**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q/A**

**Amendment No. 1 to Form 10-Q**

| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|------------|----------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                               |
| ** ** | **For the  quarterly period ended July 2, 2005.**                                                   |
| ** ** | ** **                                                                                               |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** ** | ** **                                                                                               |
| ** ** | **Commission  File Number 333-116590**                                                                   |

 

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**MUELLER WATER PRODUCTS, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                      | **20-3547095**                        |
|---------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or | (I.R.S. Employer  identification No.) |
| organization)                                     |                                  |

 

**4211W. Boy Scout Blvd.Tampa, FL 33607**(Address of principal executive offices)

**(813) 871-4811**(Registrant’s telephone number,including area code)

**Mueller Water Products, LLC500 West Eldorado StreetDecatur, IL 62522-1808**

**(Former Name and Former Addressif Changed Since Last Reported)**

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x  No o

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act.) Yes o  No x

|              | ** ** | **Common Stock** | ** **     | **Shares Outstanding  As of August 5, 2005** | ** ** |
|--------------|------------|-----------------------|----------------|-----------------------------------------------------------------------|------------|
| Class A |       | $                     | 0.01 Par Value |                                                                  |       | 131,208,998 |   |   |
| Class B |       | $                     | 0.01 Par Value |                                                                  |       | 89,343,699 |   |   |

 

 

 

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**Explanatory Note**

*Organizational Change*

Mueller Water Products,Inc., a Delaware corporation (the “Company”), was formerly known as MuellerHolding Company, Inc., and, effective February 2, 2006, is the “successorissuer” to Mueller Water Products, LLC, a Delaware limited liability company,pursuant to Rule 15d-5 promulgated under the Securities and Exchange Act of1934, as amended.

*Purpose of Amendment to QuarterlyReport*

The purpose of this Amendment No. 1 to theQuarterly Report on Form 10-Q of the Company is to restate theCompany’s consolidated financial statements as of and for the three and ninemonths ended July 2, 2005. On December 14, 2005, the Company’s managementand the Audit Committee of the Board of Directors determined that the financialstatements of the Company for the two years ended September 30, 2004 andinterim periods of fiscal years 2005 and 2004 required restatement.

The 2005 Restatements reflect adjustments to correctcash flow statement errors related to foreign currency translation and bookcash overdrafts, the misclassification of deferred income tax assets betweencurrent and non-current classifications in the balance sheet and the misclassificationof depreciation expense between selling, general and administrative expense andcost of sales. The 2005 Restatements had no impact on the Company’sconsolidated net income or the Consolidated Statement of Stockholders’ Deficit.The nature and impact of these adjustments are described in Note 2: “Restatements”in this Form 10-Q/A.

For the convenienceof the reader, this Form 10-Q/A sets forth the original Form 10-Qfiled by the Company in its entirety. Except for the revision of management’sconclusion regarding the effectiveness of the Company’s disclosure controls andprocedures as of July 2, 2005 presented under Part1, Item 4, the Companyhas not modified or updated other disclosures presented in the original reporton Form 10-Q except for the required effects of the 2005 Restatements.Accordingly, other than the items indicated above, this Form 10-Q/Adoes not reflect events occurring after the filing of the original Form 10-Qor modify or update those disclosures. Information not affected by therestatement is unchanged and reflects the disclosure made at the time of theoriginal filing of the Form 10-Q with the Securities and ExchangeCommission on August 12, 2005. Accordingly, this Form 10-Q/Ashould be read in conjunction with the Company’s filings made with theSecurities and Exchange Commission subsequent to the filing of the original Form 10-Q.The following items have been amended as a result of the 2005 Restatements:

·       Part I—Item1. Unaudited Financial Statements

·       Part I—Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations

·       Part I—Item4. Controls and Procedures; and

·       Part II—Item6. Exhibits

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**MUELLER WATERPRODUCTS, INC.REPORT ON FORM 10-QFOR THE QUARTERLY PERIOD ENDED JULY 2, 2005**

**TABLE OF CONTENTS**

| PART I—FINANCIAL  INFORMATION |                                                                                        | 3      |
|-----------------------------------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.                            | Unaudited Financial  Statements                                                             |   |   |
|                                    | Condensed Consolidated  Balance Sheets                                                      |   | 3 |
|                                    | Condensed  Consolidated Statements of Operations                                            |   | 4 |
|                                    | Condensed  Consolidated Statements of Cash Flows                                            |   | 5 |
|                                    | Notes  to Condensed Consolidated Financial Statements                                       |   | 6 |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 26 |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                 |   | 40 |
| Item 4.                            | Controls and  Procedures                                                                    |   | 40 |
| PART II—OTHER  INFORMATION    |                                                                                        | 43     |
| Item 6.                            | Exhibits                                                                                    |   | 43 |
| Signatures                              |                                                                                        | 44     |

 

2

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**PART I.   FINANCIAL INFORMATION**

**ITEM 1.**                FINANCIALSTATEMENTS

**MUELLERWATER PRODUCTS, INC.UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                            | ** ** | **September 30,  2004  (restated)**         | ** ** | **July 2,  2005  (restated)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                            | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| **Assets**                                                                                                            |       |                                             |       |                               |       |   |   |
| Cash and cash  equivalents                                                                                            |       |                                             | $          | 60.5                               |       |   | $ | 74.3 |   |
| Receivables, net  of allowance for doubtful accounts of $5.1 and $5.3, respectively                              |       |                                             | 162.0      |                               |       | 160.9 |   |
| Inventories                                                                                                           |       |                                             | 260.2      |                               |       | 309.7 |   |
| Income taxes  receivable                                                                                              |       |                                             | 4.1        |                               |       | 0.7 |   |
| Deferred income  taxes                                                                                                |       |                                             | 21.8       |                               |       | 23.9 |   |
| Prepaid expenses  and other current assets                                                                            |       |                                             | 28.9       |                               |       | 26.3 |   |
| Total current assets                                                                                                  |       |                                             | 537.5      |                               |       | 595.8 |   |
| Property, plant  and equipment, net                                                                                   |       |                                             | 186.8      |                               |       | 173.5 |   |
| Goodwill, net                                                                                                         |       |                                             | 163.2      |                               |       | 163.2 |   |
| Identifiable  intangibles, net                                                                                        |       |                                             | 55.2       |                               |       | 53.1 |   |
| Pension  intangible                                                                                                   |       |                                             | 0.8        |                               |       | 0.8 |   |
| Deferred  financing fees, net                                                                                         |       |                                             | 37.4       |                               |       | 33.5 |   |
| Deferred income  taxes                                                                                                |       |                                             | 8.3        |                               |       | 14.8 |   |
| Total assets                                                                                                          |       |                                             | $          | 989.2                              |       |   | $ | 1,034.7 |   |
| **Liabilities**                                                                                                       |       |                                             |       |                               |       |   |   |
| Accounts payable                                                                                                      |       |                                             | $          | 57.6                               |       |   | $ | 58.7 |   |
| Current portion  of long-term debt                                                                                    |       |                                             | 3.2        |                               |       | 3.9 |   |
| Accrued expenses  and other current liabilities                                                                       |       |                                             | 85.9       |                               |       | 83.6 |   |
| Total current liabilities                                                                                             |       |                                             | 146.7      |                               |       | 146.2 |   |
| Long-term debt,  net of current portion                                                                               |       |                                             | 1,036.2    |                               |       | 1,047.8 |   |
| Accrued pension  liability                                                                                            |       |                                             | 29.2       |                               |       | 33.7 |   |
| Other long-term  liabilities                                                                                          |       |                                             | 7.8        |                               |       | 3.6 |   |
| Total liabilities                                                                                                     |       |                                             | 1,219.9    |                               |       | 1,231.3 |   |
| Commitments and  contingencies (Note 9)                                                                               |       |                                             | —     |                               |       | — |   |
| Redeemable common  stock                                                                                              |       |                                             | 1.7        |                               |       | 1.7 |   |
| **Shareholders’ equity**                                                                                         |       |                                             |       |                               |       |   |   |
| Common stock:                                                                                                         |       |                                             |       |                               |       |   |   |
| Class A,  $0.01 par value (400,000,000 shares authorized and 131,208,998 issued)                            |       |                                             | 1.3        |                               |       | 1.3 |   |
| Class B,  $0.01 par value, convertible, non-voting (150,000,000 shares authorized and  89,343,699 shares issued) |       |                                             | 0.9        |                               |       | 0.9 |   |
| Additional  paid-in capital                                                                                           |       |                                             | —     |                               |       | — |   |
| Accumulated  deficit                                                                                                  |       |                                             | (218.6     | )                                  |       | (186.7 | ) |
| Accumulated other  comprehensive loss                                                                                 |       |                                             | (16.0      | )                                  |       | (13.8 | ) |
| Total  shareholders’ equity                                                                                      |       |                                             | (232.4     | )                                  |       | (198.3 | ) |
| Total liabilities and  shareholders’ equity                                                                      |       |                                             | $          | 989.2                              |       |   | $ | 1,034.7 |   |

 

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

3

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**MUELLER WATER PRODUCTS, INC.UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                         | ** ** | **Three months ended**                 | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **June 26, 2004**                      | ** ** | **July 2, 2005** | ** ** |
| ** **                                                                         | ** ** | **(restated)**                                   | ** ** | **(restated)** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| Net sales                                                                          |       |                                             | $          | 289.1 |   |   |   | $ | 296.9 |   |   |
| Cost of sales                                                                      |       |                                             | 206.3      |   |   |   | 202.1 |   |   |
| Gross profit                                                                       |       |                                             | 82.8       |   |   |   | 94.8 |   |   |
| Selling, general  and administrative expense, including stock compensation expense |       |                                             | 65.9       |   |   |   | 45.9 |   |   |
| Facility  rationalization, restructuring and related costs                         |       |                                             | —     |   |   |   | — |   |   |
| Operating income                                                                   |       |                                             | 16.9       |   |   |   | 48.9 |   |   |
| Interest expense  and early repayment costs                                        |       |                                             | (21.7      | ) |   |   | (23.4 | ) |   |
| Interest income                                                                    |       |                                             | 0.1        |   |   |   | 0.4 |   |   |
| Income before  income taxes                                                        |       |                                             | (4.7       | ) |   |   | 25.9 |   |   |
| Income tax  expense                                                                |       |                                             | (5.3       | ) |   |   | 9.9 |   |   |
| Net income                                                                         |       |                                             | $          | 0.6 |   |   |   | $ | 16.0 |   |   |

 

| ** **                                                                         | ** ** | **Nine months ended**                  | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **June 26, 2004**                      | ** ** | **July 2, 2005** | ** ** |
| ** **                                                                         | ** ** | **(restated)**                                   | ** ** | **(restated)** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)  (dollars in millions)** | ** ** |
| Net sales                                                                          |       |                                             | $          | 745.6 |   |   |   | $ | 838.2 |   |   |
| Cost of sales                                                                      |       |                                             | 541.0      |   |   |   | 583.0 |   |   |
| Gross profit                                                                       |       |                                             | 204.6      |   |   |   | 255.2 |   |   |
| Selling, general  and administrative expense, including stock compensation expense |       |                                             | 141.3      |   |   |   | 133.8 |   |   |
| Facility  rationalization, restructuring and related costs                         |       |                                             | 0.9        |   |   |   | 1.6 |   |   |
| Operating income                                                                   |       |                                             | 62.4       |   |   |   | 119.8 |   |   |
| Interest expense  and early repayment costs                                        |       |                                             | (42.1      | ) |   |   | (68.0 | ) |   |
| Interest income                                                                    |       |                                             | 0.5        |   |   |   | 1.0 |   |   |
| Income before  income taxes                                                        |       |                                             | 20.8       |   |   |   | 52.8 |   |   |
| Income tax  expense                                                                |       |                                             | 4.9        |   |   |   | 20.9 |   |   |
| Net income                                                                         |       |                                             | $          | 15.9 |   |   |   | $ | 31.9 |   |   |

 

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

4

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**MUELLER WATER PRODUCTS, INC.UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                         | ** ** | **Nine months ended**     | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                         | ** ** | **June 26,  2004**             | ** ** | **July 2,  2005** | ** ** |
| ** **                                                                         | ** ** | **(restated)**                      | ** ** | **(restated)** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                     | ** ** |
| ** **                                                                         | ** ** | **(dollars in millions)** | ** ** |
| **Cash flows from operating  activities**                                          |       |                                |       |   |   |   |   |
| Net income                                                                         |       | $                                   | 15.9       |   |   | $ | 31.9 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                |       |   |   |   |   |
| Depreciation                                                                       |       | 34.3                                |       |   | 32.7 |   |   |
| Amortization of intangibles and tooling                                            |       | 15.2                                |       |   | 4.1 |   |   |
| Unrealized gain on interest rate swaps                                             |       | (10.4                               | )          |   | (4.2 | ) |   |
| Accretion on senior discount notes and amortization  of bond discount              |       | 2.4                                 |       |   | 14.1 |   |   |
| Write-off of deferred financing fees                                               |       | 7.0                                 |       |   | — |   |   |
| All other adjustments                                                              |       | 7.2                                 |       |   | (3.8 | ) |   |
| Changes in assets and  liabilities, net of the effects of acquisitions:            |       |                                |       |   |   |   |   |
| Receivables                                                                        |       | (16.8                               | )          |   | 1.6 |   |   |
| Inventories                                                                        |       | (9.2                                | )          |   | (48.8 | ) |   |
| Accounts payable and accrued expenses                                              |       | (3.7                                | )          |   | (5.2 | ) |   |
| All other changes, net                                                             |       | 9.1                                 |       |   | 10.7 |   |   |
| Net cash provided  by operating activities                                         |       | 51.0                                |       |   | 33.1 |   |   |
| **Cash flows from investing  activities**                                          |       |                                |       |   |   |   |   |
| Purchase of  property, plant and equipment                                         |       | (17.4                               | )          |   | (20.8 | ) |   |
| Acquisition of  businesses, net of cash acquired                                   |       | (19.8                               | )          |   | — |   |   |
| Net cash used in  investing activities                                             |       | (37.2                               | )          |   | (20.8 | ) |   |
| **Cash flows from financing  activities**                                          |       |                                |       |   |   |   |   |
| Book cash overdrafts                                                               |       | 7.9                                 |       |   | 3.6 |   |   |
| Proceeds from  short-term borrowings                                               |       | 9.2                                 |       |   | — |   |   |
| Payment of  short-term borrowings                                                  |       | (9.2                                | )          |   | — |   |   |
| Proceeds from  long-term debt                                                      |       | 1,070.1                             |       |   | — |   |   |
| Payment of  long-term debt, including capital lease obligations                    |       | (604.4                              | )          |   | (2.4 | ) |   |
| Redemption of  preferred stock                                                     |       | (106.5                              | )          |   | — |   |   |
| Payment of  deferred financing fees                                                |       | (34.5                               | )          |   | — |   |   |
| Dividends paid  (excluding amounts paid to optionholders)                          |       | (386.6                              | )          |   | — |   |   |
| Net cash used in  financing activities                                             |       | (54.0                               | )          |   | 1.2 |   |   |
| Effect of  exchange rate changes on cash                                           |       | —                              |       |   | 0.3 |   |   |
| Increase  (decrease) in cash and cash equivalents                                  |       | (40.2                               | )          |   | 13.8 |   |   |
| **Cash and cash equivalents**                                                      |       |                                |       |   |   |   |   |
| Beginning of  period                                                               |       | 73.0                                |       |   | 60.5 |   |   |
| End of period                                                                      |       | $                                   | 32.8       |   |   | $ | 74.3 |   |   |

 

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

5

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**1.   Basis ofPresentation**

Mueller Water Products, Inc.(formerly Mueller Holdings (N.A.), Inc.) (“Mueller Water” or the “Company”)is the parent company of Mueller Group, Inc. (“Group”). The accompanyingunaudited condensed consolidated financial statements of Mueller Water havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial information. Accordingly,the unaudited condensed consolidated financial statements and notes do not containcertain information included in the Company’s annual financial statements. Inthe opinion of management, all normal and recurring adjustments that areconsidered necessary for a fair financial statement presentation have beenmade. Operating results for the three and nine months ended July 2, 2005are not necessarily indicative of the results that may be expected for thefiscal year ended September 30, 2005. The consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements for the year ended September 30, 2004 as found in theCompany’s Annual Report on Form 10-K.

**2.   Restatements**

This note is comprised oftwo sections: 2005 Restatements and 2004 Restatements.   The 2004 Restatements were previouslyreported in the original Form 10-Q.

***2005 Restatements***

In the course offinalizing the September 30, 2005 financial statements, the Companydetermined that certain items included in the Statements of Consolidated CashFlows, the Consolidated Statements of Operations and the Consolidated BalanceSheets were not properly classified in annual and interim periods. The interimfinancial statements for the three and nine months ended June 26, 2004 andJuly 2, 2005, respectively, were restated for the following items:

*Effect of exchange rate changes on cash*

In interim periods duringfiscal 2004 and 2005, the Company presented the entire change related toforeign currency translation in the “Effect of exchange rate changes on cash”line item in the Statements of Consolidated Cash Flows. The portion of cashflow changes related to increases or decreases in assets and liabilitiesassociated with operating, investing and financing activities did not considerthe amount of the change related to foreign currency translation.

*Book cash overdrafts*

In interim periods duringfiscal 2004 and 2005, cash accounts in book cash overdraft positions werenetted with accounts where legal right of offset did not exist. On the ConsolidatedBalance Sheets, cash and cash equivalents should have increased and a liabilityrecorded with respect to such book cash overdrafts by comparable amounts. Thechange in the book cash overdraft should have been reflected as a financingactivity in the Statements of Consolidated Cash Flows and should have beenincluded in accounts payable and as an increase in cash and cash equivalents inthe Consolidated Balance Sheet as of July 2, 2005.

6

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**2.**   Restatements(Continued)

*Current and Non-current deferred income taxes*

In interim periods duringfiscal 2004 and 2005, the Company should have classified certain deferredincome tax assets as current in the Consolidated Balance Sheets, based on thenature of the underlying temporary difference, but included such temporarydifferences incorrectly as non-current.

*Misclassification of depreciation expense*

In interim periods duringfiscal 2004 and 2005, the Company incorrectly classified certain depreciationexpense amounts as selling, general and administrative expense in theConsolidated Statements of Operations when it should have been reported as costof sales. 

The 2005 Restatements hadno impact on the Company’s consolidated net income or the Consolidated Statementof Stockholders’ Deficit for any of the prior periods presented.

***2004 Restatements***

In November 2004, theCompany’s Audit Committee was notified of alleged potential accountingimproprieties concerning the Company’s accounting for inventory reserves andcertain questions concerning revenue recognition. The Audit Committee appointedan independent law firm to investigate the allegations. The law firm delivereda report that identified several areas requiring financial review by theCompany principally concerning accounting for excess and obsolete (E&O)inventory, the capitalization of costs relating to a project that should havebeen expensed in prior periods, the accrual of reserves for this projectwithout identifying support for such accruals and the timing of recognition ofrevenue with regard to full truckload shipments that were not immediatelydispatched to customers by certain freight carriers used by the Company. TheCompany also identified some additional annual and interim items recorded inincorrect periods in the course of finalizing the 2004 financial statements. Inaddition, the Company determined that the value it assigned to stockcompensation in connection with its April 2004 recapitalization should berevised. As a result of these findings, the Company restated its annual andinterim financial statements.

The interim financialstatements for the three and nine months ended June 26, 2004 were restatedfor the following items:

*Inventory valuation adjustments*

The Company determinedthat certain reports utilized in the assessment and establishment of excess andobsolete provisions were inaccurate and that certain items were erroneouslyeliminated from the provision. The interim financial statements were restatedto reflect the decrease in inventory value and increase in cost of goods soldto reflect an adjustment to properly record the provision for excess andobsolete inventory reserves.

*Stock-based compensation*

The Company determinedthat the compensation expense recorded in April 2004 in connection withthe Company’s recapitalization did not properly reflect the current fair valueof the Company’s common 

7

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**2.**   Restatements (Continued)

stock. The financial statements for the three monthsand nine months ended June 26, 2004 were restated to record stockcompensation expense based on the fair value of the common stock issued.

*Warrants*

The Company determinedthat the fair value of the Company’s common stock used to measure theconsideration for warrants attached to the Company’s 14 3⁄4% senior discountnotes due 2014 did not reflect the stock’s current fair value. The financialstatements for the three months and nine months ended June 26, 2004 wererestated to reflect the appropriate fair value of the common stock whichresulted in an increase in additional paid-in capital and a decrease in amountsascribed to long-term debt for the warrants issued as a unit with the seniordiscount notes. The adjusted value of the warrants was recorded as debtdiscount, and resulted in an increase in interest expense associated withamortization of this debt discount over the life of the senior discount notes.

*Research and development costs*

The Company purchasedcertain inventory and tooling for a development project that was initiallyrecorded in inventory and capitalized to the extent such cost related totooling. Since there were no alternative future uses for these items, they shouldhave been recorded as an expense as they were incurred, and no expense shouldhave been recorded in 2004 interim periods. The interim financial statementswere restated to reflect this as a research and development expense (Selling,General & Administrative) in the proper periods.

*Revenue recognition adjustments*

Revenues related tocertain full-truckload customer shipments that were not immediately dispatchedto customers by certain freight carriers used by the Company originallyrecognized should have been deferred until such time as the trucks weredispatched and the products delivered to the customers. The interim financialstatements were restated to reflect the recognition of revenue in the properperiods.

*Inventory journal entries*

Unauthorized journalentries were recorded, which increased the value of inventory inappropriately.The interim financial statements were restated to reduce the inventory valueand increase cost of goods sold.

*Intercompany profit elimination*

There was an error, whichinitially arose in the first quarter of 2004, in the estimated amount ofintercompany profit elimination recorded during the interim periods in the yearended September 30, 2004.

*Deferred financing fees*

Previously expensedfinancing fees associated with an amendment to our senior credit facility inthe first quarter of 2004 should have been capitalized and amortized over theremaining term of the facility.

8

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**2.**   Restatements (Continued)

*Income tax effect of adjustments*

As a result of theaforementioned adjustments, the income tax provisions in the interim financialstatements for fiscal 2004 were also revised. Additionally, the Company changedthe classification of $3.7 million of tax obligations previously presented aspart of non-current deferred tax assets as other long-term liabilities on the June 26,2004 balance sheet.

The following tables setforth the effects of the 2005 and 2004 Restatements discussed above on thefinancial statements as of July 2, 2005 and for the three and nine monthsended June 26, 2004 and July 2, 2005 as follows:

**ConsolidatedStatement of Operations**
|                                                                                            | ** ** | **Three months ended**    | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **June 26, 2004**         | ** ** | **June 26, 2004**     | ** ** |
| ** **                                                                                 | ** ** | ** **                          | ** ** | **as restated**            | ** ** | **as restated** | ** ** | ** ** | ** ** | **as restated** | ** ** | **as restated** | ** ** |
| ** **                                                                                 | ** ** | **as originally**              | ** ** | **for 2004**               | ** ** | **for 2005** | ** ** | **as originally** | ** ** | **for 2004** | ** ** | **for 2005** | ** ** |
| ** **                                                                                 | ** ** | **reported(A)**                     | ** ** | **Restatements(B)**             | ** ** | **Restatements** | ** ** | **reported(A)** | ** ** | **Restatements(B)** | ** ** | **Restatements** | ** ** |
| ** **                                                                                 | ** ** | **(unaudited)**                     | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                                                 | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                                                  |       |                                | $          | 288.7                           |       |   |   | $ | 289.1 |   |   |   | $ | 289.1 |   |   |   | $ | 743.6 |   |   |   | $ | 745.6 |   |   |   | $ | 745.6 |   |   |
| Cost of sales                                                                              |       |                                | 205.7      |                            |       |   | 204.5 |   |   |   | 206.3 |   |   |   | 533.7 |   |   |   | 535.7 |   |   |   | 541.0 |   |   |
| Gross profit                                                                               |       |                                | 83.0       |                            |       |   | 84.6 |   |   |   | 82.8 |   |   |   | 209.9 |   |   |   | 209.9 |   |   |   | 204.6 |   |   |
| Selling, general and  administrative expense,  including stock  compensation expense  |       |                                | 63.1       |                            |       |   | 67.7 |   |   |   | 65.9 |   |   |   | 142.4 |   |   |   | 146.6 |   |   |   | 141.3 |   |   |
| Facility rationalization and related costs                                                 |       |                                | —     |                            |       |   | — |   |   |   | — |   |   |   | 0.9 |   |   |   | 0.9 |   |   |   | 0.9 |   |   |
| Operating income                                                                           |       |                                | 19.9       |                            |       |   | 16.9 |   |   |   | 16.9 |   |   |   | 66.6 |   |   |   | 62.4 |   |   |   | 62.4 |   |   |
| Interest expense and early repayment costs                                                 |       |                                | (20.8      | )                               |       |   | (21.7 | ) |   |   | (21.7 | ) |   |   | (42.0 | ) |   |   | (42.1 | ) |   |   | (42.1 | ) |   |
| Interest income                                                                            |       |                                | 0.1        |                            |       |   | 0.1 |   |   |   | 0.1 |   |   |   | 0.5 |   |   |   | 0.5 |   |   |   | 0.5 |   |   |
| Income before income  taxes                                                                |       |                                | (0.8       | )                               |       |   | (4.7 | ) |   |   | (4.7 | ) |   |   | 25.1 |   |   |   | 20.8 |   |   |   | 20.8 |   |   |
| Income tax expense                                                                         |       |                                | (3.8       | )                               |       |   | (5.3 | ) |   |   | (5.3 | ) |   |   | 6.6 |   |   |   | 4.9 |   |   |   | 4.9 |   |   |
| Net income                                                                                 |       |                                | $          | 3.0                             |       |   |   | $ | 0.6 |   |   |   | $ | 0.6 |   |   |   | $ | 18.5 |   |   |   | $ | 15.9 |   |   |   | $ | 15.9 |   |   |

 

9

----

**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**2.   Restatements(Continued)**

The following table shows the effects of the various2004 Restatement on net income. The 2005 Restatements had no impact on theCompany’s consolidated net income.
|                                         | ** ** | **Three months**               | ** ** | **Nine months**        | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **ended**                           | ** ** | **ended**                   | ** ** |
| ** **                              | ** ** | **June 26, 2004**         | ** ** | **June 26, 2004** | ** ** |
| ** **                              | ** ** | **(unaudited)**                     | ** ** | **(unaudited)**             | ** ** |
| ** **                              | ** ** | **(dollars in millions)** | ** ** |
| Net income, as  originally reported(A)  |       |                                | $          | 3.0                         |       |   |   | $ | 18.5 |   |   |
| Increased (decreased)  pretax earnings: |       |                                |       |                        |       |   |   |   |   |
| Inventory valuation adjustments         |       |                                | (0.1       | )                           |       |   | (0.2 | ) |   |
| Research & development costs   |       |                                | 0.8        |                        |       |   | 1.2 |   |   |
| Revenue recognition adjustments         |       |                                | 0.1        |                        |       |   | 0.6 |   |   |
| Inventory journal entries               |       |                                | 1.1        |                        |       |   | 0.9 |   |   |
| Stock-based compensation                |       |                                | (5.4       | )                           |       |   | (5.4 | ) |   |
| Warrants                                |       |                                | (0.1       | )                           |       |   | (0.1 | ) |   |
| Intercompany profit elimination         |       |                                | 0.5        |                        |       |   | (1.3 | ) |   |
| Deferred financing fees                 |       |                                | (0.8       | )                           |       |   | — |   |   |
| Total pre-tax  adjustments              |       |                                | (3.9       | )                           |       |   | (4.3 | ) |   |
| Income tax effect  of adjustments       |       |                                | 1.5        |                        |       |   | 1.7 |   |   |
| Net income, as restated(B)              |       |                                | $          | 0.6                         |       |   |   | $ | 15.9 |   |   |

 
|                                                                                           | ** ** | **Three months ended**    | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **July 2, 2005**          | ** ** | **July 2, 2005**      | ** ** |
| ** **                                                                                | ** ** | ** **                          | ** ** | **as restated**            | ** ** | ** ** | ** ** | **as restated** | ** ** |
| ** **                                                                                | ** ** | **as originally**              | ** ** | **for 2005**               | ** ** | **as originally** | ** ** | **for 2005** | ** ** |
| ** **                                                                                | ** ** | **reported(C)**                     | ** ** | **Restatements**                | ** ** | **reported(C)** | ** ** | **Restatements** | ** ** |
| ** **                                                                                | ** ** | **(unaudited)**                     | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                                                | ** ** | **(dollars in millions)** | ** ** |
| Cost of sales                                                                             |       |                                | $          | 200.2                           |       |   |   | $ | 202.1 |   |   |   | $ | 577.7 |   |   |   | $ | 583.0 |   |   |
| Gross profit                                                                              |       |                                | 96.7       |                            |       |   | 94.8 |   |   |   | 260.5 |   |   |   | 255.2 |   |   |
| Selling, general and  administrative expense,  including stock compensation expense  |       |                                | 47.8       |                            |       |   | 45.9 |   |   |   | 139.1 |   |   |   | 133.8 |   |   |

 

10

----

**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

** **

**Consolidated Balance Sheets**
|                                                   | ** ** | **September 30, 2004**    | ** ** | **July 2, 2005** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | ** **                          | ** ** | **as restated**       | ** ** | ** ** | ** ** | **as restated** | ** ** |
| ** **                                        | ** ** | **as originally**              | ** ** | **for 2005**          | ** ** | **as originally** | ** ** | **for 2005** | ** ** |
| ** **                                        | ** ** | **reported(C)**                     | ** ** | **Restatements**           | ** ** | **reported(C)** | ** ** | **Restatements** | ** ** |
| ** **                                        | ** ** | **(unaudited)**                     | ** ** | **(unaudited)**            | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                        | ** ** | **(dollars in millions)** | ** ** |
| Cash and cash  equivalents                        |       |                                | $          | 55.6                       |       |   |   | $ | 60.5 |   |   |   | $ | 65.8 |   |   |   | $ | 74.3 |   |   |
| Deferred income  taxes—current               |       |                                | 9.0        |                       |       |   | 21.8 |   |   |   | 10.1 |   |   |   | 23.9 |   |   |
| Current assets                                    |       |                                | 519.8      |                       |       |   | 537.5 |   |   |   | 573.5 |   |   |   | 595.8 |   |   |
| Deferred income  taxes—non-current           |       |                                | 21.1       |                       |       |   | 8.3 |   |   |   | 28.6 |   |   |   | 14.8 |   |   |
| Total assets                                      |       |                                | 984.3      |                       |       |   | 989.2 |   |   |   | 1,026.2 |   |   |   | 1,034.7 |   |   |
| Accounts payable                                  |       |                                | 52.7       |                       |       |   | 57.6 |   |   |   | 50.2 |   |   |   | 58.7 |   |   |
| Total current  liabilities                        |       |                                | 141.8      |                       |       |   | 146.7 |   |   |   | 137.7 |   |   |   | 146.2 |   |   |
| Total liabilities                                 |       |                                | 1,215.0    |                       |       |   | 1,219.9 |   |   |   | 1,222.8 |   |   |   | 1,231.3 |   |   |
| Total liabilities and  shareholders’ deficit |       |                                | 984.3      |                       |       |   | 989.2 |   |   |   | 1,026.2 |   |   |   | 1,034.7 |   |   |

 

**Statementsof Consolidated Cash Flows**
|                                                                         | ** ** | **Nine months ended**     | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **June 26, 2004**         | ** ** | **July 2, 2005**      | ** ** |
| ** **                                                              | ** ** | ** **                          | ** ** | **as restated**            | ** ** | **as restated** | ** ** | ** ** | ** ** | **as restated** | ** ** |
| ** **                                                              | ** ** | **as originally**              | ** ** | **for 2004**               | ** ** | **for 2005** | ** ** | **as originally** | ** ** | **for 2005** | ** ** |
| ** **                                                              | ** ** | **reported(A)**                     | ** ** | **Restatements(B)**             | ** ** | **Restatements** | ** ** | **reported(C)** | ** ** | **Restatements** | ** ** |
| ** **                                                              | ** ** | **(unaudited)**                     | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **                                                              | ** ** | **(dollars in millions)** | ** ** |
| **Cash flows from operating  activities:**                              |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Receivables                                                             |       |                                | $          | (14.7                           | )          |   |   | $ | (16.7 | ) |   |   | $ | (16.8 | ) |   |   | $ | 1.1 |   |   |   | $ | 1.6 |   |   |
| Inventories                                                             |       |                                | (9.9       | )                               |       |   | (9.1 | ) |   |   | (9.2 | ) |   |   | (49.5 | ) |   |   | (48.8 | ) |   |
| Accounts payable, accrued expenses  and other current liabilities  |       |                                | 5.5        |                            |       |   | (3.7 | ) |   |   | (3.7 | ) |   |   | (4.8 | ) |   |   | (5.2 | ) |   |
| Other, net                                                              |       |                                | 2.5        |                            |       |   | 8.7 |   |   |   | 9.1 |   |   |   | 9.6 |   |   |   | 10.7 |   |   |
| Cash flows provided by operating  activities                            |       |                                | 50.2       |                            |       |   | 50.8 |   |   |   | 51.0 |   |   |   | 31.2 |   |   |   | 33.1 |   |   |
| **Cash  flows from financing activities:**                              |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Book cash overdrafts                                                    |       |                                | —     |                            |       |   | — |   |   |   | 7.9 |   |   |   | — |   |   |   | 3.6 |   |   |
| Cash flows used in financing  activities                                |       |                                | (61.9      | )                               |       |   | (61.9 | ) |   |   | (54.0 | ) |   |   | (2.4 | ) |   |   | 1.2 |   |   |
| **Effect of exchange rate changes on  cash**                            |       |                                | 0.2        |                            |       |   | 0.2 |   |   |   | — |   |   |   | 2.2 |   |   |   | 0.3 |   |   |
| **Increase (decrease) in cash and cash  equivalents**                   |       |                                | (48.1      | )                               |       |   | (48.1 | ) |   |   | (40.2 | ) |   |   | 10.2 |   |   |   | 13.8 |   |   |
| **Cash  and cash equivalents—beginning  of period**                |       |                                | 71.4       |                            |       |   | 71.4 |   |   |   | 73.0 |   |   |   | 55.6 |   |   |   | 60.5 |   |   |
| **Cash and cash equivalents—end  of  period**                      |       |                                | 23.3       |                            |       |   | 23.3 |   |   |   | 32.8 |   |   |   | 65.8 |   |   |   | 74.3 |   |   |
|                                                                         |            |                                     |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

11

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

** **

**Segment Information**
|                      | ** ** | **Three months ended**    | ** ** | **Nine months ended** | ** ** |
|----------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **June 26, 2004**         | ** ** | **June 26, 2004**     | ** ** |
| ** **           | ** ** | ** **                          | ** ** | **as restated**            | ** ** | ** ** | ** ** | **as restated** | ** ** |
| ** **           | ** ** | **as originally**              | ** ** | **for 2004**               | ** ** | **as originally** | ** ** | **for 2004** | ** ** |
| ** **           | ** ** | **reported(A)**                     | ** ** | **Restatements(B)**             | ** ** | **reported(A)** | ** ** | **Restatements(B)** | ** ** |
| ** **           | ** ** | **(unaudited)**                     | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| ** **           | ** ** | **(dollars in millions)** | ** ** |
| Net sales:           |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water infrastructure |       |                                | $          | 172.4                           |       |   |   | $ | 172.8 |   |   |   | $ | 432.7 |   |   |   | $ | 434.7 |   |   |
| Piping systems       |       |                                | 116.3      |                            |       |   | 116.3 |   |   |   | 310.9 |   |   |   | 310.9 |   |   |
| Consolidated         |       |                                | 288.7      |                            |       |   | 289.1 |   |   |   | 743.6 |   |   |   | 745.6 |   |   |
| Segment EBITDA:      |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water infrastructure |       |                                | 45.2       |                            |       |   | 46.0 |   |   |   | 111.4 |   |   |   | 113.0 |   |   |
| Piping systems       |       |                                | 10.8       |                            |       |   | 12.4 |   |   |   | 28.8 |   |   |   | 28.4 |   |   |
| Total segment EBITDA |       |                                | 56.0       |                            |       |   | 58.4 |   |   |   | 140.2 |   |   |   | 141.4 |   |   |
| Operating income:    |       |                                |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water infrastructure |       |                                | 39.5       |                            |       |   | 40.3 |   |   |   | 93.5 |   |   |   | 95.1 |   |   |
| Piping systems       |       |                                | 6.5        |                            |       |   | 8.1 |   |   |   | 16.1 |   |   |   | 15.7 |   |   |
| Corporate            |       |                                | (26.1      | )                               |       |   | (31.5 | ) |   |   | (43.0 | ) |   |   | (48.4 | ) |   |
| Consolidated         |       |                                | 19.9       |                            |       |   | 16.9 |   |   |   | 66.6 |   |   |   | 62.4 |   |   |
|                      |            |                                     |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                     | ** ** | **At September 30, 2004** | ** ** | **At July 2, 2005** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | ** **                               | ** ** | **as restated**               | ** ** | ** ** | ** ** | **as restated** | ** ** |
| ** **                          | ** ** | **as originally**                   | ** ** | **for 2005**                  | ** ** | **as originally** | ** ** | **for 2005** | ** ** |
| ** **                          | ** ** | **reported(C)**                          | ** ** | **Restatements**                   | ** ** | **reported(C)** | ** ** | **Restatements** | ** ** |
| **(dollars in millions)** | ** ** | **(unaudited)**                          | ** ** | **(unaudited)**                    | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Total assets:                       |       |                                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water infrastructure                |       |                                     | $          | 500.0                              |       |   |   | $ | 500.0 |   |   |   | $ | 507.4 |   |   |   | $ | 507.4 |   |   |
| Piping systems                      |       |                                     | 307.9      |                               |       |   | 307.9 |   |   |   | 336.2 |   |   |   | 336.2 |   |   |
| Corporate                           |       |                                     | 176.4      |                               |       |   | 181.3 |   |   |   | 182.6 |   |   |   | 191.1 |   |   |
| Consolidated                        |       |                                     | $          | 984.3                              |       |   |   | $ | 989.2 |   |   |   | $ | 1,026.2 |   |   |   | $ | 1,034.7 |   |   |

 

----

(A)       Representsthe amounts originally reported before the 2004 and 2005 Restatements describedherein.

(B)        The2004 Restatements were initially presented in the original fiscal year 2005Form 10-Q filings. No previous Form 10-Q/A’s were filed for the 2004 Restatements.

(C)        Representsthe amounts originally reported in the Form 10-Q in fiscal year 2005.

 

12

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**3.   SegmentInformation**

Our operations consist of two operating segments:water infrastructure and piping systems. Water infrastructure products consistprimarily of hydrants, water and gas valves and related products used in water,power and gas distribution. Piping systems products consist primarily of pipefittings and couplings, pipe nipples and hangers and purchased products relatedto piping systems used in a variety of applications.

Intersegment sales and transfers are made atestablished intersegment selling prices generally intended to cover costs. Ourdetermination of segment earnings does not reflect allocations of certaincorporate expenses not attributable to segment operations and intersegmenteliminations, which we designate as Corporate in the segment presentation, andis before interest expense and early debt repayment costs, interest income andincome taxes. Corporate expenses include costs related to financial andadministrative matters, treasury, risk management, human resources, legal counsel,and tax functions. Corporate assets include items booked at the date of theCompany’s inception in 1999 related to purchase accounting valuationadjustments associated with property, plant and equipment and non-competeagreements with the predecessor parent company, as well as intangiblesassociated with intellectual property. These assets and any relateddepreciation or amortization expense were not pushed down to our waterinfrastructure products and piping systems products segments and are maintainedas Corporate items. Therefore, segment earnings are not reflective of resultson a stand-alone basis.

13

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**3.**   Segment Information (Continued)

The Company evaluatessegment performance based on segment EBITDA. Segment EBITDA is defined as netincome plus income tax expense, interest expense (not net of interest income),depreciation and amortization expense. Segment assets consist primarily ofaccounts receivable, inventories, property, plant and equipment—net, goodwill,and identifiable intangibles. Summarized financial information for our segmentsfollows:

| ** **                          | ** ** | **Three months  ended  June 26, 2004** | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  June 26, 2004** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **(restated)**                                        | ** ** | ** **                                           | ** ** | **(restated)**                                       | ** ** | ** **                                          | ** ** |
| **Net Sales:**                      |       |                                                  |       |                                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Water  infrastructure               |       |                                                  | $          | 172.8                                                |       |                                                 |       | $                                                   | 172.1      |   |   |   | $ | 434.7 |   |   |   | $ | 480.8 |   |   |
| Piping systems                      |       |                                                  | 116.3      |                                                 |       |                                                 | 124.8      |                                                |       |   | 310.9 |   |   |   | 357.4 |   |   |
| Consolidated                        |       |                                                  | 289.1      |                                                 |       |                                                 | 296.9      |                                                |       |   | 745.6 |   |   |   | 838.2 |   |   |
| **Intersegment  sales:**            |       |                                                  |       |                                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Water  infrastructure               |       |                                                  | 4.1        |                                                 |       |                                                 | 3.8        |                                                |       |   | 10.1 |   |   |   | 10.6 |   |   |
| Piping systems                      |       |                                                  | 0.2        |                                                 |       |                                                 | 0.3        |                                                |       |   | 0.5 |   |   |   | 0.6 |   |   |
| Consolidated                        |       |                                                  | 4.3        |                                                 |       |                                                 | 4.1        |                                                |       |   | 10.6 |   |   |   | 11.2 |   |   |
| **Segment  EBITDA:**                |       |                                                  |       |                                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Water  infrastructure               |       |                                                  | 46.0       |                                                 |       |                                                 | 52.7       |                                                |       |   | 113.0 |   |   |   | 131.9 |   |   |
| Piping systems                      |       |                                                  | 12.4       |                                                 |       |                                                 | 17.2       |                                                |       |   | 28.4 |   |   |   | 47.5 |   |   |
| Total segment  EBITDA               |       |                                                  | 58.4       |                                                 |       |                                                 | 69.9       |                                                |       |   | 141.4 |   |   |   | 179.4 |   |   |
| **Depreciation  and amortization:** |       |                                                  |       |                                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Water  infrastructure               |       |                                                  | 5.7        |                                                 |       |                                                 | 4.9        |                                                |       |   | 17.9 |   |   |   | 16.9 |   |   |
| Piping systems                      |       |                                                  | 4.3        |                                                 |       |                                                 | 4.3        |                                                |       |   | 12.7 |   |   |   | 12.9 |   |   |
| Corporate                           |       |                                                  | 6.3        |                                                 |       |                                                 | 2.2        |                                                |       |   | 18.9 |   |   |   | 7.0 |   |   |
| Consolidated                        |       |                                                  | 16.3       |                                                 |       |                                                 | 11.4       |                                                |       |   | 49.5 |   |   |   | 36.8 |   |   |
| **Impairment  charges:**            |       |                                                  |       |                                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Water  infrastructure               |       |                                                  | —     |                                                 |       |                                                 | —     |                                                |       |   | — |   |   |   | — |   |   |
| Piping systems                      |       |                                                  | —     |                                                 |       |                                                 | —     |                                                |       |   | 0.1 |   |   |   | — |   |   |
| Corporate                           |       |                                                  | —     |                                                 |       |                                                 | —     |                                                |       |   | — |   |   |   | — |   |   |
| Consolidated                        |       |                                                  | —     |                                                 |       |                                                 | —     |                                                |       |   | 0.1 |   |   |   | — |   |   |
| **Capital  expenditures:**          |       |                                                  |       |                                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Water  infrastructure               |       |                                                  | 3.1        |                                                 |       |                                                 | 4.0        |                                                |       |   | 9.3 |   |   |   | 13.0 |   |   |
| Piping systems                      |       |                                                  | 3.3        |                                                 |       |                                                 | 2.9        |                                                |       |   | 8.1 |   |   |   | 6.8 |   |   |
| Corporate                           |       |                                                  | —     |                                                 |       |                                                 | 0.3        |                                                |       |   | — |   |   |   | 1.0 |   |   |
| Consolidated                        |       |                                                  | 6.4        |                                                 |       |                                                 | 7.2        |                                                |       |   | 17.4 |   |   |   | 20.8 |   |   |
|                                     |            |                                                       |            |                                                      |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

14

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**3.**   Segment Information (Continued)

| ** **                     | ** ** | **At September 30, 2004  (restated)** | ** ** | **At July 2, 2005  (restated)** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| **Total assets:**              |       |                                                 |       |                                           |       |   |   |   |   |
| Water infrastructure           |       |                                                 | $          | 500.0                                          |       |   |   | $ | 507.4 |   |   |
| Piping systems                 |       |                                                 | 307.9      |                                           |       |   | 336.2 |   |   |
| Corporate                      |       |                                                 | 181.3      |                                           |       |   | 191.1 |   |   |
| Consolidated                   |       |                                                 | 989.2      |                                           |       |   | 1,034.7 |   |   |
| **Goodwill:**                  |       |                                                 |       |                                           |       |   |   |   |   |
| Water  infrastructure          |       |                                                 | 149.1      |                                           |       |   | 149.1 |   |   |
| Piping systems                 |       |                                                 | 14.1       |                                           |       |   | 14.1 |   |   |
| Consolidated                   |       |                                                 | 163.2      |                                           |       |   | 163.2 |   |   |
| **Identifiable  intangibles:** |       |                                                 |       |                                           |       |   |   |   |   |
| Water  infrastructure          |       |                                                 | 5.3        |                                           |       |   | 4.7 |   |   |
| Piping systems                 |       |                                                 | 7.2        |                                           |       |   | 5.7 |   |   |
| Corporate                      |       |                                                 | 42.7       |                                           |       |   | 42.7 |   |   |
| Consolidated                   |       |                                                 | 55.2       |                                           |       |   | 53.1 |   |   |
|                                |            |                                                      |            |                                                |            |  |  |  |  |  |  |

 

The Company evaluates segment performance based onsegment EBITDA. A reconciliation of segment EBITDA to consolidated incomebefore income taxes follows:

 

| ** **                                  | ** ** | **Three months  ended  June 26, 2004** | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  June  26, 2004** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **(restated)**                                        | ** ** | ** **                                           | ** ** | **(restated)**                                             | ** ** | ** **                                          | ** ** |
| Total segment  EBITDA                       |       |                                                  | $          | 58.4                                                 |       |                                                       |       | $                                                   | 69.9       |   |   |   | $ | 141.4 |   |   |   | $ | 179.4 |   |   |
| Unallocated  corporate costs                |       |                                                  | (25.1      | )                                                    |       |                                                       | (9.2       | )                                                   |       |   | (29.0 | ) |   |   | (21.8 | ) |   |
| Interest expense  and early repayment costs |       |                                                  | (21.7      | )                                                    |       |                                                       | (23.4      | )                                                   |       |   | (42.1 | ) |   |   | (68.0 | ) |   |
| Depreciation and  amortization              |       |                                                  | (16.3      | )                                                    |       |                                                       | (11.4      | )                                                   |       |   | (49.5 | ) |   |   | (36.8 | ) |   |
| Income before income  taxes                 |       |                                                  | $          | (4.7                                                 | )          |                                                       |       | $                                                   | 25.9       |   |   |   | $ | 20.8 |   |   |   | $ | 52.8 |   |   |

 

15

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**3.**   Segment Information (Continued)

Geographical areainformation with respect to net sales, as determined by the location of thecustomer invoiced, and property, plant and equipment—net, as determined by thephysical location of the assets, were as follows for the three and nine monthsended June 26, 2004 and July 2, 2005:

| ** **      | ** ** | **Three months  ended  June 26, 2004** | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  June 26, 2004** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|-----------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **      | ** ** | **(restated)**                                        | ** ** | ** **                                           | ** ** | **(restated)**                                       | ** ** | ** **                                          | ** ** |
| Net sales:      |       |                                                  |       |                                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| United States   |       |                                                  | $          | 238.6                                                |       |                                                 |       | $                                                   | 238.2      |   |   |   | $ | 620.6 |   |   |   | $ | 686.3 |   |   |
| Canada          |       |                                                  | 46.5       |                                                 |       |                                                 | 55.2       |                                                |       |   | 116.7 |   |   |   | 144.5 |   |   |
| Other Countries |       |                                                  | 4.0        |                                                 |       |                                                 | 3.5        |                                                |       |   | 8.3 |   |   |   | 7.4 |   |   |
|            |       |                                                  | $          | 289.1                                                |       |                                                 |       | $                                                   | 296.9      |   |   |   | $ | 745.6 |   |   |   | $ | 838.2 |   |   |

 

| ** **                           | ** ** | **At September 30, 2004** | ** ** | **At July 2, 2005** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|------------------------------------|------------|
| Property, plant  and equipment, net: |       |                                     |       |                               |       |   |   |   |   |
| United States                        |       |                                     | $          | 173.7                              |       |   |   | $ | 160.3 |   |   |
| Canada                               |       |                                     | 11.7       |                               |       |   | 11.7 |   |   |
| Other Countries                      |       |                                     | 1.4        |                               |       |   | 1.5 |   |   |
|                                 |       |                                     | $          | 186.8                              |       |   |   | $ | 173.5 |   |   |

 

**4.**   Summary ofSignificant Accounting Policies

Fiscal Year—The Company’s fiscal year ends on September 30.The Company’s third quarter ends on the Saturday closest to June 30.

Inventory—Inventories are recorded at the lower ofcost (first-in, first-out) or market value. Additionally, the Company evaluatesits inventory reserves in terms of excess and obsolete exposures. Thisevaluation includes such factors as anticipated usage, inventory turnover,inventory levels and ultimate product sales value. These factors may changeover time causing the reserve level to adjust accordingly.

WarrantyCosts—The Company accrues for the estimated cost of product warranties at thetime of product sale based on historical experience. Adjustments to obligationsfor warranties are made as changes in the obligations become reasonablyestimable. The following table summarizes information concerning the Company’sproduct warranty obligations:

| ** **                      | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **June 26, 2004**      | ** ** | **July 2, 2005**      | ** ** | **June 26, 2004** | ** ** | **July 2, 2005** | ** ** |
| Balance at  beginning of period |       |                             | $          | 0.9                             |       |   |   | $ | 1.4 |   |   |   | $ | 0.9 |   |   |   | $ | 1.6 |   |   |
| Accruals for  warranties        |       |                             | 2.0        |                            |       |   | 0.5 |   |   |   | 4.5 |   |   |   | 1.6 |   |   |
| Settlement of  warranty claims  |       |                             | (0.9       | )                               |       |   | (0.2 | ) |   |   | (3.4 | ) |   |   | (1.5 | ) |   |
| Balance at end of period        |       |                             | $          | 2.0                             |       |   |   | $ | 1.7 |   |   |   | $ | 2.0 |   |   |   | $ | 1.7 |   |   |

 

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**4.**   Summary of Significant Accounting Policies (Continued)

Comprehensive Income—The Company’s comprehensiveincome for the three months ended June 26, 2004, and July 2, 2005includes foreign currency translation losses of $(1.1) million and$(1.2) million, respectively and minimum pension liability adjustment of$(0.4) million for the three months ended June 26, 2004. The Company’scomprehensive income for the nine months ended June 26, 2004 and July 2,2005 includes foreign currency translation gains of $0.2 million and$2.2 million, respectively, and minimum pension liability adjustment of$(0.4) million for the nine months ended June 26, 2004.

Related Party Transactions—Substantially all of the outstandingshares of our common stock are held by DLJ Merchant Banking Partners II, L.P.and its affiliates (the “DLJ Funds”). On July 23, 1999, the Company andits subsidiary, Mueller Group, Inc., entered into a financial advisoryagreement with Donaldson, Lufkin & Jenrette (“DLJ”) whereby theCompany committed to pay DLJ for financial advisory services provided by DLJ. OnApril 27, 2004, Credit Suisse, as successor to DLJ, assigned its rightsunder the financial advisory agreement to DLJ Merchant Banking II, Inc. (“DLJMerchant Banking”), other than the right to provide services to the Company andreceive customary compensation for such services in connection with a “Transaction”,generally defined in the financial advisory agreement to be a sale or dispositionof the Company, a significant acquisition by the Company or a refinancing orrestructuring of the Company’s debt or equity. Credit Suisse and DLJ MerchantBanking are affiliates of the DLJ Funds.

The aggregate amount ofall fees incurred by the Company with DLJ Merchant Banking and Credit Suisseunder the financial advisory agreement was approximately $24.6 million and$0.2 million, respectively, for each of the three-month periods ended June 26,2004 and July 2, 2005 and $25.1 million and $0.4 million for thenine-month periods ended June 26, 2004 and July 2, 2005, respectively.Included in fees paid during the three- and nine-month periods ended June 26,2004 was $24.4 million related to the Company’s April 2004recapitalization. Under the financial advisory agreement, Credit Suisse will beentitled to receive fees in connection with the closing of the pending mergerof the Company and Walter Industries. See Note 5—Merger Announcement andAcquisitions.

**5.**   Merger Announcementand Acquisitions

*Merger Announcement*

As previously announced, on June 17, 2005, theCompany entered into a definitive merger agreement with Walter Industries, Inc.(“Walter Industries”) whereby Walter Industries will acquire the Company for anaggregate purchase price of approximately $1.91 billion, consisting ofapproximately $860 million in cash and the assumption of approximately $1.05billion in Company debt, based on the Company’s balance sheet as of April 2,2005, subject to the post-closing adjustments specified in the merger agreementbased on the Company’s working capital upon the closing of the transaction. Asa result of the merger, the Company’s shares of common stock will be convertedinto the right to receive the applicable merger consideration in cash at theclosing, subject to the post-closing adjustments. Upon closing of thetransaction, the outstanding warrants of the Company will become rights toreceive cash upon exercise of the warrants based on the number of sharesunderlying the warrants.

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**5.**   Merger Announcementand Acquisitions (Continued)

Also, as previously disclosed, the Company will causeits subsidiary, Mueller Group, Inc. (“Group”), to commence a tender offerand consent solicitation for Group’s second priority senior secured floatingrate notes due 2011, and the closing of the tender offer and consentsolicitation would be simultaneous with the merger closing but is not acondition to the merger closing. Group’s senior credit facility will berefinanced at merger closing. In addition, the holders of the Company’s 14 3⁄4%senior discount notes due 2014 and Group’s 10% senior subordinated notes due2012 will have the right to put these notes to their respective issuersfollowing the change of control resulting from the consummation of the mergertransaction in accordance with the respective indentures. See Note 7—Long TermDebt.

The merger is subject tocustomary conditions to closing, including the expiration or termination of thewaiting period under the Hart-Scott-Rodino Antitrust Improvements Act and thefunding of Walter Industries’ committed financing, and there can be noassurance that the transaction will be consummated.

*Acquisitions*

Effective January 15, 2004, the Company acquiredcertain assets of Star Pipe, Inc. (“Star”). The acquisition was accountedfor in accordance with SFAS No. 141 and the operating results wereincluded in the consolidated results since the date of acquisition. Star is aleading distributor of cast and grooved fittings and couplings sourced outsideof the United States. The Star acquisition provided an entry into themarketplace for these foreign-sourced products. The acquisition’s purchaseprice was $17 million, paid in cash at closing, plus possible deferredpurchase price payments, as discussed below.

The followingsummary presents the estimated fair values of the assets and liabilitiesassumed as of January 15, 2004:

| ** **                            | ** ** | ** ** | ** ** | **(dollars in millions)** | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------------------|------------|
| Current assets                        |       |       | $          | 13.1                                |       |   |
| Property,  plant & equipment |       |       | 0.4        |                                |       |
| Intangible assets                     |       |       | 6.7        |                                |       |
| Total assets                          |       |       | $          | 20.2                                |       |   |
| Current  liabilities                  |       |       | 3.2        |                                |       |
| Net assets acquired                   |       |       | $          | 17.0                                |       |   |

 

As part of the acquisition, the Company agreed to afuture payment to be made to the seller to the extent that the gross profit ofthe acquired business exceeds a targeted gross profit. The maximum potentialdeferred payment amount is $23 million. Management currently estimates thedeferred payment could total approximately $3 to $6 million for thethree-year deferred payment period which began February 1, 2004 and ends January 31,2007. This estimated deferred payment amount is based on management’s bestestimate, but the actual deferred payment could be materially different. Theliability for such deferred payment will be recorded at the end of eachtwelve-month period ending January 31, 2005, 2006 or 2007, in accordancewith the purchase agreement. No deferred payment was earned for the twelvemonths ended January 31, 2005.

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**5.**   Merger Announcement and Acquisitions (Continued)

The intangible assets acquired include trademarks,customer relationships and a non-compete agreement with the former owners.These intangibles are being amortized over their estimated useful lives of tenyears, three years and five years, respectively.

Also effective January 15, 2004, the Companyacquired certain assets of Modern Molded Products (“Modern Molded”). Theacquisition was accounted for in accordance with SFAS No. 141 and theoperating results were included in the consolidated results since the date ofacquisition. The purchase of the assets and technology of Modern Molded hasenabled the Company to internally produce parts that were previously purchased,thereby reducing spending and increasing product supply line predictability.The acquisition’s purchase price was $2.8 million, and was paid in cash.

The following summarypresents the estimated fair values of the assets and liabilities assumed as of January 15,2004:

| ** **                            | ** ** | **(dollars in millions)** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|
| Current assets                        |       |                                | $          | 0.2 |   |   |
| Property,  plant & equipment |       |                                | 0.7        |   |   |
| Intangible assets                     |       |                                | 1.9        |   |   |
| Net assets acquired                   |       |                                | $          | 2.8 |   |   |

 

The intangible assets acquired include a non-competeagreement with the former owners and purchased technology. These intangiblesare being amortized over their estimated useful lives of five years.

Thefollowing unaudited pro forma summary presents the consolidated results ofoperations for the three and nine months ended June 26, 2004 as if theacquisitions of Star and Modern Molded had occurred as of October 1, 2003:

| ** ** | ** ** | **Three months  ended**        | ** ** | **Nine months  ended** | ** ** |
|------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | **June 26, 2004**         | ** ** | **June 26, 2004** | ** ** |
| ** ** | ** ** | **(dollars in millions)** | ** ** |
| Net Sales  |       |                                | $          | 289.1                       |       |   |   | $ | 753.0 |   |   |
| Net income |       |                                | 0.6        |                        |       |   | 16.1 |   |   |

 

The unaudited consolidatedpro forma information is not necessarily indicative of the combined resultsthat would have occurred had the acquisitions occurred on that date, nor is itindicative of the results that may occur in the future.

**6.   New AccountingPronouncements**

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replacesSFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requirescompensation costs related to share-based payment transactions to be recognizedin the financial statements over the period that an employee provides servicein exchange for the award. 

19

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**6.**   New Accounting Pronouncements (Continued)

Public companies arerequired to adopt the new standard using a modified prospective method and mayelect to restate prior periods using the modified retrospective method. Underthe modified prospective method, companies are required to record compensationcost for new and modified awards over the related vesting period of such awardsprospectively and record compensation cost prospectively for the unvestedportion, at the date of adoption, of previously issued and outstanding awardsover the remaining vesting period of such awards. No change to prior periodspresented is permitted under the modified prospective method. Under themodified retrospective method, companies record compensation costs for priorperiods retroactively through restatement of such periods using the exact proforma amounts disclosed in the companies’ footnotes. Also, in the period ofadoption and after, companies record compensation based on the modifiedprospective method. SFAS No. 123(R), as amended in April 2005 forcompliance dates, allows companies to implement the standard at the beginningof their next fiscal year. The Company plans to adopt SFAS No. 123(R) asof October 1, 2005, the beginning of its next fiscal year and to use themodified prospective method. The adoption of SFAS 123(R) is notexpected to have a material impact on the Company’s financial statements, asall options previously outstanding have been cancelled as part of the April 2004recapitalization.

In November 2004, the Financial AccountingStandards Board issued SFAS No. 151, “Inventory Costs.” SFAS No. 151amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material. This Statement requires that those itemsbe recognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. SFAS No. 151 iseffective for fiscal years beginning after June 15, 2005. The Companyintends to adopt SFAS No. 151 on October 1, 2005, the beginning ofits 2006 fiscal year. The Company is currently evaluating the impact of thisstandard on its financial statements.

FASB Staff Position (FSP) No. FAS 109-1and 109-2 were issued in December 2004, providing guidance onforeign earnings repatriation and qualified production activities of theAmerican Jobs Creation Act (AJCA) that was enacted on October 22, 2004.The AJCA created a temporary incentive for United States multinationals torepatriate accumulated earnings outside the United States by providing an85 percent dividends received deduction for certain qualifying earningsrepatriations in either fiscal 2005 or in fiscal 2006. As of July 2, 2005,the Company has not provided deferred taxes on foreign earnings because anytaxes on dividends would be substantially offset by foreign tax credits orbecause the Company intends to reinvest those earnings indefinitely. Due to thecomplexity of the repatriation provision, the Company is still evaluating theeffects of this provision on its plan for repatriation of foreign earnings anddoes not expect to be able to complete this evaluation until after the TreasuryDepartment has issued all of its guidance, including the expected passage of aTechnical Corrections Bill by Congress.

In March 2005, theFASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting forConditional Asset Retirement Obligations.” FIN 47 provides clarification ofcertain sections of FASB Statement No. 143, “Accounting for AssetRetirement Obligations.” Specifically, FIN 47 clarifies the meaning of the term“conditional asset retirement obligation” as used in SFAS 143 and alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement 

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**6.**   New Accounting Pronouncements(Continued)

obligation.FIN 47 is effective no later than the end of fiscal years ending after December 15,2005. The Company is currently evaluating the impact of this standard on itsfinancial statements.

**7.   Long-TermDebt**

| ** **                             | ** ** | **September 30, 2004**    | ** ** | **July 2, 2005** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **(dollars in millions)** | ** ** |
| Senior credit  facility term loans     |       |                                | $          | 515.0                      |       |   |   | $ | 513.5 |   |   |
| Second Priority  Senior Secured Notes  |       |                                | 100.0      |                       |       |   | 100.0 |   |   |
| 10% Senior  Subordinated Notes         |       |                                | 315.0      |                       |       |   | 315.0 |   |   |
| 14 3¤4%  Senior discount notes(1) |       |                                | 106.8      |                       |       |   | 120.9 |   |   |
| Capital lease  obligations             |       |                                | 2.6        |                       |       |   | 2.3 |   |   |
|                                   |       |                                | 1,039.4    |                       |       |   | 1,051.7 |   |   |
| Less current  portion                  |       |                                | (3.2       | )                          |       |   | (3.9 | ) |   |
|                                   |       |                                | $          | 1,036.2                    |       |   |   | $ | 1,047.8 |   |   |

----

(1)          AtSeptember 30, 2004 and July 2, 2005, the accreted value of the 143¤4% senior discount notes is reduced by$10.1 million (net of $0.4 million of amortization) and $9.3 million (netof $1.2 million of amortization), respectively, to reflect the fair marketvalue assigned to the warrants sold as units with these notes. The fair marketvalue assigned to the warrants is reflected in stockholders’ equity. Accretionon the 14 3¤4%senior discount notes for the nine months ended July 2, 2005 was $13.3million. Amortization of the bond discount for the nine months ended July 2,2005 was $0.8 million.

Treatment of Long-Term Debt in Connection with WalterIndustries Merger - Under the Walter Industries merger agreement and prior tomerger closing, the Company will cause its subsidiary, Mueller Group, Inc.(“Group”), to commence a tender offer and consent solicitation for Group’ssecond priority senior secured floating rate notes due 2011. The consummationof the tender offer and consent solicitation is expected to occursimultaneously with the consummation of the merger, but it is not a conditionto merger closing. Group’s senior credit facility will be refinanced at mergerclosing. The Company’s 14 3/4% senior discount notes due 2014 and Group’s 10%senior subordinated notes due 2012 will remain outstanding after the merger iscompleted. However, holders of these notes will have the right to put them totheir respective issuers following the change of control resulting from theconsummation of the merger transaction in accordance with the respectiveindentures. The Company anticipates that, in connection with the merger, theCompany will incur additional debt. As a result, the Company’s leverage willincrease, thereby increasing its debt service obligations. The increasedleverage could adversely affect the outstanding notes of the Company and Groupgoing forward.

As a result of the pending acquisition by WalterIndustries, it is expected that Walter Industries’ US Pipe subsidiarywill be contributed to the Company, which will have an impact on the Company’sfinancial statements by, for example, lowering the margins of the consolidatedcompany. In addition, we expect that our reporting segments may be changedafter the merger. We also expect that purchase accounting adjustments couldincrease non-cash deprecation and amortization expense.

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**7.**   Long-Term Debt (Continued)

Interest Rate Swaps—Group has entered into interestrate swap agreements in order to reduce interest rate risks and manage interestexpense. As of July 2, 2005, a notional principal amount of$100.0 million in swap agreements was outstanding and scheduled to maturein July 2005 and May 2007. The swap agreements effectively convertfloating-rate debt into fixed-rate debt and carried an average fixed interestrate of 5.77% at July 2, 2005. Interest differentials to be paid or receivedbecause of swap agreements are reflected as an adjustment to interest expenseover the related debt period. At July 2, 2005 and September 30, 2004,the fair value of interest rate swaps was a liability of $0.5 million and$4.7 million, respectively, and has been recorded in Other Long-TermLiabilities on the Consolidated Balance Sheets.

On July 27, 2005,Group executed a new interest rate swap agreement—notional principal amount of$50.0 million, maturing in April 2007—to replace the swap agreement whichexpired in July 2005. Interest differentials to be paid or receivedbecause of swap agreements will be reflected as an adjustment to interestexpense over the related debt period.

**8.**      Redeemable CommonStock

Group has entered into anemployment agreement with Dale B. Smith, the Company’s and Group’sPresident and Chief Executive Officer. This agreement, in certaincircumstances, gives Mr. Smith the right to sell to the Company, at a priceequal to the fair market value of his equity interests as of the date of suchsale or purchase, his shares of the Company’s common stock. The Company hasclassified an amount representing the initial fair value of the redeemableshares of its common stock owned by Mr. Smith outside of permanent equity.At September 30, 2004 and July 2, 2005, Mr. Smith beneficiallyowned approximately 9.2 million Class A common shares. These sharesof common stock have not been marked-to-market as the circumstances that wouldgive rise to Mr. Smith’s right to sell, and the Company’s obligation topurchase Mr. Smith’s shares of common stock, are currently consideredremote.

**9.**   Commitments and Contingencies

The Company is subject to retention on certaincontracts, with the retention portion of the amount receivable paid uponproject completion.

In the normal course of business, the Company incursclaims with respect to product liability. Such claims are insured up to certainlimits, with such policies containing certain self-insured retention limits.Product liability claims for product manufactured or sold prior to August 1999,and environmental claims relating to property owned at or before August 1999or arising out of events occurring prior to that date, are subject to indemnificationby Tyco International, based on the provisions of the August 1999acquisition agreement whereby the Company was acquired from Tyco International.

Certain of our products contain lead. Environmentaladvocacy groups, relying on standards established by California’s Proposition65, are seeking to eliminate or reduce the content of lead in some of ourproducts offered for sale in California. In certain cases, we have entered intosettlement agreements with these environmental advocacy groups to modify ourproducts or offer substitutes. Further, similar issues may be raised by otheradvocacy groups in other jurisdictions.

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**9.**   Commitments and Contingencies (Continued)

Over the next two to three years, the Company expectsto incur between $2.0 million and $6.0 million of capital costs at its U.S.iron foundries to comply with the United States Environmental Protection Agency’sNational Emissions Standards for Hazardous Air Pollutants (“NESHAP”) for Ironand Steel Foundries and the NESHAP for Miscellaneous Metal Parts CoatingOperations.

The Company’s subsidiary, James Jones Company, and itsformer parent company are defendants in a false claims lawsuit in which aformer James Jones Company employee is suing on behalf of cities, waterdistricts and municipalities. The employee alleges that the defendants soldallegedly non-conforming public water system parts to various governmententities. The lawsuit seeks consequential damages, penalties and punitive damages.The Company’s subsidiary, Mueller Co., which had also been named as adefendant, brought a summary judgment motion and was dismissed from thislitigation in January 2004. Any liability associated with the lawsuit iscovered by an indemnification from Tyco International, our previous owner.

On March 31, 2004, the Company’s subsidiary,Anvil International, entered into a consent order with the Georgia Departmentof Natural Resources regarding various alleged hazardous waste violations atthe Statesboro, Georgia site owned by Anvil. Pursuant to the consent order,Anvil paid a settlement amount of $100,000, comprised of a $50,000 monetaryfine and $50,000 towards a supplemental environmental project. Anvil has alsoagreed to perform various investigatory and remedial actions at the site andits landfill. During the second quarter of 2005, investigatory procedures wereperformed that resulted in management’s decision to perform additionalremediation and book an additional $0.4 million to the reserve relating tothis remediation. While the ultimate investigatory and remedial costs arecurrently unknown, the total costs are estimated to be between$1.2 million and $1.4 million. The Company believes that it maintainsan adequate reserve to cover these estimated costs.

In November 2003, Beck Manufacturing, a divisionof Anvil International, closed its manufacturing facility in Kearny, NJ, andwithdrew from the Teamsters Local 11 Pension Fund (“Teamsters” or “Fund”).Anvil has established an accrual of $0.2 million for any withdrawalliability. On July 19, 2004, the Fund Trustees issued notice to Anvilthat, pursuant to ERISA Sections 4202 and 4219(b)(1), Anvil owedapproximately $1.2 million in withdrawal liability to the Fund. On October 5,2004, Anvil sent notice to the Teamsters appealing the amount of the withdrawalliability. The Teamsters denied Anvil’s appeal, and Anvil has filed anarbitration demand. However, prior to the arbitration proceeding, the partieshave agreed to mediate the dispute some time in the fall of 2005.

As part of the Star acquisition, the Company agreed toa future payment to be made to the seller to the extent that the gross profitof the acquired business exceeds a targeted gross profit. The maximum potentialdeferred payment amount is $23 million. Management currently estimates thedeferred payment could total approximately $3 to $6 million for thethree-year deferred payment period which began February 1, 2004 and ends January 31,2007. This estimated deferred payment amount is based on management’s bestestimate, but the actual deferred payment could be materially different. Theliability for such deferred payment will be recorded at the end of eachtwelve-month period ending January 31, 2005, 2006 or 2007, in accordancewith the purchase agreement. No deferred payment was earned for the twelvemonths ended January 31, 2005.

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**9.**   Commitments and Contingencies (Continued)

In the opinion ofmanagement, accruals associated with contingencies incurred in the normalcourse of business are sufficient. Resolution of existing known contingenciesis not expected to significantly affect the Company’s financial position andresult of operations.

**10.   Net PeriodicBenefit Cost—Defined Benefit Plans**

For a detailed disclosure on the Company’s pension andemployee benefits plans, please refer to Note 13 of the Company’s AuditedConsolidated Financial Statements for the year ended September 30, 2004,as found on Form 10-K (File No. 333-116590).

Thefollowing sets forth the components of net periodic benefit cost of thedomestic non-contributory defined benefit plans for the three months and thenine months ended June 26, 2004 and July 2, 2005:

| ** **                          | ** ** | **Three months ended**    | ** ** | **Nine months ended** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **June 26,  2004**             | ** ** | **July 2,  2005**          | ** ** | **June 26,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                          | ** ** | **(dollars in millions)** | ** ** |
| Service cost                        |       |                                | $          | 0.5                             |       |   |   | $ | 0.8 |   |   |   | $ | 1.5 |   |   |   | $ | 2.3 |   |   |
| Interest cost                       |       |                                | 1.4        |                            |       |   | 1.4 |   |   |   | 4.2 |   |   |   | 4.1 |   |   |
| Expected return  on plan assets     |       |                                | (1.1       | )                               |       |   | (1.3 | ) |   |   | (3.4 | ) |   |   | (3.8 | ) |   |
| Amortization of  prior service cost |       |                                | —     |                            |       |   | — |   |   |   | — |   |   |   | 0.1 |   |   |
| Amortization of  net actuarial loss |       |                                | 0.6        |                            |       |   | 0.7 |   |   |   | 2.0 |   |   |   | 2.0 |   |   |
| Net periodic benefit  cost          |       |                                | $          | 1.4                             |       |   |   | $ | 1.6 |   |   |   | $ | 4.3 |   |   |   | $ | 4.7 |   |   |

 

The Company previouslydisclosed in its financial statements for the year ended September 30,2004, that it was required to contribute $0.1 million to its pension plansin 2005. As of July 2, 2005, no contributions have been made. The Companypresently anticipates contributing $0.1 million to fund its pension plansin 2005 and may make further discretionary payments.

**11.   SupplementaryBalance Sheet Information**

Selected supplementarybalance sheet information is presented below:

| ** **                                  | ** ** | **September 30,  2004**        | ** ** | **July 2,  2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **(dollars in millions)** | ** ** |
| **Inventories**                             | ** ** |                                | ** ** | ** **             |       | ** ** | ** ** |
| Purchased materials and  manufactured parts |       |                                | $          | 41.1                   | ** ** |   | $ | 37.0 |   |
| Work in process                             |       |                                | 67.3       | ** **             |       | 90.3 |   |
| Finished goods                              |       |                                | 151.8      | ** **             |       | 182.4 |   |
|                                        |       |                                | $          | 260.2                  | ** ** |   | $ | 309.7 |   |

 

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**MUELLER WATER PRODUCTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) THREE AND NINE MONTHS ENDED JUNE 26, 2004 AND JULY 2, 2005 (UNAUDITED)**

**12.**   Supplementary Income StatementInformation

Thecomponents of interest expense are presented below:

| ** **                                        | ** ** | **Three months   ended**  | ** ** | **Nine months   ended** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                        | ** ** | **June 26,  2004**             | ** ** | **July 2,  2005**            | ** ** | **June 26,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                                        | ** ** | **(dollars in millions)** | ** ** |
| **Interest  expense and early repayment costs:**  | ** ** |                                | ** ** | ** **                        |       | ** ** | ** ** |   | ** ** | ** ** |   | ** ** | ** ** |
| Contractual interest expense                      |       |                                | $          | 18.4                              |       |   | $ | 23.4 |   |   | $ | 36.4 |   |   | $ | 68.3 |   |
| Deferred financing fee amortization               |       |                                | 0.8        |                              |       | 1.3 |   |   | 2.1 |   |   | 3.9 |   |
| Senior subordinated debt early redemption penalty |       |                                | —     |                              |       | — |   |   | 7.0 |   |   | — |   |
| Write off of deferred financing fees              |       |                                | 6.6        |                              |       | — |   |   | 7.0 |   |   | — |   |
| Interest rate swap gains                          |       |                                | (4.1       | )                                 |       | (1.3 | ) |   | (10.4 | ) |   | (4.2 | ) |
| Total interest expense  and early repayment costs |       |                                | $          | 21.7                              |       |   | $ | 23.4 |   |   | $ | 42.1 |   |   | $ | 68.0 |   |

 

Areconciliation of net income available to common shareholders is as follows:

| ** **                                                                                        | ** ** | **Three months  ended**        | ** ** | **Nine months  ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                        | ** ** | **June 26,  2004**             | ** ** | **July 2,  2005**      | ** ** | **June 26,  2004** | ** ** | **July 2,  2005** | ** ** |
| ** **                                                                                        | ** ** | **(restated)**                      | ** ** | ** **                  | ** ** | **(restated)** | ** ** | ** ** | ** ** |
| ** **                                                                                        | ** ** | **(dollars in millions)** | ** ** |
| Net income                                                                                        |       |                                | $          | 0.6                         |       |   | $ | 16.0 |   |   | $ | 15.9 |   |   | $ | 31.9 |   |
| Less preferred  share accretion related to redeemable preferred stock retired in  April 2004 |       |                                | (1.3       | )                           |       | — |   |   | (9.3 | ) |   | — |   |
| Net income available to  common shareholders                                                      |       |                                | $          | (0.7                        | )          |   | $ | 16.0 |   |   | $ | 6.6 |   |   | $ | 31.9 |   |

 

**13.**   Facility Rationalization,Restructuring and Related Costs

In the first quarter of fiscal 2005, the Companyannounced that it would cease manufacturing and begin outsourcing a productline it produced at its water infrastructure plant in Colorado. A restructuringcharge of $0.1 million in the first quarter of fiscal 2005 related toseverance payments. An additional charge of $1.5 million, relatedprimarily to the termination of operating leases for the plant building andmachinery, was reflected in the second quarter of fiscal 2005.

For the three months ended June 26, 2004, theCompany recorded no charges. For the nine months ended June 26, 2004, theCompany recorded a charge of $0.1 million related to asset impairment forwrite-offs at piping systems facilities that were closed in Norcross, Georgiaand Kearny, New Jersey, $0.3 million related to environmental issues atthe piping systems closed facility in Statesboro, Georgia (see Note 9),and $0.5 million related to future lease obligations at the closed andvacated Kearny, New Jersey facility.

25

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

In this report, each of the terms “Mueller Water,” the“Company,” “we,” “us” or “our” refers to Mueller Water Products, Inc. andits subsidiaries, except where the context makes clear that the reference isonly to Mueller Water Products, Inc. itself, and is not inclusive of itssubsidiaries.

Except as otherwise noted, we present all financialand operating data on a fiscal quarter basis. Our fiscal year ends on September 30,and our third fiscal quarter ends on the Saturday closest to June 30.

Certain information included or incorporated byreference in this document may be deemed to be “forward looking statements”within the meaning of the federal securities laws. All statements other thanstatements of historical fact are statements that could be deemed forwardlooking statements. In this context, forward looking statements often addressour future business and financial performance, and may be characterized by terminologysuch as “believe”, “anticipate”, “should”, “intend”, “plan”, “will”, “expects”,“estimates”, “projects”, “positioned”, “strategy”, and similar expressions.These statements are based on assumptions and assessments made by the Company’smanagement in light of its experience and its perception of historical trends,current conditions, expected future developments and other factors it believesto be appropriate.

These forward looking statements are subject to anumber of risks and uncertainties, including but not limited to: thepossibility that the Company and Walter Industries may not be able to obtainregulatory approvals required for the proposed acquisition of the Company byWalter Industries; the Company’s businesses may suffer as a result of theuncertainty surrounding the Walter Industries acquisition; upon consummation ofthe acquisition, the combined company will have significant debt; integratingthe businesses after the acquisition may not be successfully accomplished asanticipated; the acquisition may involve unexpected costs; the Company’sability to continue long-standing relationships with major customers; increasedcompetition; demand for and market acceptance of new and existing products inthe markets we serve; adverse changes in currency exchange rates or rawmaterial prices, specifically steel scrap, steel pipe and brass ingot;unanticipated developments that could occur with respect to contingencies suchas litigation, product liability exposures and environmental matters; the Company’sability to integrate acquired businesses into its operations; and other risksand uncertainties that affect the manufacturing sector generally including, butnot limited to, economic, political, governmental and technological factorsaffecting the Company’s operations, markets, products, services and prices.

Any such forward lookingstatements are not guarantees of future performances and actual results,developments and business decisions may differ from those contemplated by suchforward looking statements. These forward looking statements speak only as ofthe date of this Quarterly Report. The Company disclaims any duty to update anyforward looking statement, all of which are expressly qualified by theforegoing.

**Overview**

We are a leading North American manufacturer of abroad range of flow control products for use in water distribution, water andwastewater treatment facilities, gas distribution systems and piping systemsand maintain a large installed base of products. We are comprised of two segments:water infrastructure, a leading manufacturer of hydrants, valves and otherproducts for use in water and gas distribution systems; and piping systems, aleading manufacturer of fittings, pipe hangers and other products for use inpiping system applications. Our business strategy continues to be focused onsustaining our market leadership and competitive differentiation, while growingrevenues and enhancing profitability.

Results for the third quarter and first nine months of2005 reflected continued strong performance in the residential constructionmarket, as well as the full effect of the pricing increases implemented in the 

26

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second half of 2004 andearly 2005. Both our water infrastructure and piping systems segments reportedimprovements in gross profit and operating income in the three months and thenine months ended July 2, 2005 as compared to the three months and ninemonths ended June 26, 2004.

The Company incurred a significant amount ofadditional indebtedness in connection with its recapitalization in April 2004.New debt associated with the recapitalization added $5.5 million and$33.7 million of interest expense in the three and nine month periodsended July 2, 2005 as compared to the similar fiscal periods in 2004.

As previously announced, on June 17, 2005, theCompany entered into a definitive merger agreement with Walter Industries, Inc.(“Walter Industries”) whereby Walter Industries will acquire the Company for anaggregate purchase price of approximately $1.91 billion, consisting of approximately$860 million in cash and the assumption of approximately $1.05 billion inCompany debt, based on the Company’s balance sheet as of April 2, 2005,subject to the post-closing adjustments specified in the merger agreement basedon the Company’s working capital upon the closing of the transaction. As aresult of the merger, the Company’s shares of common stock will be convertedinto the right to receive the applicable merger consideration in cash at theclosing, subject to the post-closing adjustments. Upon closing of thetransaction, the outstanding warrants of the Company will become rights toreceive cash upon exercise of the warrants based on the number of sharesunderlying the warrants.

Under the merger agreement and prior to merger closingthe Company will cause its subsidiary, Mueller Group, Inc. (“Group”), tocommence a tender offer and consent solicitation for Group’s second prioritysenior secured floating rate notes due 2011. The consummation of the tenderoffer and consent solicitation is expected to occur simultaneously with theconsummation of the merger, but is not a condition to the merger closing. Group’ssenior credit facility will be refinanced at merger closing. The Company’s 143⁄4% senior discount notes due 2014 and Group’s 10% senior subordinated notes due2012 will remain outstanding after the merger is completed. However, holders ofthese notes will have the right to put them to their respective issuersfollowing the change of control resulting from the consummation of the merger transactionin accordance with the respective indentures. The Company anticipates that, inconnection with the merger, the Company will incur additional debt. As aresult, the Company’s leverage will increase, thereby increasing its debtservice obligations. The increased leverage could adversely affect theoutstanding notes of the Company and Group going forward.

The merger is subject tocustomary conditions to closing, including the expiration or termination of thewaiting period under the Hart-Scott-Rodino Antitrust Improvements Act and thefunding of Walter Industries’ committed financing, and there can be noassurance that the transaction will be consummated.

**Restatements**

This section is comprisedof two parts: 2005 Restatements and 2004 Restatements. The 2004 Restatementswere previously reported in the original Form 10-Q. The previousManagement’s Discussion and Analysis of Financial Condition and Results ofOperations has been appropriately updated to reflect the 2005 and 2004Restatements.

**2005 Restatements**

In the course offinalizing the September 30, 2005 financial statements, the Companydetermined that certain items included in the Statements of Consolidated CashFlows, the Consolidated Statements of Operations and the Consolidated BalanceSheets were not properly classified in annual and interim periods. As a resultof these findings, the Company has restated its financial statements in this Form 10-Q/A.See Note 2 to the Consolidated Financial Statements. The 2005 Restatements hadno impact on the Company’s consolidated net income or the Consolidated Statementof Stockholders’ Deficit for any of the prior periods presented.

27

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**2004 Restatements**

In November 2004, ourAudit Committee was notified of alleged potential accounting improprietiesconcerning our accounting for inventory reserves and certain questionsconcerning revenue recognition. The Audit Committee appointed an independentlaw firm to investigate the allegations. In January 2005, the independentlaw firm issued an investigative report that identified several areas requiringfinancial review by the Company. These areas principally concerned accountingfor excess and obsolete (E&O) inventory, the capitalization of costsrelating to a project that should have been expensed in prior periods, theaccrual of reserves for this project without identifying support for suchaccruals and the timing of recognition of revenue with regard to full truckloadshipments that were not immediately dispatched to customers by certain freightcarriers used by the Company. The Company also identified some additionalannual and interim items recorded in incorrect periods in the course offinalizing the 2004 financial statements. In addition, the Company determinedthat the value it assigned to stock compensation in connection with its April 2004recapitalization should be revised. As a result of these findings, the Companyrestated its annual financial statements for its 2002 and 2003 fiscal years andits interim financial statements for its 2004 fiscal year.

**Results of Operations**

***Three Months Ended July 2, 2005 As Compared tothe Three Months Ended June 26, 2004***

| ** **                                                                              | ** ** | **Three months ended**    | ** ** | ** **                                  | ** ** | **FY05 Q3 vs. FY04 Q3** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                              | ** ** | **July 2,  2005**              | ** ** | **Percentage  of net sales  (2)** | ** ** | **June 26,  2004**                     | ** ** | **Percentage  of net sales  (2)** | ** ** | **Increase/  (decrease)** | ** ** | **Change in  percentage  of  net sales** | ** ** |
| ** **                                                                              | ** ** | **(restated)**                      | ** ** | ** **                                  | ** ** | **(restated)**                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **(dollars in millions)** | ** ** |
| **Net  sales**                                                                          | ** ** |                                | ** ** | ** **                                  |       |                                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |
| Water infrastructure                                                                    |       |                                | $          | 172.1                                       |       |                                        |       | 58.0 | % |   |   | $ | 172.8 |   |   |   | 59.8 | % |   |   | $ | (0.7 | ) |   |   | (1.8 | %) |   |
| Piping systems                                                                          |       |                                | 124.8      |                                        |       |                                        | 42.0       |   |   |   | 116.3 |   |   |   | 40.2 |   |   |   | 8.5 |   |   |   | 1.8 |   |   |
| Consolidated                                                                            |       |                                | 296.9      |                                        |       |                                        | 100.0      |   |   |   | 289.1 |   |   |   | 100.0 |   |   |   | 7.8 |   |   |   | — |   |   |
| **Gross  profit**                                                                       | ** ** |                                | ** ** | ** **                                  |       |                                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |
| Water infrastructure                                                                    |       |                                | 64.5       |                                        |       |                                        | 37.5       |   |   |   | 56.6 |   |   |   | 32.8 |   |   |   | 7.9 |   |   |   | 4.7 |   |   |
| Piping systems                                                                          |       |                                | 32.2       |                                        |       |                                        | 25.8       |   |   |   | 28.0 |   |   |   | 24.1 |   |   |   | 4.2 |   |   |   | 1.7 |   |   |
| Depreciation expense not allocated to segments                                          |       |                                | (1.9       | )                                           |       |                                        | (0.6       | ) |   |   | (1.8 | ) |   |   | (0.6 | ) |   |   | (0.1 | ) |   |   | — |   |   |
| Consolidated                                                                            |       |                                | 94.8       |                                        |       |                                        | 31.9       |   |   |   | 82.8 |   |   |   | 28.6 |   |   |   | 12.0 |   |   |   | 3.3 |   |   |
| **Selling,  general and administrative expenses, including stock compensation expense** | ** ** |                                | ** ** | ** **                                  |       |                                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |
| Water infrastructure                                                                    |       |                                | 16.7       |                                        |       |                                        | 9.7        |   |   |   | 16.3 |   |   |   | 9.4 |   |   |   | 0.4 |   |   |   | 0.3 |   |   |
| Piping systems                                                                          |       |                                | 19.3       |                                        |       |                                        | 15.5       |   |   |   | 19.9 |   |   |   | 17.1 |   |   |   | (0.6 | ) |   |   | (1.6 | ) |   |
| Corporate                                                                               |       |                                | 9.9        |                                        |       |                                        | 3.3        |   |   |   | 29.7 |   |   |   | 10.3 |   |   |   | (19.8 | ) |   |   | (7.0 | ) |   |
| Consolidated                                                                            |       |                                | 45.9       |                                        |       |                                        | 15.5       |   |   |   | 65.9 |   |   |   | 22.8 |   |   |   | (20.0 | ) |   |   | (7.3 | ) |   |
| **Facility  rationalization, restructuring and related costs**                          | ** ** |                                | ** ** | ** **                                  |       |                                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |
| Water infrastructure                                                                    |       |                                | —     |                                        |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Piping systems                                                                          |       |                                | —     |                                        |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Consolidated                                                                            |       |                                | —     |                                        |       |                                        | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                                                                                         |            |                                     |            |                                             |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                  | ** ** | **Three months ended**    | ** ** | ** **                                  | ** ** | **FY05 Q3 vs. FY04 Q3** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **July 2,  2005**              | ** ** | **Percentage  of net sales  (2)** | ** ** | **June 26,  2004**                     | ** ** | **Percentage  of net sales  (2)** | ** ** | **Increase/  (decrease)** | ** ** | **Change in  percentage  of  net sales** | ** ** |
| ** **                  | ** ** | **(restated)**                      | ** ** | ** **                                  | ** ** | **(restated)**                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **(dollars in millions)** | ** ** |
| **Operating  income**       | ** ** |                                | ** ** | ** **                                  |       |                                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |
| Water infrastructure        |       |                                | 47.8       |                                        |       |                                        | 27.8       |   |   |   | 40.3 |   |   |   | 23.3 |   |   |   | 7.5 |   |   |   | 4.5 |   |   |
| Piping systems              |       |                                | 12.9       |                                        |       |                                        | 10.3       |   |   |   | 8.1 |   |   |   | 7.0 |   |   |   | 4.8 |   |   |   | 3.3 |   |   |
| Corporate                   |       |                                | (11.8      | )                                           |       |                                        | (4.0       | ) |   |   | (31.5 | ) |   |   | (10.9 | ) |   |   | 19.7 |   |   |   | 6.9 |   |   |
| Consolidated                |       |                                | 48.9       |                                        |       |                                        | 16.5       |   |   |   | 16.9 |   |   |   | 5.8 |   |   |   | 32.0 |   |   |   | 10.7 |   |   |
| Interest expense            |       |                                | (23.4      | )                                           |       |                                        | (7.9       | ) |   |   | (21.7 | ) |   |   | (7.5 | ) |   |   | (1.7 | ) |   |   | (0.4 | ) |   |
| Interest income             |       |                                | 0.4        |                                        |       |                                        | 0.1        |   |   |   | 0.1 |   |   |   | — |   |   |   | 0.3 |   |   |   | 0.1 |   |   |
| Income before  income taxes |       |                                | 25.9       |                                        |       |                                        | 8.7        |   |   |   | (4.7 | ) |   |   | (1.6 | ) |   |   | 30.6 |   |   |   | 10.3 |   |   |
| Income tax expense          |       |                                | 9.9        |                                        |       |                                        | 3.3        |   |   |   | (5.3 | ) |   |   | (1.8 | ) |   |   | 15.2 |   |   |   | 5.1 |   |   |
| Net income                  |       |                                | $          | 16.0                                        |       |                                        |       | 5.4 | % |   |   | $ | 0.6 |   |   |   | 0.2 | % |   |   | $ | 15.4 |   |   |   | 5.2 | % |   |
| **Segment  EBITDA(1)**      | ** ** |                                | ** ** | ** **                                  |       |                                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** |   |   |
| Water infrastructure        |       |                                | 52.7       |                                        |       |                                        | 30.6       |   |   |   | 46.0 |   |   |   | 26.6 |   |   |   | 6.7 |   |   |   | 4.0 |   |   |
| Piping systems              |       |                                | 17.2       |                                        |       |                                        | 13.8       |   |   |   | 12.4 |   |   |   | 10.7 |   |   |   | 4.8 |   |   |   | 3.1 |   |   |
| Total segment EBITDA        |       |                                | $          | 69.9                                        |       |                                        |       | 23.5 |   |   |   | $ | 58.4 |   |   |   | 20.2 |   |   |   | $ | 11.5 |   |   |   | 3.3 |   |   |

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(1)          Segment EBITDA isdefined as segment operating income plus depreciation and amortization expenseand excludes unallocated corporate expenses. This performance measure may notbe comparable to EBITDA as reported by other companies.

TheCompany evaluates segment performance based on segment EBITDA. A reconciliationof segment EBITDA to consolidated income before income taxes follows:

| ** **                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **July 2, 2005**       | ** ** | **June 26, 2004** | ** ** |
| ** **                                  | ** ** | ** **                       | ** ** | **(as restated)(3)** | ** ** |
| Total segment EBITDA                        |       |                             | $          | 69.9 |   |   |   | $ | 58.4 |   |   |
| Unallocated  corporate costs                |       |                             | (9.2       | ) |   |   | (25.1 | ) |   |
| Interest expense  and early repayment costs |       |                             | (23.4      | ) |   |   | (21.7 | ) |   |
| Depreciation and  amortization              |       |                             | (11.4      | ) |   |   | (16.3 | ) |   |
| Income before income  taxes                 |       |                             | $          | 25.9 |   |   |   | $ | (4.7 | ) |   |

 

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(2)          Percentages are bysegment, if applicable.

(3)          SeeNote 2 for a discussion of the restatement.

*Net Sales.**  *Net sales for the three monthsended July 2, 2005 were $296.9 million, or a 2.7% increase as compared to$289.1 million for the three months ended June 26, 2004.

Waterinfrastructure net sales for the three months ended July 2, 2005 were$172.1 million, or a 0.4% decrease as compared to $172.8 million for thethree months ended June 26, 2004. The sales volume for hydrants and valvesdecreased for our third quarter of 2005 as compared to our third quarter of2004. There was a price increase in May 2004 that we believe resulted incustomers placing a larger-than-usual amount of orders ahead of that date inorder to get the benefit of lower pricing, which subsequently resulted inhigher shipments during the third quarter of 2004. There was no similar priceincrease announced during the third quarter of 2005. The impact of the decreasein hydrant and valve volumes was offset by the effects of price increases onthose same products.

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Pipingsystems net sales for the three months ended July 2, 2005 were$124.8 million, or a 7.3% increase as compared to $116.3 million forthe three months ended June 26, 2004. This increase was driven primarilyby price increases which were implemented in the second half of 2004 and in thefirst half of 2005, and also by an additional $2.1 million of Star productsales.

*Gross Profit.**  *Gross profit for the three monthsended July 2, 2005 was $94.8 million, or a 14.5% increase as comparedto $82.8 million for the three months ended June 26, 2004. Grossprofit, as a percentage of net sales, or gross margin, increased from 28.6% forour third quarter of 2004 to 31.9% for our third quarter of 2005.

Waterinfrastructure gross profit for the three months ended July 2, 2005 was$64.5 million, or a 14.0% increase as compared to $56.6 million forthe three months ended June 26, 2004. Gross profit, as a percentage of netsales, increased from 32.8% for our third quarter of 2004 to 37.5% for our thirdquarter of 2005. The increase in gross profit was primarily driven by priceincreases and the continued strong performance of the residential constructionmarket. Partially offsetting the effects of higher prices were higher rawmaterial costs (most notably brass ingot and scrap steel) due to worldwidesupply and demand issues. We cannot provide assurances that any futureincreases in raw material costs can be passed on to our customers.

Pipingsystems gross profit for the three months ended July 2, 2005 was $32.2million, or a 15.0% increase as compared to $28.0 million for the threemonths ended June 26, 2004. Gross profit, as a percentage of net sales,increased from 24.1% to 25.8%. The increase in gross profit was primarilydriven by price increases. Increased raw material costs partially offset theeffects of the higher prices. We cannot provide assurances that we can continueto pass on cost increases to our customers.

*Selling, General & Administrative Expense.**  *Selling, General and Administrativeexpenses (“SG&A”) for the three months ended July 2, 2005 were$45.9 million, or a 30.3% decrease as compared to $65.9 million forthe three months ended June 26, 2004. As a percentage of net sales,SG&A decreased from 22.8% for our third quarter of 2004 to 15.5% for ourthird quarter of 2005.

Water infrastructure SG&A for the three monthsended July 2, 2005 was $16.7 million, or a 2.5% increase as compared to$16.3 million for the three months ended June 26, 2004. As a percentageof net sales, SG&A increased slightly from 9.4% for our third quarter of2004 to 9.7% for our third quarter of 2005. The increase was primarily due tocompensation and benefit costs for additional personnel.

Piping systems SG&A for the three months endedJuly 2, 2005 was $19.3 million, or a 3.0% decrease as compared to$19.9 million for the three months ended June 26, 2004. As apercentage of net sales, SG&A decreased from 17.1% for our third quarter of2004 to 15.5% for our third quarter of 2005. The decrease was primarily due toa reduction in legal expenses and foreign currency losses for Canadiantransactions recognized in the third quarter of 2004. There were no similarforeign currency losses in the third quarter of 2005. These decreases werepartially offset by a moderate increase in selling costs of $0.6 million,primarily due to higher sales commissions.

Corporate expenses for the three months endedJuly 2, 2005 were $9.9 million as compared to $29.7 million for thethree months ended June 26, 2004. The decrease was primarily due to a $4.0million reduction in amortization expense for 2005 as compared to 2004 as aresult of an intangible asset becoming fully amortized during the fourthquarter of 2004 and a $20.9 million reduction in corporate stock compensationcharges for 2005 as compared to 2004 primarily related to charges for employeeoptionholders made in connection with the recapitalization of the Companyduring the third quarter of 2004. All options were cancelled at that time. Theseitems were partially offset in 2005 by: consulting fees of $1.1 millionrelated to efforts to become compliant with public company reporting andSarbanes-Oxley internal control requirements, $1.4 million related tocompensation payments to current employees and directors to offset additionaltaxes owed by them as a result of the Company’s revaluation of stockcompensation paid to them in 2004, $1.6 million of professional fees related toefforts to sell the Company (see Note 5), increased board of director fees of$0.2 million, increased legal, audit and other consulting fees of$0.7 million, and increased salary and benefit costs of $0.4 millionassociated with additional 

30

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accounting and legalstaffing. Corporate expenses consist primarily of corporate staff, benefits,legal and facility costs.

*Interest Expense.**  *Interest expense for the threemonths ended July 2, 2005 was $23.4 million, or a $1.7 millionincrease from $21.7 million for the three months ended June 26, 2004.Interest expense for the three months ended July 2, 2005, included$5.5 million of additional interest expense and amortization of deferredfinancing fees on $518.0 million of net additional debt resulting from theCompany’s recapitalization in April 2004. This increase was offset by a$6.6 million write-off of term debt deferred financing fees during the threemonths ended June 26, 2004 in connection with the April 2004recapitalization. Also, gains recorded on interest rate swaps were$2.8 million lower in 2005 than in 2004 as more swap agreements expiredand were not renewed.

*Income Tax Expense.**  *The effective tax rates (excludingdiscrete third quarter items) for three months ended July 2, 2005 andJune 26, 2004 were 41% and 26%, respectively. For the third quarter of2005, the Company adjusted its tax accruals downward by approximately $0.7million due to the expiration of statutes of limitation. Discrete third quarterevents in 2004 included the conclusion of the federal and certain state taxexaminations and the expiration of certain state statutes of limitation whichallowed the Company to adjust tax accruals downward by approximately $6.4million. Partially offsetting these items in the third quarter of 2004 were$2.3 million of charges related to Foreign Tax Credits and the effects of otheritems, including changes in the effective rate on prior period deferred taxbalances.

*Segment EBITDA.**  *Segment EBITDA for the three monthsended July 2, 2005 was $69.9 million, or a 19.7% increase as comparedto $58.4 million for the three months ended June 26, 2004.

Water infrastructure EBITDA for the three months endedJuly 2, 2005 was $52.7 million, which was $6.7 million or 14.6%higher than the $46.0 million for the three months ended June 26,2004. The increased EBITDA resulted primarily from increased prices, partiallyoffset by additional SG&A spending as discussed above.

Piping systems EBITDA was $17.2 million for the threemonths ended July 2, 2005, which was $4.8 million or 38.7% higherthan the $12.4 million reported for the three months ended June 26,2004. The increased EBITDA resulted primarily from increased prices.

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**Results of Operations**

***Nine Months Ended July 2, 2005 As Compared to theNine Months Ended June 26, 2004***

| ** **                                                                              | ** ** | **Nine months ended**     | ** ** | ** **                                  | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                              | ** ** | **July 2,  2005**              | ** ** | **Percentage  of net sales  (2)** | ** ** | **June 26,  2004**     | ** ** | **Percentage  of net sales  (2)** | ** ** | **Increase/  (decrease)** | ** ** | **Change in  percentage  of  net sales** | ** ** |
| ** **                                                                              | ** ** | **(restated)**                      | ** ** | ** **                                  | ** ** | **(restated)**              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **(dollars in millions)** | ** ** |
| **Net  sales**                                                                          | ** ** |                                | ** ** | ** **                                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Water infrastructure                                                                    |       |                                | $          | 480.8                                       |       |                        |       | 57.4 | % |   |   | $ | 434.7 |   |   |   | 58.3 | % |   |   | $ | 46.1 |   |   |   | (0.9 | %) |   |
| Piping systems                                                                          |       |                                | 357.4      |                                        |       |                        | 42.6       |   |   |   | 310.9 |   |   |   | 41.7 |   |   |   | 46.5 |   |   |   | 0.9 |   |   |
| Consolidated                                                                            |       |                                | 838.2      |                                        |       |                        | 100.0      |   |   |   | 745.6 |   |   |   | 100.0 |   |   |   | 92.6 |   |   |   | — |   |   |
| **Gross  profit**                                                                       | ** ** |                                | ** ** | ** **                                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Water infrastructure                                                                    |       |                                | 166.1      |                                        |       |                        | 34.5       |   |   |   | 139.9 |   |   |   | 32.2 |   |   |   | 26.2 |   |   |   | 2.3 |   |   |
| Piping systems                                                                          |       |                                | 94.4       |                                        |       |                        | 26.4       |   |   |   | 70.0 |   |   |   | 22.5 |   |   |   | 24.4 |   |   |   | 3.9 |   |   |
| Depreciation expense not allocated to segments                                          |       |                                | (5.3       | )                                           |       |                        | (0.6       | ) |   |   | (5.3 | ) |   |   | (0.7 | ) |   |   | — |   |   |   | 0.1 |   |   |
| Consolidated                                                                            |       |                                | 255.2      |                                        |       |                        | 30.4       |   |   |   | 204.6 |   |   |   | 27.4 |   |   |   | 50.6 |   |   |   | 3.0 |   |   |
| **Selling,  general and administrative expenses, including stock compensation expense** | ** ** |                                | ** ** | ** **                                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Water infrastructure                                                                    |       |                                | 49.5       |                                        |       |                        | 10.3       |   |   |   | 44.8 |   |   |   | 10.3 |   |   |   | 4.7 |   |   |   | — |   |   |
| Piping systems                                                                          |       |                                | 59.8       |                                        |       |                        | 16.7       |   |   |   | 53.4 |   |   |   | 17.2 |   |   |   | 6.4 |   |   |   | (0.5 | ) |   |
| Corporate                                                                               |       |                                | 24.5       |                                        |       |                        | 2.9        |   |   |   | 43.1 |   |   |   | 5.8 |   |   |   | (18.6 | ) |   |   | (2.9 | ) |   |
| Consolidated                                                                            |       |                                | 133.8      |                                        |       |                        | 16.0       |   |   |   | 141.3 |   |   |   | 19.0 |   |   |   | (7.5 | ) |   |   | (3.0 | ) |   |
| **Facility  rationalization, restructuring and related costs**                          | ** ** |                                | ** ** | ** **                                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Water infrastructure                                                                    |       |                                | 1.6        |                                        |       |                        | 0.3        |   |   |   | — |   |   |   | — |   |   |   | 1.6 |   |   |   | 0.3 |   |   |
| Piping systems                                                                          |       |                                | —     |                                        |       |                        | —     |   |   |   | 0.9 |   |   |   | 0.3 |   |   |   | (0.9 | ) |   |   | (0.3 | ) |   |
| Consolidated                                                                            |       |                                | 1.6        |                                        |       |                        | 0.2        |   |   |   | 0.9 |   |   |   | 0.1 |   |   |   | 0.7 |   |   |   | 0.1 |   |   |
| **Operating  income**                                                                   | ** ** |                                | ** ** | ** **                                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Water infrastructure                                                                    |       |                                | 115.0      |                                        |       |                        | 23.9       |   |   |   | 95.1 |   |   |   | 21.9 |   |   |   | 19.9 |   |   |   | 2.0 |   |   |
| Piping systems                                                                          |       |                                | 34.6       |                                        |       |                        | 9.7        |   |   |   | 15.7 |   |   |   | 5.0 |   |   |   | 18.9 |   |   |   | 4.7 |   |   |
| Corporate                                                                               |       |                                | (29.8      | )                                           |       |                        | (3.6       | ) |   |   | (48.4 | ) |   |   | (6.5 | ) |   |   | 18.6 |   |   |   | 2.9 |   |   |
| Consolidated                                                                            |       |                                | 119.8      |                                        |       |                        | 14.3       |   |   |   | 62.4 |   |   |   | 8.4 |   |   |   | 57.4 |   |   |   | 5.9 |   |   |
| Interest expense                                                                        |       |                                | (68.0      | )                                           |       |                        | (8.1       | ) |   |   | (42.1 | ) |   |   | (5.6 | ) |   |   | (25.9 | ) |   |   | (2.5 | ) |   |
| Interest income                                                                         |       |                                | 1.0        |                                        |       |                        | 0.1        |   |   |   | 0.5 |   |   |   | 0.1 |   |   |   | 0.5 |   |   |   | — |   |   |
| Income before income taxes                                                              |       |                                | 52.8       |                                        |       |                        | 6.3        |   |   |   | 20.8 |   |   |   | 2.8 |   |   |   | 32.0 |   |   |   | 3.5 |   |   |
| Income tax expense                                                                      |       |                                | 20.9       |                                        |       |                        | 2.5        |   |   |   | 4.9 |   |   |   | 0.7 |   |   |   | 16.0 |   |   |   | 1.8 |   |   |
| Net income                                                                              |       |                                | $          | 31.9                                        |       |                        |       | 3.8 | % |   |   | $ | 15.9 |   |   |   | 2.1 | % |   |   | $ | 16.0 |   |   |   | 1.7 | % |   |
| **Segment  EBITDA(1)**                                                                  | ** ** |                                | ** ** | ** **                                  |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Water infrastructure                                                                    |       |                                | 131.9      |                                        |       |                        | 27.4       |   |   |   | 113.0 |   |   |   | 26.0 |   |   |   | 18.9 |   |   |   | 1.4 |   |   |
| Piping systems                                                                          |       |                                | 47.5       |                                        |       |                        | 13.3       |   |   |   | 28.4 |   |   |   | 9.1 |   |   |   | 19.1 |   |   |   | 4.2 |   |   |
| Total segment  EBITDA                                                                   |       |                                | $          | 179.4                                       |       |                        |       | 21.4 |   |   |   | $ | 141.4 |   |   |   | 19.0 |   |   |   | $ | 38.0 |   |   |   | 2.4 |   |   |

 

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(1)          Segment EBITDA isdefined as segment operating income plus depreciation and amortization expenseand excludes unallocated corporate expenses. This performance measure may notbe comparable to EBITDA as reported by other companies.

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TheCompany evaluates segment performance based on segment EBITDA. A reconciliationof segment EBITDA to consolidated income before income taxes follows:

| ** **                                  | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **July 2, 2005**      | ** ** | **June 26, 2004** | ** ** |
| ** **                                  | ** ** | ** **                      | ** ** | **(as restated)(3)** | ** ** |
| Total segment  EBITDA                       |       |                            | $          | 179.4 |   |   |   | $ | 141.4 |   |   |
| Unallocated  corporate costs                |       |                            | (21.8      | ) |   |   | (29.0 | ) |   |
| Interest expense  and early repayment costs |       |                            | (68.0      | ) |   |   | (42.1 | ) |   |
| Depreciation and  amortization              |       |                            | (36.8      | ) |   |   | (49.5 | ) |   |
| Income before income  taxes                 |       |                            | $          | 52.8 |   |   |   | $ | 20.8 |   |   |

 

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(2)          Percentages are bysegment, if applicable.

(3)          See Note 2 for adiscussion of the restatement.

*NetSales.**  *Netsales for the nine months ended July 2, 2005 were $838.2 million, or a12.4% increase as compared to $745.6 million for the nine months ended June 26,2004.

Water infrastructure net sales for the nine monthsended July 2, 2005 were $480.8 million, or a 10.6% increase as compared to$434.7 million for the nine months ended June 26, 2004. This increasewas driven primarily by price increases implemented in the second half of 2004and during the second quarter of 2005, as well as increased volumes due to thecontinued strong performance of the residential construction market.

Piping systems net sales for the nine months ended July 2,2005 were $357.4 million, or a 15.0% increase as compared to$310.9 million for the nine months ended June 26, 2004. This increasewas driven primarily by price increases implemented in the second half of 2004and the first half of 2005, as well as $9.5 million of additional Starproduct sales. We acquired the Star business in January 2004 (seeNote 5).

*GrossProfit.**  *Grossprofit for the nine months ended July 2, 2005 was $255.2 million, ora 24.7% increase as compared to $204.6 million for the nine months ended June 26,2004. Gross profit, as a percentage of net sales, or gross margin, increasedfrom 27.4% for our first nine months of 2004 to 30.4% for our first nine monthsof 2005.

Water infrastructure gross profit for the nine monthsended July 2, 2005 was $166.1 million, or an 18.7% increase ascompared to $139.9 million for the nine months ended June 26, 2004.Gross profit, as a percentage of net sales, increased from 32.2% for our firstnine months of 2004 to 34.5% for our first nine months of 2005. The increase ingross profit was primarily driven by price increases and the continued strongperformance of the residential construction market. Partially offsetting theeffects of higher prices were higher raw material costs (most notably brassingot and scrap steel) due to worldwide supply and demand issues. We cannotprovide assurances that any future increases in raw material costs can bepassed on to our customers.

Piping systems gross profit for the nine months ended July 2,2005 was $94.4 million, or a 34.9% increase as compared to $70.0 millionfor the nine months ended June 26, 2004. Gross profit, as a percentage ofnet sales, increased from 22.5% to 26.4%. The increase in gross profit wasprimarily driven by price increases. Increased raw material costs partiallyoffset the effects of the higher prices. We cannot provide assurances that wecan continue to pass on cost increases to our customers.

*Selling,General & Administrative Expense.**  *Selling, General and Administrativeexpenses (“SG&A”) for the nine months ended July 2, 2005 were$133.8 million, or a 5.3% decrease as compared to 

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$141.3 million forthe six months ended June 26, 2004. As a percentage of net sales, SG&Adecreased from 19.0% for our first nine months of 2004 to 16.0% for our firstnine months of 2005.

Water infrastructure SG&A for the nine monthsended July 2, 2005 was $49.5 million, or a 10.5% increase as compared to$44.8 million for the nine months ended June 26, 2004. As apercentage of net sales, SG&A remained steady at 10.3% for both our firstnine months of 2004 and 2005. Significant factors contributing to the highercosts include increased management incentive compensation costs of$1.3 million related to higher earnings, increased sales commissions of$0.3 million related to higher sales, and increased wages and benefitcosts of $1.2 million.

Piping systems SG&A for the nine months ended July 2,2005 was $59.8 million, or a 12.0% increase as compared to $53.4 millionfor the nine months ended June 26, 2004. As a percentage of net sales,SG&A decreased from 17.2% for our first nine months of 2004 to 16.7% forour first nine months of 2005. Significant factors contributing to the highercosts include increased selling costs of $3.7 million primarily due tohigher sales commissions, increased warehousing costs of $1.1 millionprimarily related to the Star product line and increased management incentive compensationcost of $1.1 million due to higher earnings.

Corporate expenses for the nine months ended July 2,2005 were $24.5 million as compared to $43.1 million for the nine monthsended June 26, 2004. The decrease was primarily due to a $12.0 million reductionin amortization expense for 2005 as compared to 2004 as a result of anintangible asset becoming fully amortized during the fourth quarter of 2004 anda $21.2 million reduction in corporate stock compensation charges for 2005 ascompared to 2004 primarily related to charges for employee optionholders madein connection with the recapitalization of the Company during the third quarterof 2004. All options were cancelled at that time. These items were partiallyoffset by legal and audit fees of $3.0 million related to an internalinvestigation (see Note 2), accounting and legal fees of $1.1 millionrelated to SEC filing matters, consulting fees of $2.6 million related toefforts to become compliant with public company reporting and Sarbanes-Oxleyinternal control requirements, $1.4 million related to compensation payments tocurrent employees and directors to offset additional taxes owed by them as aresult of the Company’s revaluation of stock compensation paid to them in 2004,$1.6 million of professional fees related to efforts to sell the Company (seeNote 5), increased board of director fees of $0.2 million, increased incentivecompensation costs of $1.6 million, increased legal, audit and otherconsulting fees of $1.4 million, and increased salary, benefit, recruitingand relocation costs of $1.2 million associated with additional accountingand legal staffing. Corporate expenses consist primarily of corporate staff,benefits, legal and facility costs.

*FacilityRationalization, Restructuring and Related Costs.**  *There was $1.6 million ofrestructuring costs for the nine months ended July 2, 2005, relatedprimarily to severance payments and to the termination of operating leases forthe building and machinery at a water infrastructure plant in Colorado thatceased manufacturing and began outsourcing a product line in February 2005.

There was $0.9 million of facilityrationalization costs for the nine months ended June 26, 2004, relatedprimarily to future lease obligations at a closed piping systems facility inNew Jersey and environmental issues at a closed piping systems plant inGeorgia.

*Interest Expense.**  *Interest expense for the ninemonths ended July 2, 2005 was $68.0 million, or a $25.9 millionincrease from $42.1 million for the nine months ended June 26, 2004.Interest expense for the nine months ended July 2, 2005, includes$33.7 million of additional interest expense and amortization of deferredfinancing fees on $518.0 million of net additional debt resulting from theCompany’s recapitalization in April 2004. In the nine months ended June 26,2004, interest expense included a $6.6 million write-off of term debt deferredfinancing fees related to the April 2004 recapitalization, and a$7.0 million early redemption penalty and a write-off of $0.4 millionin deferred financing fees related to the early redemption of$50.0 million of senior subordinated debt in November 2003. Also,gains recorded 

34

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on interest rateswaps were $6.2 million lower in 2005 than in 2004 as more swap agreementsexpired and were not renewed.

*Income Tax Expense.**  *The effective tax rates (excludingdiscrete third quarter items) for the nine months ended July 2, 2005 and June 26,2004 were 41% and 43%, respectively. Discrete third quarter events in 2005 and2004 allowed the Company to adjust tax accruals, as described in the quarterlycomparison section.

*Segment EBITDA.**  *Segment EBITDA for the nine monthsended July 2, 2005 was $179.4 million, or a 26.9% increase ascompared to $141.4 million for the nine months ended June 26, 2004.

Water infrastructureEBITDA for the nine months ended July 2, 2005 was $131.9 million,which was $18.9 million or 16.7% higher than the $113.0 million forthe nine months ended June 26, 2004. The increased EBITDA resultedprimarily from increased prices and volumes, partially offset by additionalSG&A spending as discussed above.

Piping systems EBITDA was$47.5 million for the nine months ended July 2, 2005, which was$19.1 million or 67.3% higher than the $28.4 million reported for thenine months ended June 26, 2004. The increased EBITDA resulted primarilyfrom increased prices and additional Star gross profit, partially offset byadditional SG&A spending as discussed above.

**Liquidity and Capital Resources**

We are a holding companyand have no direct material operations. Our only material asset is ourownership of Group, and our only material liabilities are the senior discountnotes, our guarantee of Group’s senior credit facility and our potentialobligation to repurchase Dale B. Smith’s equity interest (seeNote 8). Our principal source of liquidity has been and is expected to bedividends from Group and our principal use of cash will be for debt servicebeginning in 2009.

Group is the borrowerunder the senior credit facility and the issuer of $100 million principalamount of senior secured notes due 2011 and $315 million senior subordinatednotes due 2012. The senior credit facility, secured notes and subordinatednotes impose limitations on Group’s ability to pay dividends to us. Group’sability to generate net income will depend upon various factors that may bebeyond our control. Accordingly, Group may not generate sufficient cash flow orbe permitted by the terms of its debt instruments to pay dividends ordistributions to us in amounts sufficient to allow us to pay cash interest onthe senior discount notes. We would then be required to secure alternate financing,which may not be available on acceptable terms, or at all.

Group’s principal sourcesof liquidity have been and are expected to be cash flow from operations andborrowings under the senior credit facility. Its principal uses of cash will bedebt service requirements as described below, capital expenditures, workingcapital requirements, dividends to us to finance our cash needs and possibleacquisitions.

*Debt Service*

As of July 2, 2005 wehad: (a) total consolidated indebtedness of approximately $1,051.7million; and (b) approximately $58.5 million of borrowings availableunder Group’s senior revolving credit facility, subject to customaryconditions. As of July 2, 2005, Group had obtained $21.5 million inletters of credit under the senior revolving credit facility, which reducedavailability for borrowings thereunder. Our significant debt serviceobligations could have material consequences to our security holders. Our keyfinancial covenants are dependent on attaining certain levels of EBITDA, asdefined in the respective debt arrangements. The most restrictive covenant ineffect at July 2, 2005 related to Group’s leverage ratio, as defined inthe debt arrangements, which required approximately $162 million of EBITDAover the trailing twelve months, based on Group’s net debt outstanding. Group’sEBITDA, as defined in the debt agreement, exceeded $230 million over thetrailing twelve months ended July 2, 2005.

35

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*CapitalExpenditures*

The senior credit facilitycontains restrictions on our and Group’s ability to make capital expenditures.Based on current estimates, management believes that the amount of capitalexpenditures permitted to be made under the senior credit facility will beadequate to maintain the properties and business of our continuing operations.

*Sources of Funds*

We anticipate that our operating cash flow, togetherwith permitted borrowings under the senior credit facility, will be sufficientto meet our anticipated future operating expenses, capital expenditures anddebt service obligations as they become due for at least the next twelvemonths. However, the ability to make scheduled payments of principal of, to payinterest on or to refinance indebtedness and to satisfy other debt obligationswill depend upon future operating performance, which will be affected bygeneral economic, financial, competitive, legislative, regulatory, business,environmental and other factors beyond our control.

From time to time we may explore additional financingmethods and other means to lower our cost of capital, which could include stockissuance or debt financing and the application of the proceeds therefrom to therepayment of bank debt or other indebtedness. In addition, in connection withany future acquisitions, we may require additional funding which may beprovided in the form of additional debt or equity financing or a combinationthereof. There can be no assurance that any additional financing will be availableto us on acceptable terms.

*Walter IndustriesMerger*

Under the merger agreement between Walter Industriesand the Company and prior to merger closing, the Company will cause itssubsidiary, Mueller Group, Inc. (“Group”), to commence a tender offer andconsent solicitation for Group’s second priority senior secured floating ratenotes due 2011. The consummation of the tender offer and consent solicitationis expected to occur simultaneously with the consummation of the merger, but itis not a condition to the merger closing. Group’s senior credit facility willbe refinanced at merger closing. The Company’s 14 3⁄4% senior discount notes due2014 and Group’s 10% senior subordinated notes due 2012 will remain outstandingafter the merger is completed.  However, holdersof these notes will have the right to put them to their respective issuersfollowing the change of control resulting from the consummation of the mergertransaction in accordance with the respective indentures. The Companyanticipates that, in connection with the merger, the Company will incur additional debt. As a result, the Company’sleverage will increase, increasing its debt service obligations. The increasedleverage could adversely affect the outstanding notes of the Company and Groupgoing forward.

As a result of the pending acquisition by WalterIndustries, it is expected that Walter Industries’ US Pipe subsidiarywill be contributed to the Company, which will have an impact on the Company’sfinancial statements by, for example, lowering the margins of the consolidatedcompany. In addition, we expect that our reporting segments may be changedafter the merger. We also expect that purchase accounting adjustments couldincrease non-cash deprecation and amortization expense.

The merger transaction issubject to customary conditions to closing, and there can be no assurance thatthe transaction will be consummated.

***Historical***

Historically, our financing requirements have beenfunded primarily through cash generated by operating activities and borrowingsunder the revolving credit facility. From time to time, we have also raisedadditional funds through term debt offerings.

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*Cashflows from operating activities.**  *Net cash provided by operations was$33.1 million for the first nine months of 2005, compared to net cashprovided of $51.0 million for the first nine months of 2004. Significantchanges in working capital balances in the first nine months of 2005 included a$48.8 million increase in inventories. Water infrastructure inventories increased$25.9 million during the nine months ended July 2, 2005. Significantcontributing factors to the increase include higher raw material costs ofapproximately $7 million, as well as a seasonal build of approximately $10million to meet anticipated fourth quarter demand. Other contributing factorsinclude $1.8 million of increased on-hand quantities of raw material due tolarger purchases to achieve lower prices, $1.8 million of inventory costsassociated with a large, highly-engineered project scheduled to ship late inthe fourth quarter of 2005, and $1.2 million in Canadian product inventories(purchased from other water infrastructure locations) required to serviceCanadian customer requirements. Piping systems inventories increased$23.6 million during the nine months ended July 2, 2005. Increasedmaterial and labor costs accounted for approximately $7 million of theincrease. Approximately $14 million was due to increased foreign productinventories required to service North American and European customer requirements.Of this $14 million, approximately $2 million is related to the start-upof European export efforts, while the remaining $12 million is related toongoing efforts to make available a full line of foreign-sourced products toour North American customers.

*Cashflows used in investing activities.**  *In the first nine months of 2005 wehad net cash used in investing activities of $20.8 million compared to netcash used in the first nine months of 2004 of $37.2 million. This decreasewas primarily due to $19.8 million spent during the second quarter of 2004for the acquisitions of Star and Modern Molded (see Note 5).

*Cash flows from financingactivities.**  *Cashflows used in financing activities was $54.0 million in the first ninemonths of 2004 compared to cash flows provided by financing activities of$1.2 million in the first nine months of 2005. This was primarily due toearly payment of $50 million of subordinated notes due 2009 in the firstquarter of 2004.

**Off-Balance Sheet Arrangements**

We do not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. In addition, we do not have anyundisclosed borrowings or debt, and we have not entered into any derivativecontracts (other than those described in “—Qualitative and QuantitativeDisclosure About Market Risk”) or synthetic leases. We are, therefore, notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

Group utilizes letters ofcredit and surety bonds in the ordinary course of business to ensureperformance of contractual obligations. As of July 2, 2005, Group had$21.5 million of letters of credit and $16.3 million of surety bondsoutstanding.

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**Contractual Obligations**

Our contractualobligations as of July 2, 2005:

**Payments Due byPeriod**

| **Contractual Obligations**       | ** ** | ** **                          | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|-----------|------------|
| ** **                             | ** ** | **(dollars in millions)** | ** ** |
| Long-term debt                         |       |                                |       |                            |       |               |       |               |       |                        |       |      |       |   |   |   |   |   |   |
| Principal on long-term debt            |       |                                | $          | 2.9                             |       |               |       | 5.8                |       |                        |       | 5.8       |       |   |   | 1,024.1 |   |   | 1,038.6 |   |
| Interest on long-term debt(1)          |       |                                | 72.4       |                            |       |               | 143.9      |               |       |                        | 182.9      |      |       |   | 354.9 |   |   | 754.1 |   |
| Capital lease  obligations             |       |                                | 1.0        |                            |       |               | 1.2        |               |       |                        | 0.1        |      |       |   | — |   |   | 2.3 |   |
| Operating leases                       |       |                                | 8.8        |                            |       |               | 11.3       |               |       |                        | 3.0        |      |       |   | 2.9 |   |   | 26.0 |   |
| Unconditional  purchase obligations(2) |       |                                | 6.5        |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | 6.5 |   |
| Other long-term  obligations(3)        |       |                                | —     |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | — |   |
| Total contractual  cash obligations    |       |                                | $          | 91.6                            |       |               |       | 162.2              |       |                        |       | 191.8     |       |   |   | 1,381.9 |   |   | 1,827.5 |   |
|                                        |            |                                     |            |                                 |            |                    |            |                    |            |                             |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Interest on the seniorcredit facility and secured notes is calculated using LIBOR of 3.54% and 3.21%respectively, the rates applicable under these debt instruments and in effecton July 2, 2005. Each increase or decrease in LIBOR of 0.125% would resultin an increase or decrease in annual interest on the senior credit facility andsecured notes of $0.8 million. Because the interest rates under the seniorcredit facility and secured notes will be variable, actual payments may differ.Interest does not include payments that could be required under ourinterest-rate swap agreements, which payments will depend upon movements in interestrates and could vary significantly. The payments due on the existing interestrate swaps expiring in July 2005 and May 2007 are estimated to beapproximately $0.5 million, net of LIBOR interest of 3.54% received fromcounterparties.

(2)          Includes contractualobligations for purchases of raw materials and capital expenditures.

(3)          Excludes the deferredpayment portion of the purchase price for Star. The Star purchase price issubject to adjustment to reflect, among other things, a deferred payment to be madeby us to the extent that the gross profit of the business exceeds the targetgross profit from February 1, 2004 to January 31, 2007. Although themaximum amount payable is $23 million, we estimate that the total deferredpayment will be approximately $3.0 to $6.0 million. This calculation ofthe potential Star purchase price adjustment is based on management’s bestestimate; however, the actual adjustment may be materially different.

**Effect of Inflation; Seasonality**

We do not believe that general inflation has had amaterial impact on our financial position or results of operations, with theexception of recent increases in the cost of our raw materials.

Our business is largelydependent upon the North American construction industry, which is very seasonaldue to the impact of winter or wet weather conditions. Our net sales andoperating income have historically been lowest, and our working capital needshave been highest, in the three month periods ending around December 31and March 31, when the northern United States and all of Canada generallyface weather that restricts significant construction activity and we buildworking capital in anticipation of the peak construction season, during whichtime our working capital tends to be reduced.

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**Critical Accounting Policies**

Our significant accountingpolicies are described in our audited consolidated financial statements for theyear ended September 30, 2004 as found on Form 10-K (File No. 333-116590).While all significant accounting policies are important to our consolidatedfinancial statements, some of these policies may be viewed as being critical.Such policies are those that are both most important to the portrayal of ourfinancial condition and require our most difficult, subjective and complexestimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses and related disclosure of contingent assets andliabilities. These estimates are based upon our historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. Our actual results may differ from these estimates underdifferent assumptions or conditions.

**RecentlyIssued Accounting Standards**

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) replacesSFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requirescompensation costs related to share-based payment transactions to be recognizedin the financial statements over the period that an employee provides servicein exchange for the award. Public companies are required to adopt the newstandard using a modified prospective method and may elect to restate priorperiods using the modified retrospective method. Under the modified prospectivemethod, companies are required to record compensation cost for new and modifiedawards over the related vesting period of such awards prospectively and recordcompensation cost prospectively for the unvested portion, at the date ofadoption, of previously issued and outstanding awards over the remainingvesting period of such awards. No change to prior periods presented ispermitted under the modified prospective method. Under the modifiedretrospective method, companies record compensation costs for prior periodsretroactively through restatement of such periods using the exact pro formaamounts disclosed in the companies’ footnotes. Also, in the period of adoptionand after, companies record compensation based on the modified prospectivemethod. SFAS No. 123(R), as amended in April 2005 for compliancedates, allows companies to implement the standard at the beginning of theirnext fiscal year. The Company plans to adopt SFAS No. 123(R) as of October 1,2005, the beginning of its next fiscal year and to use the modified prospectivemethod. The adoption of SFAS 123(R) is not expected to have amaterial impact on the Company’s financial statements for the year ended September 30,2005.

In November 2004, the Financial AccountingStandards Board issued SFAS No. 151, “Inventory Costs.” SFAS No. 151amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material. This Statement requires that those itemsbe recognized as current-period charges regardless of whether they meet thecriterion of “so abnormal.” In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. SFAS No. 151 iseffective for fiscal years beginning after June 15, 2005. The Companyintends to adopt SFAS No. 151 on October 1, 2005, the beginning ofits 2006 fiscal year. The adoption of SFAS No. 151 is not expected to havea material impact on the Company’s financial statements.

FASB Staff Position (FSP) No. FAS 109-1and 109-2 were issued in December 2004, providing guidance onforeign earnings repatriation and qualified production activities of theAmerican Jobs Creation Act (AJCA) that was enacted on October 22, 2004.The AJCA created a temporary incentive for United States multinationals torepatriate accumulated earnings outside the United States by providing an85 percent dividends received deduction for certain qualifying earningsrepatriations in either fiscal 2005 or in fiscal 2006. As of July 2, 2005,the Company has not provided deferred taxes on foreign earnings because any taxeson dividends would be substantially offset by foreign tax credits or becausethe Company intends to reinvest those earnings indefinitely. Due to thecomplexity of the repatriation provision, the 

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Company is stillevaluating the effects of this provision on its plan for repatriation offoreign earnings and does not expect to be able to complete this evaluationuntil after the Treasury Department has issued all of its guidance, includingthe expected passage of a Technical Corrections Bill by Congress.

In March 2005, theFASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting forConditional Asset Retirement Obligations.” FIN 47 provides clarification ofcertain sections of FASB Statement No. 143, “Accounting for AssetRetirement Obligations.” Specifically, FIN 47 clarifies the meaning of the term“conditional asset retirement obligation” as used in SFAS 143 and alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. FIN 47 is effectiveno later than the end of fiscal years ending after December 15, 2005. TheCompany is currently evaluating the impact of this standard on its financialstatements.

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

The nature of market risks faced by the Company at July 2,2005 were the same as disclosed in the Company’s Annual Report on Form 10-Kfor the year ended September 30, 2004. We are exposed to various marketrisks, which are potential losses arising from adverse changes in market ratesand prices, such as interest rates, foreign exchange fluctuations and rawmaterials. We do not enter into derivatives or other financial instruments fortrading or speculative purposes.

At July 2, 2005 we had fixed rate debt of$438.2 million and variable rate debt of $613.5 million. The pre-taxearnings and cash flows impact resulting from a 100 basis point increase ininterest rates on variable rate debt, holding other variables constant andexcluding the impact of the hedging agreements described below, would beapproximately $6.1 million per year.

Group has entered into interest rate swap agreementswith a notional principal amount of $100.0 million in order to reduceinterest rate risks and manage interest expense. The swap agreements, whichmature in July 2005 and May 2007, effectively convert floating ratedebt under Group’s credit facility into fixed-rate debt and carried an averagefixed interest rate of 5.77% at July 2, 2005.

On July 27, 2005, Group executed a new interestrate swap agreement—notional principal amount of $50.0 million, maturing in April 2007—toreplace the swap agreement which expired in July 2005. With this new swapagreement, floating rate debt under Group’s credit facility is effectivelyconverted into fixed-rate debt at an average fixed interest rate of 4.09% at July 27,2005.

Our strategy for management of currency risk reliesprimarily on conducting our operations in a country’s respective currency andmay, from time to time, involve currency derivatives, primarily forward foreignexchange contracts, to reduce our exposure to currency fluctuations. As of July 2,2005, we had foreign exchange contracts outstanding with a notional principalamount of $3.2 million to hedge our Canadian operations’ exposure to currencyfluctuations on products purchased from United States suppliers and purchasesof equipment from European suppliers.

**ITEM 4.   CONTROLSAND PROCEDURES.**

This Item 4 disclosure hasbeen updated from what was originally reported for the quarter ended July 2,2005 to reflect the results of the Company’s evaluation of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures asof September 30, 2005, which identified a material weakness thateffectively led to the restatement of the previously issued financialstatements for the years ended September 30, 2004 and 2003, the firstthree quarters of fiscal 2005 and all interim periods of fiscal 2004.

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***Restatement of Previously Issued ConsolidatedFinancial Statements***

Asdescribed in Note 2 to the financial statements, the Company identified errorsin the presentation in the Company’s previously issued consolidated financialstatements: (i) the effect of foreign currency exchange rate changes oncash balances; (ii) book cash overdrafts; (iii) the misclassificationof deferred income tax assets between the current and non-currentclassifications in the balance sheet and (iv) the misclassification ofdepreciation expense. As a result of these errors, the Company has restated itsconsolidated financial statements for the years ended September 30, 2004and 2003, the first three quarters of fiscal 2005 and all interim periods offiscal 2004.

The 2005Restatement had no effect on the Company’s consolidated net income or the ConsolidatedStatement of Stockholders’ Deficit for the two fiscal years endedSeptember 30, 2004 and the first three quarters of fiscal 2005 and allinterim periods of fiscal 2004, including our quarter ended July 2, 2005.

***Evaluation of our Disclosure Controls and Procedures.***

Asof the end of the period covered by this report, we evaluated the effectivenessof the design and operation of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)). Thisevaluation was done under the supervision and with the participation ofmanagement, including Dale B. Smith, Chief Operating Officer(“COO”), andJeffery W. Sprick, Chief Financial Officer (“CFO”). It should be noted thatany  system of controls, however welldesigned and operated, can provide only reasonable, and not absolute, assurancethat the objectives of the system are met.

Basedon this evaluation and because of the material weakness described below, our COOand CFO have concluded that our disclosure controls and procedures were noteffective, at the reasonable assurance level, to enable us to record, process,summarize, and report information required to be included in our periodic SECfilings within the required time period or to ensure that information requiredto be disclosed by the Company in the reports that it files or submits underthe Securities Exchange Act is accumulated and communicated to the Company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.Notwithstanding this material weakness, our management has concluded that thefinancial statements included in this Form 10-Q/A fairly present inall material respects the Company’s financial position, results of operationsand cash flows for the periods presented in conformity with generally acceptedaccounting principles.

***Material Weakness in Internal Control over FinancialReporting***

Amaterial weakness is a control deficiency or a combination of controldeficiencies that results in more than a remote likelihood that a materialmisstatement of the annual or interim consolidated financial statements willnot be prevented or detected. As of July 2, 2005, the Company did notmaintain effective controls over the preparation, review and presentation anddisclosure of the Company’s consolidated financial statements. Specifically,the Company’s controls failed to prevent or detect the incorrect presentationof the following: (i) cash flows from the effect of exchange rate changeson cash balances; (ii) cash flows and balance sheet presentation of bookcash overdrafts; (iii) the presentation of current and non-currentdeferred income tax assets in the Company’s Consolidated Balance Sheets; and (iv) classificationof certain depreciation expense as selling, general and administrative expenseinstead of cost of sales in the Company’s Consolidated Statements of Operations.This control deficiency resulted in the restatement of our annual consolidatedfinancial statements for fiscal 2004 and 2003 and our interim consolidatedfinancial statements for the first three quarters of fiscal 2005, all interimperiods of fiscal 2004 and audit adjustments to our 2005 annual consolidatedfinancial statements. Additionally, this control deficiency could result in amisstatement of the presentation and disclosure of the Company’s consolidatedfinancial statements that would result in a material misstatement in the annualor interim financial statements that would not be prevented or detected.Accordingly, management has determined that this control deficiency constitutesa material weakness.

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***Previous Disclosure About Our Material Weakness inInternal Control over Financial Reporting***

Asof September 30, 2004, and all interim periods through July 2, 2005including our quarter ended July 2, 2005, we reported the followingcontrol deficiencies that, in the aggregate, constituted a material weakness ininternal control over preparation, review and presentation and disclosure ofthe Company’s consolidated financial statements. Specifically our control deficienciesincluded: (i) a lack of personnel with experience in financial reportingand control procedures necessary for SEC registrants; (ii) a lack ofsufficient controls to prevent or detect, on a timely basis, unauthorizedjournal entries; (iii) a lack of sufficient controls over informationtechnology data conversion and program changes; (iv) a lack of sufficientcontrols over the development and communication of income tax provisions; (v) alack of effective controls surrounding “whistleblower” hotline complaints andinternal certifications to ensure that issues were communicated on a moretimely basis by management to the audit committee and the independentregistered public accounting firm; (vi) a lack of effective controls overrevenue recognition associated with full truckload shipments not immediatelydispatched by freight carriers; and (vii) a lack of formal controls andprocedures regarding assessment of financial exposures and transactions,including consideration of accounting implications under generally acceptedaccounting principles. These control deficiencies resulted in audit adjustmentsto the consolidated financial statements for the year ended September 30,2004. Additionally, these control deficiencies, in the aggregate, could resultin a misstatement to accounts and disclosures that would result in a materialmisstatement to the annual or interim financial statements that would not beprevented or detected. Accordingly, management determined that these controldeficiencies in the aggregate constituted a material weakness.

Wereported in our Form 10-Q for all interim periods in fiscal 2005that we had taken steps to remediate this material weakness. We: (i) reassignedour Chief Financial Officer, appointed an Interim Chief Financial Officer andhired additional accounting and finance staff; (ii) introduced increasedtraining for our existing financial and accounting and other staff; (iii) retainedthird-party consultants with significant SEC financial reporting experience to provideassistance in complying with SEC reporting requirements; (iv) formed adisclosure committee to supervise the preparation of our Exchange Act Reportsand other public communications; (v) improved our controls over, and begandeveloping written policies and procedures that cover all of our significantaccounting processes, including journal entries, the development andcommunication of income tax provisions, information data conversion issues andprogram changes, revenue recognition and assessing financial exposures; (vi) improvedand centralized our controls over our information technology; and (vii) implementedglobal compliance initiatives under the direction of our Chief ComplianceOfficer. These improvement efforts continued to progress during our thirdquarter ended July 2, 2005. While significant improvements have beenimplemented throughout the year, management believes that additionalremediation is needed and will require changes in personnel, processes andprocedures to ensure timely and accurate financial reporting on a sustainablebasis.

***Changes in Internal Control Over Financial Reporting***

Therehave been no changes in our internal control over financial reporting duringthe three months ended July 2, 2005 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting other than as described above.

***Changesin Internal Control Over Financial Reporting Subsequent to September 30,2005***

Subsequentto September 30, 2005, management has taken steps to remediate thematerial weakness described above. These steps include a thorough review, on aquarterly basis, of foreign currency translation cash flow statement effects,book overdrafts and transactions related to property, plant and equipment andan additional review, on a quarterly basis, of the classification requirementsof each component line item and the individual elements that comprise each lineitem of the statement of cash flows, in accordance with Statement of FinancialAccounting Standards, No. 95, “Statement of Cash Flows.” Additionally, theclassification of deferred income tax items in the balance sheet and cash flowstatement, as well as depreciation in the statement of operations, will beevaluated quarterly. Management 

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believes the additionalcontrol procedures designed, when implemented, will fully remediate thismaterial weakness.

In addition, subsequent to September 30, 2005,the Company has made the following changes in internal controls to improvefinancial reporting accuracy:

·       Hired a full time ChiefFinancial Officer, Jeffery W. Sprick, and a Corporate Controller with SECfinancial reporting experience;

·       Hired additional financeand accounting personnel at the Company’s Pratt and Mueller Chattanoogafacilities;

·       Designated the WalterIndustries Inc. Audit Committee, which is fully independent under New YorkStock Exchange listing rules and the rules of the SEC, as its auditcommittee; and

·       Began to develop aninternal quarterly review plan to review higher risk areas in financialreporting, such as revenue recognition and inventory valuation.

Anothersignificant remedial action underway or planned to commence in fiscal year2006, not specifically related to the previously identified material weakness,includes the issuance of a code of conduct to all employees. In fiscal 2006, wewill be subject to the Sarbanes-Oxley internal control reporting requirementsand in 2006 we will be testing key internal controls for all significantbusiness units and business processes.

TheCompany continues to upgrade the knowledge of our finance staff by implementingon-going United States generally accepted accounting principles trainingprograms, consisting of providing appropriate technical resources to ourfinance team and training on the use of such resources, conducting a series oftraining sessions for plant controllers, periodic distribution of informationregarding changes in accounting and reporting standards, and issuance ofCompany accounting policy statements. Additionally, the Company terminated theprior Chief Compliance Officer and reassigned those duties to the Director ofInternal Audit.

**PART II.   OTHER INFORMATION**

**Item 6.   Exhibits.**

| 3.1   |   | Certificate  of Incorporation of Mueller Water Products, Inc. (formerly known as  Mueller Holdings (N.A.), Inc., formerly known as Hydrant Acquisition  Corp.)(1) |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1.1 |   | Amendment  to Certificate of Incorporation(2)                                                                                                                               |
| 3.2   |   | By-Laws  of Mueller Water Products, Inc.(1)                                                                                                                            |
| 31.1  |   | Certification  of Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002*                                                                  |
| 31.2  |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002*                                                                  |
| 32.1  |   | Certification  of the Chief Operating Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002*                                                              |
| 32.2  |   | Certification  of the Chief Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002*                                                              |

 

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(1)          Previously filed as an Exhibit toour Registration Statement on Form S-1 as filed with the SEC on June 17,2004.

(2)          Previously filed as Exhibit 3.1.1to our Annual Report on Form 10-K as filed with the SEC on March 31,2005.

*                    Filedherewith.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                              |   | MUELLER WATER PRODUCTS, INC. |
|------------------------------|--------|------------------------------|
|                         |   |                         |   |
|                         |   |                         |   |
| Date: February 3,  2006 |   | By:                          | /s/ DALE B. SMITH |
|                         |   |                         | Dale B. Smith |
|                         |   |                         | *Chief Operating Officer* |
|                         |   |                         |   |
|                         |   |                         |   |
| Date: February 3,  2006 |   | By:                          | /s/ JEFFERY W. SPRICK |
|                         |   |                         | Jeffery W. Sprick |
|                         |   |                         | *Chief Financial Officer* |

 

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