an initial public offering of its Series A common stock.

 

On December 14, 2006, Walter Industries, Inc. (“Walter Industries”) distributed to its shareholders all of the outstanding shares of the Company’s Series B common stock (the “Spin-off”). Prior to the Spin-off, the Series B common stock represented approximately 75% of our economic value and approximately 96% of the combined voting power of our common stock.

 

Our principal executive offices are located at 1200 Abernathy Road N.E., Suite 1200, Atlanta, Georgia 30328, and our main telephone number at that address is (770) 206-4200.

 

Our business strategy is focused on maintaining our market leadership and competitive differentiation, while growing revenues and enhancing profitability. Key elements of our strategy follow.

 

We will maintain our leadership positions with our customers and end users.

 

We will maintain our leadership positions with our customers and end users by leveraging our large installed base, the specification of our products as accepted for use in a majority of metropolitan areas, our established and extensive distribution channels and our broad range of leading water infrastructure, flow control and piping component system products, as well as by developing and introducing additional products and services.

 

We will continue to enhance operational excellence.

 

We will continue to pursue superior product engineering, design and manufacturing by investing in technologically advanced manufacturing processes such as lost foam casting and automated molding machinery. We will also seek opportunities to improve manufacturing efficiency safely, such as through the completion of a new automated ductile iron pipe operation, increased utilization of our manufacturing facility in China to produce additional high quality and cost-effective products and continuing our cost-reduction and efficiency initiatives. We will expand our number of LEAN Manufacturing specialists and use of Six Sigma business improvement methodologies to capture higher levels of operational efficiencies. We will also continue to evaluate sourcing products wherever doing so will lower our costs while maintaining quality.

 

We will increase the breadth and depth of our products and services.

 

We will continue to seek to provide value to our customers and end users by increasing the breadth and depth of our products and services. Further, though acquisition and internal development, we will continue to develop products and services recognized for their quality and reliability for our customers and end users. For example, Mueller Co. has introduced a new product that blocks reverse flows of water-borne contaminants from a fire hydrant into a water main. Additionally, with the acquisition of Fast Fabricators, U.S. Pipe expanded its product offerings to include fabricated, coated and lined pipe products. We will continue to seek to add value to our customers and end users through attractive acquisitions and internal development.

 

We will expand internationally.

 

We will selectively pursue attractive international acquisitions that enhance our existing product offerings, strengthen our current competitive positions, enable us to enter new markets, expand our technological capabilities or provide synergy opportunities.

 

We offer a full line of water infrastructure, flow control and piping component system products in the United States and Canada. Our principal products are ductile iron pipe, water and gas valves, fire hydrants and a complete range of pipe fittings, couplings, hangers and nipples. Our products are generally designed, manufactured and tested in compliance with industry standards.

 

Mueller Co.

 

Water and Gas Valves and Related Products.  Mueller Co. manufactures valves for water and gas systems, including butterfly, iron gate, tapping, check, plug and ball valves. Water and gas valves and related products accounted for approximately $470.5 million, $503.5 million and $545.7 million of our gross sales during fiscal 2008, 2007 and 2006, respectively. All of our valve products are used to control transmission of potable (drinkable) water, non-potable water or gas. Water valve products typically range in size from 3/4 inch to 36 inches, but we also manufacture significantly larger valves as custom orders. Most of these valves are used in water distribution and water treatment.

We also produce small iron valves, meter bars and line stopper fittings for use in gas systems, and we manufacture machines and tools for tapping, drilling, extracting, installing and stopping-off. These machines and tools are designed to work with our water and gas fittings and valves as an integrated system.

 

Fire Hydrants.  Mueller Co. manufactures dry-barrel and wet-barrel fire hydrants. Fire hydrants and fire hydrant parts sales accounted for approximately $175.4 million, $193.1 million and $197.0 million of our gross sales in fiscal 2008, 2007 and 2006, respectively. We sell fire hydrants for new water infrastructure development, fire protection systems and water infrastructure repair and replacement projects.

 

Our fire hydrants consist of an upper barrel and nozzle section and a lower barrel and valve section that connects to a water main. In dry-barrel hydrants, the valve connecting the barrel of the hydrant to the water main is located below ground at or below the frost line, which keeps the hydrant upper barrel “dry”. We sell dry-barrel fire hydrants with the Mueller and U.S. Pipe brand names in the United States and the Mueller and Canada Valve brand names in Canada. We also make a limited number of wet-barrel hydrants, where the valves are located in the hydrant nozzles and the barrel contains water at all times. Wet-barrel hydrants are made for warm weather climates in locations such as California and Hawaii and sold under the Jones brand name.

 

Most municipalities have a limited number of hydrant brands that are approved for installation within their system due to the need to minimize inventories of spare parts for repairs and the desire to ensure a uniform system. We believe that our large installed base of hydrants throughout the United States and Canada and our reputation for superior quality and performance, together with our incumbent specification position, have contributed to the leading positions of our key products. Our large installed base of approximately three million hydrants also leads to recurring sales as components of an installed hydrant are replaced from time to time.

 

Other Products and Services.  Mueller Co. manufactures a full line of metering products for the water industry, marketed under the Hersey brand name. These products have the capability to measure water from small residential flows to fire and master meter applications. Other products include pipe repair products, such as clamps and couplings used to repair leaks in water and gas distribution systems and municipal castings, such as manhole covers and street drain grates. We sell these products under the Mueller and Jones brand names. We also provide installation, replacement and maintenance services on new and existing valves, hydrants and service lines under the Mueller Service brand name. Services include wet taps, dry installs, line stops and main-to-meter connections with full excavation and refurbishment.

 

U.S. Pipe

 

U.S. Pipe manufactures a broad line of ductile iron pipe, restraint joint products, fittings and other ductile cast iron products. Ductile iron is a cast iron that is heat-treated to make it less brittle. U.S. Pipe’s net sales were $546.0 million, $537.1 million and $594.7 million during fiscal 2008, 2007 and 2006, respectively. Net sales in fiscal 2006 include a small amount of sales from valve and hydrant product lines that were transferred to Mueller Co. in January 2006.

 

Our ductile iron pipe typically ranges from 4 inches to 64 inches in diameter and up to 20 feet in length. Most of our pipe is sold in 18 feet lengths. Ductile iron pipe is used primarily for potable water distribution systems, small water system grids, reinforcing distribution systems (including looping grids and supply lines), major water transmission mains, wastewater collection systems, sewer force mains and water and wastewater treatment plants. We believe ductile iron pipe is preferred for most municipal uses because of its strength, ductility and long-lasting life.

 

Fast Fabricators also manufactures and sells a broad line of fabricated pipe, coated pipe and lined pipe products used primarily in wastewater treatment facilities.

 

Anvil

 

Anvil products include a variety of fittings, couplings, hangers, nipples, valves and related pipe products. Anvil’s net sales were $595.2 million, $555.8 million and $534.6 million in fiscal 2008, 2007 and 2006, respectively. Approximately $229.7 million, $200.4 million and $179.4 million, respectively, of these net

sales were of purchased products. Our products are principally used in fire protection systems, oilfield and HVAC applications.

 

The majority of Anvil products are not specified by an architect or an engineer, but are required to be manufactured to industry specifications, which could include material composition, tensile strength and various other requirements. Many products carry the Underwriters Laboratory (“UL”), Factory Mutual (“FM”) or other approval ratings.

 

Fittings and Couplings.  Anvil manufactures threaded and grooved pipe fittings. Pipe fittings and couplings join two pieces of pipe together. Listed below are the four primary categories of pipe fittings and couplings that we manufacture.

 

 

Hangers.  Anvil manufactures a broad array of pipe hangers and supports. Standard pipe hangers and supports are used in fire sprinkler systems and HVAC applications where the objective is to provide rigid support from the building structure. Special order, or engineered, pipe supports are used in nuclear and fossil power plants and petrochemical plants and refineries where the objective is to support a piping system that is subject to thermal, dynamic or seismic movement.

 

Nipples.  Anvil manufactures pipe nipples, which are used to expand or compress the flow between pipes of different diameters. The pipe nipple product line is a complementary product offering and is packaged with cast iron for fire protection products, with malleable iron for industrial applications, with our forged steel products for oil & gas and chemical applications and as a general plumbing item.

 

Other Products.  Anvil also distributes other products including (a) forged steel pipe fittings, hammer unions, bull plugs and swage nipples which are used to connect pipe in oil & gas applications and (b) standard steel and polyvinyl chloride (“PVC”) conduit couplings and elbows used to carry wire and cable in electrical applications.

 

Mueller Co.

 

Mueller Co. sells its products to a wide variety of customers, including municipalities, water and wastewater utilities, gas utilities, fire protection and construction contractors. These products are usually sold to our distributors, who then sell them to end users working to construct, replace or upgrade a water, wastewater, gas or fire protection system. In limited cases, end users of our products, including municipalities and utilities, buy products directly from us, most often as part of a program to repair, replace or upgrade existing infrastructure. Sales of our products are heavily influenced by the specifications for the underlying projects. Approximately 19%, 16% and 12% of Mueller Co.’s net sales were to Canadian customers in fiscal 2008, 2007 and 2006 respectively.

At September 30, 2008, Mueller Co. had 99 sales representatives in the field and 116 inside marketing and sales professionals, as well as 50 non-employee manufacturers’ representatives. In addition to calling on distributors, these representatives also call on municipalities, water companies and other end users to ensure that the products specified for their projects are comparable to our products, or our products are specifically specified. Municipalities often require contractors to use the same products that have been historically used by that municipality.

 

Mueller Co.’s large installed base, broad product range and well-known brands have led to our long-standing relationships with all of the leading distributors in the industries we serve. We generally ship our products directly to distributors from our plants. Our distribution network covers all of the major locations for our products in the United States and Canada. Although we have long-term relationships with most of our top distributors, we typically do not have long-term contracts with our distributors and we do not have written contracts with our two largest distributors. These top two distributors accounted for approximately 36%, 41% and 44% of Mueller Co.’s net sales in fiscal 2008, 2007 and 2006, respectively. The loss of either of these distributors could have a material adverse effect on our businesses. See “Item 1A. RISK FACTORS—We depend on a group of major distributors for a significant portion of our sales; any loss of these distributors could reduce our sales and continuing consolidation could cause price pressure.”

 

U.S. Pipe

 

U.S. Pipe products are sold primarily to waterworks distributors, contractors, municipalities, utilities and other governmental agencies. A substantial percentage of ductile iron pipe orders result from contracts that are bid by contractors or directly issued by municipalities or utilities. An increasing portion of ductile iron pipe sales is made through independent waterworks distributors. We maintain numerous supply depots in leased space throughout the United States.

 

At September 30, 2008, U.S. Pipe had a sales force of 51 sales representatives in the field and in-house and sales engineers who sell our products throughout the United States. We have divided the United States into four geographic territories, each managed by a regional sales manager. Non-U.S. orders are taken by our in-house sales personnel and through third-party representatives.

 

U.S. Pipe’s top customer, a distributor with whom we do not have a written contract, represented approximately 17%, 24% and 29% of U.S. Pipe’s net sales in fiscal 2008, 2007 and 2006, respectively. We believe the loss of this customer could have a material adverse effect on our businesses. See “Item 1A. RISK FACTORS— We depend on a group of major distributors for a significant portion of our sales; any loss of these distributors could reduce our sales and continuing consolidation could cause price pressure.”

 

Anvil

 

Approximately 71%, 72% and 74% of 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.

 

Anvil’s sales in the United States are primarily to distributors who then sell the products to a wide variety of end users including commercial contractors. At September 30, 2008, Anvil’s sales force in the United States consisted of 157 sales and customer service representatives and 15 independent sales representatives. Anvil products are shipped primarily from four major regional distribution centers from which we are generally able to provide 24-hour turnaround, as typically required by our customers.

 

In Canada, approximately 80% of Anvil’s net sales are directly to contractors and, through Anvil’s Mueller Flow Control division, approximately 20% of Anvil’s net sales are to distributors. Canadian end users are similar to those in the United States. Anvil’s Canadian sales force consists of 100 sales and customer service employees. Products sold to contractors are shipped from 18 branch locations throughout Canada. Each of Canada’s five major provinces has at least one branch location for sales to distributors.

Anvil generally does not have written contracts with its distributors, although we have long-term relationships with most of our top distributors. Our top three distributors together accounted for approximately 13% of our net sales in each of fiscal 2008, 2007 and 2006. The loss of any one of these distributors could have a material adverse effect on our businesses. See “Item 1A. RISK FACTORS — We depend on a group of major distributors for a significant portion of our sales; any loss of these distributors could reduce our sales and continuing consolidation could cause price pressure.”

 

Backlog is not significant for the Company, except for U.S. Pipe and the Henry Pratt division of Mueller Co. Other Mueller Co. divisions and Anvil generally manufacture products from raw materials in stock and deliver them to customers typically within two to four weeks from receipt of the order, depending upon customer delivery specifications. Henry Pratt manufactures parts for large projects that typically require design and build specifications. The delivery lead time for parts used for these projects can be as long as nine months. Backlog for U.S. Pipe and Henry Pratt is presented below.

 

 

See “Item 2. PROPERTIES” for a description of our principal manufacturing facilities.

 

Mueller Co.

 

Mueller Co. operates 13 manufacturing facilities in the United States, Canada and China. Our manufacturing operations include foundry, machining, fabrication, assembly, testing and painting operations. Not all facilities perform each of these operations. Our existing manufacturing capacity is sufficient for near-term requirements. We have no current plans to expand capacity. We plan to continue to maximize operational efficiencies throughout all of our plants through the use of LEAN Manufacturing techniques, which is a methodology that focuses on improving process, cost, quality, and safety.

 

Mueller Co. foundries use two casting techniques, lost foam and green sand. We utilize lost foam technology for fire hydrant production in our Albertville, Alabama facility and for iron gate valve production in our Chattanooga, Tennessee facility. The lost foam process has several advantages over the green sand process for high-volume products, including a reduction in the number of manual finishing operations, lower scrap levels and the ability to reuse some of the materials. The selection of the appropriate casting method, pattern, core-making equipment, sand and other raw materials depends on the final product and its complexity, specifications, function and intended production volume.

 

U.S. Pipe

 

U.S. Pipe operates three facilities in the United States for manufacturing ductile iron pipe. We utilize the DeLavaud centrifugal casting process, which consists of introducing molten iron into a rapidly turning steel mold and relying on the centrifugal force to distribute molten iron around the inner surface of the mold to produce ductile iron pipe of uniform quality. Construction and testing of U.S. Pipe’s new state-of-the-art ductile iron pipe manufacturing operation in Bessemer, Alabama is complete. We plan to continue to expand our use of LEAN Manufacturing and Six Sigma techniques to improve process, cost, quality, and safety.

 

In November 2007, we announced our intent to cease our ductile iron pipe manufacturing operations in Burlington, New Jersey. These manufacturing operations ceased during the year ended September 30, 2008. This facility continues to be used as a full-service distribution center for customers in the Northeast.

Fast Fabricators operates a small number of relatively small facilities throughout the United States that primarily fabricate, coat and line ductile iron pipe.

 

Anvil

 

Anvil operates 11 manufacturing facilities in the United States and Canada. Our manufacturing operations include foundry, heat treating, machining, fabricating, assembling, testing and painting operations. Not all facilities perform each of these operations. Our foundry operations employ automated vertical and horizontal green sand molding equipment. Our products are made in a high volume production environment using high-speed computer controlled machines and other automated equipment. We expect to continue to invest in modern manufacturing technology to maintain our competitiveness in quality and productivity.

 

 

Our products are made using several basic raw materials, including scrap steel and iron, sand, resin, brass ingot, steel pipe, coke and various purchased components. These materials have been and are expected to be readily available and competitively priced.

 

We generally do not hedge our exposure to raw material price changes. Our businesses have been and could continue to be adversely affected by increases in the cost of our raw materials, as we may not be able to fully or timely pass cost increases on to our customers. We estimate that raw materials and purchased components used in manufacturing processes as a percentage of cost of sales for fiscal 2008 were 13% and 43%, respectively, for Mueller Co., 23% and 44%, respectively, for Anvil and 46% and 8%, respectively, for U.S. Pipe. For the purpose of these estimates, raw materials exclude electricity, natural gas, water, oxygen and other ancillary items.

 

Scrap iron prices paid by U.S. Pipe peaked in July 2008 and were approximately 240% of July 2007 prices. Prices paid throughout fiscal 2008 were higher than corresponding prices paid 12 months earlier. Scrap iron prices have since decreased significantly. The price paid by U.S. Pipe in October 2008 was approximately 60% lower than the price paid in July 2008 and approximately 20% lower than the price paid in October 2007.

 

Brass prices have moved directionally similar to scrap iron prices, but brass price changes have not been as extreme as scrap iron price changes since the beginning of fiscal 2008. For example, brass prices did not increase as much as scrap iron and decreased approximately 20% during October 2008 compared to July 2008.

 

We can give no assurances that the price of raw materials will remain at current levels or that we will be able to increase prices to our customers to offset any future cost increases. See “Item 1A. RISK FACTORS—Our businesses are subject to risk of price increases and fluctuations and delay in the delivery of raw materials and purchased components.”

 

Our research and development (“R&D”) facilities are located in Smithfield, Rhode Island and Bessemer, Alabama. The primary focus of these groups is to develop new products, improve and refine existing products, and obtain and assure compliance with industry approval certifications or standards (such as American Water Works Association, UL, FM and NSF International). At September 30, 2008, we employed 38 people dedicated to R&D activities, of which 20 were degreed engineers. We actively seek patent protection where possible to prevent copying of our proprietary products.

 

Ideas are generated by manufacturing, marketing or R&D personnel. In order for development of a project to begin, all three of these disciplines must agree on the suitability of the project and determine an estimated return on investment. After approval, it typically takes 6 to 12 months to tool, test and start production. The R&D team typically works on various products simultaneously.

 

R&D expenses were $5.7 million, $4.6 million and $5.7 million during fiscal 2008, 2007 and 2006, respectively.

 

We have active patents and trademarks relating to the design of our products and trademarks for our brands and products. Most of the patents for technology underlying our products have been in the public domain for many years, and existing third-party patents are not considered, either individually or in the aggregate, to be material to our businesses. However, the pool of proprietary information, consisting of know-how and trade secrets relating to the design, manufacture and operations of our products is considered particularly important and valuable. We generally own the rights to the products that we manufacture and sell and are not dependent in any material way upon any license or franchise to operate. U.S. Pipe has granted numerous trademark licenses around the world with respect to its uniform family of ductile iron pipe accessories, such as joint restraint systems.

 

See “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Effect of Inflation; Seasonality.”

 

The U.S. and non-U.S. markets for water infrastructure, flow control and piping component system products are competitive. However, for most of our product offerings, there are only a few competitors. Although many of our competitors are well-established companies with strong brand recognition, we believe that each of our key product offerings is competitive. We consider our installed base, product quality, service, brand recognition, price, effectiveness of distribution and technical support to be primary competitive factors.

 

The competitive environment for Mueller Co. products is mature and most end users are slow to transition to brands other than the historically preferred brand. It is difficult to increase market share in this environment. We believe that Mueller Co. fire hydrants and valves enjoy strong competitive positions based largely on their quality, dependability and strong brand names. The principal competitors for hydrants and iron gate valves are McWane, Inc. and American Cast Iron Pipe Company. The primary competitors for our brass products are The Ford Meter Box Company, Inc. and A.Y. McDonald Mfg. Co. Many brass valves are interchangeable among different manufacturers.

 

The ductile iron pipe industry is highly competitive with a small number of manufacturers of ductile iron pipe and fittings. Our major competitors are McWane, Inc., Griffin Ductile Iron Pipe Company and American Cast Iron Pipe Company. Additional competition for ductile iron pipe comes from pipe composed of other materials, such as PVC, high-density polyethylene (“HDPE”), concrete, fiberglass, reinforced plastic and steel. Although ductile iron pipe is typically more expensive to purchase than competing forms of pipe, ductile iron pipe has the advantages of longevity, strength, ease of installation, lack of maintenance problems and environmental sustainability.

 

The competitive environment for Anvil’s products is highly competitive, price sensitive and vulnerable to the increased acceptance of products produced in perceived low-cost countries, such as China and India. We compete primarily on the basis of availability, service and price. Our primary competitors in the United States are Ward Manufacturing L.L.C. for cast iron and malleable iron fittings, Victaulic Company and the Tyco Engineered Products and Services segment of Tyco International Ltd. for ductile grooved fittings and ERICO International Corporation, NIBCO INC. and Carpenter & Paterson, Inc. for pipe hangers. Our mechanical and industrial customers have been slower to accept products manufactured outside the United States than our fire protection customers.

 

We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of many of our plants and with respect to remediating environmental conditions that may exist at our own and other properties. We strive to maintain substantial compliance with federal, state and local environmental laws and regulations. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and

reasonably estimable. These expenses were $6.8 million, $8.0 million and $2.3 million during fiscal 2008, 2007 and 2006, respectively. We capitalize environmental expenditures that increase the life or efficiency of property or reduce or prevent environmental contamination. Capital expenditures for environmental requirements are anticipated to be approximately $3.2 million during fiscal 2009. Capitalized environmental-related expenditures were $2.9 million, $16.2 million and $4.7 million during fiscal 2008, 2007 and 2006, respectively.

 

In September 1987, we implemented an Administrative Consent Order (“ACO”) for our Burlington, New Jersey plant that was required under the New Jersey Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act). The ACO required soil and ground water cleanup, and we have completed, and have received final approval on, the soil cleanup required by the ACO. U.S. Pipe continues to pump and treat ground water at this site. Further remediation could be required. We expect any such remediation costs to be minimal. Long-term ground water monitoring is also required to verify natural attenuation. We do not know how long ground water monitoring will be required, and do not believe monitoring or further cleanup costs, if any, will have a material adverse effect on our financial condition or results of operations.

 

In June 2003, Solutia, Inc. and Pharmacia Corporation (collectively “Solutia”) filed suit against U.S. Pipe and a number of co-defendant foundry-related companies in the U.S. District Court for the Northern District of Alabama for contribution and cost recovery allegedly incurred and to be incurred by Solutia in performing remediation of polychlorinated biphenyls (“PCBs”) and heavy metals in Anniston, Alabama, pursuant to a partial consent degree with the Environmental Protection Agency (“EPA”). U.S. Pipe and certain co-defendants subsequently reached a settlement with the EPA concerning their liability for certain contamination in and around Anniston, which was memorialized in an Administrative Order and Order on Consent (“AOC”) that became effective in January 2006. U.S. Pipe has reached a settlement agreement whereby Phelps Dodge Industries, Inc., a co-defendant and co-respondent on the AOC, has assumed U.S. Pipe’s obligation to perform the work required under the AOC.

 

U.S. Pipe and the other settling defendants contend that the legal effect of the AOC extinguishes Solutia’s claims and they filed a motion for summary judgment to that effect. Discovery in this matter was stayed while the motion for summary judgment was pending. The court recently issued a summary judgment order, holding that plaintiffs’ claims for contribution are barred by the AOC but giving plaintiffs the right to seek to recover cleanup costs they voluntarily incurred. The court granted a motion for immediate appeal to the Eleventh Circuit Court of Appeals, but the Eleventh Circuit Court of Appeals declined to take the appeal. We currently have no basis to form a view with respect to the probability or amount of liability in this matter.

 

U.S. Pipe and a number of co-defendant foundry-related companies were named in a putative civil class action case originally filed in April 2005 in the Circuit Court of Calhoun County, Alabama, and removed by defendants to the U.S. District Court for the Northern District of Alabama under the Class Action Fairness Act. The putative plaintiffs in the case filed an amended complaint with the U.S. District Court in December 2006. The amended complaint alleged state law tort claims (negligence, failure to warn, wantonness, nuisance, trespass and outrage) arising from the creation and disposal of “foundry sand” alleged to contain harmful levels of PCBs and other toxins, including arsenic, cadmium, chromium, lead and zinc. The plaintiffs originally sought damages for real and personal property and for other unspecified personal injury. On June 4, 2007, a motion to dismiss was granted to U.S. Pipe and certain co-defendants as to the claims for negligence, failure to warn, nuisance, trespass and outrage. The remainder of the complaint was dismissed with leave to file an amended complaint. On July 6, 2007, plaintiffs filed a second amended complaint, which dismissed prior claims relating to U.S. Pipe’s former facility located at 2101 West 10^th Street in Anniston, Alabama and no longer alleges personal injury claims. Plaintiffs filed a third amended complaint on July 27, 2007. U.S. Pipe and the other defendants have moved to dismiss the third amended complaint. On September 24, 2008, the court issued an order on the motion, dismissing the claims for trespass and permitting the plaintiffs to move forward with their claims of nuisance, wantonness and negligence. We believe that numerous procedural and substantive defenses are available. At present, we have no reasonable basis to form a view with respect to the probability or amount of liability in this matter.

 

Environmental advocacy groups, relying on standards established by California’s Proposition 65, are seeking to eliminate or reduce the content of lead in water infrastructure products offered for sale in California and other jurisdictions. Some of our subsidiaries previously entered into settlement agreements with these environmental

advocacy groups to modify products or offer substitutes for sale in California. California recently passed Assembly Bill No. 1953 that redefines, as of January 1, 2010, the term “lead free” to refer to a weighted average lead content
of the wetted surface area of the pipes, fittings and fixtures of not more than 0.25%. Mueller Co. intends to reduce shipments of brass products containing lead to customers in California in fiscal 2009. Legislation to substantially restrict lead content in water infrastructure products also has been introduced in the U.S. Congress. Congress or state jurisdictions may enact similar legislation to restrict the content of lead in water products. Although Mueller Co. now produces no-lead brass products, most of Mueller Co.’s brass valve products contain small amounts of lead.

 

In March 2004, Anvil entered into a Consent Order with the Georgia Department of Natural Resources regarding alleged hazardous waste violations at Anvil’s former foundry facility in Statesboro, Georgia. Pursuant to the Consent Order, we agreed to pay a monetary fine of $50,000 and pay an additional $50,000 to fund a supplemental environmental project. We have also agreed to perform various investigatory and remedial actions at our foundry and landfill. These total estimated costs have been accrued.

 

During fiscal 2008 and 2007, we incurred a total of approximately $1.0 million and $10.4 million, respectively, of capital expenditures at our iron foundries to comply with the EPA’s National Emissions Standards for Hazardous Air Pollutants, which were issued in April 2004.

 

Although no assurances can be given that we will not be required in the future to make material expenditures relating to environmental laws or legally mandated site cleanup, we do not believe at this time that the compliance and cleanup costs, if any, associated with the current laws and sites for which we have cleanup liability or any other future sites will have a material adverse effect on our financial condition or results of operations.

 

In fiscal 2007 and 2005, we entered into settlement and release agreements with a former insurer whereby the former insurer agreed to pay $1.6 million and $5.1 million, respectively, net of legal fees, to us for historical insurance claims we had previously expensed as incurred. Such claims had not previously been submitted to the insurance company for reimbursement. We released the insurer of both past and future claims.

 

In the acquisition agreement pursuant to which a predecessor to Tyco International Ltd. (“Tyco”) sold our Mueller Co. and Anvil businesses to the prior owners of these businesses in August 1999, Tyco agreed to indemnify us and our affiliates, among other things, for all “Excluded Liabilities.” Excluded Liabilities include, among other things, substantially all liabilities relating to the time prior to August 1999. The indemnity survives indefinitely. However, we may be responsible for these liabilities in the event that Tyco ever becomes financially unable to or otherwise fails to comply with the terms of the indemnity. In addition, Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. In June 2007, Tyco was separated into three separate publicly traded companies. Should the entity or entities that assumed Tyco’s obligations under the acquisition agreement ever become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.

 

See “Item 3. LEGAL PROCEEDINGS”.

 

 

We continuously strive to improve on injury reduction to reduce recordable injuries and days away from work injuries. In fiscal 2008, our total recordable injury rate decreased by 36% to 4.3 injuries per 100 employees and our days away from work rate decreased by 43% to 0.80 cases per 100 employees compared to fiscal 2007. This translates into 191 fewer total cases and 46 fewer days away from work cases in fiscal 2008 compared to fiscal 2007. We estimate that our injury and illness prevention programs saved us approximately $0.8 million of costs in fiscal 2008 compared to our costs in fiscal 2007.

 

 

The production and marketing of our products is subject to the rules and regulations of various federal, state and local agencies, including laws governing our relationships with distributors. Regulatory compliance has not had a material effect on our results to date. We are not aware of any pending legislation that is likely to have a material adverse effect on our operations. See “Item 3. LEGAL PROCEEDINGS,” and “Item 1A. RISK FACTORS—Our brass valve products contain lead, which may be replaced in the future”.

 

At September 30, 2008, we employed approximately 6,500 people, of whom approximately 90% work in the United States, and approximately 72% of our hourly workforce was covered by collective bargaining agreements. Our locations with employees covered by such agreements are presented below.

 

 

* Employees continue working under the terms of this agreement in lieu of a new agreement.

 

We believe that relations with our employees, including those represented by unions, are good.

 

Geographic net sales information is presented below.

 

 

 

 

 

Our businesses may suffer as a result of the downturn in new residential construction.

 

New water and wastewater infrastructure spending, which is dependent upon residential construction, is important to our businesses. Since January 2006, there have been steep declines in the construction of new homes, which have adversely impacted our volume in recent periods. Although residential construction activity is cyclical, it is unclear when the current decline will subside. An extended downtown in residential construction activity will negatively affect our sales, profitability and cash flows and could impair our ability to conduct our businesses as they have historically been conducted.

A portion of our business relies on local, state and federal spending related to infrastructure upgrade, repair and replacement.

 

A portion of our business depends on local, state and federal spending on water and wastewater infrastructure upgrade, repair and replacement. A significant percentage of our products are ultimately used by municipalities or other governmental agencies in water transmission and collection systems. As a result, our sales could decline as a result of declines in the number of projects planned by water agencies, government spending cuts, general budgetary constraints, difficulty in obtaining necessary permits or the inability of customers or end users to obtain financing. It is not unusual for water projects to be delayed and rescheduled for a number of reasons, including changes in project priorities and difficulties in complying with environmental and other government regulations. Spending growth in the infrastructure upgrade, repair and replacement sector may slow in the future if state and local governments’ budgets are negatively impacted by downturns in the economy. Even if favorable economic conditions exist, state and local governments may choose not to address deferred infrastructure needs among competing budget priorities. A decline in local, state and federal spending on infrastructure could lead to a further decline in our sales, profitability and cash flows.

 

A recent report of the U.S. Conference of Mayors estimates that state and local government funding generally provides 99% and 95% of the investment in drinking water and wastewater infrastructure, respectively. Funds for water infrastructure repair and replacement typically come from taxes or water rates. The ability of state and local governments to increase taxes or water rates may be limited. In addition, state and local governments that do not budget for capital depreciation in setting tax rates and water rates may be unable to pay for water infrastructure repair and replacement if they do not have other funding sources.

 

A portion of our business relies on cyclical non-residential construction.

 

A portion of our business depends on non-residential construction. Non-residential construction activity is cyclical and may lag general market downturns. We expect decreased non-residential construction activity in fiscal 2009 compared to fiscal 2008, especially in the latter part of the year. Independent forecasts of 2009 non-residential construction activity indicated a decline of 5% to 6% compared to 2008. Our products are used typically towards the end of a construction project, so the demand for our products in the earlier part of fiscal 2009 will be influenced by projects already underway at the end of fiscal 2008 that will be completed in fiscal 2009.

 

Our business is subject to risk of cost increases and fluctuations and delays in the delivery of raw materials and purchased components.

 

Our business is subject to the risk of cost increases and fluctuations and periodic delays in the timely delivery of raw materials and purchased components that are beyond our control. During fiscal 2008, we experienced unprecedented increases in scrap metal costs. Our operations require substantial amounts of raw materials or purchased components, such as scrap steel and iron, brass ingot, sand, resin, steel pipe and coke, as well as purchased components. Management estimates that raw materials and purchased components used in the manufacturing processes as a percentage of cost of sales for fiscal 2008 were 13% and 43%, respectively, for Mueller Co., 23% and 44%, respectively, for Anvil and 46% and 8%, respectively, for U.S. Pipe. For the purposes of these estimates, raw materials exclude electricity, natural gas, water, oxygen, and other ancillary items. In addition, if any of our supply arrangements cannot be continued, the availability of raw materials could be reduced or the price of raw materials could increase.

 

The availability and cost of certain raw materials, such as brass ingot and scrap steel, as well as purchased components are subject to economic forces largely beyond our control, including North American and international demand, freight costs, speculation and foreign currency exchange rates. We generally purchase raw materials at current market costs and do not hedge our exposure to cost changes. We are not always able, and may not be able
in the future, to pass on increases in the cost of these raw materials to our customers. In particular, when raw material costs increase rapidly or to significantly higher than normal levels, we may not be able to pass cost increases through to our customers on a timely basis, if at all, which could lead to reductions of our income from operations, operating margins and cash flows. Any increases in the cost of raw materials and purchased components or decreases in their availability could impair our profitability.

We depend on a group of major distributors for a significant portion of our sales; any loss of these distributors could reduce our sales and continuing consolidation could cause price pressure.

 

Approximately 31% of our fiscal 2008 net sales were to our ten largest distributors, and approximately 24% of our fiscal 2008 net sales were to our three largest distributors: HDS IP Holding, LLC (“HD Supply”), Ferguson Enterprises, Inc. and American Water Works Supply. HD Supply accounted for 20% and 17% of net sales for Mueller Co. and U.S. Pipe, respectively. We do not have written contracts with any of our major distributors.

 

While our relationships with our ten largest distributors have been long-lasting, distributors in our industry have experienced consolidation in recent years. For example, The Home Depot, Inc. acquired National Waterworks Holdings, Inc. in 2005 and then acquired Hughes Supply, Inc. in March 2006. These acquired businesses along with the related business from The Home Depot Inc. have been merged into one entity operating as HD Supply, which became an independent company in August 2007. As a result, two of our three historically largest distributors have been combined under common control. In addition, our distributors could be acquired by other distributors who buy products from our competitors. If consolidation among distributors continues, pricing pressure may result, which could lead to a decline in our sales and profitability. Further, our ability to retain our customers in the face of competition generally depends on a variety of factors, including the quality and price of our products and services and our ability to market our products effectively. The loss of any one of our top distributors could reduce our levels of sales and profitability.

 

Our industry is very competitive and some of our products are similar to those manufactured by our competitors.

 

The U.S. and non-U.S. markets for water infrastructure, flow control and piping component system products are competitive. While there are only a few competitors for most of our product offerings, many of our competitors are well-established companies with strong brand recognition. Anvil’s products in particular compete on the basis of price and are sold in fragmented markets with low barriers to entry. Also, competition for ductile iron pipe sold by U.S. Pipe comes not only from ductile iron pipe produced by a concentrated number of manufacturers, but also from pipe composed of other materials, such as polyvinyl chloride (“PVC”), high-density polyethelyne (“HDPE”), concrete, fiberglass, reinforced plastic and steel.

 

Competition from non-U.S. companies could increase and could harm our sales, profitability and cash flows.

 

In addition to competition from U.S. companies, we face the threat of competition from non-U.S. companies. The intensity of competition from non-U.S. companies is affected by fluctuations in the value of the U.S. dollar against their local currencies, by the cost to ship competitive products into North America and by the availability of trade remedies. Competition may also increase as a result of U.S. competitors shifting their operations or otherwise reducing their expenses by utilizing non-U.S. facilities or suppliers.

 

Interruption of normal operations at our key manufacturing facilities may impair our production capabilities.

 

Some of our key products, including fire hydrants, valves and ductile iron pipe, are manufactured at large manufacturing facilities. The operations at our major manufacturing facilities may be impaired by various operating risks, including, but not limited to:

 

 

 

The occurrence of any of these events could impair our cash flows and results of operations.

 

Our brass valve products contain lead, which may be replaced in the future.

 

Environmental advocacy groups, relying on standards established by California’s Proposition 65, are seeking to eliminate or reduce the content of lead in water infrastructure products offered for sale in California and other jurisdictions. Some of our subsidiaries previously have entered into settlement agreements with these environmental advocacy groups to modify products or offer substitutes for sale in California. California recently passed Assembly Bill No. 1953 that redefines, as of January 1, 2010, the term “lead free” to refer to a weighted average lead content of the wetted surface area of the pipes, fittings and fixtures of not more than 0.25%. Mueller Co. intends to reduce shipments of brass products containing lead to customers in California in fiscal 2009. Legislation to substantially restrict lead content in water infrastructure products also has been introduced in the U.S. Congress. Congress or state jurisdictions may enact similar legislation to restrict the content of lead in water products. Although Mueller Co. now produces no-lead brass products, most of Mueller Co.’s brass valve products contain small amounts of lead.

 

We have limited experience operating as a stand-alone company.

 

We became a stand-alone publicly-traded company as a result of Walter Industries, Inc (“Walter Industries”) distributing our Series B common stock to the shareholders of Walter Industries on December 14, 2006 (the “Spin-off”). Our operating as a stand-alone publicly-traded company may place significant demands on our management, operational and technical resources. Our successful future performance will depend on our ability to function as a stand-alone publicly-traded company, to finance our operations and to adapt our information systems to changes in our businesses. Some of the financial information included in this annual report for the period prior to the Spin-off may not reflect what the operating results would have been had we been a stand-alone publicly-traded company.

 

We are subject to certain risks inherent in managing a decentralized organization.

 

We currently have three distinct business segments and operate under a decentralized organizational structure. The application of consistent accounting policies, internal controls, procedures and compliance programs across all of our operations may enhance efficiency and operating effectiveness and improve corporate information flows. We continue to communicate such policies, controls, procedures and programs and it could take time for such implementation to be complete. Further, we may need to modify existing compliance programs and processes to increase efficiency and operating effectiveness and improve corporate visibility into our decentralized operations and it could take time for any such modifications to be implemented across our operations. During the implementation periods, our decentralized operating approach could result in inconsistent management practices and procedures, which could adversely affect our businesses.

 

The financial and credit liquidity crisis may adversely affect our ability to borrow money or raise capital.

 

If the financial and credit liquidity crisis were to continue or become more severe it may impact our ability to obtain money under our credit facility. Although our lenders have made commitments to make funds available to us in a timely fashion, if the current financial and credit liquidity crisis continues or worsens, our lenders may be unable or unwilling to lend money pursuant to our line of credit. In addition, if we determine that it is appropriate or necessary to raise capital in the future, the future cost of raising funds through the debt or equity markets may be more expensive or those markets may be unavailable. If we were unable to use our line of credit or raise funds through debt or equity markets, it could materially and adversely affect our liquidity or our ability to follow our key growth strategies.

We may be unsuccessful in identifying, acquiring or integrating suitable acquisitions.

 

A part of our growth strategy depends on expansion, which we expect to occur primarily through acquisitions of businesses that can be successfully integrated into our existing businesses and that will provide us with complementary manufacturing capabilities, products, services, customers or end users. However, we may be unable to identify targets that will be suitable for acquisition. In addition, if we identify a suitable acquisition candidate, our ability to complete the acquisition will depend on a variety of factors, including our ability to finance the acquisition. Our ability to finance our acquisitions is subject to a number of factors, including the availability of adequate cash, cash flows from operations or acceptable financing terms and the terms of our debt instruments. In addition, there are many challenges to integrating acquired companies and businesses in our Company, including eliminating redundant operations, facilities and systems, coordinating management and personnel, retaining key employees, managing different corporate cultures and achieving cost reductions and cross-selling opportunities. We may not be able to meet these challenges in the future.

 

Our goodwill and identifiable intangible assets are subject to possible impairment charges.

 

At September 30, 2008, we had $871.5 million of goodwill and $789.8 million of identifiable intangible assets on our balance sheet. Goodwill and certain identifiable intangible assets are reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products and services sold by our businesses, and a variety of other factors. Any identified impairment must be expensed immediately as a charge to results of operations.

 

We have substantial debt and we may incur additional debt in the future.

 

At September 30, 2008, our total debt was $1,095.5 million. The level of our debt could have important consequences, including:

 

 

We may not be able to generate sufficient cash to service all of our debt and may be forced to take other actions to satisfy our obligations under our debt, which may not be successful.

 

Our ability to pay or to refinance our debt will depend upon our future operating performance, which will be affected by our ability to succeed in carrying out our business plans and by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. Our businesses may not generate sufficient cash flows from operations or future borrowings may not be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We cannot assure that we will maintain a level of liquidity from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce investments, dividends and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. However, we may not be able to accomplish these actions on satisfactory terms, or at all. In addition, these actions, if accomplished, could affect the operation and growth of our businesses and may not permit us to meet our debt service obligations.

We may not be able to satisfy our debt covenants.

 

Our senior credit facilities require the maintenance of specified financial ratios on a quarterly basis. In addition, our debt instruments require us to provide regular financial information to our lenders and bondholders. Such requirements generally may be satisfied by our timely filing with the Securities and Exchange Commission (“SEC”) of periodic reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our ability to satisfy those financial ratios or covenants can be affected by events beyond our control, and there is a risk that we will not meet those tests. A breach of any of these covenants could result in a default under our debt instruments. If an event of default is not remedied after the delivery of notice of default and lapse of any relevant grace period, the holders of our debt would be able to declare it immediately due and payable. Upon the occurrence of an event of default under our senior credit facilities, the lenders could also terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness under our senior credit facilities. We have pledged substantially all of our assets (including our intellectual property), other than the assets of our foreign subsidiaries, as security under the senior credit facilities. If the lenders under our senior credit facilities or holders of our outstanding notes accelerate the repayment of borrowings, we may not have sufficient assets to repay our senior credit facilities and our other indebtedness, which could negatively impact the value of our common stock and our ability to operate as a going concern. Further, the covenants in our debt instruments could limit our ability to engage in certain transactions.

 

Our business may be harmed by work stoppages and other labor relations matters.

 

We are subject to a risk of work stoppages and other labor relations matters because a large portion of our hourly workforce is represented by collective bargaining agreements. At September 30, 2008, approximately 72% of our hourly workforce was covered by these agreements. These employees are represented by locals from six different unions, including the Glass, Molders, Pottery, Plastics and Allied Workers International Union, which represents the largest number of our employees. Our labor agreements will be negotiated as they expire at various times through June 2012. Work stoppages for an extended period of time could impair our businesses. Labor costs are a significant element of the total costs involved in our manufacturing process, and an increase in the costs of labor could therefore harm our businesses. In addition, the freight companies that deliver our products to our customers generally use truck drivers represented by collective bargaining agreements, and our businesses could suffer if these truck drivers face work stoppages or support other work stoppages.

 

If the Employee Free Choice Act is adopted, it would be easier for our employees to obtain union representation and our businesses could suffer.

 

In 2007, the Employee Free Choice Act of 2007: H.R. 800 (“EFCA”) was passed in the U.S. House of Representatives. This bill or a variation of it could be enacted in the future and could have an adverse impact on our businesses. The EFCA aims to amend the National Labor Relations Act, by making it easier for workers to obtain union representation and increasing the penalties employers may incur if they engage in labor practices in violation of the National Labor Relations Act. The EFCA requires the National Labor Relations Board (“NLRB”) to review petitions filed by employees for the purpose of creating a labor organization and to certify a bargaining representative without directing an election if a majority of the bargaining unit employees have authorized designation of the representative. The EFCA also requires the parties to begin bargaining within 10 days of the receipt of the petition, or longer time if mutually agreed upon. In addition, if the union and employer cannot agree upon the terms of a first collective bargaining agreement within 90 days, which can be extended by mutual agreement, either party can request federal mediation, which could lead to binding arbitration if an agreement still cannot be reached after an additional 30 days which can be extended by mutual agreement. EFCA would also require the NLRB to seek a federal injunction against an employer whenever there is reasonable cause to believe that the employer has discharged or discriminated against an employee to encourage or discourage membership in the labor organization, threatened to discharge or otherwise discriminate against an employee in order to interfere with, restrain, or coerce employees in the exercise of guaranteed collective bargaining rights, or engaged in any other related unfair labor practice that significantly interferes with, restrains, or coerces employees in the exercise of such guaranteed rights. The EFCA adds additional remedies for such violations, including back pay plus liquidated damages and civil penalties to be determined by the NLRB not to exceed $20,000 per infraction.

Our sales are influenced by weather conditions and the level of construction activity at different times of the year; we may not be able to generate sales that are sufficient to cover our expenses during certain periods of the year.

 

Some of our products, including ductile iron pipe, are moderately seasonal, with lower sales in our first and second quarters when weather conditions throughout most of North America tend to be cold or wet resulting in lower levels of construction activity. This seasonality in demand has resulted in fluctuations in our sales and operating results. In order to satisfy demand during peak periods, we may incur costs associated with inventory build-up, and there can be no assurance that our projections as to future needs will be accurate. We have a backlog of orders for some products for which we have inadequate inventories, or which are made-to-order. Because many of our expenses are fixed, seasonal trends can cause reductions in our income from operations, profit margins and deterioration of our financial condition during periods of lower production or sales activity.

 

We may be subject to product liability or warranty claims that could require us to make significant payments.

 

We are exposed to product liability claims in the event that the use of our products results, or is alleged to result, in bodily injury or property damage. There is a risk that we will experience product liability or warranty losses in the future or that we will incur expenses to defend such claims. Such losses and expenses may be material. While we currently have product liability insurance, our product liability insurance coverage may not be adequate for any liabilities that may ultimately be incurred or the coverage may not continue to be available on terms acceptable to us. A successful claim brought against us in excess of our available insurance coverage could require us to make significant payments or a requirement to participate in a product recall may harm our reputation or profitability. Any such product claims can include costs to access and repair installed products, which can exceed our sales related to these products.

 

We rely on a predecessor to Tyco International Ltd. (“Tyco”) to indemnify us for certain liabilities and there is a risk that Tyco may become unable or fail to fulfill its obligations.

 

Under the terms of the acquisition agreement relating to the August 1999 sale by Tyco of the Mueller Co. and Anvil businesses to the prior owner of these businesses, we are indemnified by Tyco for all liabilities arising in connection with the operation of these businesses prior to their sale by Tyco, including with respect to products manufactured or sold prior to the closing of that transaction. The indemnity survives forever and is not subject to any dollar limits. In the past, Tyco has made substantial payments and/or assumed defense of claims pursuant to this indemnification provision. However, we may be responsible for these liabilities in the event that Tyco ever becomes financially unable or fails to comply with, the terms of the indemnity. In addition, Tyco’s indemnity does not cover product liabilities to the extent caused by our products manufactured after that transaction. In June 2007, Tyco was separated into three separate publicly traded companies. Should the entity or entities that assumed Tyco’s obligations under the acquisition agreement ever become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities. For more information about our potential product liabilities, see “Item 3. LEGAL PROCEEDINGS”.

 

We are subject to environmental, health and safety laws and regulations that could subject us to liability for fines, clean-ups and other damages, require us to incur significant costs to modify our operations and increase our manufacturing costs.

 

We are subject to various laws and regulations relating to the protection of the environment and human health and safety and must incur capital and other expenditures to comply with these requirements. Failure to comply with any environmental, health or safety requirements could result in the assessment of damages, or imposition of penalties, suspension of production, a required upgrade or change to equipment or processes or a cessation of operations at one or more of our facilities. Because these laws are complex, constantly changing and may be applied retroactively, there is a risk that these requirements, in particular as they change in the future, may impair our businesses profitability and results of operations.

 

In addition, we incurred costs to comply with the National Emissions Standards for Hazardous Air Pollutants for iron and steel foundries and for our foundries’ painting operations issued by the Environmental Protection Agency (“EPA”). See “Item 1. BUSINESS—Environmental Matters”. We may be required to

conduct investigations and perform remedial activities that could require us to incur material costs in the future. Our operations involve the use of hazardous substances and the disposal of hazardous wastes. We may incur costs to manage these substances and wastes and may be subject to claims for damage for personal injury, property damages or damage to natural resources.

 

Our U.S. Pipe segment has been identified as a potentially responsible party liable under federal environmental laws for a portion of the cleanup costs with regard to two sites, one in Alabama and one in California, and is currently subject to an administrative consent order requiring certain monitoring and cleanup with regard to a New Jersey facility. Such cleanup costs could be substantial and could have a negative effect on our profitability and cash flows in any given reporting period. For more information about our environmental compliance and potential environmental liabilities, see “Item 1. BUSINESS—Environmental Matters.”

 

Compliance with the securities laws and regulations is likely to make it more difficult and expensive for us to maintain directors and officers liability insurance and to attract and retain qualified members of our Board of Directors.

 

We expect the Sarbanes-Oxley Act and the rules and regulations subsequently implemented by the SEC and the Public Company Accounting Oversight Board to continue to impose compliance burdens and costs on us. Those rules and regulations may make it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our audit committee, and executive officers.

 

Our businesses and ability to compete could suffer if we fail to protect our intellectual property.

 

Our businesses depend upon our technology and know-how, which is largely developed internally. While we believe that none of our operating units is substantially dependent on any single patent, trademark, copyright or other form of intellectual property, we rely on a combination of patent protection, copyright and trademark laws, trade secrets protection, employee and third party confidentiality and nondisclosure agreements and technical measures to protect our intellectual property rights. There is a risk that the measures we take to protect our intellectual property rights may not be adequate to deter infringement, misappropriation or independent third-party development of our technology or to prevent an unauthorized third party from obtaining or using information or intellectual property that we regard as proprietary or to keep others from using brand names similar to our own. The disclosure, misappropriation or infringement of our intellectual property could harm our competitive position. In addition, our actions to enforce our rights may result in substantial costs and diversion of management and other resources. We may also be subject to intellectual property infringement claims from time to time, which may result in our incurring additional expenses and diverting our resources to respond to these claims.

 

Our ability to sell our products could suffer if transportation for our products becomes unavailable or uneconomic for our customers.

 

Transportation costs are a critical factor in a customer’s purchasing decision. Increases in transportation costs could make our ductile iron pipe and other products less competitive with the same or alternative products from competitors.

 

We typically depend upon rail, barge and trucking systems to deliver our products to customers. While our customers typically arrange and pay for transportation from our factory to the point of use, disruption of these transportation services because of weather-related problems, strikes, lock-outs or other events could temporarily impair our ability to supply our products to our customers thereby resulting in lost sales and reduced profitability.

 

Our required pension contributions may increase.

 

A significant portion of the assets invested in our defined benefit pension plans are invested in equity securities. A large majority of equity securities have declined in value during the general timeframe of late September through the latter part of November 2008 in response to general economic turmoil and the credit crisis in particular. The level of pension plan assets compared to pension plan liabilities at various

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.

 

 

We may have substantial additional liability for federal income tax allegedly owed by Walter Industries.

 

Each member of a consolidated group for federal income tax purposes is severally liable for the federal income tax liability of each other member of the consolidated group for any year in which it is a member of the group at any time during such year. Each member of the Walter Industries consolidated group, which included us (including our subsidiaries) through December 14, 2006, is also jointly and severally liable for pension and benefit funding and termination liabilities of other group members, as well as certain benefit plan taxes. Accordingly, we could be liable under such provisions in the event any such liability is incurred, and not discharged, by any other member of the Walter Industries consolidated group for any period during which we were included in the Walter Industries consolidated group.

 

A dispute exists with regard to federal income taxes for fiscal years 1980 to 1994 and 1999 to 2001 allegedly owed by the Walter Industries consolidated group, which included U.S. Pipe during these periods. According to Walter Industries’ quarterly report on Form 10-Q for the period ended September 30, 2008, Walter Industries’ management estimates that the amount of tax claimed by the IRS is approximately $34.0 million for issues currently in dispute in bankruptcy court for matters unrelated to us. This amount is subject to interest and penalties. In addition, the Internal Revenue Service has issued a Notice of Proposed Deficiency assessing additional tax of $82.2 million for the Walter Industries tax years ended May 31, 2000, December 31, 2000 and December 31, 2001. As a matter of law, we are jointly and severally liable for any final tax determination, which means that in the event Walter Industries is unable to pay any amounts owed, we would be liable. Walter Industries disclosed in the above mentioned Form 10-Q that they believe their filing positions have substantial merit and that they intend to defend vigorously any claims asserted.

 

The tax allocation agreement between us and Walter Industries allocates to us certain tax risks associated with the Spin-off.

 

Walter Industries effectively controlled all of our tax decisions for periods during which we were a member of the Walter Industries consolidated federal income tax group and certain combined, consolidated or unitary state and local income tax groups. Under the terms of the income tax allocation agreement between Walter Industries and us dated May 26, 2006, we generally compute our tax liability on a stand-alone basis, but Walter Industries has sole authority to respond to and conduct all tax proceedings (including tax audits) relating to our federal income and combined state returns, to file all such returns on behalf of us and to determine the amount of our liability to (or entitlement to payment from) Walter Industries for such periods. This arrangement may result in conflicts of interests between us and Walter Industries. In addition, the tax allocation agreement provides that if the Spin-off is determined not to be tax-free pursuant to Section 355 of the Internal Revenue Code of 1986, as amended, we generally will be responsible for any taxes incurred by Walter Industries or its shareholders if such taxes result from certain of our actions or omissions and for a percentage of any such taxes that are not a result of our actions or omissions or Walter Industries’ actions or omissions or taxes based upon our market value relative to Walter Industries’ market value. Additionally, to the extent that Walter Industries was unable to pay taxes, if any, attributable to the Spin-off and for which it is responsible under our tax allocation agreement, we could be liable for those taxes as a result of being a member of the Walter Industries consolidated group for the year in which the Spin-off occurred.

 

 

None.

 

Our principal properties are listed below.

 

 

We consider our facilities to be well-maintained and believe we have sufficient capacity to meet our anticipated needs through fiscal 2009. All of our U.S. facility leases and leasehold interests are encumbered by liens securing our obligations under our senior credit facilities. Our leased properties have terms expiring at various dates through September 2017.

 

We are involved in various legal proceedings that have arisen in the normal course of operations, including the proceedings summarized below. The effect of the outcome of these matters on our future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. Other than the litigation described below, we do not believe that any of our outstanding litigation would have a material adverse effect on our businesses, operations or prospects.

 

Environmental.  We are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of many of our plants and with respect to remediating environmental conditions that may exist at our own and other properties. We strive to maintain substantial compliance with federal, state and local environmental laws and regulations. We accrue for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable. These expenses were $6.8 million, $8.0 million and $2.3 million during fiscal 2008, 2007 and 2006, respectively. We capitalize environmental expenditures that increase the life or efficiency of property or reduce or prevent environmental contamination. Capital expenditures for environmental requirements are anticipated to be approximately $3.2 million during fiscal 2009. Capitalized environmental-related expenditures were $2.9 million, $16.2 million and $4.7 million during fiscal 2008, 2007 and 2006, respectively.

 

In September 1987, we implemented an Administrative Consent Order (“ACO”) for our Burlington, New Jersey plant that was required under the New Jersey Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act). The ACO required soil and ground water cleanup, and we have completed, and have received final approval on, the soil cleanup required by the ACO. U.S. Pipe continues to pump and treat ground water at this site. Further remediation could be required. We expect any such remediation costs to be minimal. Long-term ground water monitoring is also required to verify natural attenuation. We do not know how long ground water monitoring will be also required, and do not believe monitoring or further cleanup costs, if any, will have a material adverse effect on our financial condition or results of operations.

 

In June 2003, Solutia Inc. and Pharmacia Corporation (collectively, “Solutia”) filed suit against U.S. Pipe and a number of co-defendant foundry-related companies in the U.S. District Court for the Northern District of Alabama for contribution and cost recovery allegedly incurred and to be incurred by Solutia in performing remediation of polychlorinated biphenyls (“PCBs”) and heavy metals in Anniston, Alabama, pursuant to a partial consent degree with the Environmental Protection Agency (“EPA”). U.S. Pipe and certain co-defendants subsequently reached a settlement with the EPA concerning their liability for certain contamination in and around Anniston, which was memorialized in an AOC that became effective in January 2006. U.S. Pipe has reached a settlement agreement whereby Phelps Dodge Industries, Inc., a co-defendant and co-respondent on the AOC, has assumed U.S. Pipe’s obligation to perform the work required under the AOC.

 

U.S. Pipe and the other settling defendants contend that the legal effect of the Administrative Order and Order on Consent (“AOC”) extinguishes Solutia’s claims and they filed a motion for summary judgment to that effect. Discovery in this matter was stayed while the motion for summary judgment was pending. The court recently issued a summary judgment order, holding that plaintiffs’ claims for contribution are barred by the AOC but giving plaintiffs the right to seek to recover cleanup costs they voluntarily incurred. The court granted a motion for immediate appeal to the Eleventh Circuit Court of Appeals, but the Eleventh Circuit Court of Appeals declined to take the appeal. We currently have no basis to form a view with respect to the probability or amount of liability in this matter.

 

U.S. Pipe and a number of co-defendant foundry-related companies were named in a putative civil class action case originally filed in April 2005 in the Circuit Court of Calhoun County, Alabama, and removed by defendants to the U.S. District Court for the Northern District of Alabama under the Class Action Fairness Act. The putative plaintiffs in the case filed an amended complaint with the U.S. District Court in December 2006. The amended complaint alleged state law tort claims (negligence, failure to warn, wantonness, nuisance, trespass and outrage) arising from the creation and disposal of “foundry sand” alleged to contain harmful levels of PCBs and other toxins, including arsenic, cadmium, chromium, lead and zinc. The plaintiffs originally sought damages for real and personal property and for other unspecified personal injury. On June 4, 2007, a motion to dismiss was granted to U.S. Pipe and certain co-defendants as to the claims for

negligence, failure to warn, nuisance, trespass and outrage. The remainder of the complaint was dismissed with leave to file an amended complaint. On July 6, 2007, plaintiffs filed a second amended complaint, which dismissed prior claims relating to U.S. Pipe’s former facility located at 2101 West 10^th Street in Anniston, Alabama and no longer alleges personal injury claims. Plaintiffs filed a third amended complaint on July 27, 2007. U.S. Pipe and the other defendants have moved to dismiss the third amended complaint. On September 24, 2008, the court issued an order on the motion, dismissing the claims for trespass and permitting the plaintiffs to move forward with their claims of nuisance, wantonness and negligence. We believe that numerous procedural and substantive defenses are available. At present, we have no reasonable basis to form a view with respect to the probability or amount of liability in this matter.

 

Environmental advocacy groups, relying on standards established by California’s Proposition 65, are seeking to eliminate or reduce the content of lead in water infrastructure products offered for sale in California and other jurisdictions. Some of our subsidiaries previously entered into settlement agreements with these environmental advocacy groups to modify products or offer substitutes for sale in California. California recently passed Assembly Bill No. 1953 that redefines, as of January 1, 2010, the term “lead free” to refer to a weighted average lead content of the wetted surface area of the pipes, fittings and fixtures of not more than 0.25%. Legislation to substantially restrict lead content in water infrastructure products also has been introduced in the U.S. Congress. Congress or state jurisdictions may enact similar legislation to restrict the content of lead in water products. Although Mueller Co. now produces no-lead brass products, most of Mueller Co.’s brass valve products contain small amounts of lead.

 

In March 2004, Anvil entered into a Consent Order with the Georgia Department of Natural Resources regarding alleged hazardous waste violations at Anvil’s former foundry facility in Statesboro, Georgia. Pursuant to the Consent Order, we agreed to pay a monetary fine of $50,000 and pay an additional $50,000 to fund a supplemental environmental project. We have also agreed to perform various investigatory and remedial actions at our foundry and landfill. These total estimated costs have been accrued.

 

During fiscal 2008 and 2007, we incurred a total of approximately $11.4 million of capital expenditures at our iron foundries to comply with the EPA’s National Emissions Standards for Hazardous Air Pollutants, which were issued in April 2004.

 

Although no assurances can be given that we will not be required in the future to make material expenditures relating to environmental laws or legally mandated site cleanup, we do not believe at this time that the compliance and cleanup costs, if any, associated with the current laws and sites for which we have cleanup liability or any other future sites will have a material adverse effect on our financial condition or results of operations.

 

In fiscal 2007 and 2005, we entered into settlement and release agreements with a former insurer whereby the former insurer agreed to pay $1.6 million and $5.1 million, respectively, net of legal fees, to us for historical insurance claims we had previously expensed as incurred. Such claims had not previously been submitted to the insurance company for reimbursement. We released the insurer of both past and future claims.

 

In the acquisition agreement pursuant to which a predecessor to Tyco International Ltd. (“Tyco”) sold our Mueller Co. and Anvil businesses to the prior owners of these businesses in August 1999, Tyco agreed to indemnify us and our affiliates, among other things, for all “Excluded Liabilities.” Excluded Liabilities include, among other things, substantially all liabilities relating to the time prior to August 1999. The indemnity survives indefinitely and is not subject to any deductibles or caps. However, we may be responsible for these liabilities in the event that Tyco ever becomes financially unable to or otherwise fails to comply with the terms of the indemnity. In addition, Tyco’s indemnity does not cover liabilities to the extent caused by us or the operation of our businesses after August 1999, nor does it cover liabilities arising with respect to businesses or sites acquired after August 1999. In June 2007, Tyco was separated into three separate publicly traded companies. Should the entity or entities that assumed Tyco’s obligations under the acquisition agreement ever become financially unable or fail to comply with the terms of the indemnity, we may be responsible for such obligations or liabilities.

 

Other Litigation.  We are parties to a number of other lawsuits arising in the ordinary course of our businesses, including product liability cases for products manufactured by us or third parties. We provide for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Administrative costs related to these matters are expensed as incurred. The effect of the outcome of these matters on our

future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such other litigation is not likely to have a materially adverse effect on our consolidated financial statements.

 

 

No matters were submitted to a vote of security holders during the quarter ended September 30, 2008.

 

 

Our Series A common stock has been listed on the New York Stock Exchange under the trading symbol MWA since May 26, 2006. Our Series B common stock has been listed on the New York Stock Exchange under the trading symbol MWA.B since December 14, 2006. Covenants contained in certain of the debt instruments referred to in Note 7 of “Notes to Consolidated Financial Statements” may restrict the amount we can pay in cash dividends. Future dividends will be declared at the discretion of our Board of Directors and will depend on our future earnings, financial condition and other factors.

 

The shares of Series A and Series B common stock have identical rights except that the Series A common stock has one vote per share and the Series B common stock has eight votes per share. The range of high and low sales prices of the Series A and Series B common stock and the dividends declared per share is presented below.

 

 

At September 30, 2008, there were 23 stockholders of record for our Series A common stock and 122 stockholders of record for our Series B common stock.

 

The information regarding our compensation plans under which equity securities are authorized for issuance is set forth in “Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCHOLDER MATTERS”.

 

We did not issue any unregistered securities during the year ended September 30, 2008.

 

During the three months ended September 30, 2008, we repurchased shares of our Series A common stock as presented below.

 

 

 

The following line graphs compare the cumulative quarterly stock market performance of our Series A common stock and our Series B common stock with the Russell 2000 Stock Index (“Russell 2000”) and the Dow Jones U.S. Building Materials & Fixtures Index (“DJ Building Materials & Fixtures”). Our Series A common stock first traded on May 30, 2006 and our Series B common stock first traded on December 15, 2006.

 

Total return values were calculated based on cumulative total return assuming (i) the investment of $100 in our common stock, the Russell 2000 and the DJ Building Materials & Fixtures on the dates indicated and (ii) reinvestment of all dividends.

Comparison of Cumulative Total Returns

Assumes Initial Investment of $100

Total Return since May 26, 2006

Series A Common Stock

 

 

Comparison of Cumulative Total Returns

Assumes Initial Investment of $100

Total Return since December 14, 2006

Series B Common Stock

 

 

On October 3, 2005, Walter Industries Inc. (“Walter Industries”) acquired all outstanding shares of capital stock representing the Mueller Co. and Anvil businesses and contributed its U.S. Pipe business to form the Company as it currently exists. U.S. Pipe was deemed the acquirer of Mueller Co. and Anvil. Accordingly, U.S. Pipe’s historical financial information is used for the Company prior to October 3, 2005. The Company’s results of operations include Mueller Co. and Anvil beginning October 3, 2005. Net income (loss) per share was determined using 85.8 million shares outstanding for all periods prior to our initial public offering in June 2006. Effective September 30, 2005, the Company changed its fiscal year end to September 30. This change resulted in a nine month fiscal period in 2005. The nine months ended September 30, 2004 (unaudited) are shown for comparative purposes only. The selected financial and other data presented below should be read in conjunction with, and are qualified by reference to, “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and the consolidated financial statements and notes thereto included elsewhere in this 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.

 

 

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:

 

 

Year Ended September 30, 2008 Compared to Year Ended September 30, 2007

 

 

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.

 

 

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

 

 

 

Consolidated Analysis

 

Net Sales.  Consolidated net sales for the year ended September 30, 2007 were $1,849.0 million, a decrease of $84.4 million, or 4.4%, from $1,933.4 million in fiscal 2006. Net sales decreases were principally caused by a downturn in residential construction demand. While volume related to repair and replacement work in the municipal sector increased year-over-year, it did not offset weakness in residential construction. Volume declines of approximately $204.0 million were partially offset by higher pricing of approximately $120.0 million and net sales from Fast Fabricators, which was acquired in January 2007. The prior year includes approximately $30.0 million of ductile iron pipe sales resulting from contractors substituting ductile iron pipe for plastic pipe in certain construction projects that were underway immediately after Hurricane Katrina due to the limited availability of plastic pipe.

 

Gross Profit.  Consolidated gross profit for the year ended September 30, 2007 was $463.2 million, an increase of $55.5 million, or 13.6% compared to $407.7 million in the prior year. Gross margin increased to 25.0% in fiscal 2007 compared to 21.1% in fiscal 2006. Excluding $91.7 million of prior year costs associated with the closure of U.S. Pipe’s Chattanooga, Tennessee plant and purchase accounting adjustments related to valuing Mueller Co. and Anvil inventory acquired October 3, 2005 at fair value, gross margin would have been 25.8% in the prior year.

 

The decline in margin excluding these adjustments is due primarily to reduced production and lower shipments of higher-margin water infrastructure products such as hydrants and valves, lower ductile iron pipe shipments and increased raw material and purchased component costs. A decline in sales volume and an initiative to lower inventory levels drove a decision to reduce production during the fourth quarter of fiscal 2007. Overall results were partially offset by higher pricing and synergy related cost savings associated with plant consolidations and other expense reduction initiatives.

 

Selling, General and Administrative Expenses.  Consolidated selling, general and administrative expenses for the year ended September 30, 2007 were $253.2, an increase of $3.1 million, or 1.2%, compared to $250.1 million in the prior year. Expenses as a percentage of net sales increased to 13.7% in fiscal 2007 compared to 12.9% fiscal 2006. The increase is due to higher overall costs associated with operating the Company on a stand-alone basis as a public company.

 

Facility Rationalization, Restructuring and Related Charges.  Restructuring costs of $28.6 million for the year ended September 30, 2006 were due to the closure of U.S. Pipe’s Chattanooga, Tennessee plant. These costs are comprised of fixed asset impairments of $21.5 million, severance for terminated hourly and salaried employees of $3.8 million, and other post-employment benefit costs of $3.3 million.

Interest Expense, Net of Interest Income.  Interest expense, net of interest income for the year ended September 30, 2007 was $86.8 million, compared to $107.4 million for the year ended September 30, 2006, as follows.

 

 

Interest expense on the Company’s outstanding debt obligations was $86.4 million, net of interest rate swap gains of $2.2 million in fiscal 2007, compared to $109.5 million, net of interest rate swap gains of $0.4 million in fiscal 2006. The Company refinanced its debt in May 2007 with lower interest rate debt and repaid $40.0 million of that debt in July 2007. In the prior year, the Company used proceeds from its June 2006 initial public offering to reduce debt. These actions contributed to lower interest expense in fiscal 2007 as compared to fiscal 2006. Other, net in fiscal 2007 includes $1.9 million related to certain state income tax exposure, partially offset by $0.8 million of capitalized interest. Other, net for fiscal 2006 was comprised primarily of a $2.5 million bridge loan fee incurred in connection with financing the October 2005 acquisition of Mueller Co. and Anvil. Interest income for fiscal 2006 includes a $2.9 million prepayment penalty and $1.8 million in interest income earned on a loan to the Company’s former parent.

 

Loss on Early Extinguishment of Debt.  Loss on early extinguishment of debt for the fiscal year ended September 30, 2007 was $36.5 million compared to $8.5 million in the prior year. In May 2007, the Company retired its outstanding senior subordinated notes and senior discount notes primarily with the proceeds from the issuance of $425.0 million of 73/8% Senior Subordinated Notes and amended its credit agreement. During fiscal 2006, the Company partially redeemed outstanding debt using the net proceeds from its initial public offering.

 

Income Tax Expense.  Income tax expense for fiscal 2007 was $38.5 million as compared to $8.0 million in fiscal 2006. The effective tax rates for fiscal year 2007 and fiscal year 2006 were 44.4% and 61.1%, respectively. The estimated effective tax rates differ from the statutory rate primarily due to non-deductible interest, non-deductible compensation, manufacturing production deductions and state income taxes. In addition, fiscal 2007 included $1.1 million of state income tax expense with respect to certain state income tax matters associated with the October 2005 acquisition of Mueller Co. and Anvil.

 

Segment Analysis

 

Mueller Co.  Mueller Co. segment net sales for the year ended September 30, 2007 were $756.1 million, a decrease of $48.0 million, or 6.0% from $804.1 million in the prior year. This decline is primarily due to lower volumes of iron gate valves, hydrants, and brass products partially offset by the effect of price increases. These reduced unit volumes were the result of continuing weakness in residential construction. Distributor orders that were placed before the effective dates of May and June 2006 price increases also contributed to an overall higher level of shipments in the fourth quarter of fiscal 2006.

 

Mueller Co. segment gross profit for the year ended September 30, 2007 was $235.8 million, an increase of $12.8 million, or 5.7% compared to $223.0 million in the prior year. Gross margin increased to 31.2% in the current year compared to 27.7% in the prior year. Included in cost of sales in the prior year were $53.1 million of purchase accounting adjustments related to valuing Mueller Co.’s inventory acquired in October 2005 at fair value. Excluding the impact of these adjustments, gross margin would have been 34.3%. The decline in margin excluding these adjustments is due primarily to volume declines in higher-margin iron gate valves and hydrants, higher raw material and purchased component costs, and reduced manufacturing production that led to higher per unit overhead costs. The effects of these items were partially offset by higher pricing.

Mueller Co. segment income from operations for the year ended September 30, 2007 was $154.7 million, an increase of $10.0 million compared to $144.7 million in the prior year. Excluding $53.1 million of purchase accounting adjustments discussed above, and the causes of the changes in gross profit, there was an increase in certain administrative costs, primarily related to personnel costs that were previously reported as Corporate costs prior to being a stand-alone public company.

 

U.S. Pipe.  U.S. Pipe segment net sales for the year ended September 30, 2007 were $537.1 million, a decrease of $57.6 million, or 9.7% from $594.7 million in the prior year. Net sales decreased primarily due to volume declines during the current year of approximately $101.0 million, partially offset by higher selling prices, sales of higher margin products and sales resulting from the acquisition of Fast Fabricators, which was acquired in January 2007. Volume declines were attributable to a weak residential construction market and were partially offset by increased sales for repair and replacement products. The prior year includes approximately $30.0 million of sales of ductile iron pipe that customers substituted for unavailable PVC pipe as a result of Hurricane Katrina and approximately $15.4 million of net sales from valves and hydrants manufactured at U.S. Pipe’s Chattanooga, Tennessee plant. Effective January 1, 2006, U.S. Pipe branded valve and hydrant manufacturing was transferred to the Mueller Co. segment.

 

U.S. Pipe segment gross profit for the year ended September 30, 2007 was $78.0 million, an increase of $15.5 million, or 24.8%, compared to $62.5 million in the prior year. Gross margin increased to 14.5% in the current year compared to 10.5% in the prior year. Excluding $21.3 million of Chattanooga closure-related costs included in cost of sales, the prior year gross margin would have been 14.1%. Increased pricing offset higher raw material costs.

 

U.S. Pipe segment income from operations for the year ended September 30, 2007 was $33.4 million, an increase of $50.4 million compared to a loss from operations of $17.0 million in the prior year. The current year includes the result of the Fast Fabricators acquisition completed in January 2007, as well as certain cost reductions in selling, general and administrative costs. The prior year included $49.9 million of Chattanooga restructuring and closure-related costs and an additional $4.2 million in related party corporate charges.

 

Anvil.  Anvil segment net sales for the year ended September 30, 2007 were $555.8 million, an increase of $21.2 million, or 4.0%, from $534.6 million in the prior year. The increase was due primarily to higher selling prices.

 

Anvil segment gross profit for the year ended September 30, 2007 was $149.6 million, an increase of $27.0 million, or 22.0%, compared to $122.6 million in the prior year. Gross margin increased to 26.9% in the current year compared to 22.9% in the prior year. Excluding $17.3 million of prior year purchase accounting adjustments related to the fair value of Anvil’s inventory acquired in October 2005, gross margin in the prior year would have been 26.2%. The increase in margin excluding these costs is due primarily to higher selling prices.

 

Anvil segment income from operations for the fiscal year ended September 30, 2007 was $57.4 million compared to $31.8 million in the prior year. The current year includes approximately $2.7 million of anti-dumping duties received from the federal government. The remaining increase is primarily related to the $17.3 million of prior year purchase accounting adjustments discussed above and increased selling prices.

 

Corporate.  Corporate expenses for the year ended September 30, 2007 were $35.3 million compared to $30.1 million in the prior year. The increase is due to higher overall costs associated with operating the Company on a stand-alone basis as a public company. On December 14, 2006, the remaining 75% of the Company not already publicly traded was distributed in a tax-free spin-off from its former parent company. As a result, a separate corporate headquarters office was created and established in Atlanta, Georgia during the first quarter of fiscal 2007. This corporate office provides functions including, but not limited to, treasury, risk, management, legal, accounting, human resources, investor relations, and business planning and analysis. The costs of these functions as well as costs related to Sarbanes-Oxley compliance and the annual audit of our consolidated financial statements are reported as corporate items. Fiscal 2006 expenses of $8.0 million for services previously provided by its former parent were recorded by U.S. Pipe. These charges were discontinued in conjunction with our separation

from our former parent in December 2006. The only costs we incur that are allocated to our segments are personnel and benefit costs directly attributable to segment employees.

 

 

Cash and cash equivalents were $183.9 million at September 30, 2008 compared to $98.9 million at September 30, 2007. Cash and cash equivalents increased during fiscal 2008 as a result of cash provided by operating activities of $182.0 million exceeding the cash used in investing activities and financing activities of $78.5 million and $18.1 million, respectively. Cash and cash equivalents decreased $0.4 million during fiscal 2008 due to changes in currency exchange rates. Other than commitments in the normal course of business, which are relatively minor, all of the cash and cash equivalents at September 30, 2008 can be considered available for general corporate purposes.

 

Receivables, net were $298.2 million at September 30, 2008 compared to $302.1 million at September 30, 2007. Receivables at September 30, 2008 represented approximately 54.6 days sales compared to September 30, 2007 receivables representing approximately 57.9 days sales, each calculated using the respective fourth quarter sales. Management considers this variation in days sales in receivables normal as this measure has typically been in the mid-50s in recent years.

 

Inventories were $459.4 million at September 30, 2008 compared to $453.5 million at September 30, 2007. Raw material costs were higher at the end of fiscal 2008 compared to fiscal 2007. Although inventory dollar balances were greater at the end of fiscal 2008, quantities were lower. There was slightly over three months sales in inventory near the end of fiscal 2008 compared to approximately four months sales in inventory at the end of September 2007. Inventory turns near the end of fiscal 2008 were generally at their highest level over the past several years as we began tighter management of our inventory levels in the latter part of fiscal 2007.

 

Property, plant and equipment, net were $356.8 million at September 30, 2008 compared to $351.8 million at September 30, 2007. Capital expenditures were $88.1 million during fiscal 2008 compared to depreciation of $62.3 million (depreciation related to other current assets was $1.3 million) and asset impairment charges of $11.8 million. Other activity during fiscal 2008 included some minor disposals and currency translation adjustments. The majority of capital expenditures during fiscal 2008 were related to the construction of a new automated ductile iron pipe manufacturing operation in Bessemer, Alabama. Capital expenditures for fiscal 2009 are expected to be between $50 million and $60 million.

 

Goodwill was $871.5 million at September 30, 2008 compared to $871.1 million at September 30, 2007. The change during fiscal 2008 resulted from the adoption of new income tax accounting rules on October 1, 2007. Goodwill is not amortized. It is reviewed at least annually for possible impairment. We concluded from our annual review at September 1, 2008 that the carrying amount of goodwill had not been impaired. We also concluded that no events occurred during fiscal 2008 requiring testing for possible impairment at any other date.

 

Identifiable intangible assets were $789.8 million at September 30, 2008 compared to $819.3 million at September 30, 2007. Finite-lived intangible assets, $385.3 million of net book value at September 30, 2008, are amortized over their estimated useful lives. Such amortization expense was $29.5 million during fiscal 2008 and is expected to be a similar amount for each of the next five years. Indefinite-lived identifiable intangible assets, $404.5 million at September 30, 2008, are not amortized, but tested at least annually for possible impairment. We concluded from our annual review at September 1, 2008 that the carrying amount of its indefinite-life identifiable intangible assets had not been impaired. We also concluded that no events occurred during fiscal 2008 requiring testing for possible impairment at any other date.

 

Accounts payable and other current liabilities were $285.0 million at September 30, 2008 compared to $234.1 million at September 30, 2007. Compared to quarterly spending activity, these amounts represented approximately 56 days of purchases at September 30, 2008 compared to approximately 54 days of purchases at September 30, 2007, each of which is consistent with recent historical trends. Inventory purchases were significantly higher during the fourth quarter of fiscal 2008 compared to fiscal 2007. There is significant variability regarding the payment patterns for various purchases, ranging from payroll which is very fast to incentive compensation and customer rebates that might only be paid once per year.

Outstanding borrowings were $1,095.5 million at September 30, 2008 compared to $1,100.5 million at September 30, 2007. The decrease of $5.0 million during fiscal 2008 was essentially the quarterly payments due on the Term Loan B under the 2007 Credit Agreement. Principal payments due during fiscal 2009 are $9.7 million.

 

Deferred income taxes were net liabilities of $247.6 million at September 30, 2008 compared to net liabilities of $278.1 million at September 30, 2007. Deferred tax liabilities related to property, plant and equipment, goodwill and identifiable intangible assets were $322.2 million and $332.7 million at September 30, 2008 and 2007, respectively.

 

We had cash and cash equivalents of $183.9 million at September 30, 2008 and $261.9 million of borrowing capacity under the revolving credit facility component of our 2007 Credit Agreement. Our operating activities generated $182.0 million, $155.1 million and $107.6 million of cash during fiscal 2008, 2007 and 2006, respectively.

 

We anticipate that our existing cash, cash equivalents and borrowing capacity combined with our expected operating cash flows will be sufficient to meet our anticipated operating expenses, capital expenditures, pension contributions and debt service obligations as they become due for at least the next twelve months. However, our ability to make scheduled payments of principal of, to pay interest on or to refinance our debt and to satisfy our other debt obligations will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

 

The 2007 Credit Agreement includes a Term Loan A, a Term Loan B and a revolving credit facility. The Term Loan A, $141.6 million owed at September 30, 2008, accrues interest at LIBOR plus a margin of up to 175 basis points and is payable $3.5 million per quarter beginning September 2009 with the balance due May 2012. The Term Loan B, $526.7 million owed at September 30, 2008, accrues interest at LIBOR plus 175 basis points and is payable $1.3 million per quarter with the balance due May 2014. The revolving credit facility provides for borrowings of up to $300 million, including letters of credit and terminates in May 2012. At September 30, 2008, letters of credit outstanding under the revolving credit facility were $38.1 million. Borrowings under the revolving credit facility bear interest at LIBOR plus a margin of up to 175 basis points. The margin on Term Loan A borrowings and the revolving credit facility was 150 basis points at September 30, 2008.

 

We pay a commitment fee on the unused portion of the revolving credit facility. This fee is payable quarterly in arrears and upon the maturity or termination of the revolving credit facility. The fee is subject to adjustment based on the leverage ratio. The fee was 0.375% at September 30, 2008.

 

The 2007 Credit Agreement is subject to mandatory prepayment with the net cash proceeds from the sale or other disposition of any property or assets, subject to permitted reinvestments and other specified exceptions. All mandatory prepayment amounts are applied to the prepayment of the term loans pro rata between the Term Loan A and the Term Loan B to reduce the remaining amortization payments of each term loan.

 

All of our material direct and indirect U.S. restricted subsidiaries are guarantors of the 2007 Credit Agreement. Our obligations under the 2007 Credit Agreement are secured by:

 

 

The 2007 Credit Agreement contains customary negative covenants and restrictions on our ability to engage in specified activities and contains financial covenants requiring us to maintain a specified consolidated leverage ratio decreasing over time and an interest charge coverage ratio on a quarterly basis. Borrowings under the revolving credit facility are subject to significant conditions, including compliance with the financial ratios included in the 2007 Credit Agreement and the absence of any material adverse change.

 

We were in compliance with all applicable debt covenants at September 30, 2008 and anticipate maintaining such compliance.

 

We also owed $425.0 million of principal of 73/8% Senior Subordinated Notes (“Senior Notes”) at September 30, 2008. Interest on the Senior Notes is payable semi-annually and the principal is due June 2017. We may redeem any portion of the of the Senior Notes after May 2012 at specified redemption prices or prior to June 2010 we may redeem up to 35% of the Senior Notes at a redemption price of 107.375% of the principal amount, plus accrued and unpaid interest with the net cash proceeds of certain equity offerings. Upon the occurrence of a change in control, we must offer to repurchase the Senior Notes at 101% of their principal amount, plus accrued and unpaid interest. The Senior Notes are secured by the guarantees of essentially all of our U.S. subsidiaries, but are subordinate to the borrowings under the 2007 Credit Agreement.

 

At September 30, 2008, our credit ratings issued by Moody’s and Standard & Poor’s were as follows. Any changes from the ratings at September 30, 2007 have been noted.

 

 

(1) “Positive” at September 30, 2007

 

A significant portion of the assets invested in our defined benefit pension plans are invested in equity securities. A large majority of equity securities have declined in value during the general timeframe of late September through the latter part of November 2008 in response to general economic turmoil and the credit crisis in particular. The level of pension plan assets compared to pension plan liabilities at various measurement dates influences the level of future contributions to be made to these pension plans. The reduced value of pension plan assets could increase future pension plan contributions. Our upcoming pension plan contribution requirements will be determined by an analysis at January 1, 2009, which will not be concluded until later in 2009. As a result of the general decline in equity values and credit crisis, there may be legislative changes that occur that may change or otherwise provide relief for pension plan contributions that might otherwise become due relatively soon. We believe pension plan contributions to be made during fiscal 2009 will be at least $7.3 million but may exceed that amount due to both required minimum contributions and additional voluntary contributions. We anticipate the total pension plan contributions for fiscal 2009 will be approximately $20 million.

 

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not have any undisclosed borrowings or debt or any derivative contracts other than those described in “Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK” or synthetic leases. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.

 

We use letters of credit and surety bonds in the ordinary course of business to ensure its performance of contractual obligations. At September 30, 2008, we had $38.1 million of letters of credit and $18.9 million of surety bonds outstanding.

 

Our contractual obligations at September 30, 2008 are presented below.

 

 

 

We experience changing price levels related to purchases of raw materials and purchased components. The average purchased costs of scrap iron at U.S. Pipe and brass ingot at Mueller Co. in fiscal 2008 were 42% and 11%, respectively, higher than in fiscal 2007. We do not believe that changing prices for other goods had a material impact on our financial position or results of operations.

 

Our business is dependent upon the construction industry, which is seasonal due to the impact of cold and wet weather conditions. Net sales and operating income have historically been lowest in the three month periods ending December 31 and March 31 when the northern United States and all of Canada generally face weather conditions that restrict significant construction activity. Inventory levels tend to be highest in the three month periods ending March 31 and June 30 as we prepare for our peak selling periods. Receivables tend to be highest in the three month periods ending June 30 and September 30 as these are also the highest sales periods.

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. These estimates are based upon experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates. We consider an accounting estimate to be critical if changes in the estimate that are reasonably likely to occur over time or the use of reasonably different estimates could have a material impact on our financial condition or results of operations. We consider the accounting topics presented below to include our critical accounting estimates.

Revenue Recognition

 

We recognize revenue when delivery of a product has occurred and there is persuasive evidence of a sales arrangement, sales prices are fixed and determinable and collectability from the customers is reasonably assured. Sales are recorded net of estimated cash discounts and rebates.

 

Receivables

 

The estimated allowance for doubtful receivables is based upon judgments and estimates of expected losses and specific identification of problem accounts. Significantly weaker than anticipated industry or economic conditions could impact customers’ ability to pay such that actual losses may be greater than the amounts provided for in this allowance. The periodic evaluation of the adequacy of the allowance for doubtful receivables is based on an analysis of prior collection experience, specific customer creditworthiness and current economic trends within the industries served. In circumstances where a specific customer’s inability to meet its financial obligation is known to us (e.g., bankruptcy filings or substantial downgrading of credit ratings), we record a specific allowance to reduce the receivable to the amount we reasonably believe will be collected.

 

Inventories

 

We record inventories at the lower of cost using the first-in, first-out method or market value. Inventory cost includes an overhead component that can be affected by levels of production and actual costs incurred. We evaluate the need to record adjustments for impairment of inventory at least quarterly. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels and ultimate product sales value. Inventory that, in the judgment of management, is obsolete or in excess of our normal usage is written-down to its estimated market value, if less than its cost. Significant judgments must be made when establishing the reserve for obsolete and excess inventory.

 

Income Taxes

 

We recognize deferred tax liabilities and deferred tax assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the differences between the financial statements and the tax basis of assets and liabilities, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. If we were to reduce our estimates of future taxable income, we could be required to record additional valuation allowances against our deferred tax assets. Our tax balances are based on our expectations of future operating performance, tax planning strategies, interpretation of the tax regulations currently enacted and rulings in numerous tax jurisdictions.

 

We only record tax benefits for positions that we believe are more likely than not of being sustained under audit examination based solely on the technical merits of the associated tax position. The amount of tax benefit recognized for any position that meets the more likely than not threshold is the largest amount of the tax benefit that we believe is greater than 50% likely of being realized.

 

Accounting for the Impairment of Long-Lived Assets Including Goodwill and Other Intangible Assets

 

We test long-lived assets, including goodwill and intangible assets that have an indefinite life, for impairment annually (or more frequently if events or circumstances indicate possible impairments). Finite-lived intangible assets are amortized over their respective estimated useful lives and reviewed if events or circumstances indicate possible impairment. We perform our annual impairment testing at September 1.

 

We test goodwill for possible impairment by first determining the fair value of the related reporting unit and comparing this value to the recorded net assets of the reporting unit, including goodwill. Fair value is determined using a combination of a discounted cash flow model and stock market comparable valuations for a peer group of companies. Significant judgments and estimates must be made when estimating