TEXT - S&P revises Mueller Water Products outlook to positive
Overview -- Credit measures of Atlanta-based water infrastructure product maker Mueller Water Products Inc. have improved, and we believe they could reach appropriate levels for a higher rating in the next 12 months. -- We are affirming our ratings on Mueller, including the 'B' corporate credit rating, and revising the outlook to positive from stable. -- The positive outlook reflects the potential for a one-notch upgrade over the next 12 months if the company continues to improve credit measures through a combination of improved operating results and potential debt repayment. Rating Action On Dec. 10, 2012, Standard & Poor's Ratings Services affirmed its ratings, including the 'B' corporate credit rating, on Mueller Water Products Inc. At the same time, we revised our outlook to positive from stable. Rationale The outlook revision reflects the potential for a one-notch higher rating if Mueller continues to improve credit measures in fiscal 2013. We expect the company to remain disciplined with its financial policy and to potentially accelerate credit measure improvement through debt repayment. After several years of weak credit measures, we believe adjusted debt to EBITDA could improve to less than 5x and funds from operations to more than 12% by the end of fiscal 2013. The ratings on Mueller reflect the company's "weak" business risk profile, marked by its exposure to the cyclical nonresidential and residential construction markets. We now consider the company's financial risk profile as "aggressive," from "highly leveraged" previously. Credit measures have improved from very weak levels, and we expect them to remain consistent with an aggressive financial risk profile by the end of 2013. Our projections assume: -- A continuation of the fragile domestic economic recovery, which supports sales growth in both the Mueller and Anvil divisions. -- Overall revenue growth in the mid- to high-single-digit percentage area this fiscal year. -- EBITDA margins rebounding to more than 10%. Mueller sold its U.S. Pipe division in 2012, using a portion of the proceeds to redeem $22.5 million of the company's senior unsecured notes. Credit measures improved as a result of the sale (cash proceeds were $94 million and Mueller recorded a receivable of about $10 million) because of the unprofitable status of that division. Still, U.S. Pipe had previous periods of decent profitability and the sale reduced Mueller's overall product diversification profile. Nonetheless, we did not adjust our business risk profile assessment of "weak" as a result of the sale. Mueller maintains a good position, operating in the moderately cyclical niche markets of the North American water infrastructure and nonresidential pipe-related product markets. The company offers a full line of water infrastructure flow control (such as gate valves), fire hydrants, and pipe fittings. Over the past couple of years, Mueller has been investing in adjacent markets such as the advanced metering infrastructure (AMI) systems, leak detection, and pipe condition assessment markets, and we consider the company's efforts in these areas to be a work in progress. New housing starts and replacement needs for aging water infrastructure create demand for Mueller's products. Residential housing starts remain low (although we expect them to pick up moderately), and we expect the potential for municipalities spending to remain weak for several years as budgetary pressures continue. Private nonresidential construction activity and oil and gas markets also fuel demand through the Anvil division, but we do not expect robust recovery in these areas for the next couple of years. We believe Mueller's geographic diversification will remain limited, with nearly all of its business based in North America and more than 80% in the U.S. The company's strengths include good casting technologies and economies of scale that benefit from a large installed base. We expect the company will maintain a low-double-digit EBITDA margin. Mueller's EBITDA margins have been volatile historically, and we expect some improvement in the next year as it has shed its unprofitable U.S. Pipe division and believe volume levels will grow in its other businesses. Still, we believe the EBITDA margin is likely to remain below peaks in the high-teens percentage area over the next couple of years. Raw material price movements and a reversal in economic prospects that reduces order volumes can significantly affect profitability. Our assessment of the company's management and governance is "fair". We consider Mueller's financial risk profile to be aggressive and expect credit measures to improve somewhat in fiscal 2013, ending September 2013. For instance, we believe debt to EBITDA will be less than 5x, down from more than 5x at the end of fiscal 2012. We expect Mueller's capital expenditures to continue to represent a moderate use of cash. We expect the company to continue to make small bolt-on acquisitions that complement its businesses. Liquidity We believe Mueller has "adequate" sources of liquidity to cover its needs over the next few quarters, even if its EBITDA declines unexpectedly. Our assessment of Mueller's liquidity profile incorporates the following expectations and assumptions: -- We expect the company's sources of liquidity, including cash and facility availability, to exceed its uses by 1.2x or more over the next 12 months. -- We expect net sources to remain positive, even if EBITDA declines by 15%. As of Sept. 30, 2012, the company had $83 million in cash and cash equivalents, and good capacity under its $275 million revolving credit facility. There are no significant debt maturities until 2015 when the revolver matures. Financial covenants become effective when availability under the facility is less than a set threshold. The company completed a refinancing in August 2010, when it issued $225 million of senior unsecured notes maturing 2020 and used the proceeds to retire its term debt. Recovery analysis We rate Mueller's senior unsecured notes 'B+' with a recovery rating of '2', indicating our expectation that noteholders would receive substantial (70% to 90%) recovery in the event of a payment default. We rate Mueller's senior subordinated debt 'CCC+' with a recovery rating of '6', indicating our expectation of negligible (0% to 10%) recovery prospects for noteholders. Our updated recovery report will be published later on RatingsDirect. Outlook The outlook is positive. We believe credit measures could improve to levels commensurate with a higher rating in the next year if operating performance remains decent and no sizable acquisitions are undertaken that increase debt levels. We could raise the ratings in the next 12 months if credit measures continue to improve and if liquidity remains adequate. For example, if we believe that debt to EBITDA will be sustained at less than 5x and funds from operations to total debt will exceed 12%, we could raise the rating. We could revise the outlook to stable if operating performance does not demonstrate improvements. For example, debt to EBITDA does not improve and approach 5x, we could revise the outlook to stable. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Criteria For Rating The Global Capital Goods Industry, April 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook To Positive To From Mueller Water Products Inc. Corporate Credit Rating B/Positive/-- B/Stable/-- Ratings Affirmed Mueller Water Products Inc. Senior Unsecured B+ Recovery Rating 2 Subordinated CCC+ Recovery Rating 6
- Insight: How U.S. spying cost Boeing multibillion-dollar jet contract
- Exclusive: Secret contract tied NSA and security industry pioneer |
- With Fed out of the way, what's next on Wall Street?
- Yemeni al Qaeda says attack on hospital was mistake
- Insight: For Chinese farmers, a rare welcome in Russia's Far East