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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
COMMISSION FILE NUMBER 333-102430
NATIONAL WATERWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 05-0532711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 WEST HIGHWAY 6
SUITE 620
WACO, TEXAS 76712
(Address of principal executive offices)
(254) 772-5355
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ ] Yes [X] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
[ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING AS OF MAY 7, 2003
-------------- -----------------------------
$.01 Par Value 100
NATIONAL WATERWORKS, INC.
FORM 10-Q
INDEX
PAGE(S)
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets of National Waterworks, Inc. as of
March 28, 2003 (unaudited) and December 31, 2002 3
Statements of Operations of National Waterworks, Inc.
for the Three Months Ended March 28, 2003 and of U.S. Filter
Distribution Group, Inc. and subsidiary for the Three Months
Ended March 29, 2002 (unaudited) 4
Statements of Cash Flows of National Waterworks, Inc.
for the Three Months Ended March 28, 2003 and of U.S. Filter
Distribution Group, Inc. and subsidiary for the Three Months
Ended March 29, 2002 (unaudited) 5
Notes to Financial Statements (unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17-18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21-24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Successor
----------------------------
National Waterworks, Inc.
-Note 1
----------------------------
March 28,
2003 December 31,
(unaudited) 2002
----------- ------------
Assets
Current assets:
Cash and cash equivalents $ 36,511 $ 39,888
Trade accounts receivable, net 178,995 174,012
Inventories 110,313 91,619
Deferred income taxes 7,864 4,713
Other current assets 1,628 2,402
--------- ---------
Total current assets 335,311 312,634
Property and equipment, net 21,294 21,805
Goodwill 468,841 465,662
Deferred financing fees, net 12,673 12,667
Other assets 829 49
--------- ---------
$ 838,948 $ 812,817
========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Trade accounts payable $ 147,353 $ 126,662
Current installments of long-term debt 10,000 10,000
Accrued compensation and benefits 12,549 22,036
Other accrued expenses 14,281 8,989
--------- ---------
Total current liabilities 184,183 167,687
Long-term debt, excluding current installments 440,000 440,000
Deferred income taxes 5,987 1,025
Other long term liabilities 955 --
--------- ---------
Total liabilities 631,125 608,712
Commitments and Contingencies
Stockholder's Equity:
Common stock, par value $.01 per share; 100
shares authorized, issued and outstanding -- --
Additional paid-in capital 210,999 209,999
Retained earnings (accumulated deficit) (3,176) (5,894)
--------- ---------
Total stockholder's equity 207,823 204,105
--------- ---------
$ 838,948 $ 812,817
========= =========
The accompanying notes are an integral part of these financial statements.
3
STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
Successor Predecessor
------------------ ------------------
U.S. Filter
National Distribution Group,
Waterworks, Inc. Inc. and Subsidiary
-Note 1 -Note 1
Three Months Ended Three Months Ended
March 28, March 29,
2003 2002
------------------ ------------------
Net sales $ 269,779 $ 226,667
Cost of goods sold 216,312 175,955
--------- ---------
Gross profit 53,467 50,712
Operating expenses:
Selling, general and administrative 38,696 34,091
Loss - accounts receivable securitization -- 678
--------- ---------
Income before depreciation
and amortization 14,771 15,943
Depreciation and amortization 725 830
--------- ---------
Operating income 14,046 15,113
Other income (expense):
Interest expense, net (9,471) (10)
Other (45) 8
--------- ---------
Income before income taxes 4,530 15,111
Income tax expense 1,812 5,884
--------- ---------
Income before cumulative effect
of change in accounting Principle 2,718 9,227
Cumulative effect of a change in accounting principle -- (459,000)
--------- ---------
Net income (loss) $ 2,718 $(449,773)
========= =========
The accompanying notes are an integral part of these financial statements.
4
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Successor Predecessor
------------------ ------------------
U.S. Filter
National Distribution Group,
Waterworks, Inc. Inc. and Subsidiary
-Note 1 -Note 1
Three Months Ended Three Months Ended
March 28, March 29,
2003 2002
------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 2,718 $(449,773)
Adjustments to reconcile net income (loss)
to net cash provided by(used in) operating
activities:
Deferred income taxes 1,811 406
Amortization of deferred financing fees 401 --
Depreciation and amortization 725 830
Loss on goodwill impairment -- 459,000
Loss (gain) on disposal of equipment 26 (37)
Provision for doubtful accounts 193 142
Changes in operating assets and liabilities, net
of businesses acquired:
Trade accounts receivable (5,176) (3,961)
Inventories (18,694) (8,448)
Other current assets 774 347
Other assets (782) 4,298
Trade accounts payable 20,691 13,065
Accrued compensation and benefits (9,487) (12,174)
Other accrued expenses 5,292 838
Other long term liabilities 955 --
-------- ---------
Net cash provided by (used in)
operating activities (553) 4,533
-------- ---------
Cash flows from investing activities:
Capital expenditures (301) (271)
Additional NWW acquisition costs (3,179) --
Business acquisitions, net of cash -- (18,706)
Proceeds from sales of property and equipment 63 36
-------- ---------
Net cash used in investing activities (3,417) (18,941)
-------- ---------
Cash flows from financing activities:
Capital contribution 1,000 --
Financing fees (407) --
Principal payments on long-term debt -- (56)
Investment by US Filter -- 19,200
Funds transferred to US Filter -- (244,379)
Expenditures funded by US Filter -- 226,019
Allocation of expenses from US Filter -- 10,862
-------- ---------
Net cash provided by financing activities 593 11,646
-------- ---------
Net decrease in cash and cash equivalents (3,377) (2,762)
Cash and cash equivalents at beginning of period 39,888 13,288
Cash and cash equivalents at end of period $ 36,511 $ 10,526
======== =========
Cash paid for interest 4,142 11
======== =========
Cash paid for income taxes 118 5,478
======== =========
The accompanying notes are an integral part of these financial statements.
5
NATIONAL WATERWORKS, INC.
(Successor)
US FILTER DISTRIBUTION GROUP, INC. AND SUBSIDIARY
(Predecessor)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
National Waterworks, Inc. ("NWW", "Company", or "Successor"), a wholly owned
subsidiary of National Waterworks Holding, Inc. ("Parent"), was incorporated in
September 2002 for the purpose of acquiring substantially all of the assets and
assuming certain obligations of U.S. Filter Distribution Group, Inc. ("USFDG",
"Predecessor" or the "Group"), a wholly owned subsidiary of United States Filter
Corporation ("US Filter"), which is a wholly owned subsidiary of Vivendi
Environnement S.A. ("Vivendi"). The acquisition was consummated on November 22,
2002.
As a result of the NWW acquisition, the balance sheets as of March 28, 2003
(unaudited) and December 31, 2002, and the unaudited statements of operations
and cash flows for the three months ended March 28, 2003 represent NWW's
financial position and the results of its operations and cash flows as of those
dates. The unaudited statements of operations and cash flows for the three
months ended March 29, 2002 represent USFDG's consolidated results of their
operations and cash flows as of those dates.
The financial statements of USFDG include the financial statements of USFDG and
its wholly owned subsidiary, United States Filter Receivables Corporation
("USFRC"). All significant intercompany balances and transactions have been
eliminated in consolidation. NWW has no subsidiaries.
The information contained in the accompanying notes to the financial statements
is condensed from that which would appear in the annual financial statements;
accordingly, the financial statements included herein should be reviewed in
conjunction with the financial statements for the year ended December 31, 2002,
and related notes thereto, included in the prospectus dated April 18, 2003
included in the Company's Registration Statement on Form S-4 (No. 333-102430)
relating to its 10.50% Senior Subordinated Notes due 2012.
The accompanying unaudited financial statements include all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end.
The results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the entire year.
FISCAL YEAR
The Company's calendar year begins on January 1 of the year stated and ends on
December 31 of that same year. The Company reports results using the fiscal
quarter method; each quarter is reported as of the last Friday of the period.
The results for the quarter ended March 28, 2003 include twelve weeks and three
days. The results for the quarter ended March 29, 2002 include twelve weeks and
four days.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement applies to all entities that have legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development or normal use of the asset. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 as
of January 1, 2003 did not have a significant impact on our financial condition
or results of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which is effective for disposal activities
initiated after December 31, 2002. SFAS No. 146 nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
6
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred as opposed to the date of the commitment of an exit plan.
The adoption of SFAS No. 146 as of January 1, 2003 did not have a significant
impact on our financial condition or results of operations.
In November 2002, the EITF reached consensus on Issue 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor. The consensus was reached that cash consideration received by a customer
from a vendor is presumed to be a reduction of the prices of the vendor's
products or services and should be treated as a reduction of cost of sales when
recognized in the customer's income statement. This presumption can be overcome
if the consideration can be shown to represent either a payment for assets or
services delivered to the vendor or a reimbursement of costs incurred by the
reseller to sell the vendor's products. It also reached consensus on when a
customer should recognize a rebate or refund that is payable only if the
customer completes a specified level of purchases. Recognition should occur when
the rebate or refund is probable and reasonably estimable and should be based on
a systematic and rational method. The Company has historically accounted for
such consideration as a reduction of cost of sales when the vendor rebate is
probable and reasonably estimable and based on a systematic and rational
allocation of the cash consideration to be received. The Company estimated the
adoption of this EITF increased net income by $0.6 million for the quarter ended
March 28, 2003.
NOTE 2. GOODWILL
The changes in the carrying amount of goodwill for the three-month period ended
March 28, 2003, are as follows (in thousands):
GOODWILL
--------
Balance at December 31, 2002 $465,662
Additional goodwill related to the NWW acquisition of USFDG:
Additional transaction costs 39
Working capital purchase price adjustment 3,140
--------
Balance at March 28, 2003 $468,841
========
Effective January 1, 2002, the Predecessor fully adopted the provisions of SFAS
No. 142, Goodwill and Other Intangible Assets, for all business combinations
consummated before July 1, 2001. As of the date of adoption, unamortized
goodwill totaled $933.4 million. The Predecessor evaluated its existing goodwill
that was acquired in prior purchase business combinations and determined that no
reclassifications were necessary in order to conform to the new classification
criteria in SFAS No. 141, Business Combinations, for recognition apart from
goodwill.
In the first quarter of 2002, the Predecessor completed the transitional
assessment required by SFAS No. 142 of whether there was an indication that
goodwill was impaired and concluded that it was probable that the goodwill then
assigned to its reporting units was impaired. The fair value of its reporting
units was estimated using, among other factors, the sales price included in the
agreement relating to the sale of substantially all of the assets, net of
certain liabilities, of U.S. Filter Distribution Group, Inc. to National
Waterworks, Inc. The Predecessor estimated an impairment loss of $459.0 million.
The goodwill impairment is reported as a cumulative effect of change in
accounting principle in the accompanying financial statements for the period
ended March 29, 2002.
7
NOTE 3. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Management has implemented the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosure about Segments of an Enterprise and
Related Information. The Company has determined that the six geographic regions,
to which substantially all income and expenses are allocated for purposes of
allocating resources by the chief operating decision maker, meet all of the
aggregation criteria of SFAS No. 131, including similar economic
characteristics. Accordingly, there is one reportable segment.
Products include pipe, fire hydrants, meters, valves, fittings and other
complementary products for waterworks construction and maintenance/repair. The
following table sets forth net sales by product category (in thousands):
THREE MONTHS THREE MONTHS
ENDED ENDED
PRODUCT CATEGORY MARCH 28, 2003 MARCH 29, 2002
---------------------------- -------------- --------------
Pipe $111,138 $ 83,639
Fittings 40,839 35,733
Valves 34,147 29,032
Meters 23,422 23,312
Fire Hydrants 15,122 13,929
Service and Repair Products 17,801 15,811
Other 27,310 25,211
-------- --------
$269,779 $226,667
======== ========
All revenues are derived from customers domiciled in the United States and there
are no long-lived assets located outside of the United States, and no single
customer, as defined in SFAS No. 131, represents ten percent or more of revenues
for any period presented.
NOTE 4. ACQUISITIONS AND DIVESTITURES
On March 29, 2002, the Group acquired substantially all of the assets and
certain liabilities of Utility Piping Systems, Inc. for an aggregate purchase
price of $20.1 million, including post-closing purchase price adjustments as
stated in the Asset Purchase Agreement. US Filter paid this amount on the
Group's behalf.
NOTE 5. ACCOUNTS RECEIVABLE SECURITIZATION
The Predecessor utilized a standard third-party receivables sale program, to
provide low-cost funding based upon a securitization agreement entered into on
December 19, 2001. Under this maximum $170 million program, the Predecessor sold
monthly, on a revolving basis, all of its rights, title and interest in, to and
under these eligible accounts receivable to the Receivables Company, a
bankruptcy-remote special purpose limited liability company. This company in
turn transferred the eligible accounts receivable to a master trust which issued
undivided interests in eligible accounts receivable to a third-party,
multi-seller asset-backed commercial paper program, existing solely for the
purpose of issuing commercial paper.
The sale of receivables under this Receivables Securitization Program was
accounted for as a sale in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
Losses recognized on the sale of accounts receivable totaled approximately $0.7
million during the three-month period ending March 29, 2002. These costs are
included in the accompanying unaudited statement of operations under the caption
"Loss-accounts receivable securitization."
Concurrent with the sale of USFDG business to NWW, the accounts receivable
securitization facility was terminated using proceeds from the sale.
8
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
Certain of USFDG's predecessors distributed or may have distributed cement pipe
containing asbestos. Except for one predecessor, the cement pipe distributed was
primarily used in water and sewage application where the pipe was typically
buried underground. Management believes that the nature of the
asbestos-containing pipe distributed by the predecessors and the uses of such
pipe makes it unlikely that a large number of plaintiffs would be exposed to
friable asbestos emanating from the pipe. Management is not aware of any
predecessor manufacturing or fabricating asbestos containing products of any
type or assuming any product liability for such products.
As discussed in Note 1, US Filter and USFDG completed an agreement to sell
substantially all of the Group's assets, net of certain liabilities as defined
in the sales agreement, to NWW. As part of the agreement, US Filter and USFDG
have retained the liabilities related to all existing and future, if any,
asbestos claims. As the asbestos claims were retained by USFDG and US Filter and
in view of the indemnity by USFDG and US Filter with respect to retained
liabilities and the Vivendi guarantee, discussed below, management of NWW
believes that it has no liability related to asbestos claims at March 28, 2003.
As part of the agreement, US Filter and USFDG have agreed to indemnify NWW and
its affiliates for any and all losses and expenses incurred by NWW for the
liabilities retained by US Filter and USFDG, including asbestos liabilities, and
as a result of breaches of representations, warranties and covenants by them.
NWW has agreed to indemnify US Filter and USFDG and their affiliates for all
losses and expenses incurred by them as a result of breaches of representations,
warranties and covenants by NWW and for the liabilities that NWW is assuming. US
Filter and USFDG's indemnity obligations with respect to the liabilities
retained by them, including asbestos liabilities, are unlimited and have no
termination date. Generally, indemnification obligations with respect to
representations and warranties will survive for 18 months from November 22,
2002, the closing date of the acquisition. In addition, indemnification
obligations for breaches of representations and warranties by either party are
not effective until the aggregate amount of losses suffered by any such
indemnified party exceeds 1% of the acquisition consideration, as adjusted for
the post-closing adjustment and with each specific loss being for at least $50
thousand. The aggregate liability of an indemnifying party for breaches of
representations and warranties is limited in the aggregate to 10% of the
adjusted acquisition consideration. Additionally, Vivendi Environnement S.A.,
the parent of US Filter, has agreed to guarantee all obligations of USFDG and US
Filter under the asset purchase agreement up to an aggregate of $50 million for
a period of 15 years.
The uncertainties of asbestos claim litigation and resolution make it difficult
to accurately predict the results of the ultimate resolutions of asbestos
claims. That uncertainty is increased by the possibility of adverse court
rulings or new legislation effecting asbestos claim litigation or the settlement
process. Subject to these uncertainties and based on the Predecessor's
experience defending asbestos claims, the estimate of the amounts to be
recovered from insurance companies and the indemnity provision provided in the
sales agreement, NWW management believes that it has no liability related to
asbestos claims.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this Report on Form 10-Q, unless the context otherwise requires, references
to the "Company," "we," "our," and "us" refer to U.S. Filter Distribution Group,
Inc. and its consolidated subsidiary ("USFDG", "Predecessor" or the "Group") for
periods prior to November 22, 2002 and to National Waterworks, Inc. for periods
from and after November 22, 2002.
The following is management's discussion and analysis of significant factors
which have affected the financial condition of the Company as of March 28, 2003
and the results of operations for the three months then ended. This information
should be read in conjunction with the Company's financial statements and the
notes thereto contained herein and in the prospectus dated April 18, 2003
included in the Company's Registration Statement on Form S-4 (No. 333-102430)
relating to our 10.50% Senior Subordinated Notes due 2012.
9
FORWARD-LOOKING STATEMENTS
Certain statements set forth in this Report on Form 10-Q constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as
amended, and are subject to the safe harbor created by such sections.
Forward-looking statements include statements concerning our plans, objectives,
goals, strategies, future events, future revenue or performance, capital
expenditures, financing needs, plans or intentions relating to acquisitions,
business trends and other information that is not historical information. When
used in this report, the words "believe", "anticipate", "estimate", "expect",
"may", "will", "should", "plan", "intend", "forecast" and similar expressions
are intended to identify forward-looking statements. All forward-looking
statements, including, without limitation, management's examination of
historical operating trends, are based upon our current expectations and various
assumptions. Our expectations, beliefs and projections are expressed in good
faith and we believe there is a reasonable basis for them. However, there can be
no assurance that management's expectations, beliefs and projections will result
or be achieved. Actual results or events may differ significantly from those
expressed in, or implied by, such forward-looking statements as a result of
various important factors. These factors include, but are not limited to,
national, regional and local general economic and business conditions; trends in
the water and wastewater transmission products industry and trends in the
construction industry; changes in municipal funding and spending levels; our
high level of indebtedness and the restrictions imposed by the terms of our
indebtedness; our ability to generate cash to service our debt; failure to
successfully implement, or changes in, our business strategy and the risk that
our business strategy may not be successful in improving our operating results;
competition and the development of alternatives to water and wastewater
transmission products distributors in the supply chain; the loss of one or more
of the Company's major suppliers or a reduction in supplier participation in our
preferred vendor program; changes in the cost of polyvinyl chloride ("PVC") pipe
or reductions in PVC pipe and other product availability; the risk that our
quarterly operating results are subject to substantial fluctuations; the
availability of qualified branch managers and sales personnel and the loss of
members of our senior management team; disruptions in our IT systems which
manage numerous aspects of our business and customer and supplier relationships;
and changes in, or the failure or inability to comply with, environmental and
safety regulations and increased costs of such regulations, as well as the other
risk factors affecting the Company detailed from time to time in the documents
filed by the Company with the Securities and Exchange Commission, including
those set forth in the prospectus dated April 18, 2003 included in the Company's
Registration Statement on S-4 (No. 333-102430) relating to our 10.50% Senior
Subordinated Notes due 2012. Except as otherwise required by the federal
securities laws, the Company assumes no obligation to publicly update or revise
any forward-looking statements to reflect subsequent events or circumstances.
OVERVIEW
We are a leading distributor of water and wastewater transmission products in
the United States with approximately a 20% share of the estimated $6 billion
U.S. waterworks product distribution market. We distribute a full line of pipes,
fittings, valves, meters, fire hydrants and other components that are used to
transport clean water and wastewater between reservoirs and treatment plants and
residential and commercial locations. Our products are integral to building,
repairing and maintaining water and wastewater (sewer) systems and serve as part
of the basic municipal infrastructure required to support population and
economic growth and residential and commercial construction. In addition, we
provide a broad array of value-added services that we believe are critical to
our customers' success. These services include project estimation, project
management and product advice. Through our network of 139 branches in 35 states,
we sell directly to municipalities and to contractors who serve municipalities
and also perform residential, commercial and industrial waterworks projects. In
addition to significant customer and geographic diversification, we estimate
that our net sales are split approximately evenly between publicly-funded and
privately-funded sales.
Acquisition of United States Filter Corporation. On April 23, 1999, Vivendi
Environnement S.A. acquired United States Filter Corporation, the parent of U.S.
Filter Distribution Group, Inc. The acquisition was accounted for as a purchase
and the related purchase accounting adjustments have been reflected, or
"pushed-down," in the consolidated financial statements of U.S. Filter
Distribution Group, Inc. for periods subsequent to April 30, 1999.
Acquisition of Assets of U.S. Filter Distribution Group, Inc. On November 22,
2002, we consummated the purchase of substantially all of the assets and
businesses of, and assumed certain liabilities and obligations of, U.S. Filter
Distribution Group, Inc., a wholly-owned subsidiary of United States Filter
Corporation, which is an indirect wholly-owned subsidiary of Vivendi
Environnement S.A. We refer to the foregoing transaction as the
10
"acquisition." The total cost of the acquisition, including the payment of
transaction fees and expenses incurred by us and our stockholders, was
approximately $662.2 million, after giving effect to a $3.1 million post-closing
adjustment made on February 13, 2003 related to the level of our working capital
at the time of closing. The acquisition of the assets and businesses of U.S.
Filter Distribution Group, Inc. has been accounted for as a purchase in
accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations. The excess of the purchase consideration over the historical basis
of the net assets acquired has been applied, based on final valuations, to
revalue the assets acquired and liabilities assumed to their fair values as of
November 22, 2002, the date of acquisition. The post-closing adjustment has been
reflected as an adjustment to goodwill in National Waterworks' financial
statements for the quarter ended March 28, 2003.
The acquisition was financed through $250.0 million of term loans under our
senior credit facility, the issuance of $200.0 million principal amount of our
10.50% Senior Subordinated Notes due 2012, a $210.0 million cash equity
investment in our parent, National Waterworks Holdings, Inc., of which an
aggregate of $206.0 million was made equally by affiliates of each of J.P.
Morgan Partners, LLC and Thomas H. Lee Partners, L.P. (the "Sponsors") and $4.0
million was made by certain members of our management and our parent's board of
directors, and $2.2 million from cash from operations. In addition, concurrent
with the closing of the acquisition, U.S. Filter Distribution Group, Inc. used a
portion of the acquisition consideration to repay and terminate its accounts
receivable securitization facility. The acquisition, the offering of the notes,
the initial borrowings under our senior credit facility, the cash equity
investment described above, the repayment of the accounts receivable
securitization facility and the other related transactions are collectively
referred to in this Report on Form 10-Q as the "Transactions."
FACTORS AFFECTING OUR BUSINESS
PVC Pipe Pricing. The price of polyvinyl chloride ("PVC") pipe is volatile due
to supply and demand dynamics in the PVC pipe and PVC resin markets. Volatility
in these markets can cause fluctuations in our revenues and, to a lesser extent,
in our gross profit. PVC pipe products accounted for approximately 24.1%, and
17.5% of our net sales in the three months ended March 28, 2003 and March 29,
2002, respectively. The purchase price of PVC pipe ranged from $0.29 to $0.60
per pound between 1997 and 2001, which we believe to be the most recent peak to
trough period. Our purchase price of PVC pipe averaged $0.36, $0.34 and $0.49
per pound for the years ended December 31, 2002 (combined), 2001 and 2000,
respectively, with our 2002 PVC purchase price ranging from a quarterly average
of $0.30 to $0.42 per pound. Our purchase price of PVC pipe averaged $.40 and
$.30 per pound for the three months ended March 28, 2003 and March 29, 2002,
respectively. In periods of higher PVC pipe pricing, assuming constant sales
volumes, our net sales of PVC pipe would be higher as the same volume of pipe
sales generates higher revenue. Conversely, in periods of lower PVC pipe prices,
assuming constant sales volumes, our net sales of PVC pipe would be lower as the
same volume of PVC pipe sales generates lower revenue. In general, we can
experience a decline in the volume of PVC pipe sales (but an increase in the
volume of ductile iron pipe sales) in periods of higher PVC pipe pricing, as our
customers can substitute ductile iron pipe for PVC pipe in certain applications.
PVC pipe accounts for approximately one-half of our pipe sales. As a result of
this interchangeability, pricing of ductile iron pipe tends to move in the same
direction as the pricing of PVC pipe but in a less volatile fashion.
Consequently, we can experience a change in product mix between PVC pipe and
ductile iron pipe as the prices of these products fluctuate.
The impact of PVC pipe pricing on our gross profit has been less pronounced than
the impact on our net sales. Historically, we have been able to maintain our
gross profit dollars on a given volume of PVC pipe sales, even when PVC pipe
prices have fallen, as we have been able to pass through a majority of the
increase or decrease in PVC pipe prices to our customers. The impact of PVC
price changes is minimized because we sell the majority of our PVC pipe
utilizing direct shipments from suppliers and target and achieve high turnover
for PVC pipe sales out of our inventory. Gross margins, defined as gross profits
as a percentage of net sales, are affected by PVC price fluctuations because we
focus on maintaining gross profit to the extent possible even when net sales are
impacted and because of the effect that changes in the PVC pipe/ductile iron
pipe product mix have on gross margins, given that PVC pipe typically carries a
higher gross margin than ductile iron pipe.
Demand Fluctuations. Our sales are also affected by regional and local changes
in commercial and residential construction activity and the level of municipal
waterworks spending. The level of activity in the commercial construction market
depends on the general economic outlook, corporate profitability, interest rates
and existing plant capacity utilization. The level of activity in the
residential construction market depends on new housing starts, which are
influenced by interest rates, availability of financing, housing affordability,
unemployment rates, demographic trends, gross domestic product and consumer
11
confidence. Changing economic conditions in our markets could affect the level
of construction activity and, consequently, our net sales. In addition, water
and wastewater transmission products sales are subject to the level of
waterworks spending by municipalities. We believe municipal spending is a
function of the amount of repair and improvements required for existing
systems, which are functions of the age of the infrastructure, weather and
construction-related damage, the level of maintenance spending, the water
infrastructure needs of the municipality relative to other spending needs and
the availability of municipal, state or federal funds for waterworks projects.
Seasonality. Given the seasonal nature of construction activity in many regions
of the United States, our results of operations and working capital, including
our accounts receivable, inventory and accounts payable, fluctuate during the
year. We believe that our significant operations in more mild southern climates
moderate our seasonality. Historically, consistent with annual construction
seasonality, our net sales are typically higher during the second and third
calendar quarters as compared to the first and fourth calendar quarters. In
addition, we typically generate cash from a reduction in net working capital in
the fourth quarter of each year and utilize cash from operations to fund
increases in net working capital in the first and second quarter of each year.
Other important factors that could affect our results of operations are set
forth under the heading "Risk factors" in the prospectus dated April 18, 2003
included in our Registration Statement on Form S-4 (No. 333-102430) relating to
our 10.50% Senior Subordinated Notes due 2012.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are more fully described in the
notes to our audited financial statements which are set forth in the prospectus
dated April 18, 2003 included in our Registration Statement on Form S-4 (No.
333-102430) relating to our 10.50% Senior Subordinated Notes due 2012. Certain
of the Company's accounting policies require management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. These judgments are based on our historical experience,
current economic and industry trends, information provided by outside sources
and management estimates. As with all judgments, they are subject to an inherent
degree of uncertainty. Actual results may vary from the underlying estimates and
such differences may be material to our results of operations.
Allowance for Doubtful Accounts. We evaluate the collectibility of accounts
receivable based on historical trends, customer transaction history, accounts
receivable aging and an evaluation of customer credit worthiness. Initially, a
monthly provision is made based on historical experience. On a quarterly basis,
we perform a detailed analysis of accounts receivable and adjust the allowance
for doubtful accounts when necessary. While we have a large customer base that
is geographically diverse, an economic slowdown in the markets in which we
operate may result in higher uncollected accounts receivable and therefore the
need to revise estimates for bad debts. To the extent actual credit experience
or other assumptions used by management change, the allowance for doubtful
accounts would be adjusted, which could affect our operating results.
Inventories. We periodically evaluate our inventories to ensure they are
recorded at the lower of cost or market value. Inventories are adjusted based on
this analysis as well as other factors including potential adjustments from
physical inventory counts. Significant unusual events giving rise to changes in
our inventory valuation are adjusted for when appropriate. To the extent future
events impact the salability of our products, we may have to make future lower
of cost or market inventory adjustments.
Goodwill and Long-Lived Assets. At March 28, 2003, $468.8 million of goodwill
was reflected in our consolidated financial statements. We review the carrying
value of our goodwill for impairment at least annually. To accomplish this, we
estimate the fair value of each of our reporting units and compare the fair
value estimate to the unit's carrying value. The fair value of a reporting unit
may be estimated using methods such as a discounted cash flow analysis. If the
carrying value of a reporting unit exceeds its fair value estimate, an
indication exists that goodwill is impaired and we must perform additional
analysis to determine the extent of any impairment. Any such impairment would be
reflected as a charge in the statement of operations at that time.
We assess the impairment of our other long-lived assets whenever events or
changes indicate that the carrying value of those assets may not be recoverable.
If we determine that the sum of the estimated future cash flows (undiscounted)
that we expect to result from the use and eventual deposition of those assets is
less than the carrying value of the assets, we will recognize an impairment
charge. Measurement of such impairment charge is based on our estimate of the
fair value of our assets.
12
Consideration Received From Vendors. The Company enters into agreements with
many of its vendors providing for inventory purchase rebates ("vendor rebates")
upon achievement of specified volume purchasing levels. The Company accrues the
receipt of vendor rebates as part of its cost of sales for products sold based
on progress towards earning the vendor rebates, taking into consideration
cumulative purchases of inventory to date and projected purchases through the
end of the year. An estimate of unearned vendor rebates is included in the
carrying value of inventory at a period end for vendor rebates received on
products not yet sold. While management believes the Company will continue to
recognize consideration from vendors pursuant to underlying agreements, there
can be no assurance that vendors will continue to provide comparable amounts of
vendor rebates in the future, which could impact our operating results.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship that certain items
from our unaudited financial statements bear in relation to net sales.
Successor Predecessor
------------------ ------------------
U.S. Filter
National Distribution Group,
Waterworks, Inc. Inc. and Subsidiary
-Note 1 -Note 1
Three Months Ended Three Months Ended
March 28, March 29,
2003 2002
------------------ ------------------
STATEMENT OF OPERATIONS DATA:
Net sales 100.0% 100.0%
Cost of goods sold 80.2% 77.6%
------ ------
Gross profit 19.8% 22.4%
Operating expenses:
Selling, general and administrative 14.3% 15.0%
Loss - accounts receivable securitization -- 0.3%
------ ------
Income before depreciation
and amortization 5.5% 7.1%
Depreciation and amortization 0.3% 0.4%
------ ------
Operating income 5.2% 6.7%
Other income (expense):
Interest expense, net (3.5%) (0.0%)
Other (0.0%) 0.0%
------ ------
Income before income taxes 1.7% 6.7%
Income tax expense 0.7% 2.6%
------ ------
Income before cumulative effect of
change in accounting principle 1.0% 4.1%
Cumulative effect of a change in
accounting principle -- (202.5%)
------ ------
Net income (loss) 1.0% (198.4%)
====== ======
THREE MONTHS ENDED MARCH 28, 2003 VERSUS THREE MONTHS ENDED MARCH 29, 2002
The following discussion regarding the three months ended March 28, 2003 and
March 29, 2002 is based on the results of operations of U. S. Filter
Distribution Group, Inc. for the 2002 period and of National Waterworks, Inc.
for the 2003 period.
13
Certain Financial Statement Impacts of the Acquisition. As more fully discussed
below, the revaluation of the net assets acquired in the acquisition did not
affect our net sales. However, we recorded a $13.0 million valuation increase in
inventory at November 22, 2002 as a result of the asset revaluation. While the
increase in the value of our inventory had no cash impact, it did increase our
costs of goods sold, adversely impacting our gross profit and our earnings
before interest, taxes, depreciation and amortization ("EBITDA"). We recognized
$9.0 million of the impact of the inventory revaluation during the November 22
to December 31, 2002 period. The final $4.0 million of the inventory revaluation
was recognized in the first quarter of 2003.
Net Sales. Net sales for the three months ended March 28, 2003 increased $43.1
million, or 19.0%, to $269.8 million from $226.7 million for the three months
ended March 29, 2002. The increase reflects the combined effects of a $6.0
million increase in net sales from the acquisition of Utility Piping Systems,
Inc., a regional waterworks distribution company operating in Pennsylvania, New
Jersey and Delaware, which we acquired on March 29, 2002, and a $37.1 million
increase in net sales of our historical operations. The increase in net sales of
our historical operations was primarily attributable to an increase in our sales
price of PVC pipe, resulting from the pass through of an approximate 35%
increase in our purchase price of PVC pipe. The PVC price increase combined with
a volume increase resulted in an increase in sales of PVC pipe products of $23.8
million. Increases were recorded in all other product areas. As described above,
we believe our ability to quickly pass-through increases or decreases in raw
material prices to our customers significantly mitigates the impact of these
fluctuations on our profitability.
Cost of Goods Sold. Cost of goods sold for the three months ended March 28, 2003
increased $40.4 million, or 22.9%, to $216.3 million from $175.9 million for the
three months ended March 29, 2002. The increase reflects an increase in cost of
goods sold of our historical operations which was primarily attributable to an
approximate 35% increase in our purchase price of PVC pipe. The PVC price
increase combined with a volume increase resulted in an increase in cost of
goods sold of PVC pipe products of $22.1 million. Additionally the increase
reflects the combined effects of a $4.8 million increase in cost of goods sold
associated with sales resulting from our Utility Piping Systems, Inc.
acquisition and the recognition of the final $4.0 million impact of the
inventory revaluation as discussed above. As a percentage of net sales, cost of
goods sold increased to 80.2% for the 2003 period compared to 77.6% in 2002.
Gross Profit. As a result of the foregoing, gross profit for the three months
ended March 28, 2003 increased $2.8 million, to $53.5 million from $50.7 million
for the three months ended March 29, 2002. Gross profit increases as a result of
the acquisition of Utility Piping Systems and increased volume in our historical
operations, were partially offset by the adverse impact of the inventory
revaluation, representing 1.5% of net sales, recognized during the 2003 period.
Our gross profit margin decreased to 19.8% for the 2003 period compared to 22.4%
in 2002 as a result of the foregoing factors.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 28, 2003 increased $4.6 million, or
13.5%, to $38.7 million from $34.1 million for the three months ended March 29,
2002. This increase is primarily related to sales volume increases discussed
above, $0.9 million of additional expenses resulting from the March 29, 2002
acquisition of Utility Piping Systems, Inc., and to a lesser extent, incremental
costs of operating on a stand alone basis. As a percentage of net sales,
selling, general and administrative expenses were 14.3% for the 2003 period
compared to 15.0% in 2002.
Operating Income. As a result of the foregoing, operating income for the three
months ended March 28, 2003 decreased $1.1 million, or 7.1%, to $14.0 million
from $15.1 million for the three months ended March 29, 2002. As a percentage of
net sales, operating income decreased to 5.2% for the 2003 period from 6.7% for
the 2002 period, which is primarily attributable to the adverse impact of the
inventory revaluation discussed above.
Interest Expense, Net. Interest expense, net for the three months ended March
28, 2003 was $9.5 million and was less than $0.1 million in 2002. The increase
reflects the additional debt we incurred on November 22, 2002 to finance the
acquisition of substantially all of the assets and certain liabilities of U. S.
Filter Distribution Group, Inc.
Cumulative Effect of Change in Accounting Principle. As a result of the adoption
of SFAS No. 142 prior to the consummation of the acquisition, USFDG completed an
assessment of whether its goodwill at January 1, 2002, the date of adoption of
SFAS No. 142, was impaired. As a result of this assessment, USFDG concluded that
it was probable that the goodwill then assigned to its reporting units was
impaired based in part upon the anticipated sale price of substantially all of
its assets and liabilities to National Waterworks, Inc. Accordingly, the first
quarter of 2002 included a charge for the estimated goodwill impairment of
14
$459.0 million. During this period, goodwill was primarily comprised of amounts
resulting from the purchase accounting adjustments associated with the
acquisition of United States Filter Corporation by Vivendi Environnement S.A.
in 1997 and reflected, or "pushed-down", in USFDG's consolidated financial
statements, and, to a lesser extent, amounts resulting from acquisitions since
the date of the Vivendi Environnement S.A. acquisition.
Net Income (Loss). As a result of the foregoing, we reported net income of $2.7
million for the three months ended March 28, 2003, compared to a net loss of
$449.8 million for the three months ended March 29, 2002. Excluding the
cumulative effect of a change in accounting principle in 2002, net income
decreased $6.5 million to $2.7 million in the 2003 period from $9.2 million in
the 2002 period. This decline primarily reflects increased interest expense
during the 2003 period and the effect of the inventory revaluation discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we participated in the centralized cash management program of our
former parent, United States Filter Corporation, whereby all of our cash
receipts were remitted to our former parent and substantially all of our cash
disbursements were funded by our former parent. As a result of the acquisition
and our separation from United States Filter Corporation, we no longer
participate in such program. Historically, our primary cash requirements were to
fund our operations, working capital and capital expenditures. Following the
acquisition, our primary cash requirements are to make the interest and
principal payments on our debt and to fund our operations, working capital and
capital expenditures. We expect to fund these needs principally from cash flow
from operations and, if necessary, borrowings under the revolving credit portion
of our senior credit facility. In addition, as the acquisition was structured as
an asset acquisition, we will be able to deduct for tax purposes, on a
straight-line basis over 15 years, the related goodwill. We expect that this
amortization will result in significant cash tax savings.
Net working capital is comprised of current assets, excluding cash and cash
equivalents, minus current liabilities. We had net working capital of $114.6
million at March 28, 2003 compared to net working capital of $105.1 million at
December 31, 2002. The increase in net working capital is primarily attributable
to the payment of annual incentive compensation plans during the first quarter
of 2003.
On December 19, 2001, the Predecessor entered into an accounts receivable
securitization facility pursuant to which from time to time the Predecessor sold
its eligible accounts receivable to a wholly-owned, qualified special purpose
entity ("QSPE"). The QSPE, in turn, sold the receivables to a securitization
company. See Note 6 to our unaudited financial statements included elsewhere in
this quarterly report. Concurrently with the closing of, and as a condition
precedent to the Transactions, U.S. Filter Distribution Group, Inc. utilized a
portion of the acquisition consideration to repay and terminate the
securitization facility, which resulted in National Waterworks, Inc. acquiring
all of U.S. Filter Distribution Group, Inc.'s accounts receivable at closing,
including those that had been previously sold pursuant to the securitization
facility.
Net cash used in operating activities for the three months ended March 28, 2003
was $0.6 million compared to net cash provided by operating activities for the
three months ended March 29, 2002 of $4.5 million. The change in net cash
provided by operating activities in 2003 compared to 2002 was primarily
attributable to the change in our net income, excluding the effect of the
cumulative change in accounting principle resulting from the goodwill impairment
charge associated with the adoption of SFAS No. 142. The changes in inventories
and trade accounts payable for the three months ended March 28, 2003 reflect the
impact of PVC pricing fluctuations.
Net cash used in investing activities for the three months ended March 28, 2003
and March 29, 2002 was $3.4 million and $18.9 million, respectively. Net cash
used in investing activities for the period ended March 28, 2003 reflected the
post-closing cash adjustment of $3.1 million paid to U.S. Filter Distribution
Group, Inc., related to the level of our working capital at the time of closing
of the Transactions. Net cash used in investing activities for the three months
ended March 29, 2002 reflected the one operating acquisition we completed in
2002 for a net consideration of $19.6 million. Of this consideration, $0.9
million, representing a purchase price adjustment, was paid during the third
quarter of 2002. Capital expenditures for the three months ended March 28, 2003
and March 29, 2002 were unchanged at $0.3 million. We estimate that our capital
expenditures for the remainder of 2003 will be approximately $2 million. Capital
expenditures principally relate to improvements at our branch facilities and
on-going investments to our IT system.
15
Net cash provided by financing activities for the three months ended March 28,
2003 and March 29, 2002 was $0.6 million and $11.6 million, respectively. Net
cash provided in the 2003 period included a $1.0 million cash equity investment
in our Parent by one of our and our Parent's directors, who had not made an
investment in our Parent at the time the Transactions were consummated. The
Parent made a concurrent $1.0 million capital contribution to the Company. Net
cash provided by financing activities for the 2002 period reflected the excess
of investments by our former parent, US Filter, through the cash management
program over funds transferred to and expenditures funded by US Filter during
the period.
Our senior credit facility consists of a $250.0 million term loan facility, all
of which was outstanding at March 28, 2003, and a $75.0 million revolving credit
facility. No amount was outstanding under the revolving credit facility at March
28, 2003 but approximately $3.4 million of the availability under the facility
was used to support outstanding letters of credit. We repaid $2.5 million of the
term loan on March 31, 2003 The borrowings under the revolving credit facility
will be available until its maturity to fund our working capital requirements,
capital expenditures and other general corporate needs. The revolving credit
facility will mature on November 22, 2008 and will have no scheduled
amortization or commitment reductions. The term loan facility will mature on
November 22, 2009 and has quarterly scheduled amortization payments of $2.5
million in 2003, $3.75 million in 2004 and 2005, $5.0 million in 2006 and $6.25
million in 2007 and 2008, with the balance of the facility to be repaid
quarterly during 2009. In addition, commencing with the year ending December 31,
2003, we will be required to make annual mandatory prepayments of the term loans
under the senior credit facility in an amount equal to 75% of Excess Cash Flow,
determined generally as the amount by which our operating cash flow exceeds the
sum of our capital expenditures (including in respect of permitted
acquisitions), repayments of indebtedness and certain other amount, or, 50% of
Excess Cash Flow if our ratio of consolidated total debt to consolidated EBITDA
as of the last day of the fiscal year is not greater than 4:0 to 1:0. The term
loans are also subject to mandatory prepayments in an amount equal to (i) 75% of
the net proceeds from certain equity issuances (or 50% if we meet the foregoing
leverage ratio); (ii) 100% of the net cash proceeds of certain debt issuances;
and (iii) 100% of the net cash proceeds of certain asset sales or other
dispositions of property, in each case subject to certain exceptions. Borrowing
under the term loan portion and revolving credit facility each bear interest at
a variable rate based on, at our option, the Eurodollar rate (but not less than
2.50%) plus an applicable margin, or a base rate plus a margin. The base rate is
the higher of the prime rate or the federal funds rate plus 0.5%. At March 28,
2003, the interest rate on the term loan was 6.5% per annum. Our senior credit
facility permits us to issue up to an additional $50.0 million of credit
facilities without the consent of the lenders there under, so long as no default
or event of default under the senior credit facility has occurred or would occur
after giving effect to such issuance and certain other conditions are satisfied,
including pro forma compliance with certain leverage ratios. Our $200.0 million
principal amount of senior subordinated notes due 2012 bear interest at 10.50%
per annum with interest due semi-annually on June 1 and December 1 of each year.
Interest payments on the senior subordinated notes and required principal and
interest payments on borrowings under our senior credit facility have
substantially increased our liquidity requirements.
The senior credit facility and the indenture for the notes impose certain
restrictions on us, including restrictions on our ability to incur indebtedness,
pay dividends, make investments, grant liens, sell our assets and engage in
certain other activities. Our senior credit facility also requires that we
satisfy leverage and interest coverage ratios and contains a capital
expenditures limitation. We were in compliance with all covenants at March 28,
2003. Indebtedness under the senior credit facility is secured by substantially
all of our and our parent's assets, including our real and personal property,
inventory, accounts receivable, intellectual property and other intangibles. In
addition, the senior credit facility is secured by the stock and substantially
all of the assets of our future domestic subsidiaries, if any. We do not
currently have any subsidiaries.
Our ability to pay principal and interest on our indebtedness and to satisfy our
other obligations will depend upon, among other things:
- our future financial and operating performance, which will be
affected by prevailing economic conditions and financial, business,
regulatory and other factors, many of which are beyond our control;
and
- the future availability of borrowings under our senior credit
facility or any successor facility, the availability of which
depends or may depend on, among other things, our complying with the
covenants in our senior credit facility.
16
We believe that, based on our current levels of operations, our cash flow from
operations, together with available borrowings under the senior credit facility,
will be adequate for at least the next few years to make scheduled amortization
and interest payments on our indebtedness and to fund anticipated capital
expenditures and for working capital requirements. We cannot assure you,
however, that our business will generate sufficient cash flow from operations or
that future borrowings will be available under the senior credit facility in an
amount sufficient to enable us to service our indebtedness or to fund our other
liquidity needs.
RECENT ACCOUNTING PRONOUNCEMENTS
See discussion regarding recent accounting pronouncements in Note 1 to the
accompanying financial statements.
RELATED PARTY TRANSACTIONS
In January 2003, one of our and our Parent's directors, who had not made an
investment in the Parent at the time the Transactions were consummated, made a
$1.0 million cash equity investment in the Parent in exchange for the issuance
of shares of common stock of the Parent. The Parent made a concurrent $1.0
million capital contribution to the Company. The investment was made at the same
price per share as the original investment made by the Sponsors and management
on November 22, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks as part of our on-going business
operations. Primary exposure includes changes in interest rates as borrowings
under our senior credit facility bear interest at floating rates based on the
London InterBank Offered Rate ("LIBOR") or the prime rate, in each case plus an
applicable borrowing margin. We manage our interest rate risk by balancing the
amount of fixed-rate and floating-rate debt. For fixed rate debt, interest rate
changes affect the fair market value but do not impact earnings or cash flows.
Conversely, for floating-rate debt, interest rate changes generally do not
affect the fair market value but do impact our earnings and cash flows, assuming
other factors are held constant. As of March 28, 2003, we had $200 million
principal amount of fixed-rate debt represented by the notes and $250 million of
floating-rate debt represented by borrowings under the term loan portion of the
senior credit facility. We repaid $2.5 million of the term loan on March 31,
2003. In addition, up to $75 million of floating rate borrowings are available
under the revolving credit portion of the senior credit facility, of which $3.4
million was used to support outstanding letters of credit at March 28, 2003.
Based on the amount outstanding under the term loans at March 28, 2003, an
immediate increase of one percentage point in the applicable interest rate would
not cause an increase in annual interest expense due to the 2.5% Libor floor.
Libor was less than 1.5% at March 28, 2003. We may use derivative financial
instruments, where appropriate, to manage our interest rate risks. However, as a
matter of policy, we will not enter into derivative or other financial
investments for trading or speculative purposes. All of our sales are
denominated in U.S. dollars; thus our financial results are not subject to
foreign currency exchange risks or weak economic conditions in foreign markets.
For a discussion of the effect of PVC pipe price changes on our business, see
"Factors affecting our business -- PVC Pipe Pricing" above.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
17
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
There have been no significant changes in our internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date we completed our evaluation.
18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended
March 28, 2003.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL WATERWORKS, INC.
Date: May 7, 2003 By: /s/ Harry K. Hornish, Jr.
--------------------------
Harry Hornish
President and Chief Executive Officer
Date: May 7, 2003 By: /s/ Mechelle Slaughter
----------------------
Mechelle Slaughter
Chief Financial Officer
20
CERTIFICATIONS
I, Harry Hornish, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Waterworks,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 7, 2003 /s/ Harry K. Hornish, Jr.
-------------------------
Harry Hornish
President and Chief Executive Officer
21
I, Mechelle Slaughter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Waterworks,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 7, 2003 /s/ Mechelle Slaughter
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Mechelle Slaughter
Chief Financial Officer
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