-- 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
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.
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
-- 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.
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
-- We expect net sources to remain positive, even if EBITDA declines by
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.
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.
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
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 Affirmed; Outlook To Positive
Mueller Water Products Inc.
Corporate Credit Rating B/Positive/-- B/Stable/--
Mueller Water Products Inc.
Senior Unsecured B+
Recovery Rating 2
Recovery Rating 6