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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) x
 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.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    05-0532711
(I.R.S. Employer
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. x 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
    
    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 5, 2004$.01 Par Value
    
    100




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National Waterworks, Inc.
Form 10-Q
Index Page(s)PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsBalance Sheets of National Waterworks, Inc. as of
March 26, 2004 (unaudited) and December 31, 2003
    
    
    3Statements of Operations for the Three Months Ended
March 26, 2004 and March 28, 2003 (unaudited)
    
    
    4Statements of Cash Flows for the Three Months Ended
March 26, 2004 and March 28, 2003 (unaudited)
    
    
    5Notes to Financial Statements (unaudited)
    
    
    6-8Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    8-14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II. OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    17CERTIFICATIONS
    
    
    18-21CERTIFICATION OF CEOCERTIFICATION OF CFOCERTIFICATION OF CEOCERTIFICATION OF CFO
 2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements National Waterworks, Inc. 
 Balance Sheets  (in thousands, except share and per share amounts)
 March 26,2004
    
    December 31,(unaudited)
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    37,798
    
    
    $
    18,702Trade accounts receivable, net
    
    
    202,416
    
    
    
    188,476Inventories
    
    
    117,694
    
    
    
    90,739Other current assets
    
    
    2,137
    
    
    
    2,689Total current assets
    
    
    360,045
    
    
    
    300,606Property and equipment, net
    
    
    20,194
    
    
    
    20,523Goodwill
    
    
    457,221
    
    
    
    456,080Deferred financing fees, net
    
    
    23,247
    
    
    
    24,141Other assets
    
    
    2,168
    
    
    
    1,607$
    862,875
    
    
    $
    802,957Liabilities and Stockholders EquityCurrent liabilities:Trade accounts payable
    
    $
    179,368
    
    
    $
    115,038Current installments of long-term debt
    
    
    15,000
    
    
    
    15,000Accrued compensation and benefits
    
    
    13,508
    
    
    
    27,036Other accrued expenses
    
    
    15,349
    
    
    
    9,677Total current liabilities
    
    
    223,225
    
    
    
    166,751Long-term debt, excluding current installments
    
    
    425,000
    
    
    
    425,000Deferred income taxes
    
    
    13,354
    
    
    
    10,059Other long term liabilities
    
    
    2,244
    
    
    
    1,674Total liabilities
    
    
    663,823
    
    
    
    603,484Commitments and ContingenciesStockholders Equity:Common stock, par value $.01 per share; 100
shares authorized, issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    199,052
    
    
    
    199,473Retained earnings (accumulated deficit)
    
    
    
    
    
    
    Total stockholders equity
    
    
    199,052
    
    
    
    199,473$
    862,875
    
    
    $
    802,957
 The accompanying notes are an integral part of these financial statements. 3




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National Waterworks, Inc. 
 Statements of Operations (unaudited)  (in thousands)
 Three Months Ended
    
    Three Months EndedMarch 26,
    
    March 28,2004
    
    2003Net sales
    
    $
    279,524
    
    
    $
    269,779Cost of goods sold
    
    
    223,074
    
    
    
    216,312Gross profit
    
    
    56,450
    
    
    
    53,467Operating expenses:Selling, general and administrative
    
    
    38,075
    
    
    
    38,696Income before depreciation
and amortization
    
    
    18,375
    
    
    
    14,771Depreciation and amortization
    
    
    557
    
    
    
    725Operating income
    
    
    17,818
    
    
    
    14,046Other income (expense):Interest expense, net
    
    
    (8,249
    )
    
    
    (9,471
    )Other
    
    
    63
    
    
    
    (45
    )Income before income taxes
    
    
    9,632
    
    
    
    4,530Income tax expense
    
    
    3,939
    
    
    
    1,812Net income
    
    $
    5,693
    
    
    $
    2,718
 The accompanying notes are an integral part of these financial statements. 4




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National Waterworks, Inc. 
 Statements of Cash Flows (unaudited)  (in thousands)
 Three Months Ended
    
    Three Months EndedMarch 26,
    
    March 28,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    5,693
    
    
    $
    2,718Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:Deferred income taxes
    
    
    3,294
    
    
    
    1,811Amortization of deferred financing fees
    
    
    894
    
    
    
    401Depreciation and amortization
    
    
    557
    
    
    
    725Loss (gain) on disposal of equipment
    
    
    (87
    )
    
    
    26Provision for doubtful accounts
    
    
    236
    
    
    
    193Changes in operating assets and liabilities, net
of businesses acquired:Trade accounts receivable
    
    
    (13,060
    )
    
    
    (5,176
    )Inventories
    
    
    (26,056
    )
    
    
    (18,694
    )Other current assets
    
    
    552
    
    
    
    774Other assets
    
    
    (563
    )
    
    
    (782
    )Trade accounts payable
    
    
    63,109
    
    
    
    20,691Accrued compensation and benefits
    
    
    (13,527
    )
    
    
    (9,487
    )Other accrued expenses
    
    
    5,672
    
    
    
    5,292Other long term liabilities
    
    
    570
    
    
    
    955Net cash provided by (used in)
operating activities
    
    
    27,284
    
    
    
    (553
    )Cash flows from investing activities:Capital expenditures
    
    
    (239
    )
    
    
    (301
    )Additional NWW acquisition costs
    
    
    
    
    
    
    (3,179
    )Business acquisitions
    
    
    (1,992
    )
    
    
    Proceeds from sales of property and equipment
    
    
    157
    
    
    
    63Net cash used in investing activities
    
    
    (2,074
    )
    
    
    (3,417
    )Cash flows from financing activities:Equity investment by Holdings
    
    
    
    
    
    
    1,000Dividend distribution
    
    
    (6,114
    )
    
    
    Financing fees
    
    
    
    
    
    
    (407
    )Net cash provided by (used in)
financing activities
    
    
    (6,114
    )
    
    
    593Net increase (decrease) in cash and
cash equivalents
    
    
    19,096
    
    
    
    (3,377
    )Cash and cash equivalents at beginning of period
    
    
    18,702
    
    
    
    39,888Cash and cash equivalents at end of period
    
    $
    37,798
    
    
    $
    36,511Cash paid for interest
    
    
    1
    
    
    
    4,148Cash paid for income taxes
    
    
    3,125
    
    
    
    118
 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, 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: Goodwill(in
thousands)Balance at December 31, 2003
    
    $
    456,080Additional goodwill related to the acquisition of Midstate
Utility Supply, Inc.
    
    
    1,141Balance at March 26, 2004
    
    $
    457,221
 6




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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): Three Months
    
    Three MonthsEnded
    
    EndedProduct Category
    
    March 26, 2004
    
    March 28, 2003Pipe
    
    $
    116,618
    
    
    $
    111,119Fittings
    
    
    42,394
    
    
    
    40,811Valves
    
    
    33,332
    
    
    
    34,128Meters
    
    
    25,075
    
    
    
    23,420Fire Hydrants
    
    
    16,603
    
    
    
    15,121Service and Repair Products
    
    
    17,251
    
    
    
    17,802Other
    
    
    28,251
    
    
    
    27,378$
    279,524
    
    
    $
    269,779
 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. 7




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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. 8




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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 9




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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. 10




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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. 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 Ended
    
    Three Months EndedMarch 26,
    
    March 28,2004
    
    2003Statement of Operations Data:Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    79.8
    %
    
    
    80.2
    %Gross profit
    
    
    20.2
    %
    
    
    19.8
    %Operating expenses:Selling, general and administrative
    
    
    13.6
    %
    
    
    14.3
    %Income before depreciation
and amortization
    
    
    6.6
    %
    
    
    5.5
    %Depreciation and amortization
    
    
    0.2
    %
    
    
    0.3
    %Operating income
    
    
    6.4
    %
    
    
    5.2
    %Other income (expense):Interest expense, net
    
    
    (3.0
    %)
    
    
    (3.5
    %)Income before income taxes
    
    
    3.4
    %
    
    
    1.7
    %Income tax expense
    
    
    1.4
    %
    
    
    0.7
    %Net income
    
    
    2.0
    %
    
    
    1.0
    %
 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. 12




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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. 13




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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 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 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. 15




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PART II. OTHER INFORMATION 
 Item 6. Exhibits and Reports on Form 8-K (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 pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    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 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. 16




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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 SlaughterMechelle SlaughterChief Financial Officer 17