Mueller Water Products, Inc. (Mueller Water) has reported net sales of $367.7 million for the first quarter of fiscal 2009, compared with the net sales of $412.3 million in the year-ago quarter. It has also reported a net loss of $400 million, or $3.47 loss per share, for the first quarter of fiscal 2009, compared with the net loss of $1.6 million, or $0.01 loss per share, in the year-ago quarter.
Loss from operations for the 2009 first quarter was $387.1 million compared to income of $16.4 million for the 2008 first quarter. Excluding the goodwill impairment charge and the restructuring items associated with the closure of US. Pipe’s manufacturing operations in Burlington, New Jersey., adjusted income from operations for the 2009 first quarter was $12.7 million compared to $32.6 million for the 2008 first quarter. Adjusted operating income margin was 3.5%in the 2009 first quarter compared to 7.9% in the 2008 first quarter.
Adjusted EBITDA was $35.5 million in the 2009 first quarter compared to $56.2 million in the 2008 first quarter. Adjusted EBITDA margin for the 2009 first quarter was 9.7% compared to 13.6% in the 2008 first quarter.
During the 2009 first quarter, the company determined that the significant deterioration of equity markets made it more likely than not that the carrying amount of its goodwill was impaired and recorded an estimated impairment charge of $400 million.
Adjusted net income per diluted share was $0.00 for the 2009 first quarter compared to $0.07 for the 2008 first quarter.
Net debt, which is total debt less cash and cash equivalents, at December 31, 2008 decreased to $937.2 million from $962.2 million at December 31, 2007.
Demand for our products dropped significantly during the first quarter of fiscal 2009, with shipments of our core water infrastructure products down between 30% and 40% year-over-year. A sharp decline in municipal spending that had been growing in prior quarters was the primary driver of this drop-off in orders, said Gregory E. Hyland, chairman, president and chief executive officer of Mueller Water Products. The liquidity crisis, budget shortfalls and uncertainty surrounding the proposed federal stimulus bill all factored into the decline in municipal spending. Until we see improvement in our markets, we will continue to be aggressive in taking actions to offset the volume decline, including reducing headcount and temporarily shutting down manufacturing operations. We will take the steps necessary to respond to near-term market conditions while ensuring we are well-positioned to address the mounting water infrastructure needs in the future.
First Quarter Consolidated Results
Net sales for the quarter decreased $44.6 million year-over-year due to lower shipment volumes of $80.0 million across all business segments and unfavorable Canadian currency exchange rates, which were partially offset by price increases implemented in 2008.
Adjusted income from operations for the quarter of $12.7 million decreased $19.9 million from the prior year period. 2009 first quarter adjusted income from operations was negatively impacted by higher raw material costs and lower shipment volumes, partially offset by higher sales pricing, cost savings and the gain on the sale of a building.
First Quarter Segment Results
Mueller Co. Segment
Net sales for the Mueller Co. segment of $119.6 million in the 2009 first quarter declined from 2008 first quarter net sales of $161.6 million. Lower shipment volumes of $49.0 million were partially offset by higher pricing of $8.8 million. Shipment volumes of iron gate valves, hydrants and brass service products in the quarter were below the prior year period.
Adjusted income from operations of $8.5 million and adjusted EBITDA of $20.8 million in the 2009 first quarter compare to $24.8 million and $37.4 million, respectively, in the 2008 first quarter. Adjusted income from operations was reduced primarily by $21.2 million of lower shipment volumes and $6.1 million of higher costs of raw materials, partially offset by cost reductions of $4.6 million and the higher sales pricing.
US Pipe Segment
Net sales for the US. Pipe segment increased in the 2009 first quarter to $115.7 million from $110.7 million in the 2008 first quarter. The sales increase was attributable to $22.8 million of higher pricing partially offset by $17.8 million of lower volume of ductile iron pipe shipments. Higher pricing did not cover our higher costs of raw materials.
Adjusted loss from operations of $6.5 million and an adjusted EBITDA loss of $0.4 million in the 2009 first quarter compare to adjusted income from operations of $0.9 million and adjusted EBITDA of $6.8 million in the 2008 first quarter. The 2009 first quarter results were negatively impacted by increased raw material costs of $30.4 million and $4.7 million related to lower shipment volumes. These items were partially offset by cost savings of $4.4 million and the higher sales pricing.
Net sales for the Anvil segment of $132.4 million in the 2009 first quarter declined from 2008 first quarter net sales of $140.0 million. The net sales decline was driven by $13.2 million of lower shipment volumes and $6.6 million due to unfavorable Canadian currency exchange rates. This decline was partially offset by higher sales pricing of $12.2 million.
Income from operations of $21.3 million and EBITDA of $25.5 million in the 2009 first quarter compare to $15.9 million and $20.9 million, respectively, in the 2008 first quarter. Income from operations increased principally due to higher sales pricing and a $3.5 million gain on the sale of a building. The 2009 first quarter results were reduced by higher raw material costs of $3.5 million and under-absorbed overhead of $4.7 million.
Goodwill Impairment Charge
As a result of the significant deterioration of equity markets in fiscal first quarter 2009, the company evaluated its goodwill and other indefinite-lived intangible assets for possible impairment. Due to higher discount rates, the company determined that its goodwill was impaired and recorded an estimated impairment charge of $400 million. The final impairment analysis requires a fair value determination of the company’s recorded and unrecorded assets and liabilities, and the estimation of these fair values has not been completed at this time. Any revision to the estimated impairment charge will be recorded during the 2009 second quarter and is expected not to exceed an additional $200 million.
The impairment charge is a non-cash item and therefore will not result in any cash expenditures and will not affect the company’s cash position, cash flows from operating activities, free cash flow, liquidity position or availability under its credit facilities. Further, this charge is excluded from all of the company’s financial results in evaluating financial covenants under its debt agreements.
Burlington Closure Restructuring Charges
In 2008, the company closed US. Pipe’s manufacturing operations in Burlington, N.J. while retaining the facility as a full-service distribution center for customers in the Northeast. In connection with this action, the company recorded restructuring charges of $16.2 million, or $0.08 per share after tax, in the 2008 first quarter. The company expects to incur the remaining charges of less than $1.0 million over the next six months.
Interest Expense, Net
Interest expense, net of interest income, was $17.3 million in the 2009 first quarter compared to $19.2 million in the 2008 first quarter. Interest expense declined as a result of lower interest rates and lower average net debt outstanding.
Income Tax Expense
In the 2009 first quarter, the total income tax benefit of $2.9 million included a $1.2 million adjustment to reduce the valuation allowance related to deferred tax assets. The income tax benefit also included $0.4 million principally related to legacy state income tax matters that have been effectively resolved. There was no income tax benefit related to the goodwill impairment charge. Excluding these items, the effective income tax rate was comparable to the 2008 first quarter.