UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 26, 2004

OR

o 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.

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

National Waterworks, Inc.
Form 10-Q
Index

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

National Waterworks, Inc.

The accompanying notes are an integral part of these financial statements.

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National Waterworks, Inc.

The accompanying notes are an integral part of these financial statements.

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National Waterworks, Inc.

The accompanying notes are an integral part of these financial statements.

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National Waterworks, Inc.

Notes to Financial Statements (unaudited)

Note 1. Basis of Presentation

National Waterworks, Inc. (“NWW”, “Company”) is a wholly owned subsidiary of National Waterworks Holdings, Inc. (“Holdings”).

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. Certain prior year amounts have been reclassified to conform to the 2004 presentation.

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 and related notes thereto, included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

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 26, 2004 include twelve weeks and two days. The results for the quarter ended March 28, 2003 include twelve weeks and three days.

Recent Accounting Pronouncements

None

Note 2. Goodwill

The change in the carrying amount of goodwill for the three-month period ended March 26, 2004, is as follows:

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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, fittings, valves, meters, fire hydrants, service and repair products and other complementary products for waterworks construction and maintenance/repair. The following table sets forth net sales by product category (in thousands):

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 February 9, 2004, NWW acquired substantially all of the assets and certain liabilities of Midstate Utility Supply, Inc. for an aggregate purchase price of approximately $2.0 million. This acquisition was accounted for by the purchase method, and accordingly, the purchase price was allocated to the net assets acquired based upon their estimated fair values as of the date of acquisition. The allocation of purchase price resulted in approximately $1.1 million of goodwill acquired.

As this acquisition is immaterial to the financial statements, pro forma results of operations are not presented.

On November 22, 2002, NWW acquired substantially all of the assets and certain liabilities of U.S. Filter Distribution Group, Inc. (“USFDG”), a wholly owned subsidiary of United States Filter Corporation (“U.S. Filter”), which is an indirect-wholly owned subsidiary of Veolia Environnement (“Veolia”, formerly Vivendi Environnement S.A.). A post-closing purchase price adjustment of $3.1 million was paid in the first quarter of 2003.

Note 5. 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.

In November 2002, NWW entered into a management agreement with J.P. Morgan Partners, LLC and Thomas H.

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Lee Partners, L.P. (“Sponsors”). Each Sponsor and its affiliates own 43.1% of the outstanding common stock of Holdings. Under the agreement, the Sponsors agreed to provide NWW with financial advisory and other services. NWW will pay each Sponsor an annual management fee in the amount of $0.5 million, commencing July 1, 2004. The management agreement continues until terminated by a Sponsor as provided in the management agreement. Upon termination under certain conditions, each Sponsor will be entitled to receive a termination fee equal to the net present value of the fees which would have been paid to the Sponsor for the 10-year period commencing on the date of termination.

Certain of the Company’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 previously discussed, on November 22, 2002, NWW acquired substantially all of the assets and certain liabilities of USFDG, a wholly owned subsidiary of U.S. Filter, which is an indirect-wholly owned subsidiary of Veolia. The November 2002 acquisition was structured as an asset purchase, and we did not assume any existing or future asbestos-related liabilities relating to U.S. Filter or its predecessors. U.S. Filter and USFDG retained these liabilities and jointly and severally agreed to indemnify and defend us from and against these liabilities on an unlimited basis with no termination date. U.S. Filter and USFDG also agreed that, until November 22, 2012, U.S. Filter will cause USFDG to maintain USFDG’s corporate existence and ensure that USFDG has sufficient funds to pay any and all of its debts and other obligations, including liabilities retained by USFDG and its indemnification obligations, as and when they become due. In addition, Veolia has guaranteed all obligations of U.S. Filter and USFDG under the asset purchase agreement, including the indemnity discussed above, up to an aggregate of $50.0 million through the period ending November 22, 2017. Historically, courts have not held the acquirer of an entity’s assets liable for liabilities that are not assumed as part of the transaction unless the asset buyer is found to be a “successor” to the asset seller. Accordingly, we could become subject to asbestos liabilities in the future to the extent we are found to be a successor to USFDG and to the extent USFDG, U.S. Filter and Veolia are unable to fulfill their contractual obligations. As the asbestos claims were retained by USFDG and U.S. Filter and in view of the indemnity by USFDG and U.S. Filter with respect to retained liabilities and the Veolia guarantee, discussed above, management of NWW believes that it has no liability related to asbestos claims at March 26, 2004.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of significant factors which have affected the financial condition of the Company as of March 26, 2004 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 Company’s annual report on Form 10-K for the year ended December 31, 2003.

Forward-Looking Statements

Unless the context otherwise requires, “we,” “us”, “our” and National Waterworks refer to National Waterworks, Inc., a Delaware corporation.

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, 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 “estimates,” “expects,” “anticipates,” “projects,” “forecasts,” “plans,” “intends,” “believes,” “may,” “should”, and variations of such words or 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.

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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 seasonal 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 in the Company’s annual report on Form 10-K for the year ended December 31, 2003. 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 products including pipe, fittings, valves, meters, service and repair products, fire hydrants and other components that are used to transport clean water and wastewater between reservoirs and treatment plants and residential and commercial locations. In addition, we provide a broad array of value-added services such as project estimation, project management and product advice. 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. Through our network of 133 branches in 36 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.

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 23.2%, and 24.0% of our net sales in the three months ended March 26, 2004 and March 28, 2003, respectively. The purchase price of PVC pipe ranged from $0.29 to $0.60 per pound between 1997 and 2003, which we believe to be the most recent peak to trough period. Our purchase price of PVC pipe averaged $0.41, $0.36 and $0.34 per pound for the years ended December 31, 2003, 2002 (combined) and 2001, respectively, with our 2003 PVC purchase price ranging from a quarterly average of $0.39 to $0.44 per pound. Our purchase price of PVC pipe averaged $0.45 and $0.41 per pound for the three months ended March 26, 2004 and March 28, 2003, 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, with an offsetting 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 dollar increase or decrease in PVC pipe prices to our customers. The impact of PVC price changes is minimized because we sell the majority of

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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 profit dollars as a percentage of net sales, are affected by PVC price fluctuations because we focus on maintaining gross profit dollars 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 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 in Item 7 of the Company’s annual report on Form 10-K for the year ended December 31, 2003.

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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 Company’s annual report on Form 10-K for the year ended December 31, 2003. 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. The inventory reserve is adjusted monthly based on a review of slow moving inventories as well as other factors including potential adjustments from physical inventory counts. Significant unusual events giving rise to changes in our inventory valuation are reserved when appropriate. To the extent future events impact, either favorably or unfavorably, the salability of our products, our inventory reserves could differ significantly resulting in higher or lower future inventory accruals.

Goodwill and Long-Lived Assets. We review the carrying value of our goodwill for impairment at least annually. To accomplish this, we utilize a third party independent appraiser to assess the fair value of each of our reporting units. The fair value of a reporting unit may be estimated using methods such as a discounted cash flow analysis and market approaches. The Company compares the fair value estimate to the unit’s carrying value. 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.

Long-lived assets, including property and equipment, are reviewed for possible impairment whenever events or other changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected to result from the asset’s use and eventual disposition. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Consideration Received From Vendors. We enter into agreements with many of our vendors providing for inventory purchase rebates (“vendor rebates”) upon achievement of specified volume purchasing levels. We accrue the receipt of vendor rebates as part of our 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 that we 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.

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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.

Three Months Ended March 26, 2004 versus Three Months Ended March 28, 2003

Net Sales. Net sales for the three months ended March 26, 2004 increased $9.7 million, or 3.6%, to $279.5 million from $269.8 million for the three months ended March 28, 2003. The increase reflects the pass through of price increases in all major product lines except meters, partially offset by the impact of two fewer shipping days.

Cost of Goods Sold. Cost of goods sold for the three months ended March 26, 2004 increased $6.8 million, or 3.1%, to $223.1 million from $216.3 million for the three months ended March 28, 2003. The increase reflects the increase in net sales. This increase is partially offset by the recognition of the final $4.0 million inventory revaluation recognized in the 2003 period related to the acquisition of USFDG. The 2003 period also reflects a $1.0 million reduction in cost of goods sold from the adoption of EITF issue 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor .

Gross Profit. As a result of the foregoing, gross profit for the three months ended March 26, 2004 increased $3.0 million, to $56.5 million from $53.5 million for the three months ended March 28, 2003. Our gross profit margin increased to 20.2% for the 2004 period compared to 19.8% in 2003.

Selling, General and Administrative. Selling, general and administrative expenses for the three months ended March 26, 2004 decreased $0.6 million, or 1.6%, to $38.1 million from $38.7 million for the three months ended March 28, 2003. This decrease is primarily related to higher training costs combined with acquisition related transition costs recorded in the 2003 period.

Operating Income. As a result of the foregoing, operating income for the three months ended March 26, 2004 increased $3.8 million, or 27.1%, to $17.8 million from $14.0 million for the three months ended March 28, 2003. As a percentage of net sales, operating income increased to 6.4% for the 2004 period from 5.2% for the 2003 period.

Interest Expense, Net. Interest expense, net for the three months ended March 26, 2004 decreased $1.3 million, or 13.7%, to $8.2 million from $9.5 million for the three months ended March 28, 2003. The decrease is a result of lower applicable margins related to the August 2003 refinancing of the term loan under our senior credit facility.

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Net Income. We reported net income of $5.7 million for the three months ended March 26, 2004, compared to $2.7 million for the three months ended March 28, 2003. This increase primarily reflects the result of the foregoing, partially offset by the applicable increase in income tax expense.

Liquidity and Capital Resources

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, the NWW acquisition was structured as an asset acquisition which will allow us 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 $99.0 million at March 26, 2004 compared to net working capital of $115.2 million at December 31, 2003. The decrease in net working capital is primarily attributable to the seasonal increase in accounts payable exceeding the increases in inventory and accounts receivable as a result of rising PVC prices and improved vendor payment terms.

Net cash provided by operating activities for the three months ended March 26, 2004 was $27.3 million compared to net cash used in operating activities for the three months ended March 28, 2003 of $0.6 million. The change in net cash provided by operating activities in 2004 compared to 2003 is primarily attributable to the increase in net income and the impact of the foregoing working capital decrease.

Net cash used in investing activities for the three months ended March 26, 2004 and March 28, 2003 was $2.1 million and $3.4 million, respectively. Net cash used in investing activities for the three months ended March 26, 2004 reflects the acquisition of Midstate Utility Supply, Inc. for a net consideration of $2.0 million. 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. Capital expenditures for the three months ended March 26, 2004 were $0.2 million compared to $0.3 million for the three months ended March 28, 2003.

Net cash provided by (used in) financing activities for the three months ended March 26, 2004 and March 28, 2003 was ($6.1) million and $.6 million, respectively. Net cash used in the 2004 period represents a dividend distribution. Net cash provided in the 2003 period included a $1.0 million cash equity investment in Holdings, by one of our and Holdings’ directors, who had not made an investment in Holdings at the time the NWW acquisition was consummated. Holdings made a concurrent $1.0 million capital contribution to the Company.

Our senior credit facility, as amended, consists of a $245.0 million term loan facility, of which $240.0 million was outstanding at March 26, 2004, and a $75.0 million revolving credit facility. No amount was outstanding under the revolving credit facility at March 26, 2004, however approximately $4.0 million of the availability under the revolving credit facility was used to support outstanding letters of credit. We repaid $3.75 million of the term loan on March 31, 2004. 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, subject to the negative covenants set forth in our senior credit facility. 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 $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 and at maturity during 2009. In addition, we are required to make annual mandatory prepayments of the term loans (or, if no term loans are outstanding, revolving loans) under the senior credit facility in an amount equal to 75% of Excess Cash Flow, as defined in our senior credit facility, and 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 amounts, or 50% of Excess Cash Flow if our ratio of consolidated total debt to consolidated EBITDA as of the last day of the applicable fiscal year is not greater than 4:0 to 1:0. The term loans (or, if no term loans are outstanding, revolving loans) are also subject to mandatory prepayments in an amount equal to (i) 75% of the net cash proceeds from certain equity issuances by us or our subsidiaries (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.

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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 plus an applicable margin, or a base rate plus an applicable margin. The base rate is the higher of the prime rate or the federal funds rate plus 0.5%. At March 26, 2004, the interest rate on the term loan was 3.92% per annum. Our senior credit facility permits us to issue up to an additional $100.0 million of credit facilities without the consent of the existing lenders thereunder, so long as no default or event of default under the senior credit facility has occurred and is continuing or would occur after giving effect to such issuance and certain other conditions are satisfied, including pro forma compliance with certain senior leverage ratios. Our senior credit facility provides that we can pay a dividend to Holdings from time to time, contingent upon meeting certain financial covenants and ratios and other conditions. Holdings can use the amount of such dividend for certain purposes including to pay a dividend on its capital stock. In addition, the aggregate amount of dividends paid pursuant to the provision referred to in the preceding sentence may not exceed $110.0 million in total, and may not exceed $45.0 million in fiscal year 2003 and $40.0 per fiscal year thereafter, provided that any amount not paid in the fiscal year for which it is permitted may be carried over to any succeeding fiscal year.

Our $200.0 million aggregate 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. We may, from time to time, and subject to the limitations in our senior credit facility, purchase senior subordinated notes in the open market or in privately negotiated transactions.

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 26, 2004. Indebtedness under the senior credit facility is secured by substantially all of our and Holdings’ 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 and, to the extent that no material adverse tax consequences would result, foreign 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.

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

None

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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 26, 2004, we had $200.0 million principal amount of fixed-rate debt represented by the notes and $240.0 million of floating-rate debt represented by borrowings under the term loan portion of the senior credit facility. We repaid $3.75 million of the term loan on March 31, 2004. In addition, up to $75 million of floating rate borrowings are available under the revolving credit portion of the senior credit facility, of which approximately $4.0 million was used to support outstanding letters of credit at March 26, 2004. Based on the amount outstanding under the term loans at March 26, 2004, an immediate increase of one percentage point in the applicable interest rate would cause an approximate $2.4 million increase in annual interest expense. 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.

As of the end of the first quarter, 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 over financials reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting in the three months since the Company last evaluated the system of internal controls in conjunction with the preparation of financial statements for the year ended December 31, 2003.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

     On March 2, 2004 the Company filed a Current report on Form 8-K reporting that (i) a press release was issued regarding the Company’s financial results for the year ended December 31, 2003 under Item 7 and Item 12 and (ii) a press release was issued announcing the declaration of a cash dividend under Item 9.

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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 5, 2004	By:	/s/ Harry K. Hornish, Jr.
		Harry K. Hornish, Jr.
		President and Chief Executive Officer

Date: May 5, 2004	By:	/s/ Mechelle Slaughter
		Mechelle Slaughter
		Chief Financial Officer

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