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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 25, 2005 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.  Delaware
    
    05-0532711(State or other jurisdiction of
    
    (I.R.S. Employerincorporation 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. þ Yes
    
    o No
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act) o Yes
    
    þ 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 April 26, 2005$.01 Par Value
    
    
    100




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National Waterworks, Inc.
Form 10-Q
Index Page(s)PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Balance Sheets as of March 25, 2005 (unaudited) and December 31, 2004
    
    
    3Statements of Operations for the Three Months Ended March 25, 2005 and March 26, 2004 (unaudited)
    
    
    4Statements of Cash Flows for the Three Months Ended March 25, 2005 and March 26, 2004 (unaudited)
    
    
    5Notes to Financial Statements (unaudited)
    
    
    6-8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9-14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    16PART II. OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    17SIGNATURES
    
    
    18CERTIFICATIONS
    
    
    19-21EX-31.1 CERTIFICATIONEX-31.2 CERTIFICATIONEX-32.1 CERTIFICATION
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements National Waterworks, Inc. 
 Balance Sheets
  March 25,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    28,836
    
    
    $
    15,940Trade accounts receivable, net
    
    
    235,844
    
    
    
    227,780Inventories
    
    
    149,407
    
    
    
    126,866Deferred income taxes
    
    
    1,754
    
    
    
    1,398Other current assets
    
    
    2,369
    
    
    
    2,668Total current assets
    
    
    418,210
    
    
    
    374,652Property and equipment, net
    
    
    18,929
    
    
    
    19,269Goodwill
    
    
    457,221
    
    
    
    457,221Deferred financing fees, net
    
    
    19,671
    
    
    
    20,565Other assets
    
    
    3,556
    
    
    
    2,961$
    917,587
    
    
    $
    874,668Liabilities and Stockholders EquityCurrent liabilities:Trade accounts payable
    
    $
    213,754
    
    
    $
    172,214Current installments of long-term debt
    
    
    15,000
    
    
    
    15,000Accrued compensation and benefits
    
    
    16,964
    
    
    
    33,795Other accrued expenses
    
    
    23,849
    
    
    
    12,564Total current liabilities
    
    
    269,567
    
    
    
    233,573Long-term debt, excluding current installments
    
    
    395,000
    
    
    
    395,000Deferred income taxes
    
    
    25,050
    
    
    
    23,163Other long-term liabilities
    
    
    3,732
    
    
    
    3,132Total liabilities
    
    
    693,349
    
    
    
    654,868Commitments and contingencies (note 3)Stockholders Equity:Common stock - $0.01 par value; 100 shares
authorized, issued and outstanding
    
    
    Additional paid-in capital
    
    
    199,710
    
    
    
    199,614Retained earnings
    
    
    24,528
    
    
    
    20,186Total stockholders equity
    
    
    224,238
    
    
    
    219,800$
    917,587
    
    
    $
    874,668
 The accompanying notes are an integral part of these financial statements. 3




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National Waterworks, Inc. 
 Statements of Operations
  Three Months EndedMarch 25,
    
    
    March 26,2005
    
    
    2004Net sales
    
    $
    339,448
    
    
    $
    280,022Cost of goods sold
    
    
    269,599
    
    
    
    223,572Gross profit
    
    
    69,849
    
    
    
    56,450Operating expenses:Selling, general and administrative
    
    
    44,899
    
    
    
    38,075Income before depreciation and
amortization
    
    
    24,950
    
    
    
    18,375Depreciation and amortization
    
    
    762
    
    
    
    557Operating income
    
    
    24,188
    
    
    
    17,818Other income (expense):Interest expense, net
    
    
    (8,450
    )
    
    
    (8,249
    )Other
    
    
    (79
    )
    
    
    63Income before income taxes
    
    
    15,659
    
    
    
    9,632Income tax expense
    
    
    6,317
    
    
    
    3,939Net income
    
    $
    9,342
    
    
    $
    5,693
 The accompanying notes are an integral part of these financial statements. 4




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The accompanying notes are an integral part of these financial statements. National Waterworks, Inc. 
 Statements of Cash Flows
  Three Months EndedMarch 25,
    
    
    March 26,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    9,342
    
    
    $
    5,693Adjustments to reconcile net income
to net cash from operating activities:Deferred income taxes
    
    
    1,531
    
    
    
    3,294Amortization of deferred financing fees
    
    
    894
    
    
    
    894Non-cash stock compensation expense
    
    
    96
    
    
    
    Depreciation and amortization
    
    
    762
    
    
    
    557Loss (gain) on disposal of equipment
    
    
    2
    
    
    
    (87
    )Provision for doubtful accounts
    
    
    197
    
    
    
    236Changes in operating assets and liabilities,
net of acquisitions:Trade accounts receivable
    
    
    (8,261
    )
    
    
    (13,060
    )Inventories
    
    
    (22,541
    )
    
    
    (26,056
    )Other current assets
    
    
    299
    
    
    
    552Other assets
    
    
    (595
    )
    
    
    (563
    )Trade accounts payable and other accrued expenses
    
    
    35,994
    
    
    
    55,254Other long term liabilities
    
    
    600
    
    
    
    570Net cash from operating activities
    
    
    18,320
    
    
    
    27,284Cash flows from investing activities:Capital expenditures
    
    
    (442
    )
    
    
    (239
    )Business acquisitions, net of cash
    
    
    
    
    
    
    (1,992
    )Proceeds from sales of property and equipment
    
    
    18
    
    
    
    157Net cash from investing activities
    
    
    (424
    )
    
    
    (2,074
    )Cash flows from financing activities:Dividend distribution
    
    
    (5,000
    )
    
    
    (6,114
    )Net cash from financing activities
    
    
    (5,000
    )
    
    
    (6,114
    )Net increase in cash and cash equivalents
    
    
    12,896
    
    
    
    19,096Cash and cash equivalents at beginning of period
    
    
    15,940
    
    
    
    18,702Cash and cash equivalents at end of period
    
    $
    28,836
    
    
    $
    37,798Cash paid for interest
    
    $
    62
    
    
    $
    1Cash paid for income taxes
    
    $
    1,810
    
    
    $
    3,125
 The accompanying notes are an integral part of these financial statements. 5




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National Waterworks, Inc. 
 Notes to Financial Statements (unaudited) Note 1. Basis of Presentation National Waterworks, Inc. (NWW) 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 2005 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 NWWs annual report on Form 10-K for the year ended December 31, 2004. Fiscal Year NWWs calendar year begins on January 1 of the year stated and ends on December 31 of that same
year. NWW 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 25, 2005 include twelve weeks. The
results for the quarter ended March 26, 2004 include twelve weeks and two days. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment: an Amendment of
FASB Statements No. 123 and 95(SFAS No. 123R). SFAS No. 123R requires the recognition in the
income statement of the grant-date fair value of stock options and other equity-based compensation
issued to employees. SFAS No. 123R is effective for most public companies annual periods
beginning after June 15, 2005. NWW plans to adopt SFAS No. 123R prospectively on January 1, 2006.
The adoption of SFAS No. 123R is not expected to have a significant impact on NWWs financial
statements. 6




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Note 2. 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. NWW 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): Three Months EndedMarch 25,
    
    
    March 26,Product Category
    
    2005
    
    
    2004Pipe
    
    $
    150,727
    
    
    $
    116,825Fittings
    
    
    51,052
    
    
    
    42,479Valves
    
    
    38,328
    
    
    
    33,379Meters
    
    
    28,114
    
    
    
    25,118Fire hydrants
    
    
    18,179
    
    
    
    16,633Service and repair products
    
    
    20,784
    
    
    
    17,277Other
    
    
    32,264
    
    
    
    28,311$
    339,448
    
    
    $
    280,022
 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 3. Commitments and Contingencies 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 (USFC), which is an indirect-wholly owned subsidiary of Veolia Environnement
(Veolia, formerly Vivendi Environnement S.A.). 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. The November 2002 acquisition was structured as an asset purchase and NWW did not assume any
existing or future asbestos-related liabilities relating to USFC or its predecessors. USFC and
USFDG retained these liabilities and jointly and severally agreed to indemnify and defend NWW from
and against these liabilities on an unlimited basis with no termination date. USFC and USFDG also
agreed that, until November 22, 2012, USFC 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 USFC 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, NWW could become subject
to asbestos liabilities in the future to the extent it is found to be a successor to USFDG and to
the extent USFDG, USFC and Veolia are unable to fulfill their contractual obligations. As the
asbestos claims were retained by USFDG and USFC and in view of the indemnity by USFDG and USFC 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 25, 2005. 7




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USFDG and its predecessor companies have been named as defendants in 1,180 asbestos related
lawsuits, of which 976 have been dismissed, 144 have been settled and 60 remain open at March 25,
2005. The majority of these suits have related to one location and have either been dismissed or
settled for nominal amounts. USFDGs insurers have paid the majority of the settlement and defense
costs related to these suits. As of March 25, 2005, USFDG has made aggregate settlement payments
of $0.1 million and paid aggregate defense costs of $0.6 million related to settled claims. NWW is involved in various other 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 NWWs financial position or results of operations. Note 4. Related Party Transactions In November 2002, NWW entered into a management agreement with J.P. Morgan Partners, LLC and Thomas
A. Lee Partners, L.P. (collectively, the Sponsors). Each of the Sponsors and its affiliates owns
43.3% of the outstanding common stock of Holdings. Under the agreement, the Sponsors agreed to
provide NWW with financial advisory and other services. Beginning July 1, 2004, NWW pays each
Sponsor an annual management fee of $0.5 million for these services. 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 that would have been paid to the Sponsor for the 10-year period
commencing on the date of termination. 8




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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 25, 2005 and the results of operations for the
three months then ended. This information should be read in conjunction with our financial
statements and the notes thereto contained herein and in our annual report on Form 10-K for the
year ended December 31, 2004. 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. 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 our 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 us detailed in our annual report on Form 10-K for the year ended December 31, 2004.
Except as otherwise required by the federal securities laws, we assume 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 an approximately 17% share of the estimated $9 billion U.S. waterworks products distribution
market. We distribute a full line of pipes, fittings, valves, meters, fire hydrants, service and
repair products 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. Through our network of 135 branches in 36 states, we sell
directly to municipalities and to contractors who serve municipalities and perform residential,
commercial and industrial waterworks projects. 9




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Factors affecting our business Commodity Pricing. The price we pay our suppliers for certain products can be volatile due to
supply and demand dynamics, which are beyond our control. This volatility can cause fluctuations
in our revenues and the related gross profit dollars. We attempt to manage this volatility by
adjusting our prices to reflect vendor pricing fluctuations and by managing our inventory levels.
However, our gross profit percentage may fluctuate somewhat due to competitive forces or the timing
of our price adjustments. The cost of PVC pipe, which represented approximately 24% of our net sales for the quarter ended
March 25, 2005, is particularly volatile and we have experienced a significant increase in the cost
of PVC pipe during recent quarters. 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 our
annual report on Form 10-K for the year ended December 31, 2004. 10




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Critical accounting policies and estimates Our significant accounting policies are more fully described in the notes to our audited financial
statements which are set forth in our annual report on Form 10-K for the year ended December 31,
2004. Certain of our 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 carrying value of our inventory 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 are accounted for as a reduction of the carrying value
of our inventory when appropriate. To the extent future events impact the salability of our
products, additional adjustments to the carrying value of our inventory may be required. Goodwill and Long-Lived Assets.We review the carrying value of our goodwill for impairment at
least annually by comparing the estimated fair value of each of our six reporting units to its
carrying value. If the carrying value of a reporting unit exceeds its estimated fair value, 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. 11




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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 EndedMarch 25,
    
    
    March 26,2005
    
    
    2004Statement of Operations Data:Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    79.4
    %
    
    
    79.8
    %Gross profit
    
    
    20.6
    %
    
    
    20.2
    %Operating expenses:Selling, general and administrative
    
    
    13.2
    %
    
    
    13.6
    %Income before depreciation and amortization
    
    
    7.4
    %
    
    
    6.6
    %Depreciation and amortization
    
    
    0.2
    %
    
    
    0.2
    %Operating income
    
    
    7.2
    %
    
    
    6.4
    %Other income (expense):Interest expense, net
    
    
    (2.5
    %)
    
    
    (3.0
    %)Other
    
    
    0.0
    %
    
    
    0.0
    %Income before income taxes
    
    
    4.7
    %
    
    
    3.4
    %Income tax expense
    
    
    1.9
    %
    
    
    1.4
    %Net income
    
    
    2.8
    %
    
    
    2.0
    %
 Three Months Ended March 25, 2005 versus Three Months Ended March 26, 2004 Net Sales.Net sales for the three months ended March 25, 2005 increased $59.4 million, or 21.2%,
to $339.4 million from $280.0 million for the three months ended March 26, 2004. The increase
reflects the significant price increases on pipe, including PVC pipe, as well as increased volume
and prices for most other major product lines. Cost of Goods Sold.Cost of goods sold for the three months ended March 25, 2005 increased $46.0
million, or 20.6%, to $269.6 million from $223.6 million for the three months ended March 26, 2004.
This increase is due primarily to the significant increase in our cost of pipe, including PVC pipe,
as well as increased volume and costs for most other major product lines. Gross Profit.As a result of the foregoing, gross profit for the three months ended March 25, 2005
increased $13.4 million, to $69.8 million from $56.4 million for the three months ended March 26,
2004. Our gross profit margin increased to 20.6% for the 2005 period compared to 20.2% in the 2004
period. Selling, General and Administrative.Selling, general and administrative expenses, consisting
primarily of compensation and benefits expense and facility costs, for the three months ended March
25, 2005 increased $6.8 million, or 17.8%, to $44.9 million from $38.1 million for the three months
ended March 26, 2004. This increase is due primarily to increases in costs that vary based on our
operating performance, such as variable employee compensation. As a percentage of sales, selling,
general and administrative expenses were 13.2% for the 2005 period compared to 13.6% for the 2004
period. Depreciation and
Amortization.Depreciation and amortization expenses for the
three months ended March 25, 2005 were $0.8 million, compared to
$0.6 million for the three months ended March 26, 2004.
Depreciation includes depreciation of property and equipment. Operating Income.As a result of the foregoing, operating income for the three months ended March
25, 2005 increased $6.4 million, or 36.0%, to $24.2 million from $17.8 million for the three months
ended March 26, 2004. As a percentage of net sales, operating income increased to 7.2% for the 2005
period from 6.4% for the 2004 period. Interest Expense, Net.Interest expense, net for the three months ended March 25, 2005 increased
$0.2 million, or
2.4%, to $8.4 million from $8.2 million for the three months ended March 26, 2004. The increase is
a result of higher interest rates during the 2005 period compared to the 2004 period. Income Taxes.Our
effective income tax rate for the three months ended March 25, 2005
was approximately 40.3% compared to 40.9% for the three months ended
March 26, 2004. 12




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Net Income.We reported net income of $9.3 million for the three months ended March 25, 2005,
compared to $5.7 million for the three months ended March 26, 2004. 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. Net working capital is comprised of current assets, excluding cash and cash equivalents, minus
current liabilities. We had net working capital of $119.8 million at March 25, 2005 compared to net
working capital of $125.1 million at December 31, 2004. The decrease in net working capital
reflects lower working capital needs during the quarter ended March 25, 2005, as compared to the
quarter ended December 31, 2004, due to the seasonal reduction in sales volume in the current
quarter. Net cash provided by operating activities for the three months ended March 25, 2005 was $18.3
million compared to net cash provided by operating activities of $27.3 million for the three months
ended March 26, 2004. This change is primarily attributable to the increase in net income, offset
by the applicable changes in working capital during each period. Net cash used in investing activities for the three months ended March 25, 2005 and March 26, 2004
was $0.4 million and $2.1 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. Capital expenditures for the three months ended March 25, 2005
were $0.4 million compared to $0.2 million for the three months ended March 26, 2004. Net cash used in financing activities for the three months ended March 25, 2005 and March 26, 2004
was $5.0 and $6.1 million, respectively. Net cash used in each period represents dividend
distributions to our parent, National Waterworks Holdings, Inc. (Holdings). Our senior credit facility, as amended, consists of a $245.0 million term loan facility, of which
$210.0 million was outstanding at March 25, 2005, and a $75.0 million revolving credit facility.
No amount was outstanding under the revolving credit facility at March 25, 2005; however,
approximately $4.4 million of the availability under the revolving credit facility was used to
support outstanding letters of credit. 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 is scheduled to mature on November 22, 2008 and will have
no scheduled amortization or commitment reductions. The term loan facility is scheduled to mature
on November 22, 2009 and has quarterly scheduled amortization payments of $3.75 million in 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. 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 25, 2005, the interest rate on the term loan was 5.06% 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 13




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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 $125.0 million in total, and may not exceed $40.0 million per fiscal year,
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 governing our senior subordinated 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 25, 2005.
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, to fund
anticipated capital expenditures and to maintain sufficient working capital levels. 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. In addition to our outstanding debt, as of March 25, 2005, Holdings had $250.0 million aggregate
principal amount of unsecured senior notes outstanding. These notes, which are scheduled to mature
on January 1, 2014, bear interest at 12.50% and provide for quarterly interest payments with
payment in kind provisions, as defined in the underlying indenture, at Holdings option. Though
not obligated to do so, we intend to pay dividends and make other distributions to Holdings to
enable it to service the interest payments on its senior subordinated notes. On April 6, 2005, Holdings filed a registration statement on Form S-1 (File No. 333-123874) with
the Securities and Exchange Commission in connection with its initial public offering. Recent Accounting Pronouncements See discussion regarding recent accounting pronouncements in Note 1 to the accompanying financial
statements. Related Party Transactions See discussion regarding related party transactions in Note 4 to the accompanying financial
statements. 14




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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 25, 2005,
we had $200.0 million aggregate principal amount of fixed-rate debt represented by the notes and
$210.0 million of floating-rate debt represented by borrowings under the term loan portion of the
senior credit facility. In addition, up to $75.0 million of floating rate borrowings are available
under the revolving credit portion of the senior credit facility, of which approximately $4.4
million was used to support outstanding letters of credit at March 25, 2005. Based on the amount
outstanding under the term loans at March 25, 2005, an immediate increase of one percentage point
in the applicable interest rate would cause an approximate $2.1 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. 15




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Item 4. Controls and Procedures We maintain 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. We have 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 we last evaluated the system
of internal controls in conjunction with the preparation of financial statements for the year ended
December 31, 2004. 16




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PART II. OTHER INFORMATION 
 Item 6. Exhibits (a) Exhibits  31.1
    Certification of Chief Executive Officer pursuant to Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    Certification of Chief Financial Officer pursuant to Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. 17




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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: April 27, 2005
    By:
    /s/ Harry K. Hornish, Jr.Harry K. Hornish, Jr.President and Chief Executive Officer Date: April 27, 2005
    By:
    /s/ Philip KeippPhilip KeippVice President and Chief Financial Officer 18