**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGEACT OF 1934

**Forthe quarterly period ended June 30, 2006.**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGEACT OF 1934

**CommissionFile Number 333-117473**

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**MUELLER GROUP, LLC**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **37-1387813**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  identification No.) |

 

**500 West Eldorado StreetDecatur, IL 62522-1808**(Address of principal executive offices)

**(217) 423-4417**

(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o   AcceleratedFiler o   Non-accelerated Filer x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act). o Yes  x No

Noneof the Registrant’s voting stock was held by non-affiliates as of August 9,2006. As of August 9, 2006, Mueller Group, LLC had 1 unit outstanding.

 

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**PART I.**                   FINANCIALINFORMATION

**ITEM 1.**                FINANCIALSTATEMENTS

**MUELLER GROUP, LLC**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

| ** **                                                                                                                                                  | ** ** | **June 30,  2006**             | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                                                                                                                  | ** ** | ** **                          | ** ** |                         | ** ** | ** ** |   |
| Cash and cash  equivalents                                                                                                                                  |       | $                                   | 177.3      |                         |       | $ | — |   |   |
| Receivables, net of  allowance for doubtful accounts of $5.5 million and $0.9 million at  June 30, 2006 and September 30, 2005, respectively |       | 309.2                               |       |                         | 118.5      |   |   |
| Inventories                                                                                                                                                 |       | 466.2                               |       |                         | 147.2      |   |   |
| Deferred income taxes                                                                                                                                       |       | 58.1                                |       |                         | 11.1       |   |   |
| Prepaid expenses                                                                                                                                            |       | 30.8                                |       |                         | 1.5        |   |   |
| Total current assets                                                                                                                                        |       | 1,041.6                             |       |                         | 278.3      |   |   |
| Property, plant and  equipment, net                                                                                                                         |       | 338.2                               |       |                         | 149.2      |   |   |
| Deferred financing fees                                                                                                                                     |       | 22.5                                |       |                         | —     |   |   |
| Deferred income taxes                                                                                                                                       |       | —                              |       |                         | 9.5        |   |   |
| Due from parent, Walter  Industries                                                                                                                         |       | 10.8                                |       |                         | —     |   |   |
| Identifiable  intangibles, net                                                                                                                              |       | 842.6                               |       |                         | —     |   |   |
| Goodwill                                                                                                                                                    |       | 722.5                               |       |                         | 58.4       |   |   |
| Other long-term assets                                                                                                                                      |       | 9.5                                 |       |                         | —     |   |   |
| Total assets                                                                                                                                                |       | $                                   | 2,987.7    |                         |       | $ | 495.4 |   |   |
| **Liabilities  and Shareholder’s Equity (Deficit)**                                                                                                    | ** ** | ** **                          | ** ** |                         | ** ** | ** ** |   |
| Current portion of long-term  debt                                                                                                                          |       | $                                   | 119.2      |                         |       | $ | — |   |   |
| Accounts payable                                                                                                                                            |       | 117.1                               |       |                         | 52.5       |   |   |
| Accrued expenses and  other liabilities                                                                                                                     |       | 119.9                               |       |                         | 34.7       |   |   |
| Payable to affiliate,  Sloss Industries                                                                                                                     |       | 2.0                                 |       |                         | 2.5        |   |   |
| Total current  liabilities                                                                                                                                  |       | 358.2                               |       |                         | 89.7       |   |   |
| Long-term debt                                                                                                                                              |       | 1,010.6                             |       |                         | —     |   |   |
| Payable to parent,  Walter Industries                                                                                                                       |       | —                              |       |                         | 443.6      |   |   |
| Accrued pension liability,  net                                                                                                                             |       | 104.3                               |       |                         | 53.6       |   |   |
| Accumulated  postretirement benefits obligation                                                                                                             |       | 47.0                                |       |                         | 51.1       |   |   |
| Deferred income taxes                                                                                                                                       |       | 316.7                               |       |                         | —     |   |   |
| Other long-term  liabilities                                                                                                                                |       | 25.4                                |       |                         | 12.6       |   |   |
| Total liabilities                                                                                                                                           |       | 1,862.2                             |       |                         | 650.6      |   |   |
| Commitments and  contingencies (Note 14)                                                                                                                    |       |                                |       |                         |       |   |   |
| **Shareholder’s equity (deficit):**                                                                                                                    | ** ** | ** **                          | ** ** |                         | ** ** | ** ** |   |
| Membership unit:                                                                                                                                            |       |                                |       |                         |       |   |   |
| (1 unit outstanding at  June 30, 2006 and September 30, 2005)                                                                                     |       | —                              |       |                         | —     |   |   |
| Capital in excess of par  value                                                                                                                             |       | 1,357.9                             |       |                         | 68.3       |   |   |
| Accumulated deficit                                                                                                                                         |       | (194.4                              | )          |                         | (178.1     | ) |   |
| Accumulated other comprehensive  loss                                                                                                                       |       | (38.0                               | )          |                         | (45.4      | ) |   |
| Total shareholder’s  equity (deficit)                                                                                                                  |       | 1,125.5                             |       |                         | (155.2     | ) |   |
| Total liabilities and shareholder’s equity (deficit)                                                                                                   |       | $                                   | 2,987.7    |                         |       | $ | 495.4 |   |   |

 

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

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**MUELLER GROUP, LLCCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)**

| ** **                                                                | ** ** | **Three months ended June 30,**                                                      | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| ** **                                                                | ** ** | **(dollars in millions)**                                                                      | ** ** |
| Net sales                                                                 |       |                                                                                                     | $          | 500.0 |   |   |   | $ | 162.0 |   |   |
| Cost of sales                                                             |       |                                                                                                     | 365.5      |   |   |   | 139.2 |   |   |
| Gross profit                                                              |       |                                                                                                     | 134.5      |   |   |   | 22.8 |   |   |
| Operating expenses:                                                       |       |                                                                                                     |       |   |   |   |   |   |   |
| Selling, general and administrative                                       |       |                                                                                                     | 62.6       |   |   |   | 10.7 |   |   |
| Related party corporate charges                                           |       |                                                                                                     | 2.3        |   |   |   | 1.8 |   |   |
| Facility rationalization, restructuring and related  costs                |       |                                                                                                     | 0.2        |   |   |   | — |   |   |
| Total operating expenses                                                  |       |                                                                                                     | 65.1       |   |   |   | 12.5 |   |   |
| Income from  operations                                                   |       |                                                                                                     | 69.4       |   |   |   | 10.3 |   |   |
| Interest expense  arising from related party payable to Walter Industries |       |                                                                                                     | —     |   |   |   | (4.9 | ) |   |
| Interest expense,  net of interest income                                 |       |                                                                                                     | (27.6      | ) |   |   | — |   |   |
| Income before income taxes                                                |       |                                                                                                     | 41.8       |   |   |   | 5.4 |   |   |
| Income tax  expense                                                       |       |                                                                                                     | 18.2       |   |   |   | 1.8 |   |   |
| Net income                                                                |       |                                                                                                     | $          | 23.6 |   |   |   | $ | 3.6 |   |   |

 

| ** **                                                                | ** ** | **Nine months ended June 30,**                               | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| ** **                                                                | ** ** | **(dollars in millions)**                                              | ** ** |
| Net sales                                                                 |       |                                                                             | $          | 1,415.3 |   |   |   | $ | 427.8 |   |   |
| Cost of sales                                                             |       |                                                                             | 1,142.7    |   |   |   | 381.7 |   |   |
| Gross profit                                                              |       |                                                                             | 272.6      |   |   |   | 46.1 |   |   |
| Operating expenses:                                                       |       |                                                                             |       |   |   |   |   |   |   |
| Selling, general and administrative                                       |       |                                                                             | 180.5      |   |   |   | 29.0 |   |   |
| Related party corporate charges                                           |       |                                                                             | 6.1        |   |   |   | 5.5 |   |   |
| Facility rationalization, restructuring and related  costs                |       |                                                                             | 28.6       |   |   |   | — |   |   |
| Total operating expenses                                                  |       |                                                                             | 215.2      |   |   |   | 34.5 |   |   |
| Income from  operations                                                   |       |                                                                             | 57.4       |   |   |   | 11.6 |   |   |
| Interest expense  arising from related party payable to Walter Industries |       |                                                                             | —     |   |   |   | (15.9 | ) |   |
| Interest expense,  net of interest income                                 |       |                                                                             | (81.6      | ) |   |   | (0.3 | ) |   |
| Loss before income taxes                                                  |       |                                                                             | (24.2      | ) |   |   | (4.6 | ) |   |
| Income tax  expense (benefit)                                             |       |                                                                             | (7.9       | ) |   |   | 2.5 |   |   |
| Net loss                                                                  |       |                                                                             | $          | (16.3 | ) |   |   | $ | (7.1 | ) |   |

 

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

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**MUELLER GROUP, LLC**

**CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’SEQUITY (DEFICIT) ANDCOMPREHENSIVE LOSS**

**FOR THE NINE MONTHS ENDED JUNE 30, 2006**

**(UNAUDITED)**

| ** **                                          | ** ** | **Capital in  Excess of  Par Value** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income  (Loss)** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance at September 30,  2005                 |       | $                                                   | 68.3       |                     |       | $                                 | (178.1     | )                                           |       |      |       |   |   |   | $ | (45.4 | ) |   | $ | (155.2 | ) |
| Walter’s  investment in subsidiary             |       | 932.9                                               |       |                     | —     |                              |       |                                        |       |      |       |   | — |   |   | 932.9 |   |
| Dividend to  Walter                                 |       | (444.5                                              | )          |                     | —     |                              |       |                                        |       |      |       |   | — |   |   | (444.5 | ) |
| Dividend to  Walter for acquisition costs           |       | (12.0                                               | )          |                     | —     |                              |       |                                        |       |      |       |   | — |   |   | (12.0 | ) |
| Forgiveness of  U.S. Pipe payable to Walter         |       | 443.6                                               |       |                     | —     |                              |       |                                        |       |      |       |   | — |   |   | 443.6 |   |
| Contribution from  Mueller Water Products           |       | 369.1                                               |       |                     | —     |                              |       |                                        |       |      |       |   | — |   |   | 369.1 |   |
| Share-based  compensation                           |       | 0.5                                                 |       |                     | —     |                              |       |                                        |       |      |       |   | — |   |   | 0.5 |   |
| Comprehensive income  (loss)                        |       |                                                |       |                     |       |                              |       |                                        |       |      |       |   |   |   |   |   |   |
| Net loss                                            |       | —                                              |       |                     | (16.3      | )                                 |       |                                        | (16.3      | )         |       |   | — |   |   | (16.3 | ) |
| Other  comprehensive income (loss), net of tax |       |                                                |       |                     |       |                              |       |                                        |       |      |       |   |   |   |   |   |   |
| Unrealized gain on interest rate swaps         |       | —                                              |       |                     | —     |                              |       |                                        | 5.3        |      |       |   | 5.3 |   |   | 5.3 |   |
| Foreign currency translation adjustments            |       | —                                              |       |                     | —     |                              |       |                                        | 2.1        |      |       |   | 2.1 |   |   | 2.1 |   |
| Comprehensive  loss                                 |       |                                                |       |                     |       |                              |       |                                        | $          | (8.9      | )          |   |   |   |   |   |   |   |
| Balance at June 30,  2006                      |       | $                                                   | 1,357.9    |                     |       | $                                 | (194.4     | )                                           |       |      |       |   |   |   | $ | (38.0 | ) |   | $ | 1,125.5 |   |
|                                                     |            |                                                     |            |                          |            |                                   |            |                                             |            |           |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

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

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**MUELLER GROUP, LLCCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

| ** **                                                                       | ** ** | **Nine months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **(dollars in millions)**            | ** ** |
| OPERATING ACTIVITIES                                                             |       |                                           |       |   |   |
| Net loss                                                                         |       | $                                              | (16.3      | ) | $ | (7.1 | ) |
| Adjustments to reconcile net loss to net cash provided  by operating activities: |       |                                           |       |   |   |
| Depreciation                                                                     |       | 51.6                                           |       | 19.7 |   |
| Amortization of  intangibles                                                     |       | 21.0                                           |       | — |   |
| Amortization of deferred  financing fees                                         |       | 7.4                                            |       | — |   |
| Accretion resulting from  valuing acquired debt at fair value                    |       | (2.3                                           | )          | — |   |
| Loss on disposal of property,  plant and equipment                               |       | 1.3                                            |       | — |   |
| Stock-based compensation  expense                                                |       | 1.0                                            |       | — |   |
| Impairments of property,  plant and equipment                                    |       | 21.6                                           |       | — |   |
| Provision (credit) for  deferred income taxes                                    |       | (25.6                                          | )          | 8.5 |   |
| Gain on interest rate  swaps                                                     |       | (0.5                                           | )          | — |   |
| Other, net                                                                       |       | (2.0                                           | )          | — |   |
| Changes in assets and liabilities, net of the  effects of acquisitions:          |       |                                           |       |   |   |
| Receivables                                                                      |       | (11.6                                          | )          | 3.3 |   |
| Inventories                                                                      |       | 58.8                                           |       | (49.8 | ) |
| Income taxes payable                                                             |       | —                                         |       | 3.8 |   |
| Prepaid expenses and  other current assets                                       |       | 1.8                                            |       | — |   |
| Other non-current assets                                                         |       | (0.4                                           | )          | — |   |
| Pension and other  long-term liabilities                                         |       | 2.5                                            |       | 3.1 |   |
| Accounts payable,  accrued expenses and other current liabilities                |       | (8.6                                           | )          | 3.4 |   |
| Net cash provided by  (used in) operating activities                             |       | 99.7                                           |       | (15.1 | ) |
| INVESTING ACTIVITIES                                                             |       |                                           |       |   |   |
| Additions to property,  plant and equipment                                      |       | (48.0                                          | )          | (15.7 | ) |
| Acquisition of  businesses, net of cash acquired                                 |       | (15.5                                          | )          | — |   |
| Increase in amounts due  (from) to Walter                                        |       | (12.5                                          | )          | 33.1 |   |
| Net cash (used in)  provided by investing activities                             |       | (76.0                                          | )          | 17.4 |   |
| FINANCING ACTIVITIES                                                             |       |                                           |       |   |   |
| Increase (decrease) in  dollar value of bank checks outstanding                  |       | 12.0                                           |       | (2.4 | ) |
| Proceeds from short-term  borrowings                                             |       | 55.9                                           |       | — |   |
| Retirement of short-term  debt                                                   |       | (55.9                                          | )          | — |   |
| Proceeds from long-term  debt                                                    |       | 1,050.0                                        |       | — |   |
| Retirement of long-term  debt                                                    |       | (866.9                                         | )          | — |   |
| Contribution from  Mueller Water Products                                        |       | 369.1                                          |       | — |   |
| Payment of deferred  financing fees                                              |       | (21.6                                          | )          | — |   |
| Dividend paid to Walter                                                          |       | (444.5                                         | )          | — |   |
| Dividend to Walter for  acquisition costs                                        |       | (12.0                                          | )          | — |   |
| Walter contribution of  Predecessor Mueller’s cash                          |       | 67.4                                           |       | — |   |
| Net cash provided by  (used in) financing activities                             |       | 153.5                                          |       | (2.4 | ) |
| Effect of exchange rate  changes on cash                                         |       | 0.1                                            |       | — |   |
| Net increase (decrease)  in cash and cash equivalents                            |       | 177.3                                          |       | (0.1 | ) |
| Cash and cash  equivalents at beginning of period                                |       | —                                         |       | 0.1 |   |
| Cash and cash equivalents at end of period                                       |       | $                                              | 177.3      |   | $ | — |   |

 

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

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Schedule of non-cash investing and financingactivities:

On October 3,the Company’s parent, Walter Industries, Inc. (“Walter”), purchased all ofthe outstanding common stock of Mueller Water Products, Inc. (“PredecessorMueller”). This stock was contributed to the Company by Walter as furtherdescribed in Note 3.

| ** **                                     | ** ** | **(dollars in millions)** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| Contribution of  Predecessor Mueller by Walter |       |                                | $          | 932.9 |   |   |
| Less: Cash of  Predecessor Mueller received    |       |                                | (67.4      | ) |   |
| Total net assets  received, excluding cash     |       |                                | $          | 856.5 |   |   |

 

Subsequent to the Acquisition, Walter forgave anintercompany receivable from U.S. Pipe of $443.6 million.

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

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**MUELLER GROUP, LLCNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSAS OF AND FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2006 ANDJUNE 30, 2005(UNAUDITED)**

**Note 1.**   Organization

Mueller Group, LLC (the “Company”) is a wholly-ownedsubsidiary of Mueller Water Products, Inc. (“Mueller Water”), a Delawarecorporation. Mueller Water is the surviving corporation of the merger on February 2,2006 of Mueller Water Products, LLC (Commission File Number: 333-116590)and Mueller Water Products Co-Issuer, Inc. with and into Mueller HoldingCompany, Inc., a Delaware corporation.

On June 1, 2006, Mueller Water completed itsinitial public offering (“IPO”) of its Series A common stock (NYSE: MWA). WalterIndustries, Inc. (“Walter”) is the holder of all of Mueller Water’soutstanding Series B common stock. Mueller Water is a majority-ownedsubsidiary of Walter. The Company continues to be a wholly-owned subsidiary ofMueller Water.

On October 3, 2005, through a series oftransactions (the “Acquisition”), Walter, through a wholly-ownedsubsidiary, acquired all outstanding shares of capital stock of our parentcompany, Mueller Water Products, Inc. (“Predecessor Mueller Water”), whichimmediately was converted into Mueller Water Products, LLC, a Delaware limitedliability company and contributed United States Pipe and Foundry Company, LLC,(“U.S. Pipe”), owned by Walter since 1969, to the acquired company’s wholly-ownedsubsidiary, Mueller Group, LLC (“Predecessor Mueller Group”). In accordancewith generally accepted accounting principles, for accounting purposes U.S.Pipe is treated as the acquirer of Predecessor Mueller Group. Accordingly,effective October 3, 2005, U.S. Pipe’s basis of accounting is used for theCompany and all financial data for periods prior to October 3, 2005 of theCompany included in this report on Form 10-Q, is that of U.S. Pipe.The results of operations of Predecessor Mueller Group are included in theConsolidated Statements of Operations beginning October 3, 2005.

The Company was originally organized as United StatesPipe and Foundry Company, Inc. (“Inc.”) and was a wholly-owned subsidiaryof Walter, a diversified New York Stock Exchange traded company (NYSE: WLT).On September 23, 2005, Inc. was dissolved and United States Pipe andFoundry Company, LLC was organized in the state of Alabama, and the operationsof Inc. were conducted under the form of a limited liability company.

In December 2005, U.S. Pipe changed its fiscalyear-end to September 30, which coincides with the fiscal year end of PredecessorMueller Group. Beginning with the quarter ended December 31, 2005, theCompany has three operating segments which are named after its leading brandsin each segment: Mueller, U.S. Pipe, and Anvil.

The accompanying unaudited condensed consolidated financialstatements of the Company have been prepared in accordance with generallyaccepted accounting principles for interim financial information and with theinstructions to Form 10-Q. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States for complete financial statements. In the opinionof management, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the three-month and nine-month periods ended June 30, 2006 arenot necessarily indicative of the results that may be expected for the yearending September 30, 2006.

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The balance sheet at September 30, 2005 has beenderived from the audited financial statements at that date but does not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.

Certain amounts in theprior period’s consolidated financial statements have been reclassified toconform to the current-period presentation. On the Consolidated Balance Sheetas of September 30, 2005, prepaid pension cost of $19.3 million has beennetted against accrued pension liability of $72.9 million and is presented asaccrued pension liability, net of $53.6 million.

**Note 2.**   Summaryof Significant Accounting Policies

*Revenue Recognition**—The* Companyrecognizes revenue based on the recognition criteria set forth in theSecurities and Exchange Commission’s Staff Accounting Bulletin 104 “RevenueRecognition in Financial Statements”, which is when delivery of product hasoccurred or services have been rendered and there is persuasive evidence of asales arrangement, selling prices are fixed or determinable, and collectibilityfrom the customer is reasonably assured. Revenue from the sale of products viarail or truck is recognized when title passes upon delivery to the customer.Revenue earned for shipments via ocean vessel is recognized under internationalshipping standards as defined by Incoterms 2000 when title and risk of loss transferto the customer. Sales are recorded net of estimated cash discounts andrebates.

*Shipping and Handling**—Costs* to shipproducts to customers are included in cost of sales in the ConsolidatedStatements of Operations. Amounts billed to customers, if any, to covershipping and handling costs are included in net sales.

*Customer Rebates**—Customer* rebates areapplied against net sales at the time the sales are recorded based on estimateswith respect to the deductions to be taken.

*Share-BasedCompensation*—On May 25, 2006, the Company adopted the MuellerWater Products, Inc. 2006 Stock Incentive Plan (the “2006 Plan”), which is morefully described in Note 5. The Company records compensation costs for stockoptions and restricted stock units granted to employees based on the fair valueat the grant dates as prescribed by Statement of Financial Accounting Standards(“SFAS”) No. 123(R), “Share-Based Payment”. The Company recordsshare-based compensation costs as selling, general and administrative in thecondensed consolidated statements of operations.

*Cash and Cash Equivalents**—The***Company considers all highly liquid investments withoriginal maturities of ninety days or less when purchased to be cashequivalents. Outstanding checks are netted against cash when there is asufficient balance of cash available in the Company’s accounts at the bank tocover the outstanding amount and the right of offset exists. Where there is noright of offset against cash balances, outstanding checks are classified alongwith accounts payable. At June 30, 2006 and September 30, 2005 checksissued but not yet presented to the banks for payment (i.e. the dollar value ofbank checks outstanding) were $12.0 million and zero, respectively, and wererecorded in accounts payable.

The cash balance as of June 30, 2006 included$123.1 million that was used on July 3, 2006 for the partial redemption ofthe Company’s outstanding debt, accrued interest and prepayment premiums andother debt repayment costs which is more fully described in Note 15 “SubsequentEvents”.

*Receivables**—Receivables*relateprimarily to amounts due from customers located in North America. To reducecredit risk, credit investigations are performed prior to accepting an orderand, when necessary, letters of credit are required to ensure payment.

The estimated allowance for doubtful accountsreceivable is based, in large part, upon judgments and estimates of expectedlosses and specific identification of problem trade accounts. Significantlyweaker than anticipated industry or economic conditions could impact customers’ability to pay such that actual 

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losses may be greater thanthe amounts provided for in these allowances. The periodic evaluation of theadequacy of the allowance for doubtful accounts is based on an analysis of priorcollection experience, specific customer creditworthiness and current economictrends within the industries served. In circumstances where a specific customer’sinability to meet its financial obligation is known to the Company (e.g.,bankruptcy filings or substantial downgrading of credit ratings), the Companyrecords a specific allowance to reduce the receivable to the amount the Companyreasonably believes will be collected.

*Inventories**—Inventories* arerecorded at the lower of cost (first-in, first-out) or market value.Additionally, the Company evaluates its inventory in terms of excess andobsolete exposures. This evaluation includes such factors as anticipated usage,inventory turnover, inventory levels and ultimate product sales value. Inventorycost includes an overhead component that can be affected by levels ofproduction and actual costs incurred. Management periodically evaluates theeffects of production levels and costs capitalized as part of inventory.

*Property, plant andequipment**—Property,*plant and equipment isrecorded at cost, less accumulated depreciation and amortization. Depreciationis recorded on the straight-line method over the estimated useful lives of theassets. Leasehold improvements are amortized on the straight-line method overthe lesser of the useful life of the improvement or the remaining lease term.Estimated useful lives used in computing depreciation expense are 2 to20 years for machinery and equipment and 3 to 50 years for landimprovements and buildings. Gains and losses upon disposition are reflected inthe Consolidated Statements of Operations in the period of disposition.

Direct internal andexternal costs to implement computer systems and software are capitalized asincurred. Capitalized costs are amortized over the estimated useful life of thesystem or software, beginning when site installations or module development iscomplete and ready for its intended use, which generally is 3 to 5 years.

The Company accounts forits asset retirement obligations related to plant and landfill closures inaccordance with Statement of Financial Accounting Standards No. 143 (“SFAS143”). Under SFAS 143, liabilities are recognized at fair value for anasset retirement obligation in the period in which it is incurred and the carryingamount of the related long-lived asset is correspondingly increased. Over time,the liability is accreted to its future value. The corresponding assetcapitalized at inception is depreciated over the estimated useful life of theasset.

*Tooling**—Prepaid* expensesinclude maintenance and tooling inventory costs. Perishable tools andmaintenance items are expensed when put into service. More durable items aredepreciated over their estimated useful lives, ranging from 4 to 10 years.

*Environmental Expenditures**—The* Companycapitalizes environmental expenditures that increase the life or efficiency ofproperty or that reduce or prevent environmental contamination. The Companyaccrues for environmental expenses resulting from existing conditions thatrelate to past operations when the costs are probable and reasonably estimable.The Company is indemnified by Tyco for all environmental liabilities associatedwith Predecessor Mueller as it existed as of August 16, 1999, whetherknown or not.

*Accounting for the Impairmentof Long-Lived Assets**—Long-lived* assets are reviewed forimpairment whenever events or changes in circumstances indicate that the bookvalue of the asset may not be recoverable. Goodwill and intangible assets thathave an indefinite life are not amortized, but instead are tested forimpairment annually (or more frequently if events or circumstances indicatepossible impairments) using both a discounted cash flow method and a marketcomparable method.

*Workers’ Compensation**—The* Company is self-insured for workers’compensation benefits for work-related injuries. Liabilities, includingthose related to claims incurred but not reported, are recorded 

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principally usingannual valuations based on discounted future expected payments and usinghistorical data or combined insurance industry data when historical data islimited. Pursuant to the terms of the Tyco Purchase Agreement, PredecessorMueller is indemnified by Tyco for all liabilities that occurred prior to August 16,1999. Workers’ compensation liabilities were as follows:

| ** **                                                          | ** ** | **June 30,  2006**             | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **(dollars in millions)** | ** ** |
| Workers’ compensation liability recorded on a discounted basis |       |                                | $          | 24.8                         |       |   |   | $ | 11.9 |   |   |
|                                                                     |            |                                     |            |                              |            |  |  |  |  |  |  |

 

Aone-percentage-point increase in the discount rate on the discounted claimsliability would decrease the liability by $0.1 million, while aone-percentage-point decrease in the discount rate would increase the liabilityby $0.1 million.

*Warranty Costs**—The***Company accrues for U.S. Pipe segment warranty expensesthat include customer costs of repair and/or replacement, including labor,materials, equipment, freight and reasonable overhead costs, determined on acase-by-case basis, whenever the Company’s products and/or services fail tocomply with published industry standards or mutually agreed upon customerrequirements.

The Company accrues for the estimated cost of productwarranties of the Mueller and Anvil segments at the time of sale based onhistorical experience. Adjustments to obligations for warranties are made aschanges in the obligations become reasonably estimable.

Activityin accrued warranty, included in the caption accrued expenses in theaccompanying Consolidated Balance Sheets, was as follows (in millions):

| ** **                               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **June 30,  2006**          | ** ** | **June 30,  2005**         | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
| Accrued balance  at beginning of period  |       |                             | $          | 4.4                             |       |   |   | $ | 1.8 |   |   |   | $ | 4.7 |   |   |   | $ | 1.8 |   |   |
| Accrued warranty  of Predecessor Mueller |       |                             | —     |                            |       |   | — |   |   |   | 1.6 |   |   |   | — |   |   |
| Warranty expense                         |       |                             | 1.4        |                            |       |   | 2.8 |   |   |   | 3.2 |   |   |   | 4.5 |   |   |
| Settlement of  warranty claims           |       |                             | (1.7       | )                               |       |   | (0.8 | ) |   |   | (5.4 | ) |   |   | (2.5 | ) |   |
| Balance at end of period                 |       |                             | $          | 4.1                             |       |   |   | $ | 3.8 |   |   |   | $ | 4.1 |   |   |   | $ | 3.8 |   |   |

 

*DeferredFinancing Fees*—Costs of debtfinancing are amortized over the life of the related loan agreements, whichrange from five to eight years. Such costs are reassessed when amendmentsoccur, in accordance with Emerging Issues Task Force (EITF) 96-19, “DebtorsAccounting for a Modification or Exchange of Debt Instruments.”

*Income Taxes**—Deferred***tax liabilities and assets are recognized for the expectedfuture tax consequences of events that have been included in the financialstatements or tax returns. Deferred tax liabilities and assets are determinedbased on the differences between the financial statements and the tax basis ofassets and liabilities, using tax rates in effect for the years in which thedifferences are expected to reverse. A valuation allowance is provided tooffset any net deferred tax assets if, based upon the available evidence, it ismore likely than not that some or all of the deferred tax assets will not berealized.

*Research and Development**—Research*anddevelopment expenditures are expensed when incurred.

*Advertising**—Advertising* costsare expensed when incurred.

*Translation of ForeignCurrency**—Assets*and liabilities of the Company’sbusinesses operating outside of the United States of America that maintainaccounts in a functional currency other than U.S. dollars are translated intoU.S. dollars using year-end exchange rates. Revenues and expenses aretranslated at the average exchange rates effective during the year. Foreigncurrency translation gains and losses are included 

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as a separate component ofstockholders’ equity. Gains and losses resulting from foreign currencytransactions are included in either cost of sales or selling, general andadministrative expense, as appropriate.

*Derivative Instruments andHedging Activities**—The***Companycurrently uses interest rate swaps as required in the 2005 Mueller CreditAgreement to reduce the risk of interest rate volatility. The amount to be paidor received from interest rate swaps is charged or credited to interest expenseover the lives of the interest rate swap agreements. Changes in the fair valueof derivatives are recorded each period in earnings or Accumulated OtherComprehensive Income (Loss), depending on whether or not a derivative isdesignated and effective as part of a hedge transaction and meets theapplicable requirements (see Note 7).

Additionally, the Companyutilizes forward contracts to mitigate its exposure to changes in foreigncurrency exchange rates from third party and intercompany transactions. Theprimary currency to which the Company is exposed and to which it hedges theexposure is the Canadian Dollar. The effective portion of unrealized gains andlosses associated with forward contracts are deferred as a component ofAccumulated Other Comprehensive Income (Loss) until the underlying hedgedtransactions are reported in the Company’s Consolidated Statements ofOperations.

*Related Party Transactions**—The***Company purchases foundry coke from an affiliate, SlossIndustries, Inc. for an amount that approximates the market value ofcomparable transactions. Costs included in cost of sales related to purchasesfrom Sloss Industries, Inc. were $4.8 million and $6.5 millionfor the three months ended June 30, 2006 and 2005, respectively, and $15.6million and $16.7 million for the nine months ended June 30, 2006 and2005, respectively.

Other services that Sloss Industries, Inc.provides to the Company include the delivery of electrical power to one of theCompany’s facilities, rail car switching and the leasing of a distributionfacility. The total of these other services included in the Company’s operatingexpenses were $0.5 million and $0.4 million for the three months endedJune 30, 2006 and 2005, respectively, and $1.3 million and$1.2 million for the nine months ended June 30, 2006 and 2005,respectively.

*Related Party Allocations**—Certain* costsincurred by Walter such as insurance, executive salaries, professional servicefees, human resources, transportation, healthcare and other centralizedbusiness functions are allocated to its subsidiaries. Certain costs that wereconsidered directly related to the U.S. Pipe segment were charged to theCompany and included in selling, general and administrative expenses. Thesecosts were approximately $0.6 million and $0.4 million for the threemonths ended June 30, 2006 and 2005, respectively, and approximately $1.5million and $1.2 million for the nine months ended June 30, 2006 and 2005.Costs incurred by Walter that cannot be directly attributed to its subsidiariesare allocated to them based on estimated annual revenues. Such costs wereallocated to the Company and are recorded in the caption, related partycorporate charges, in the accompanying Consolidated Statements of Operationsand were approximately $2.3 million and $1.8 million for the threemonths ended June 30, 2006 and 2005, respectively, and approximately $6.1million and $5.5 million for the nine months ended June 30, 2006 and 2005,respectively.

While the Companyconsiders the allocation of such costs to be reasonable, in the event theCompany was not affiliated with Walter, these costs may increase or decrease.

Certain of theCompany’s employees have been granted Walter restricted stock units and stockoptions under Walter’s stock-based compensation plans. The Company has expensed$0.2 million and $0.5 million related to the stock-based compensationcosts allocated from Walter for the three and nine months ended June 30,2006, respectively.

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During the threemonths ended June 30, 2006, the Company recorded $1.4 million of interestincome receivable related to the $20.0 million note receivable from Walter. Thisamount is included in Interest Expense, net of Interest Income on the consolidatedstatement of operations.

**Note 3.**   Acquisitions

**Hunt Industries, Inc.**

On January 4, 2006, the Company acquired HuntIndustries, Inc. (“Hunt”) for $6.8 million in cash. Hunt, based inMurfreesboro, Tennessee, is a manufacturer of meter pits and meter yokes whichare sold by the Company’s Mueller segment.

Theestimated fair values of the assets and liabilities acquired are as follows(dollars in millions):

| Current assets       |   | $    | 0.2    |   |
|----------------------|--------|------|--------|--------|
| Goodwill             |   | 6.8  |   |
| Current  liabilities |   | (0.2 | )      |
| Net assets  acquired |   | $    | 6.8    |   |

 

**CCNE, L.L.C.**

On January 27, 2006, the Company acquired theoperating assets of CCNE, L.L.C., a Connecticut-based manufacturer ofcheck valves for sale to the water and wastewater treatment markets, for$8.8 million in cash. 

Theestimated fair values of the assets and liabilities acquired are as follows(dollars in millions):

| Inventory            |   | $   | 2.1    |   |
|----------------------|--------|-----|--------|--------|
| Intangible assets    |   | 6.7 |   |
| Net assets  acquired |   | $   | 8.8    |   |

 

The intangible assetsacquired represent purchased technology and are being amortized over anestimated useful life of 55 months. 

**Acquisition ofPredecessor Mueller by Walter Industries**

On October 3, 2005, pursuant to the agreementdated June 17, 2005, Walter acquired all of the outstanding common stockof Predecessor Mueller Water for $943.4 million and assumed $1.05 billion ofindebtedness. Predecessor Mueller Water was converted into a limited liabilitycompany on October 3, 2005 and was merged with and into our parent,Mueller Water, on February 2, 2006. Transaction costs included in theacquisition price were $14.8 million. In conjunction with the acquisition, U.S.Pipe was contributed in a series of transactions to the Company, a wholly-ownedsubsidiary of Mueller Water, on October 3, 2005. On February 23,2006, Walter received $10.5 million based on the final closing cash and workingcapital, adjusting the purchase price to $932.9 million.

 

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Walter’sacquisition of Predecessor Mueller Water has been accounted for as a businesscombination with U.S. Pipe considered the acquirer for accounting purposes.Assets acquired and liabilities assumed were recorded at their fair values asof October 3, 2005. The total purchase price of $932.9 million iscomprised of (dollars in millions):

| Acquisition of  the outstanding common stock of Predecessor Mueller Water |   | $    | 918.1  |   |
|---------------------------------------------------------------------------|--------|------|--------|--------|
| Acquisition-related  transaction costs                                    |   | 14.8 |   |
| Total purchase  price                                                     |   | $    | 932.9  |   |

 

Acquisition-related transaction costs includeinvestment banking, legal and accounting fees and other external costs directlyrelated to the Acquisition.

Underbusiness combination accounting, the purchase price was allocated toPredecessor Mueller Water’s net tangible and identifiable intangible assetsbased on their fair values as of October 3, 2005. The excess of thepurchase price over the net tangible and identifiable intangible assets wasrecorded as goodwill. Based on estimated fair values, the purchase price wasallocated as follows (dollars in millions):

| Receivables, net                 |   | $        | 177.4  |   |
|----------------------------------|--------|----------|--------|--------|
| Inventory                        |   | 373.2    |   |
| Property, plant  and equipment   |   | 215.7    |   |
| Identifiable  intangible assets  |   | 856.9    |   |
| Goodwill                         |   | 651.2    |   |
| Net other assets                 |   | 415.5    |   |
| Net deferred tax  liabilities    |   | (345.9   | )      |
| Debt                             |   | (1,411.1 | )      |
| Total purchase  price allocation |   | $        | 932.9  |   |

 

The purchase price allocation is preliminary and issubject to future adjustments to goodwill for the execution of certainrestructuring plans identified by Walter prior to the acquisition dateprimarily related to Predecessor Mueller Group facility rationalizationactions. Costs related to these facility rationalization actions will berecorded to goodwill through October 3, 2006.

Receivables are short-term trade receivables and theirnet book value approximates current fair value.

Finished goods inventory is valued at estimatedselling price less cost of disposal and reasonable profit allowance for theselling effort. Work in process inventory is valued at estimated selling priceof finished goods less costs to complete, cost of disposal and a reasonableprofit allowance for the completing and selling effort. Raw materials arevalued at book value, which approximates current replacement cost. The carryingvalue of inventories include $70.2 million in excess of Predecessor Mueller’scarrying value, of which nothing was charged to cost of sales during the threemonths ended June 30, 2006 and $70.2 million was charged to cost of salesduring the nine months ended June 30, 2006.

Property,plant and equipment are valued at the current replacement cost as follows (inmillions):

| ** **                           | ** ** | ** ** | ** ** | **Depreciation  Period** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------|------------|
| Land                                 |       | $          | 14.1       |                     | Indefinite |   |
| Buildings                            |       | 51.8       |       | 5 to  14 years           |       |
| Machinery and  equipment             |       | 136.6      |       | 3 to  5 years            |       |
| Other                                |       | 13.2       |       | 3  years                 |       |
| Total property,  plant and equipment |       | $          | 215.7      |                     |       |   |

 

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Identifiable intangible assets acquired consist oftrade name, trademark, technology and customer relationships and were valued attheir current fair value. Trade name and trademark relate to Mueller®, Anvil®, HerseyTM, Henry PrattTM and James JonesTM.Technology represents processes related to the design and development ofproducts. Customer relationships represent the recurring nature of sales tocurrent distributors, municipalities, contractors and other end customersregardless of their contractual nature.

Identifiableintangible assets were as follows (dollars in millions):

| ** **                            | ** ** | ** ** | ** ** | **Amortization  Period** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------|------------|
| Trade name and  trademark             |       | $          | 403.0      |                     | Indefinite |   |
| Technology                            |       | 56.3       |       | 10  years                |       |
| Customer  relationships               |       | 397.6      |       | 16  and 19 years         |       |
| Total  identifiable intangible assets |       | $          | 856.9      |                     |       |   |

 

Goodwill represents the excess of the purchase priceover the fair value of tangible and identifiable intangible assets acquired.Goodwill is not amortized, but rather is tested for impairment at leastannually. In the event that the Company determines the book value of goodwillhas become impaired, the Company will incur an accounting charge for the amountof impairment during the fiscal quarter in which such determination is made. TheCompany’s goodwill is not tax deductible.

Net other assets include cash, prepaid expenses,deferred financing fees, accounts payable, accrued expenses and accrued pensionliability and were valued at their approximate current fair value. After thepurchase price allocation Predecessor Mueller Group paid a $444.5 milliondividend to Walter.

Net deferred tax liabilities include the tax effectsof fair value adjustments related to identifiable intangible assets and nettangible assets.

Debt is valued at fair market value as of October 3,2005, which resulted in an $18.9 million fair value increase to the seniorsubordinated notes. 

The following table of unaudited pro forma results ofoperations of Predecessor Mueller Group and U.S. Pipe for the three and ninemonths ended June 30, 2005 is presented as if the Acquisition andborrowings under the 2005 Mueller Credit Agreement had taken place on October 1,2004 and were carried forward through June 30, 2005.

Theunaudited pro forma amounts are not intended to represent or be indicative ofthe consolidated results of operations that would have been reported had theAcquisition and borrowings under the 2005 Mueller Credit Agreement beencompleted as of the dates presented, and should not be taken as representativeof the future consolidated results of operations of the Company.

| ** ** | ** ** | **Three months  ended**        | ** ** | **Nine months  ended** | ** ** |
|------------|------------|-------------------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | **June 30, 2005**         | ** ** | **June 30, 2005** | ** ** |
| ** ** | ** ** | **(dollars in millions)** | ** ** |
| ** ** | ** ** | **(unaudited)**                     | ** ** |
| Net sales  |       |                                | $          | 458.9                       |       |   |   | $ | 1,266.1 |   |   |
| Net income |       |                                | $          | 16.5                        |       |   |   | $ | 12.0 |   |   |

 

The pro forma amounts arebased on the historical results of operations and are adjusted for amortizationof definite-lived intangibles of $5.9 million and $17.7 million for the threeand nine months ended June 30, 2005, respectively; depreciation ofproperty, plant and equipment of ($0.2) million and ($0.6) million for thethree and nine months ended June 30, 2005, respectively; interest expenseof $5.9 million and $18.8 million for the three and nine months ended June 30,2005, respectively; and 

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amortizationof financing fees related to the 2005 Mueller Credit Agreement of ($0.1)million and $2.3 million for the three and nine months ended June 30,2005, respectively.

**Note 4.**   FacilityRationalization, Restructuring and Related Costs

On April 20, 2006, the Company announced theclosure of the Mueller Canada valve and hydrant manufacturing facility inMilton, Ontario, Canada, which is included in the Company’s Mueller segment. Theeventual closure of the facility is expected to occur by the end of fiscal year2006, resulting in the termination of approximately 130 employees. The transferof production to other Mueller facilities began in the third quarter of fiscal2006. Total estimated costs related to this closure are $3.9 million, of which$2.5 million, consisting of termination benefits, and $0.2 million, consistingof fixed asset impairment charges, were recorded as adjustments to goodwill inthe three months ended June 30, 2006. Other estimated costs of $1.2million, associated with relocating the Milton warehouse and equipment, will beexpensed as incurred. The restructuring costs are recorded to goodwill as theoverall plan to close the facility was identified prior to the Acquisition.

On January 26, 2006, the Company announced theclosure of the Henry Pratt valve manufacturing facility in Dixon, Illinois,which is included in the Company’s Mueller segment. The eventual closure of thefacility is expected to occur by the end of the fiscal year 2006, resulting inthe termination of approximately 100 employees. Total estimated costs relatedto this closure are $3.4 million, of which $1.0 million, consisting oftermination benefits, and $1.4 million, consisting of fixed asset impairmentcharges, were recorded as adjustments to goodwill. The remaining otherestimated costs of $1.0 million include costs to transfer and install equipmentand temporary outsourcing of manufacturing and will be expensed when incurred.During the three and nine months ended June 30, 2006, $0.7 million and$1.0 million, respectively, of termination benefits and $1.4 million and $1.4million, respectively, of fixed asset impairment charges were recorded asadjustments to goodwill. The restructuring costs are recorded to goodwill asthe overall plan to close the facility was identified prior to the Acquisition.

On October 26, 2005, Walter announced plans toclose U.S. Pipe’s Chattanooga, Tennessee plant and transfer the valve andhydrant production of that plant to Mueller’s Chattanooga, Tennessee andAlbertville, Alabama plants. The eventual closure of the U.S. Pipe Chattanoogaplant is expected to occur in calendar 2006, resulting in the termination ofapproximately 340 employees. Total exit costs are expected to approximate $49.9million of which approximately $28.6 million qualify as restructuring andimpairment charges. The remaining exit costs of $21.3 million were comprised ofan inventory write-down totaling $11.4 million, a $9.0 million write-off of unabsorbedoverhead costs, and $0.9 million of other related costs, of which $3.1 millionand $21.3 million were recognized in cost of sales during the three months andnine months ended June 30, 2006, respectively.

Totalestimated restructuring and impairment charges and the amounts recorded torestructuring expenses are as follows (in millions):

| ** **                                   | ** ** | ** **                                         | ** ** | **Restructuring & impairment  charges expensed**               | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Total estimated  restructuring costs** | ** ** | **For the three months   ended June 30, 2006** | ** ** | **For the nine months  ended June 30, 2006** | ** ** |
| ** **                                   | ** ** | **(dollars in millions)**                | ** ** | ** **                                                                        | ** ** |
| Termination  benefits                        |       |                                               | $          | 3.8                                                                               |       |   |   | $ | 0.4 |   |   |   | $ | 3.8 |   |   |
| Other  employee-related costs                |       |                                               | 3.3        |                                                                              |       |   | (0.6 | ) |   |   | 3.3 |   |   |
| Other associated  costs                      |       |                                               | 2.1        |                                                                              |       |   | — |   |   |   | 2.1 |   |   |
| Impairment of  property, plant and equipment |       |                                               | 19.4       |                                                                              |       |   | 0.4 |   |   |   | 19.4 |   |   |
| Total                                        |       |                                               | $          | 28.6                                                                              |       |   |   | $ | 0.2 |   |   |   | $ | 28.6 |   |   |

 

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Termination benefits relating to the U.S. PipeChattanooga plant closure of $3.8 million consist primarily of severancerelated to staff reductions of hourly and salaried personnel. In addition, theCompany recognized other employee-related costs (benefits) of approximately$(0.6) million and $3.3 million related to pension and otherpostretirement benefit obligations during the three and nine months ended June 30,2006, respectively. 

Other associated costs of $2.1 million principallyinclude environmental liabilities.

Property impairment charges of $0.4 million and $19.4million were recorded during the three and nine months ended June 30,2006, respectively. 

Activityin accrued restructuring was as follows (dollars in millions):

| ** **                                                                                            | ** ** | **For the three  months ended  June 30, 2006** | ** ** | **For the nine  months ended  June 30, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Beginning balance                                                                                     |       |                                                                    | $          | 3.6                                                                    |       |   |   | $ | — |   |   |
| Restructuring  expenses accrued                                                                       |       |                                                                    | 0.7        |                                                                   |       |   | 6.2 |   |   |
| Restructuring  accruals allocated to goodwill for plant closures identified prior to the  Acquisition |       |                                                                    | 3.8        |                                                                   |       |   | 3.8 |   |   |
| Restructuring payments and charges                                                                    |       |                                                                    | (2.0       | )                                                                      |       |   | (3.9 | ) |   |
| Ending balance                                                                                        |       |                                                                    | $          | 6.1                                                                    |       |   |   | $ | 6.1 |   |   |

 

**Note 5.**   Share-BasedCompensation Plans 

The stockholders of Mueller Water approved the 2006Stock Incentive Plan (the “2006 Plan”), under which an aggregate of 8.0 millionshares of Mueller Water’s common stock have been reserved for grant andissuance of awards of incentive stock options, nonstatutory stock options,restricted stock bonuses, restricted stock purchase rights, stock appreciationrights, phantom stock units, restricted stock units, performance share bonusesand performance share units. Generally, all of the employees (includingexecutive officers), members of the Board of Directors, and employees of itsdesignated subsidiaries and its affiliates are eligible to participate in the2006 Plan.

Under the 2006 Plan, an award becomes exercisable atsuch times and in such installments as set by the Compensation Committee of theBoard of Directors (generally, vesting occurs over three years in equal annualincrements), but no award will be exercisable after the tenth anniversary ofthe date on which it is granted.

The Company records compensation costs for stockoptions and restricted stock units granted to employees based on the fair valueat the grant dates as prescribed by SFAS No. 123(R), “Share-Based Payment”,which requires that compensation costs related to share-based paymenttransactions be recognized in the financial statements over the period that anemployee provides service in exchange for the award. The Company uses themodified prospective method, under which compensation cost for new and modifiedawards is recorded over the related vesting period of such awards.

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Theeffect of share-based compensation on the financial performance of the Companyfor the three and nine months ended June 30, 2006 was as follows (inmillions, except per share data):

| ** **                                              | ** ** | **For the  three months ended  June 30, 2006** | ** ** | **For the  nine months ended  June 30, 2006** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Decrease in  income from operations before income taxes |       |                                                                    | $          | 0.5                                                                    |       |   |   | $ | 0.5 |   |   |
| Decrease in net  income                                 |       |                                                                    | $          | 0.2                                                                    |       |   |   | $ | 0.2 |   |   |
| Cash outflow from  operating activities                 |       |                                                                    | $          | —                                                                 |       |   |   | $ | — |   |   |
| Cash inflow from  financing activities                  |       |                                                                    | $          | —                                                                 |       |   |   | $ | — |   |   |
| Decrease in basic and  diluted earnings per  share      |       |                                                                    | $          | —                                                                 |       |   |   | $ | — |   |   |

 

During the three months and nine months ended June 30,2006, the Company recorded share-based compensation expense associated with the2006 Plan of approximately $0.5 million. These amounts are reflected inselling, general and administrative expenses and have been allocated to thereportable segments. 

In addition to the share-based compensation expenseassociated with the 2006 Plan, certain of the Company’s employees have been granted Walterrestricted stock units and stock options under Walter’s share-basedcompensation plans. The Company has expensed $0.2 million and $0.5 millionrelated to the share-based compensation costs allocated from Walter for thethree and nine months ended June 30, 2006, respectively.

Asummary of activity related to stock options under the 2006 Plan as of June 30,2006 and changes during the three months then ended is presented below:

| ** **                          | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | ** **                                 | ** ** | ** **                                                               | ** ** | **($ millions)**               | ** ** |
| Outstanding at  March 31, 2006 |       | —     |       |                                       | $          | —                                                                   |       |                                |       |   |   |   |   |   |   |   |
| Granted                             |       | 85,600     |       |                                       | 16.00      |                                                                     |       |                                |       |   |   |   |   |   |   |
| Exercised                           |       | —     |       |                                       | —     |                                                                     |       |                                |       |   |   |   |   |   |   |
| Cancelled                           |       | —     |       |                                       | —     |                                                                     |       |                                |       |   |   |   |   |   |   |
| Outstanding at  June 30, 2006  |       | 85,600     |       |                                       | 16.00      |                                                                     |       |                                | 9.9        |   |   |   | $ | 0.1 |   |   |
| Exercisable at  June 30, 2006  |       | —     |       |                                       | $          | —                                                                   |       |                                |       | — |   |   |   | $ | — |   |   |

 

Weightedaverage assumptions used to determine the grant-date fair value of optionsgranted during the three months ended June 30, 2006 under theBlack-Scholes method were:

| Risk-free  interest rate |   | 5.05  | %      |
|--------------------------|--------|-------|--------|
| Dividend yield           |   | 0.44  | %      |
| Expected life  (years)   |   | 6.00  |   |
| Volatility               |   | 31.80 | %      |
| Forfeiture rate          |   | 5.00  | %      |

 

The risk-free interest rate is based on the U.S.Treasury yield in effect at the time of grant and has a term equal to theexpected life. The expected dividend yield is based on the Company’s estimatedannual dividend payout at grant date. The expected term of the optionsrepresents the period of time the options 

16

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are expected to beoutstanding. Expected volatility is based on management’s best estimate usingthe most recently disclosed data from a group of comparable companies. TheCompany incorporated the volatility data from comparable companies because ofits limited historical share price information since the Company’s IPO on June 1,2006. Since the Company’s 2006 Plan is at its inception, the Company does nothave a sufficient history to estimate the expected pre-vesting forfeiture rate.Since the structure and terms of the plan are very similar to Walter’s plan,the Company has decided it would be reasonable to use a pre-vestingforfeiture rate similar to Walter’s current historical rate of approximately 5%as an initial estimate for the Company’s plan. This initial estimate will bere-evaluated as the Company accumulates actual experience with the passage oftime. 

Approximately 1.1 million restricted stock units weregranted during the three months ended June 30, 2006 and wereoutstanding at June 30, 2006. At June 30, 2006, the weighted-averageremaining contractual term on the Company’s restricted stock units was 2.9years.

The weighted-averagegrant-date fair value of stock options and restricted stock units grantedduring the three months and nine months ended June 30, 2006 was $6.52 forstock options and $16.00 for restricted stock units. There were no stockoptions exercised during the three months ended June 30, 2006. As of June 30,2006, there was approximately $17.8 million of unrecognized compensation costrelated to non-vested share-based compensation arrangements granted under the2006 Plan; that cost is to be recognized over the three year period duringwhich they vest.

**Note 6.**   BorrowingArrangements

*Long-TermDebt—**Long-term*debt consists of the following obligations:

| ** **                        | ** ** | **June 30,  2006**             | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **(dollars in millions)** | ** ** |
| 2005 Mueller Credit  Agreement    |       | $                                   | 795.7      |                         |       | $ | — |   |   |
| 10% senior subordinated  notes(1) |       | 331.7                               |       |                         | —     |   |   |
| Capital lease  obligations        |       | 2.4                                 |       |                         | —     |   |   |
|                              |       | 1,129.8                             |       |                         | —     |   |   |
| Less current portion              |       | (119.2                              | )          |                         | —     |   |   |
|                              |       | $                                   | 1,010.6    |                         |       | $ | — |   |   |

----

*      **(1) Thevalue of the 10% senior subordinated notes were recorded at fair value at October 3,2005 which was an increase of $18.9 million over Predecessor Mueller. Thisamount is amortized over the life of the notes as a reduction to interestexpense. As of June 30, 2006, the unamortized fair value adjustment was$16.7 million.*

*2005 Mueller CreditAgreement:**  *On October 3, 2005,the Company entered into a credit agreement (the “2005 Mueller Credit Agreement”)consisting of a $145 million senior secured revolving credit facility maturingin October 2010 (the “2005 Mueller Revolving Credit Facility”) and a $1,050million senior secured term loan maturing in October 2012 (the “2005Mueller Term Loan”). The 2005 Mueller Credit Agreement is a secured obligationof the Company and substantially all of its wholly-owned domestic subsidiaries.The 2005 Mueller Term Loan requires quarterly principal payments of $2.0million through October 3, 2012, at which point in time the remainingprincipal outstanding is due. The commitment fee on the unused portion of the2005 Mueller Revolving Credit Facility is 0.50% and the interest rate is afloating interest rate of 2.5% over LIBOR. The 2005 Mueller Term Loan carries afloating interest rate of 2.25% over LIBOR. As of June 30, 2006, theweighted average interest rate including interest rate swaps was 7.2% and theweighted average interest rate excluding interest rate swaps was 7.5%.

17

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Proceeds from the 2005 Mueller Credit Agreement were$1,053.4 million, net of $21.6 million of underwriting fees and expenses whichwill be amortized over the life of the loans. The proceeds were used to financethe acquisition of our parent, Predecessor Mueller Water, by Walter and torefinance existing indebtedness.

The 2005 Mueller Credit Agreement contains customaryevents of default and covenants, including covenants that restrict the abilityof the Company and certain of its subsidiaries to incur certain additionalindebtedness, pay dividends, create or permit liens on assets, engage inmergers or consolidations, and certain restrictive financial covenants.

An amendment to the 2005 Mueller Credit Agreement madein January 2006 provides that in the event of an initial public offering,the Company may pay annual dividends of up to $8.5 million to Mueller Water topay its common shareholders.

On June 1, 2006, the Company used $246.0 millionof the $369.1 million contributed to it by Mueller Water from the proceeds fromMueller Water’s IPO for a partial redemption of the outstanding 2005 MuellerTerm Loan. A $4.1 million portion of the deferred financing fees related to the2005 Mueller Term Loan was written off to interest expense as a result of thistransaction during the three months ended June 30, 2006. In addition tothis transaction, the Company paid $1.0 million of the outstanding 2005 MuellerTerm Loan during the three months ended June 30, 2006.

*10%Senior Subordinated Notes:*   In 2004, the Company issued$315 million principal face amount of 10% senior subordinated notes due 2012.The senior subordinated notes are guaranteed by each of the Company’sexisting domestic restricted subsidiaries. The subordinated notes contain customarycovenants and events of default, including covenants that limit the Company’sability to incur debt, pay dividends and make investments. The effectiveinterest rate was 8.0% as of the June 30, 2006 market value of the thenotes.

On July 3, 2006, the Company used $123.1 millionof the $429.3 million in proceeds from the Company’s IPO for a partialredemption of $116.1 million of the senior subordinated notes, plus accruedinterest of $1.8 million. The Company will record a $2.5 million charge tointerest expense for the write-off of deferred financing fees.

*CapitalLeases—**The*Company leases automobilesunder capital lease arrangements that expire over the next four years.

**Interest Rate Swaps****—These**hedges are described in Note 7 and comply withcovenants contained in the 2005 Mueller Credit Agreement.

**Distributions to MuellerWater****—Mueller Water**has no material assets other than its ownership ofthe Company’s capital stock and accordingly depends upon distributions from theCompany to satisfy its cash needs. Mueller Water’s principal cash needs will bedebt service on its senior discount notes due 2014. These senior discount notesdo not require cash interest payments until 2009 and contain restrictivecovenants that will, among other things, limit the ability of Mueller Water andits subsidiaries (including the Company) to incur debt, pay dividends and makeinvestments. Neither the Company nor any of its subsidiaries guarantee thesenotes. Mueller Water, however, is a holding company and its ability to pay intereston the notes will be dependent upon the receipt of dividends from itssubsidiaries. The Company is Mueller Water’s only direct subsidiary. However,the terms of the Company’s borrowing arrangements significantly restrict itsability to pay dividends to Mueller Water.

**Note 7.**   DerivativeFinancial Instruments

*InterestRate Swaps—On*October 27, 2005, the Companyentered into six interest rate hedge transactions with a cumulative notionalamount of $350 million. The swap terms are between one and 

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seven years with fiveseparate counter-parties. The objective of the hedges is to protect the Companyagainst rising LIBOR interest rates that would have a negative effect on theCompany’s cash flows due to changes in interest payments on its 2005 MuellerTerm Loan. The structure of the hedges are a one-year 4.617% LIBOR swap of $25million, a three-year 4.740% LIBOR swap of $50 million, a four-year 4.800%LIBOR swap of $50 million, a five-year 4.814% LIBOR swap of $100 million,a six-year 4.915% LIBOR swap of $50 million, and a seven year 4.960% LIBOR swapof $75 million. These swap agreements call for the Company to make fixed ratepayments over the term at each swap’s stated fixed rate and to receive paymentsbased on three month LIBOR from the counter-parties. These swaps will be settledquarterly over their lives and will be accounted for as cash flow hedges. Assuch, changes in the fair value of these swaps that take place through the dateof maturity will be recorded in Accumulated Other Comprehensive Income (Loss).These hedges comply with covenants contained in the 2005 Mueller CreditAgreement.

The Company also has two interest rate hedgeagreements that existed as of October 3, 2005: a two-year 3.928%LIBOR swap that matures in May 2007 and a two-year 4.249% LIBOR swap thatmatures in April 2007. The changes in fair value of these two swaps wererecorded as interest expense in the Statements of Operations until achievinghedge effectiveness in October 2005 and November 2005, respectively,at which times such changes in fair value were recorded in Accumulated OtherComprehensive Income (Loss).

The Company recorded an unrealized gain from itsinterest rate swap contracts, net of tax, of $5.3 million at June 30,2006 in Accumulated Other Comprehensive Income (Loss).

*ForwardForeign Currency Exchange Contracts—**The*Company enteredinto forward exchange contracts primarily to hedge currency fluctuations fromtransactions (primarily an intercompany loan and anticipated inventorypurchases) denominated in foreign currencies, thereby limiting the risk thatwould otherwise result from changes in foreign currency exchange rates. Themajority of the Company’s exposure to currency fluctuations is in Canada. Gainsand losses on the forward foreign currency exchange contracts are expected tobe offset by losses / gains on identified underlying foreign currency exchangetransactions. As of June 30, 2006, the Company had entered into forwardforeign currency exchange contracts at a notional amount of $8.7 million toprotect anticipated inventory purchases over the next three months by itsCanadian operations. With these hedges, the Company purchases U.S. dollars andsells Canadian dollars at an average exchange rate of $0.885.

The Company has also entered into hedges protecting the Companyfrom currency fluctuations from its Canadian-denominated intercompany loan. Thehedges have a notional value of $37.3 million and mature over the next threeyears. With these hedges, the Company sells Canadian dollars for U.S. dollarsat an exchange rate of $0.8681. Gains or losses on these hedges will berecorded in earnings. The loss on the hedges for the three months and ninemonths ended June 30, 2006 was $1.6 million and $1.6 million,respectively.

**Note 8.**   InterestExpense Arising from Related Party Payable to Walter Industries

Interest expense associated with the outstanding debtpayable to Walter was allocated to the Company up to the date of theAcquisition based upon the outstanding balance of the intercompany note. On October 3,2005, the intercompany note to Walter of $443.6 million was forgiven andcontributed to capital. Intercompany interest expense was zero and $4.9 millionfor the three months ended June 30, 2006 and 2005, respectively, and waszero and $15.9 million for the nine months ended June 30, 2006 and 2005,respectively.

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**Note 9.**   Pensionand Other Postretirement Benefits

Thecomponents of net periodic benefit cost for pension and postretirement benefitsfor the three months and nine months ended June 30, 2006 and 2005 are asfollows:

| ** **                                       | ** ** | **Pension Benefits**                                         | ** ** | **Other Benefits**                                           | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **For the three months  ended June 30,** | ** ** | **For the three months  ended June 30,** | ** ** |
| ** **                                       | ** ** | **2006**                                                          | ** ** | **2005**                                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(dollars in millions)**                               | ** ** |
| Components of net  periodic benefit cost:        |       |                                                              |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                     |       |                                                              | $          | 2.0                                                               |       |   |   | $ | 1.3 |   |   |   | $ | 0.1 |   |   |   | $ | 0.1 |   |   |
| Interest cost                                    |       |                                                              | 4.7        |                                                              |       |   | 3.1 |   |   |   | 0.4 |   |   |   | 0.3 |   |   |
| Expected return on plan assets                   |       |                                                              | (4.9       | )                                                                 |       |   | (3.5 | ) |   |   | — |   |   |   | — |   |   |
| Amortization of prior service cost               |       |                                                              | —     |                                                              |       |   | 0.1 |   |   |   | (0.7 | ) |   |   | (0.6 | ) |   |
| Amortization of net loss (gain)                  |       |                                                              | 1.2        |                                                              |       |   | 0.8 |   |   |   | (0.3 | ) |   |   | (0.2 | ) |   |
| Curtailment and termination benefits loss (gain) |       |                                                              | 0.1        |                                                              |       |   | — |   |   |   | (0.6 | ) |   |   | — |   |   |
| Net periodic  benefit cost                       |       |                                                              | $          | 3.1                                                               |       |   |   | $ | 1.8 |   |   |   | $ | (1.1 | ) |   |   | $ | (0.4 | ) |   |

 

| ** **                                       | ** ** | **Pension Benefits**                                        | ** ** | **Other Benefits**                                          | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **For the nine months  ended June 30,** | ** ** | **For the nine months  ended June 30,** | ** ** |
| ** **                                       | ** ** | **   2006   **                     | ** ** | **   2005   **                     | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** |
| ** **                                       | ** ** | **(dollars in millions)**                              | ** ** |
| Components of net  periodic benefit cost:        |       |                                                             |       |                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                     |       |                                                             | $          | 5.9                                                              |       |   |   | $ | 3.7 |   |   |   | $ | 0.5 |   |   |   | $ | 0.3 |   |   |
| Interest cost                                    |       |                                                             | 14.1       |                                                             |       |   | 9.4 |   |   |   | 1.0 |   |   |   | 1.0 |   |   |
| Expected return on plan assets                   |       |                                                             | (14.7      | )                                                                |       |   | (10.1 | ) |   |   | — |   |   |   | — |   |   |
| Amortization of prior service cost               |       |                                                             | 0.2        |                                                             |       |   | 0.3 |   |   |   | (1.9 | ) |   |   | (1.9 | ) |   |
| Amortization of net loss (gain)                  |       |                                                             | 3.5        |                                                             |       |   | 2.4 |   |   |   | (0.7 | ) |   |   | (0.6 | ) |   |
| Curtailment and termination benefits loss (gain) |       |                                                             | 5.0        |                                                             |       |   | — |   |   |   | (1.7 | ) |   |   | 0.3 |   |   |
| Net periodic  benefit cost                       |       |                                                             | $          | 14.0                                                             |       |   |   | $ | 5.7 |   |   |   | $ | (2.8 | ) |   |   | $ | (0.9 | ) |   |

 

The curtailment and termination benefits loss (gain)shown in the schedule above are related to the closure of the U.S. PipeChattanooga, Tennessee plant as described in Note 4. These components of netperiodic benefit cost for pension and postretirement plans were charged torestructuring expense in the statement of operations.

For the three months andnine months ended June 30, 2006, the Company had contributions to itspension plans of $2.9 million. The Company anticipates contributingapproximately $5.3 million to fund its pension plans in fiscal 2006 andmay make further discretionary payments.

**Note 10.**   Goodwilland Identifiable Intangibles

Goodwill and intangible assets that have an indefinitelife are not amortized, but instead are tested for impairment annually (or morefrequently if events or circumstances indicate possible impairments) using botha discounted cash flow method and a market comparable method. Definite-livedintangible assets are amortized over their respective estimated useful livesand reviewed for impairment if events or circumstances indicate possibleimpairment. The Company uses an estimate of future undiscounted net cash flowsof the related asset or asset grouping over the remaining life in measuringwhether the assets are recoverable.

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Identifiableintangible assets consist of the following:

| ** **                              | ** ** | **June 30, 2006**         | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **Cost**                            | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                              | ** ** | **(dollars in millions)** | ** ** |
| **Definite-lived  intangible assets**   | ** ** | ** **                          | ** ** |   | ** ** | ** ** |   |
| Technology                              |       | $                                   | 63.0       |   |   | $ | 4.9 | ** ** |   |
| Customer  relationships                 |       | 397.6                               |       |   | 16.1 | ** ** |   |
|                                    |       | 460.6                               |       |   | 21.0 | ** ** |   |
| **Indefinite-lived  intangible assets** | ** ** | ** **                          | ** ** |   | ** ** | ** ** |   |
| Trade name and  trademarks              |       | 403.0                               |       |   | — | ** ** |   |
|                                    |       | $                                   | 863.6      |   |   | $ | 21.0 | ** ** |   |

 

Identifiable intangible assets, net, were $842.6million at June 30, 2006, compared to zero at September 30, 2005. Theincrease primarily represents the allocation of purchase price of theAcquisition of $855.9 million as of October 3, 2005. During the threemonths ended March 31, 2006, there was an addition of $6.7 million oftechnology intangibles related to the acquisition of CCNE, L.L.C. in January 2006.During the three months ended June 30, 2006 there was an adjustment to thepurchase price allocation of the Acquisition to increase customer relationshipsby $1.0 million and decrease goodwill by the same amount. Amortization expensewas $7.4 million and $21.0 million for the three and nine months ended June 30,2006, respectively.

Goodwillwas $722.5 million at June 30, 2006, compared to $58.4 million at September 30,2005. The following adjustments have been recorded during the nine months endedJune 30, 2006:

| ** **                                                                                         | ** ** | **(dollars in millions)** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Balance at  September 30, 2005                                                                |       |                                | $          | 58.4 |   |   |
| Allocation of the  purchase price of Predecessor Mueller, as adjusted                              |       |                                | 661.6      |   |   |
| Final working  capital and cash adjustments to the purchase price of Predecessor Mueller           |       |                                | (10.5      | ) |   |
| Acquisition of  Hunt Industries                                                                    |       |                                | 6.8        |   |   |
| Restructuring  items allocated to goodwill for plant closures identified prior to the  Acquisition |       |                                | 6.2        |   |   |
| Balance at June 30,  2006                                                                     |       |                                | $          | 722.5 |   |   |

 

Goodwill is expected toincrease as the Company implements facility rationalizations that were formallyidentified prior to the Acquisition up to, and no later than, October 3,2006. Certain facility rationalization costs, primarily related to severance,will be recorded as a liability at the time identified as permitted underaccounting principles generally accepted in the United States of America, witha corresponding increase in goodwill. All closure costs related to theshut-down of the U.S. Pipe Chattanooga facility (as described in Note 4) havebeen charged to operating expenses and are not reflected as a component ofgoodwill.

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**Note 11.**   SupplementaryBalance Sheet Information

Selectedsupplementary balance sheet information is presented below:

| ** **                                  | ** ** | **June 30,  2006**             | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **(dollars in millions)** | ** ** |
| **Inventories**                             | ** ** |                                | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Purchased  materials and manufactured parts |       |                                | $          | 75.8                         | ** ** |   |   | $ | 30.6 | ** ** |   |
| Work in process                             |       |                                | 119.0      | ** **                   |       |   | 15.5 | ** ** |   |
| Finished goods                              |       |                                | 271.4      | ** **                   |       |   | 101.1 | ** ** |   |
|                                        |       |                                | $          | 466.2                        | ** ** |   |   | $ | 147.2 | ** ** |   |

 

| ** **                         | ** ** | **June 30,  2006**             | ** ** | **September 30,  2005** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **(dollars in millions)** | ** ** |
| **Property,  plant and equipment** | ** ** | ** **                          | ** ** |                         | ** ** | ** ** |   |
| Land                               |       | $                                   | 25.6       |                         |       | $ | 11.3 |   |   |
| Buildings                          |       | 89.0                                |       |                         | 33.8       |   |   |
| Machinery and  equipment           |       | 534.1                               |       |                         | 401.7      |   |   |
| Other                              |       | 39.7                                |       |                         | 16.2       |   |   |
| Accumulated  depreciation          |       | (350.2                              | )          |                         | (313.8     | ) |   |
|                               |       | $                                   | 338.2      |                         |       | $ | 149.2 |   |   |

 

| ** **                                              | ** ** | **June 30,  2006**             | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **(dollars in millions)** | ** ** |
| **Accrued expenses and other  liabilities**             | ** ** |                                | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Vacations and  holidays                                 |       |                                | $          | 14.7                         | ** ** |   |   | $ | 4.5 | ** ** |   |
| Workers’  compensation and comprehensive liability |       |                                | 6.4        | ** **                   |       |   | 2.9 | ** ** |   |
| Accrued payroll  and bonus                              |       |                                | 17.3       | ** **                   |       |   | 3.9 | ** ** |   |
| Accrued sales  commissions                              |       |                                | 4.3        | ** **                   |       |   | 1.0 | ** ** |   |
| Accrued other  taxes                                    |       |                                | 6.2        | ** **                   |       |   | 2.1 | ** ** |   |
| Accrued warranty  claims                                |       |                                | 4.1        | ** **                   |       |   | 4.7 | ** ** |   |
| Accrued  environmental claims                           |       |                                | 3.4        | ** **                   |       |   | 4.0 | ** ** |   |
| Accrued income  taxes                                   |       |                                | 8.9        | ** **                   |       |   | 5.5 | ** ** |   |
| Accrued cash  discounts and rebates                     |       |                                | 18.5       | ** **                   |       |   | 4.8 | ** ** |   |
| Accrued interest                                        |       |                                | 11.1       | ** **                   |       |   | — | ** ** |   |
| Other                                                   |       |                                | 25.0       | ** **                   |       |   | 1.3 | ** ** |   |
|                                                    |       |                                | $          | 119.9                        | ** ** |   |   | $ | 34.7 | ** ** |   |

 

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**Note 12.**   SupplementaryIncome Statement Information

Thecomponents of interest expense, net of interest income are presented below:

| ** **                                      | ** ** | **Three months ended**    | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **June 30,  2006**             | ** ** | **June 30,  2005**         | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
| ** **                                      | ** ** | **(dollars in millions)** | ** ** |
| **Interest  expense, net of interest income:**  | ** ** |                                | ** ** | ** **                      |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Interest expense                                |       |                                | $          | 24.5                            |       |   |   | $ | — | ** ** |   |   | $ | 75.1 |   |   |   | $ | 0.3 | ** ** |   |
| Deferred financing fee amortization             |       |                                | 1.1        |                            |       |   | — | ** ** |   |   | 3.3 |   |   |   | — | ** ** |   |
| Write off of bridge loan commitment fees        |       |                                | —     |                            |       |   | — | ** ** |   |   | 2.5 |   |   |   | — | ** ** |   |
| Write off of deferred financing fees            |       |                                | 4.1        |                            |       |   | — | ** ** |   |   | 4.1 |   |   |   | — | ** ** |   |
| Interest rate swap gains                        |       |                                | —     |                            |       |   | — | ** ** |   |   | (0.5 | ) |   |   | — | ** ** |   |
| Total interest expense                          |       |                                | 29.7       |                            |       |   | — | ** ** |   |   | 84.5 |   |   |   | 0.3 | ** ** |   |
| Interest income                                 |       |                                | (2.1       | )                               |       |   | — | ** ** |   |   | (2.9 | ) |   |   | — | ** ** |   |
| Total interest expense,  net of interest income |       |                                | $          | 27.6                            |       |   |   | $ | — | ** ** |   |   | $ | 81.6 |   |   |   | $ | 0.3 | ** ** |   |

 

The bridge loan commitment fees represent fees paid tolenders to make available to the Company a bridge loan commitment to repurchasethe 10% senior subordinated notes from the holders of such notes under theterms of the change of control provisions of the indentures. No notes weretendered under the offer and the bridge loan was not used. The relatedcommitment fees were charged to interest expense during the three months ended December 31,2005.

On June 1, 2006, theCompany used $246.0 million of the $369.1 million contributed to it by MuellerWater from the proceeds from Mueller Water’s initial public offering to prepaya portion of the outstanding 2005 Mueller Term Loan. A $4.1 million portion ofthe deferred financing fees related to the 2005 Mueller Term Loan was writtenoff as a result of this transaction during the three months ended June 30,2006.

**Note 13.**   SegmentInformation

Prior to the Acquisition on October 3, 2005, theCompany had one segment—U.S. Pipe. As of June 30, 2006, the Company’soperations consisted of three operating segments: Mueller, U.S. Pipe and Anvil.These segments are organized based on products and are consistent with how theoperating segments are managed, how resources are allocated, and howinformation is used by the chief operating decision maker. The Mueller segmentis a manufacturer of valves, fire hydrants and other related products utilizedin the distribution of water and gas and in water and wastewater treatmentfacilities. The U.S. Pipe segment is a manufacturer of ductile iron pressurepipe, fittings and other cast iron products used primarily for major water andwastewater transmission and collection systems. The Anvil segment is amanufacturer of cast iron and malleable iron pipe fittings, ductile ironcouplings and fittings, pipe hangers and other related products for the fireprotection, plumbing, heating, mechanical, construction, retail hardware andother related industries. The accounting policies of the segments are the sameas those described in the summary of significant accounting policies.

Intersegment sales and transfers are made atestablished intersegment selling prices generally intended to cover costs. Thedetermination of segment earnings does not reflect allocations of certain corporateexpenses not directly attributable to segment operations and intersegmenteliminations, which is designated as Corporate in the segment presentation, andis before interest expense, net of interest income, and income taxes. Corporateexpenses include those costs incurred by Mueller’s corporate function and donot include any allocated costs from Walter. Costs allocated by Walter to theCompany are recorded in the determination of U.S. Pipe’s operating income.Corporate costs include those costs related to financial and administrativematters, treasury, risk management, human resources, legal counsel, 

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and tax functions.Corporate assets include cash, deferred tax assets and deferred financing fees.These assets have not been pushed down to the Company’s segments and aremaintained as Corporate items. Therefore, segment earnings are not reflectiveof results on a stand-alone basis. See also Note 2 regarding RelatedParty Allocations from Walter which are recorded by U.S. Pipe and Corporate andare reflected in the Company’s consolidated SG&A expenses.

Segmentassets consist primarily of accounts receivable, inventories, property, plantand equipment, goodwill, and identifiable intangibles. Summarized financialinformation for the Company’s segments follows:

| ** **                                                      | ** ** | **Three months ended  June 30,**          | ** ** | **Nine months ended  June 30,**           | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                      | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(dollars in millions)**                      | ** ** |
| **Net sales:**                                                  | ** ** |                                                     | ** ** | ** **                                               |       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Mueller                                                         |       |                                                     | $          | 225.5                                                    |       |   |   | $ | — | ** ** |   | $ | 599.0 |   | $ | — |   |
| U.S. Pipe                                                       |       |                                                     | 143.8      |                                                     |       |   | 162.0 | ** ** |   | 434.6 |   | 427.8 |   |
| Anvil                                                           |       |                                                     | 136.5      |                                                     |       |   | — | ** ** |   | 396.7 |   | — |   |
| Consolidating eliminations                                      |       |                                                     | (5.8       | )                                                        |       |   | — | ** ** |   | (15.0 | ) | — |   |
| Consolidated                                                    |       |                                                     | $          | 500.0                                                    |       |   |   | $ | 162.0 | ** ** |   | $ | 1,415.3 |   | $ | 427.8 |   |
| **Income  (loss) from operations:**                             | ** ** |                                                     | ** ** | ** **                                               |       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Mueller                                                         |       |                                                     | $          | 56.8                                                     |       |   |   | $ | — | ** ** |   | $ | 92.2 |   | $ | — |   |
| U.S. Pipe                                                       |       |                                                     | 7.6        |                                                     |       |   | 10.3 | ** ** |   | (27.4 | ) | 11.6 |   |
| Anvil                                                           |       |                                                     | 12.2       |                                                     |       |   | — | ** ** |   | 15.7 |   | — |   |
| Corporate expense(1)                                            |       |                                                     | (7.4       | )                                                        |       |   | — | ** ** |   | (22.7 | ) | — |   |
| Consolidating eliminations                                      |       |                                                     | 0.2        |                                                     |       |   | — | ** ** |   | (0.4 | ) | — |   |
| Consolidated                                                    |       |                                                     | $          | 69.4                                                     |       |   |   | $ | 10.3 | ** ** |   | $ | 57.4 |   | $ | 11.6 |   |
| **Depreciation  and amortization:**                             | ** ** |                                                     | ** ** | ** **                                               |       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Mueller                                                         |       |                                                     | $          | 13.0                                                     |       |   |   | $ | — | ** ** |   | $ | 37.9 |   | $ | — |   |
| U.S. Pipe                                                       |       |                                                     | 5.4        |                                                     |       |   | 6.6 | ** ** |   | 17.0 |   | 19.7 |   |
| Anvil                                                           |       |                                                     | 6.2        |                                                     |       |   | — | ** ** |   | 17.5 |   | — |   |
| Corporate                                                       |       |                                                     | —     |                                                     |       |   | — | ** ** |   | 0.2 |   | — |   |
| Consolidated                                                    |       |                                                     | $          | 24.6                                                     |       |   |   | $ | 6.6 | ** ** |   | $ | 72.6 |   | $ | 19.7 |   |
| **Facility  rationalization, restructuring and related costs:** | ** ** |                                                     | ** ** | ** **                                               |       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Mueller                                                         |       |                                                     | $          | —                                                   |       |   |   | $ | — | ** ** |   | $ | — |   | $ | — |   |
| U.S. Pipe                                                       |       |                                                     | 0.2        |                                                     |       |   | — | ** ** |   | 28.6 |   | — |   |
| Anvil                                                           |       |                                                     | —     |                                                     |       |   | — | ** ** |   | — |   | — |   |
| Consolidated                                                    |       |                                                     | $          | 0.2                                                      |       |   |   | $ | — | ** ** |   | $ | 28.6 |   | $ | — |   |
| **Capital  expenditures:**                                      | ** ** |                                                     | ** ** | ** **                                               |       |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Mueller                                                         |       |                                                     | $          | 9.7                                                      |       |   |   | $ | — | ** ** |   | $ | 24.1 |   | $ | — |   |
| U.S. Pipe                                                       |       |                                                     | 3.8        |                                                     |       |   | 4.5 | ** ** |   | 14.3 |   | 15.7 |   |
| Anvil                                                           |       |                                                     | 3.6        |                                                     |       |   | — | ** ** |   | 9.5 |   | — |   |
| Corporate                                                       |       |                                                     | —     |                                                     |       |   | — | ** ** |   | 0.1 |   | — |   |
| Consolidated                                                    |       |                                                     | $          | 17.1                                                     |       |   |   | $ | 4.5 | ** ** |   | $ | 48.0 |   | $ | 15.7 |   |

----

       (1) Includes certain expenses not allocated to segments.

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| ** **                | ** ** | **June 30,  2006**             | ** ** | **September 30,  2005** | ** ** |
|---------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **(dollars in millions)** | ** ** |
| Total assets:             |       |                                |       |                         |       |   |   |
| Mueller                   |       | $                                   | 1,794.8    |                         |       | $ | — |   |   |
| U.S. Pipe                 |       | 401.1                               |       |                         | 495.4      |   |   |
| Anvil                     |       | 483.8                               |       |                         | —     |   |   |
| Corporate                 |       | 308.0                               |       |                         | —     |   |   |
| Consolidated              |       | $                                   | 2,987.7    |                         |       | $ | 495.4 |   |   |
| Goodwill:                 |       |                                |       |                         |       |   |   |
| Mueller                   |       | $                                   | 595.5      |                         |       | $ | — |   |   |
| U.S. Pipe                 |       | 58.4                                |       |                         | 58.4       |   |   |
| Anvil                     |       | 68.6                                |       |                         | —     |   |   |
| Consolidated              |       | $                                   | 722.5      |                         |       | $ | 58.4 |   |   |
| Identifiable intangibles: |       |                                |       |                         |       |   |   |
| Mueller                   |       | $                                   | 753.7      |                         |       | $ | — |   |   |
| U.S. Pipe                 |       | —                              |       |                         | —     |   |   |
| Anvil                     |       | 88.9                                |       |                         | —     |   |   |
| Consolidated              |       | $                                   | 842.6      |                         |       | $ | — |   |   |

 

Geographicalarea information with respect to net sales, as determined by the location ofthe customer invoiced, and property, plant and equipment—net, as determined bythe physical location of the assets, were as follows:

| ** **      | ** ** | **Three months  ended  June 30, 2006** | ** ** | **Three months  ended  June 30, 2005** | ** ** | **Nine months  ended  June 30, 2006** | ** ** | **Nine months  ended  June 30, 2005** | ** ** |
|-----------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **      | ** ** | **(dollars in millions)**                   | ** ** |                                                  |
| Net sales:      |       |                                                  |       |                                                  |       |                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| United States   |       |                                                  | $          | 430.8                                                 |       |                                                 |       | $                                                    | 158.1      |   |   |   | $ | 1,249.1 |   |   |   | $ | 416.8 |   |   |   |
| Canada          |       |                                                  | 67.4       |                                                  |       |                                                 | —     |                                                 |       |   | 161.3 |   |   |   | — |   |   |   |
| Other Countries |       |                                                  | 1.8        |                                                  |       |                                                 | 3.9        |                                                 |       |   | 4.9 |   |   |   | 11.0 |   |   |   |
|            |       |                                                  | $          | 500.0                                                 |       |                                                 |       | $                                                    | 162.0      |   |   |   | $ | 1,415.3 |   |   |   | $ | 427.8 |   |   |   |

 

| ** **                           | ** ** | **June 30,  2006**             | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **(dollars in millions)** | ** ** |
| Property, plant  and equipment, net: |       |                                |       |                         |       |   |   |   |   |
| United States                        |       |                                | $          | 317.8                        |       |   |   | $ | 149.2 |   |   |
| Canada                               |       |                                | 18.9       |                         |       |   | — |   |   |
| Other Countries                      |       |                                | 1.5        |                         |       |   | — |   |   |
|                                 |       |                                | $          | 338.2                        |       |   |   | $ | 149.2 |   |   |

 

**Note 14.**   Commitmentsand Contingencies

**Income TaxLitigation**

A controversy exists withregard to federal income taxes for fiscal years 1980 through 1994 allegedlyowed by the Walter consolidated group, which included the U.S. Pipe segmentduring these periods. It is estimated that the amount of tax presently claimedby the IRS is approximately $34.0 million for issues currently in disputein bankruptcy court for matters unrelated to the Company. This amount issubject to interest and penalties. In addition, the Internal Revenue Servicehas issued a Notice of Proposed 

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Deficiencyassessing additional tax of $80.4 million for the fiscal years ended May 31,2000, December 31, 2000, and December 31, 2001. The proposedadjustments relate primarily to Walter’s method of recognizing revenue on thesale of homes and interest income on the related installment notes receivable.Under tax law, the Company is jointly and severally liable for any final taxdetermination. However, Walter and its affiliates believe that their tax filingpositions have substantial merit and intend to defend vigorously any claimsasserted. Walter believes that it has an accrual sufficient to cover theestimated probable loss, including interest and penalties. There are no chargesor accruals in the Company’s accounts related to these issues since thesematters do not relate to the operations of the Company.

**EnvironmentalMatters**

The Company is subject to a wide variety of laws andregulations concerning the protection of the environment, both with respect tothe construction and operation of many of its plants and with respect toremediating environmental conditions that may exist at its own and otherproperties. The Company believes that it is in substantial compliance withfederal, state and local environmental laws and regulations. The Companyaccrues for environmental expenses resulting from existing conditions thatrelate to past operations when the costs are probable and reasonably estimable.Expensescharged to the statement of operations for compliance of ongoing operations andfor remediation of environmental conditions arising from past operations wereapproximately $0.6 million and $0.2 million in the three months ended June 30,2006 and 2005, respectively, and were approximately $1.8 million and $0.5million in the nine months ended June 30, 2006 and 2005, respectively.Because environmental laws and regulations continue to evolve and becauseconditions giving rise to obligations and liabilities under environmental lawsare in some circumstances not readily identifiable, it is difficult to forecastthe amount of such future environmental expenditures or the effects of changingstandards on future business operations or results. Consequently, the Companycan give no assurance that such expenditures will not be material in thefuture. The Company capitalizes environmental expenditures that increase thelife or efficiency of property or that reduce or prevents environmentalcontamination. Capital expenditures for environmental requirements are anticipatedto average approximately $6.3 million per year in the next five years. Capital expenditures forenvironmental requirements were approximately $0.5 million and $0.2 millionin the three months ended June 30, 2006 and 2005, respectively, and wereapproximately $1.5 million and $1.6 million in the nine months ended June 30,2006 and 2005, respectively.

The Company has implemented an Administrative ConsentOrder (“ACO”) for its Burlington, New Jersey plant that was required underthe New Jersey Environmental Cleanup Responsibility Act (now known as theIndustrial Site Recovery Act). The ACO required soil and ground water cleanup,and the Company has completed, and has received final approval on, the soilcleanup required by the ACO. U. S. Pipe is continuing to address ground waterissues at this site. Further remediation could be required. These remediationcosts are expected to be minimal. Long-term ground water monitoring will berequired to verify natural attenuation. It is not known how long ground watermonitoring will be required. Management does not believe monitoring or furthercleanup costs, if any, will have a material adverse effect on the financialcondition or results of operations of the Company.

The Federal Comprehensive Environmental Response,Compensation and Liability Act (“CERCLA”) generally imposes liability, whichmay be joint and several and is without regard to fault or the legality ofwaste generation or disposal, on certain classes of persons, including ownersand operators of sites at which hazardous substances are released into theenvironment (or pose a threat of such release), persons that disposed orarranged for the disposal of hazardous substances at such sites, and personswho owned or operated such sites at the time of such disposal. CERCLAauthorizes the EPA, the States and, in some circumstances, private entities totake actions in response to public health or environmental threats and to seekto recover the costs they incur from the same classes of persons. Certaingovernmental authorities can also seek recovery for damages to naturalresources. Currently, U.S. Pipe has been 

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identified as apotentially responsible party (“PRP”) by the EPA under CERCLA with respect tocleanup of hazardous substances at a superfund site located in Anniston,Alabama, and U.S. Pipe is among many PRP’s at the site, a significant number ofwhich are substantial companies.

With respect to the site located in Anniston, the PRP’shave negotiated an administrative consent order with the EPA. Based on thesenegotiations, management estimates the Company’s share of liability forcleanup, after allocation among several PRP’s, will be approximately$4.0 million, which was accrued in 2004. Civil litigation in respect ofthe site is also ongoing as follows: a suit for contribution by anotherAnniston PRP and a putative class action lawsuit against 18 foundries in theAnniston, Alabama area alleging state law tort claims in the creation anddisposal of foundry sand alleged to contain lead and PCB’s and seeking damagesfor personal injury and property damage. Management believes that thelikelihood of liability in the contribution litigation is remote. The classaction lawsuit is still in early stages of litigation and no substantivediscovery has taken place yet. In addition, management believes that bothprocedural and substantive defenses would be available to the Company shouldthis litigation proceed. Accordingly, management believes that presently, thereis no reasonable basis for management to form a view with respect to theprobability of liability in the putative class action matter.

The Company’s Anvil segment entered into a ConsentOrder with the Georgia Department of Natural Resources regarding allegedhazardous waste violations at Anvil’s former foundry facility in Statesboro,Georgia. Pursuant to the Consent Order, Anvil agreed to pay a monetary fine of$50,000 and pay an additional $50,000 to fund a supplemental environmentalproject. Anvil has also agreed to perform various investigatory and remedial actionsat the foundry and its landfill. The total costs are estimated to be between$1.2 million and $1.4 million. The Company maintains an adequatereserve to cover these estimated costs.

Over the next two and one-half years, the Companycould potentially incur between $18.0 million and $22.0 million ofcapital costs at its iron foundries to comply with the United StatesEnvironmental Protection Agency’s National Emissions Standards for HazardousAir Pollutants which were issued April 22, 2004.

Although no assurances can be given that the Companywill not be required in the future to make material expenditures relating toenvironmental laws or legally mandated site clean-up, management does notbelieve at this time that the compliance and cleanup costs, if any, associatedwith the current laws and sites for which the Company has cleanup liability orany other future sites will have a material adverse effect on the financialcondition or results of operations of the Company, but such cleanup costs couldbe material to results of operations in a reporting period.

In 2004, the Company entered into a settlement andrelease agreement with a former insurer whereby the former insurer paid$1.9 million, net of legal fees, to the Company for historical insuranceclaims, previously expensed as incurred by the Company. Such claims had notpreviously been submitted to the insurance company for reimbursement. TheCompany released the insurer of both past and future claims, and recorded a$1.9 million reduction to selling, general and administrative expenses in2004.

In 2005, the Company entered into a settlement andrelease agreement with a former insurer whereby the former insurer agreed topay $5.1 million, net of legal fees, to the Company for historicalinsurance claims previously expensed as incurred by the Company. Such claimshad not previously been submitted to the insurance company for reimbursement.The Company released the insurer of both past and future claims. During 2005,the Company received $2.8 million in cash and the remainder was receivedduring the quarter ended March 31, 2006. The Company recorded a$5.1 million reduction to selling, general and administrative expenses in2005.

Under the terms of theagreement whereby Tyco International sold the Mueller and Anvil businesses in August 1999to prior owners (the “August 1999 Tyco Transaction”), Tyco agreed toindemnify the 

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Company’spredecessor-in-interest (“Predecessor Mueller”), and, by legal succession, theCompany and its affiliates, for all “Excluded Liabilities”. ExcludedLiabilities include, among other things, substantially all environmentalliabilities relating to the time prior to the August 1999 TycoTransaction. The indemnity survives indefinitely, is not subject to anydeductibles or caps, and continues with respect to the Company’s currentoperations, other than those operations acquired since the August 1999Tyco Transaction, including the operations of the U.S. Pipe segment. If Tycoever becomes financially unable to, or otherwise fails to comply with the termsof the indemnity, the Company may be responsible for the Tyco-indemnifiedobligations. In addition, Tyco’s indemnity does not cover environmentalliabilities to the extent caused by the Company or Predecessor Mueller or theoperation of the Company’s business after the August 1999 TycoTransaction, nor does it cover environmental liabilities arising with respectto businesses or sites acquired after the August 1999 Tyco Transaction,which would include the U.S. Pipe business and facilities.

**MiscellaneousLitigation**

In 2003, the Company increased its accruals foroutstanding litigation by approximately $6.5 million, principally relatedto the settlement of a class action employment matter. The settlement wasfinalized in May 2004 for an amount approximating the accrual.

The Los Angeles Department of Water and Power, ex rel.Nora Armenta (“Armenta”) filed suit against the Company’s subsidiaries, JamesJones Company and Mueller Co. (Superior Court, Los Angeles County, California;Case No. BC 173487) on June 27, 1997. In addition, the City ofBanning (“City of Banning”) filed suit against the Company’s subsidiaries,James Jones Company and Mueller Co. (Superior Court, Los Angeles County; Case No. BC321513) on September 15, 2004. The Armenta matter is a false claimslawsuit brought on behalf of cities, water districts and municipalitiesalleging that the defendants sold allegedly non-conforming public water systemparts to various government entities. The lawsuit seeks consequential damages,penalties and punitive damages relating to the repair and replacement of thewater systems to remove the allegedly non-conforming parts. Mueller Co., whichhad also been named as a defendant in the Armenta matter, brought a summaryjudgment motion and was dismissed from this litigation in January 2004;James Jones Company remains a defendant in the action. On September 15,2004, the Armenta trial court ruled against the intervention of approximately30 municipalities that had failed to intervene within the time deadlinespreviously specified by the court. The trial court also ruled that the majorityof municipalities that had purchased James Jones products from contractors ordistributors, were not in privity with the James Jones Company and were notentitled to punitive damages. Following the Armenta court’s ruling, the waterdistricts and municipalities filed the City of Banning action against the JamesJones Company and Watts (former parent company of James Jones Company),alleging fraud and intentional misrepresentation. This lawsuit is based on thesame underlying facts as the Armenta lawsuit. Any liability associated withthese lawsuits is covered by the Tyco indemnity, and the defense is being paidfor and conducted by Tyco, all in accordance with the indemnity obligation ofTyco described above in *Environmental Matters*.

Some of the Company’s subsidiaries have been named asdefendants in a small number of asbestos-related lawsuits. The Companydoes not believe these lawsuits, either individually or in the aggregate, arematerial to its financial position or results of operations.

The Company is a party toa number of other lawsuits arising in the ordinary course of business. TheCompany provides for costs relating to these matters when a loss is probableand the amount is reasonably estimable. The effect of the outcome of thesematters on the Company’s future results of operations cannot be predicted withcertainty as any such effect depends on future results of operations and theamount and timing of the resolution of such matters. While the results oflitigation cannot be predicted with certainty, the Company believes that thefinal outcome of such other litigation will not have a materially adverseeffect on the Company’s financial statements.

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*Commitments andContingencies—Other*

As part of the acquisition on January 15, 2004 ofthe business of Star Pipe, Inc. (“Star”), Anvil has agreed to a futurepayment to be made to the seller of Star to the extent that the gross profit ofthe acquired business exceeds a targeted gross profit. The maximum potentialpayment amount is $23 million. Management currently estimates the payment couldtotal approximately $3 million to $6 million for the payment period that began February 1,2004 and ends January 31, 2007. The payment amount indicated above isbased on management’s best estimate, but the actual adjustment could bematerially different. The liability for such payment will be recorded at theend of the payment period, in accordance with the purchase agreement, with a correspondingincrease to goodwill.

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.

**Note 15.**   SubsequentEvents

On July 3, 2006, theCompany used $123.1 million of cash proceeds contributed to it by Mueller Waterfrom the IPO for a partial redemption of $116.1 million of the seniorsubordinated notes, plus accrued interest of $1.8 million. The Company willrecord a $2.5 million charge to interest expense for the write-off of deferredfinancing fees.

**Note 16.**   NewAccounting Pronouncements

In June 2006, the FASB ratified EITF No. 06-3“How Taxes Collected from Customers and Remitted to Governmental AuthoritiesShould Be Presented in the Income Statement (That Is, Gross versus NetPresentation)” (“EITF 06-3”). EITF 06-3 addresses the income statementpresentation of any tax collected from customers and remitted to a governmentauthority and concludes the presentation of taxes on either a gross basis or anet basis is an accounting policy decision that should be disclosed pursuant toAPB Opinion No. 22 “Disclosure of Accounting Policies.” This is effectivefor interim and annual reporting periods beginning after December 15, 2006and will require the financial statement disclosure of any significant taxesrecognized on a gross basis. The Company has not yet determined what effect, ifany, the adoption of this interpretation will have on its consolidatedfinancial statements.

In July 2006, theFASB issued final Interpretation (“FIN”) No. 48, “Accounting forUncertainty in Income Taxes”, which defines the minimum recognition threshold atax provision must meet before being recognized in the financial statements. Thisinterpretation also provides guidance on derecognition of income tax assets andliabilities, classification of current and deferred income tax assets andliabilities, accounting for interest and penalties associated with taxpositions, accounting for income taxes in interim periods, and income taxdisclosures. FIN No. 48 applies to all tax positions related to incometaxes subject to SFAS No. 109, “Accounting for Income Taxes”. The Companyhas not yet determined what effect, if any, the adoption of thisinterpretation, which becomes effective October 1, 2007, will have on itsconsolidated financial statements.

**Note 17.**   ConsolidatingGuarantor and Non-Guarantor Financial Information

The following information is included as a result ofthe guarantee by certain of the Company’s wholly owned U.S. subsidiaries (“GuarantorCompanies”) of the senior subordinated notes issued by Predecessor MuellerGroup prior to the Acquisition on October 3, 2005 that have continued tobe liabilities of the Company subsequent to the Acquisition. None of theCompany’s other subsidiaries guarantee the debt. Each of the guarantees isjoint and several and full and unconditional. “Mueller Group, LLC” (“Issuer”)includes the consolidated financial results of Mueller Group, LLC with allof its wholly-owned subsidiaries accounted for under the equity method.

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Prior to the Acquisition on October 3, 2005, U.S.Pipe was not a Guarantor Company of the senior subordinated notes issued byPredecessor Mueller Group. See Note 18 for further discussion of PredecessorMueller Group. The Consolidating Statements of Operations for the three andnine months ended June 30, 2006 and the Consolidating Statement of CashFlows for the nine months ended June 30, 2006 and the ConsolidatingBalance Sheet as of June 30, 2006 reflect the results of the Company.

**Consolidating Statement of OperationsFor Mueller Group, LLCFor the Three Months Ended June 30, 2006**

| ** **                                                      | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                       |       | $                                   | —     |                        |       | $                            | 445.4      |                           |       |             | $          | 54.6 |   |   |   | $ | — |   |   |   | $ | 500.0 |   |   |
| Cost of sales                                                   |       | —                              |       |                        | 321.9      |                         |       |                           | 43.6       |             |       |   | — |   |   |   | 365.5 |   |   |
| Gross profit                                                    |       | —                              |       |                        | 123.5      |                         |       |                           | 11.0       |             |       |   | — |   |   |   | 134.5 |   |   |
| Selling, general  and administrative                            |       | —                              |       |                        | 55.8       |                         |       |                           | 6.8        |             |       |   | — |   |   |   | 62.6 |   |   |
| Related party  corporate charges                                |       | —                              |       |                        | 2.3        |                         |       |                           | —     |             |       |   | — |   |   |   | 2.3 |   |   |
| Facility rationalization,  restructuring and related costs |       | —                              |       |                        | 0.2        |                         |       |                           | —     |             |       |   | — |   |   |   | 0.2 |   |   |
| Income from  operations                                         |       | —                              |       |                        | 65.2       |                         |       |                           | 4.2        |             |       |   | — |   |   |   | 69.4 |   |   |
| Interest expense,  net of interest income                       |       | (27.5                               | )          |                        | (0.1       | )                            |       |                           | —     |             |       |   | — |   |   |   | (27.6 | ) |   |
| Income (loss)  before income tax expense (benefit)              |       | (27.5                               | )          |                        | 65.1       |                         |       |                           | 4.2        |             |       |   | — |   |   |   | 41.8 |   |   |
| Income tax  expense (benefit)                                   |       | (6.2                                | )          |                        | 22.2       |                         |       |                           | 2.2        |             |       |   | — |   |   |   | 18.2 |   |   |
| Equity income  (loss) from subsidiaries                         |       | 44.9                                |       |                        | 2.0        |                         |       |                           | —     |             |       |   | (46.9 | ) |   |   | — |   |   |
| Net income (loss)                                               |       | $                                   | 23.6       |                        |       | $                            | 44.9       |                           |       |             | $          | 2.0 |   |   |   | $ | (46.9 | ) |   |   | $ | 23.6 |   |   |

 

 

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**Consolidating Statement of OperationsFor Mueller Group, LLCFor the Nine Months Ended June 30, 2006**

| ** **                                                      | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **(dollars in millions)** | ** ** |
| Net sales                                                       |       | $                                   | —     |                        |       | $                            | 1,274.4    |                           |       |             | $          | 140.9 |   |   |   | $ | — |   |   |   | $ | 1,415.3 |   |   |
| Cost of sales                                                   |       | —                              |       |                        | 1,032.3    |                         |       |                           | 110.4      |             |       |   | — |   |   |   | 1,142.7 |   |   |
| Gross profit                                                    |       | —                              |       |                        | 242.1      |                         |       |                           | 30.5       |             |       |   | — |   |   |   | 272.6 |   |   |
| Selling, general  and administrative                            |       | —                              |       |                        | 160.7      |                         |       |                           | 19.8       |             |       |   | — |   |   |   | 180.5 |   |   |
| Related party  corporate charges                                |       | —                              |       |                        | 6.1        |                         |       |                           | —     |             |       |   | — |   |   |   | 6.1 |   |   |
| Facility  rationalization, restructuring and related costs |       | —                              |       |                        | 28.6       |                         |       |                           | —     |             |       |   | — |   |   |   | 28.6 |   |   |
| Income (loss)  from operations                                  |       | —                              |       |                        | 46.7       |                         |       |                           | 10.7       |             |       |   | — |   |   |   | 57.4 |   |   |
| Interest expense,  net of interest income                       |       | (81.8                               | )          |                        | (0.2       | )                            |       |                           | 0.4        |             |       |   | — |   |   |   | (81.6 | ) |   |
| Income (loss)  before income tax expense (benefit)              |       | (81.8                               | )          |                        | 46.5       |                         |       |                           | 11.1       |             |       |   | — |   |   |   | (24.2 | ) |   |
| Income tax  expense (benefit)                                   |       | (26.7                               | )          |                        | 15.2       |                         |       |                           | 3.6        |             |       |   | — |   |   |   | (7.9 | ) |   |
| Equity income  (loss) from subsidiaries                         |       | 38.8                                |       |                        | 7.5        |                         |       |                           | —     |             |       |   | (46.3 | ) |   |   | — |   |   |
| Net income (loss)                                               |       | $                                   | (16.3      | )                           |       | $                            | 38.8       |                           |       |             | $          | 7.5 |   |   |   | $ | (46.3 | ) |   |   | $ | (16.3 | ) |   |

 

31

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**Consolidating Balance SheetFor Mueller Group, LLCJune 30, 2006**

| ** **                                                      | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                      | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                      |       | $                                   | 185.7      |                        |       | $                            | (11.8      | )                               |       |             | $          | 3.4 |   |   |   | $ | — |   |   |   | $ | 177.3 | ** ** |   |
| Receivables, net                                                |       | —                              |       |                        | 273.0      |                         |       |                            | 36.2       |             |       |   | — |   |   |   | 309.2 | ** ** |   |
| Inventories                                                     |       | —                              |       |                        | 404.0      |                         |       |                            | 62.2       |             |       |   | — |   |   |   | 466.2 | ** ** |   |
| Deferred income  taxes                                          |       | —                              |       |                        | 58.1       |                         |       |                            | —     |             |       |   | — |   |   |   | 58.1 | ** ** |   |
| Prepaid expenses                                                |       | —                              |       |                        | 28.3       |                         |       |                            | 2.5        |             |       |   | — |   |   |   | 30.8 | ** ** |   |
| Total current  assets                                           |       | 185.7                               |       |                        | 751.6      |                         |       |                            | 104.3      |             |       |   | — |   |   |   | 1,041.6 | ** ** |   |
| Property, plant  and equipment, net                             |       | 3.1                                 |       |                        | 314.8      |                         |       |                            | 20.3       |             |       |   | — |   |   |   | 338.2 | ** ** |   |
| Deferred  financing fees, net                                   |       | 22.5                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 22.5 | ** ** |   |
| Due from parent,  Walter Industries                             |       | —                              |       |                        | 10.8       |                         |       |                            | —     |             |       |   | — |   |   |   | 10.8 | ** ** |   |
| Identifiable  intangibles, net                                  |       | —                              |       |                        | 842.6      |                         |       |                            | —     |             |       |   | — |   |   |   | 842.6 | ** ** |   |
| Goodwill                                                        |       | —                              |       |                        | 722.5      |                         |       |                            | —     |             |       |   | — |   |   |   | 722.5 | ** ** |   |
| Other non-current  assets                                       |       | —                              |       |                        | 9.5        |                         |       |                            | —     |             |       |   | — |   |   |   | 9.5 | ** ** |   |
| Investment in  subsidiaries                                     |       | 2,690.2                             |       |                        | 48.4       |                         |       |                            | —     |             |       |   | (2,738.6 | ) |   |   | — | ** ** |   |
| Total assets                                                    |       | $                                   | 2,901.5    |                        |       | $                            | 2,700.2    |                            |       |             | $          | 124.6 |   |   |   | $ | (2,738.6 | ) |   |   | $ | 2,987.7 | ** ** |   |
| **Liabilities**                                                 | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Accounts payable                                                |       | $                                   | 12.3       |                        |       | $                            | 92.8       |                            |       |             | $          | 12.0 |   |   |   | $ | — |   |   |   | $ | 117.1 | ** ** |   |
| Current portion  of long-term debt                              |       | 118.2                               |       |                        | 1.0        |                         |       |                            | —     |             |       |   | — |   |   |   | 119.2 | ** ** |   |
| Accrued expenses                                                |       | 11.1                                |       |                        | 101.1      |                         |       |                            | 7.7        |             |       |   | — |   |   |   | 119.9 | ** ** |   |
| Payable to  affiliate, Sloss Industries                         |       | —                              |       |                        | 2.0        |                         |       |                            | —     |             |       |   | — |   |   |   | 2.0 | ** ** |   |
| Total current  liabilities                                      |       | 141.6                               |       |                        | 196.9      |                         |       |                            | 19.7       |             |       |   | — |   |   |   | 358.2 | ** ** |   |
| Intercompany  accounts                                          |       | 625.2                               |       |                        | (680.4     | )                            |       |                            | 55.2       |             |       |   | — |   |   |   | — | ** ** |   |
| Long-term  debt                                                 |       | 1,009.2                             |       |                        | 1.4        |                         |       |                            | —     |             |       |   | — |   |   |   | 1,010.6 | ** ** |   |
| Accrued pension  liability                                      |       | —                              |       |                        | 105.3      |                         |       |                            | (1.0       | )                |       |   | — |   |   |   | 104.3 | ** ** |   |
| Accumulated  postretirement benefits obligation                 |       | —                              |       |                        | 47.0       |                         |       |                            | —     |             |       |   | — |   |   |   | 47.0 | ** ** |   |
| Deferred income  taxes                                          |       | —                              |       |                        | 314.4      |                         |       |                            | 2.3        |             |       |   | — |   |   |   | 316.7 | ** ** |   |
| Other long-term  liabilities                                    |       | —                              |       |                        | 25.4       |                         |       |                            | —     |             |       |   | — |   |   |   | 25.4 | ** ** |   |
| Total liabilities                                               |       | 1,776.0                             |       |                        | 10.0       |                         |       |                            | 76.2       |             |       |   | — |   |   |   | 1,862.2 | ** ** |   |
| **Shareholder’s equity (deficit)**                         | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total  shareholder’s equity (deficit)                      |       | 1,125.5                             |       |                        | 2,690.2    |                         |       |                            | 48.4       |             |       |   | (2,738.6 | ) |   |   | 1,125.5 | ** ** |   |
| Total liabilities and  shareholder’s equity (deficit) |       | $                                   | 2,901.5    |                        |       | $                            | 2,700.2    |                            |       |             | $          | 124.6 |   |   |   | $ | (2,738.6 | ) |   |   | $ | 2,987.7 | ** ** |   |

 

32

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**ConsolidatingStatement of Cash FlowsFor Mueller Group, LLCFor the Nine Months Ended June30, 2006**

| ** **                                                              | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                              | ** ** | **(dollars in millions)** | ** ** |
| Net cash provided  by (used in) operating activities                    |       | $                                   | (33.2      | )                           |       | $                            | 202.0      |                            |       |             | $          | (69.1 | ) |   |   | — |   |   |   | $ | 99.7 |   |   |
| **Cash  flows from investing activities**                               | ** ** | ** **                          |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                   |       | —                              |       |                        | (45.8      | )                            |       |                            | (2.2       | )                |       |   | — |   |   |   | (48.0 | ) |   |
| Acquisition of  businesses, net of cash acquired                        |       | —                              |       |                        | (15.5      | )                            |       |                            | —     |             |       |   | — |   |   |   | (15.5 | ) |   |
| Increase in  amounts due from Walter                                    |       | —                              |       |                        | (12.5      | )                            |       |                            | —     |             |       |   | — |   |   |   | (12.5 | ) |   |
| Net cash used in  investing activities                                  |       | —                              |       |                        | (73.8      | )                            |       |                            | (2.2       | )                |       |   | — |   |   |   | (76.0 | ) |   |
| **Cash  flows from financing activities**                               | ** ** | ** **                          |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Book cash  overdrafts                                                   |       | 12.0                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 12.0 |   |   |
| Intercompany  change                                                    |       | 53.4                                |       |                        | (128.0     | )                            |       |                            | 74.6       |             |       |   | — |   |   |   | — |   |   |
| Proceeds from  short-term borrowings                                    |       | 55.9                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 55.9 |   |   |
| Retirement of  short-term debt                                          |       | (55.9                               | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (55.9 | ) |   |
| Proceeds from  long-term debt                                           |       | 1,050.0                             |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 1,050.0 |   |   |
| Retirement of  long-term debt, including capital lease obligations |       | (866.9                              | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (866.9 | ) |   |
| Contribution from  Mueller Water                                        |       | 369.1                               |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 369.1 |   |   |
| Payment of  deferred financing fees                                     |       | (21.6                               | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (21.6 | ) |   |
| Dividend paid to  Walter                                                |       | (444.5                              | )          |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | (444.5 | ) |   |
| Dividend to  Walter for acquisition  costs                              |       | —                              |       |                        | (12.0      | )                            |       |                            | —     |             |       |   | — |   |   |   | (12.0 | ) |   |
| Walter  contribution of Predecessor Mueller’s cash            |       | 67.4                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 67.4 |   |   |
| Net cash provided  by (used in) financing activities                    |       | 218.9                               |       |                        | (140.0     | )                            |       |                            | 74.6       |             |       |   | — |   |   |   | 153.5 |   |   |
| Effect of  exchange rate changes on  cash                               |       | —                              |       |                        | —     |                         |       |                            | 0.1        |             |       |   | — |   |   |   | 0.1 |   |   |
| Increase in cash                                                        |       | 185.7                               |       |                        | (11.8      | )                            |       |                            | 3.4        |             |       |   | — |   |   |   | 177.3 |   |   |
| **Cash  and cash equivalents**                                          | ** ** | ** **                          |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Beginning of  period                                                    |       | —                              |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | — |   |   |
| End of period                                                           |       | $                                   | 185.7      |                        |       | $                            | (11.8      | )                               |       |             | $          | 3.4 |   |   |   | — |   |   |   | $ | 177.3 |   |   |

----

       (1) Guarantors include the accounts of thefollowing direct and indirect subsidiaries of Mueller Group, LLC:

| **Name**                        | ** ** | ** ** | ** ** | **State of Incorporation** | ** ** |
|---------------------------------|------------|------------|------------|--------------------------------------|------------|
| AnvilStar, LLC                  |       |       | Delaware   |                                 |       |
| Anvil  International, Inc. |       |       | Delaware   |                                 |       |
| Henry Pratt Company             |       |       | Delaware   |                                 |       |
| Henry Pratt  International Ltd  |       |       | Delaware   |                                 |       |
| Hersey Meters Co.               |       |       | Delaware   |                                 |       |
| Hydro Gate Acquisition  Corp.   |       |       | Delaware   |                                 |       |

33

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| James Jones Company                           |   |   | California |   |   |
|-----------------------------------------------|--------|--------|------------|--------|--------|
| J.B. Smith Mfg. Co.                           |   |   | Oklahoma   |   |   |
| Mueller Co.                                   |   |   | Illinois   |   |   |
| Mueller Service  Co.                          |   |   | Delaware   |   |   |
| Milliken  Acquisition Corp.                   |   |   | Delaware   |   |   |
| Mueller  International, Inc.             |   |   | Delaware   |   |   |
| Mueller  International, LLC                   |   |   | Delaware   |   |   |
| Mueller  International Finance, Inc.     |   |   | Delaware   |   |   |
| Mueller  International Finance, LLC           |   |   | Delaware   |   |   |
| *United States Pipe and  Foundry Company, LLC |   |   | Alabama    |   |   |

 

                 * Applicable only for periods beginning October 3,2005.

**Note 18.   SupplementalData—Predecessor Mueller Group Financial Statements**

Prior to the October 3, 2005 Acquisition,Predecessor Mueller Group was a registrant filing reports with the U.S.Securities and Exchange Commission (“SEC”). The following financial statementswere derived from reports previously filed with the SEC (Commission File Number333-117473). The unaudited Consolidated Statements of Operations and CashFlows for the three months ended July 2, 2005 shown below are derived fromthe Quarterly Report on Form 10-Q/A of Mueller Group, LLC (formerlyknown as Mueller Group, Inc.) for the quarterly period ended July 2,2005, as filed with the SEC on February 3, 2006. The audited ConsolidatedBalance Sheet as of September 30, 2005 shown below is derived from theAnnual Report on Form 10-K of Mueller Group, LLC (formerly known asMueller Group, Inc.) for the fiscal year ended September 30, 2005, asfiled with the SEC on December 19, 2005. This information is presented assupplemental data in this Form 10-Q to support the prior periodPredecessor Mueller Group Guarantor Financial Statements. In this footnote, each of the terms “Group,” the “Company,”“we,” “us” or “our” refers to Predecessor Mueller Group, LLC and itssubsidiaries, except where the context makes clear that the reference is onlyto Predecessor Mueller Group itself, and is not inclusive of its subsidiaries.

34

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**PREDECESSOR MUELLERGROUPUNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS**

| ** **                                                                         | ** ** | **Three months ended  July 2, 2005** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **(dollars in millions)**                      | ** ** |
| Net sales                                                                          |       |                                                     | $          | 296.9 |   |   |
| Cost of sales                                                                      |       |                                                     | 202.1      |   |   |
| Gross profit                                                                       |       |                                                     | 94.8       |   |   |
| Selling, general  and administrative expense, including stock compensation expense |       |                                                     | 45.9       |   |   |
| Facility  rationalization, restructuring and related costs                         |       |                                                     | —     |   |   |
| Operating income                                                                   |       |                                                     | 48.9       |   |   |
| Interest expense,  net of interest income                                          |       |                                                     | (18.1      | ) |   |
| Income before  income taxes                                                        |       |                                                     | 30.8       |   |   |
| Income tax  expense                                                                |       |                                                     | 11.0       |   |   |
| Net income                                                                         |       |                                                     | $          | 19.8 |   |   |

 

| ** **                                                                         | ** ** | **Nine months ended  July 2, 2005** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **(dollars in millions)**                     | ** ** |
| Net sales                                                                          |       |                                                    | $          | 838.2 |   |   |
| Cost of sales                                                                      |       |                                                    | 583.0      |   |   |
| Gross profit                                                                       |       |                                                    | 255.2      |   |   |
| Selling, general  and administrative expense, including stock compensation expense |       |                                                    | 133.8      |   |   |
| Facility  rationalization, restructuring and related costs                         |       |                                                    | 1.6        |   |   |
| Operating income                                                                   |       |                                                    | 119.8      |   |   |
| Interest expense,  net of interest income                                          |       |                                                    | (52.6      | ) |   |
| Income before  income taxes                                                        |       |                                                    | 67.2       |   |   |
| Income tax  expense                                                                |       |                                                    | 25.1       |   |   |
| Net income                                                                         |       |                                                    | $          | 42.1 |   |   |

 

35

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**PREDECESSOR MUELLERGROUPCONSOLIDATED BALANCE SHEET**

| ** **                                                            | ** ** | **September 30,  2005**        | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                            | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                            | ** ** |                                | ** ** | ** ** |   |
| Cash and cash  equivalents                                            |       |                                | $          | 112.8 |   |   |
| Receivables, net                                                      |       |                                | 177.4      |   |   |
| Inventories                                                           |       |                                | 303.0      |   |   |
| Income tax  receivable                                                |       |                                | —     |   |   |
| Deferred income  taxes                                                |       |                                | 27.7       |   |   |
| Prepaid expenses                                                      |       |                                | 31.1       |   |   |
| Total current assets                                                  |       |                                | 652.0      |   |   |
| Property, plant  and equipment, net                                   |       |                                | 168.0      |   |   |
| Deferred  financing fees, net                                         |       |                                | 29.0       |   |   |
| Deferred income  taxes                                                |       |                                | 10.9       |   |   |
| Other long-term  assets                                               |       |                                | 1.5        |   |   |
| Identifiable  intangibles, net                                        |       |                                | 52.4       |   |   |
| Goodwill                                                              |       |                                | 163.2      |   |   |
| Total assets                                                          |       |                                | $          | 1,077.0 |   |   |
| **Liabilities**                                                       | ** ** |                                | ** ** | ** ** |   |
| Accounts payable                                                      |       |                                | $          | 63.3 |   |   |
| Current portion  of long-term debt                                    |       |                                | 3.8        |   |   |
| Accrued expenses                                                      |       |                                | 103.0      |   |   |
| Total current liabilities                                             |       |                                | 170.1      |   |   |
| Long-term  debt                                                       |       |                                | 926.2      |   |   |
| Accrued pension  liability                                            |       |                                | 37.7       |   |   |
| Other long-term  liabilities                                          |       |                                | 1.5        |   |   |
| Total liabilities                                                     |       |                                | 1,135.5    |   |   |
| Commitments and  contingencies                                        |       |                                | —     |   |   |
| **Shareholders’  deficit:**                                      |       |                                |       |   |   |
| Common  stock—$0.01 par value (100 shares authorized and issued) |       |                                | —     |   |   |
| Accumulated deficit                                                   |       |                                | (48.9      | ) |   |
| Accumulated other  comprehensive loss                                 |       |                                | (9.6       | ) |   |
| Total shareholders’ deficit                                      |       |                                | (58.5      | ) |   |
| Total liabilities  and shareholders’ deficit                     |       |                                | $          | 1,077.0 |   |   |

 

36

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**PREDECESSOR MUELLERGROUPUNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS**

| ** **                                                                                   | ** ** | **Nine months ended**     | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                   | ** ** | **July 2, 2005**          | ** ** |
| ** **                                                                                   | ** ** | **(dollars in millions)** | ** ** |
| **Cash flows from operating  activities**                                                    | ** ** |                                | ** ** | ** ** |   |
| Net income                                                                                   |       |                                | $          | 42.1 |   |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                                |       |   |   |
| Depreciation                                                                                 |       |                                | 32.7       |   |   |
| Amortization of intangibles and tooling                                                      |       |                                | 4.1        |   |   |
| Unrealized gain on interest rate swaps                                                       |       |                                | (4.2       | ) |   |
| All other adjustments                                                                        |       |                                | (0.5       | ) |   |
| Changes in assets and  liabilities, net of the effects of acquisitions:                      |       |                                |       |   |   |
| Receivables                                                                                  |       |                                | 1.6        |   |   |
| Inventories                                                                                  |       |                                | (48.8      | ) |   |
| Accounts payable, accrued expenses and other current  liabilities                            |       |                                | (4.8       | ) |   |
| All other changes, net                                                                       |       |                                | 10.9       |   |   |
| Net cash provided  by operating activities                                                   |       |                                | 33.1       |   |   |
| **Cash  flows from investing activities**                                                    | ** ** |                                | ** ** | ** ** |   |
| Purchase of  property, plant and equipment                                                   |       |                                | (20.8      | ) |   |
| Net cash used in  investing activities                                                       |       |                                | (20.8      | ) |   |
| **Cash  flows from financing activities**                                                    | ** ** |                                | ** ** | ** ** |   |
| Book cash  overdrafts                                                                        |       |                                | 3.6        |   |   |
| Payment of  long-term debt, including capital lease obligations                              |       |                                | (2.4       | ) |   |
| Net cash provided  by financing activities                                                   |       |                                | 1.2        |   |   |
| Effect of  exchange rate changes on cash                                                     |       |                                | 0.3        |   |   |
| Increase in cash  and cash equivalents                                                       |       |                                | 13.8       |   |   |
| **Cash and cash equivalents**                                                                | ** ** |                                | ** ** | ** ** |   |
| Beginning of  period                                                                         |       |                                | 60.5       |   |   |
| End of period                                                                                |       |                                | $          | 74.3 |   |   |

 

37

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**PREDECESSOR MUELLERGROUPNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Organization**

Mueller Group, LLC (formerly Mueller Group, Inc.)(“Group” or the “Company”) is a wholly-owned subsidiary of Mueller WaterProducts, LLC (formerly Mueller Water Products, Inc.) (“Mueller Water”).As of September 30, 2005, the Company has two reporting and operatingsegments, Mueller and Anvil. Our Mueller segment (formerly called “Waterinfrastructure”) is a manufacturer of valves, fire hydrants and other relatedproducts utilized in the distribution of water and gas and in water andwastewater treatment facilities. Our Anvil segment segment (formerly called “Pipingsystems”) is a manufacturer of cast iron and malleable iron pipe fittings,ductile iron couplings and fittings, pipe hangers and other related productsfor the plumbing, heating, mechanical, construction retail hardware and otherrelated industries. Both segments have operations in the United States andCanada.

*Fiscal Year End—The***fiscal year of theCompany ends on September 30.

**Segment Information**

As of September 30, 2005, the Company’soperations had two operating segments: Mueller and Anvil. These segments areorganized around differences in products and are consistent with how theoperating entities are managed, how resources are allocated, and howinformation is used by the chief operating decision maker. The Mueller segmentis a manufacturer of valves, fire hydrants and other related products utilizedin the distribution of water and gas and in water and wastewater treatmentfacilities. The Anvil segment is a manufacturer of cast iron and malleable ironpipe fittings, ductile iron couplings and fittings, pipe hangers and otherrelated products for the plumbing, heating, mechanical, construction retailhardware and other related industries. Both segments have operations in theUnited States and Canada.

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 directly attributable to segment operations andintersegment eliminations, which we designate as Corporate in the segmentpresentation, and is before interest expense, net, and income taxes. Corporate expensesinclude costs related to financial and administrative matters, treasury, riskmanagement, human resources, legal counsel, and tax functions. Corporate assetsinclude items recorded at the date of the Company’s inception in 1999 relatedto purchase accounting valuation adjustments associated with property, plantand equipment and non-compete agreements with the predecessor parent company,as well as intangibles associated with intellectual property. These assets andany related depreciation or amortization expense have not been pushed down toour segments and are maintained as Corporate items. Therefore, segment earningsare not reflective of results on a stand-alone basis.

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Segmentassets consist primarily of accounts receivable, inventories, property, plantand equipment, net, goodwill, and identifiable intangibles, net. Summarizedfinancial information for our segments follows:

| ** **                                  | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Net  Sales:**                             | ** ** |                                                 | ** ** | ** **                                          |       |   | ** ** | ** ** |   |
| Mueller segment                             |       |                                                 | $          | 172.1                                               |       |   |   | $ | 480.8 |   |   |
| Anvil segment                               |       |                                                 | 124.8      |                                                |       |   | 357.4 |   |   |
| Consolidated                                |       |                                                 | 296.9      |                                                |       |   | 838.2 |   |   |
| **Intersegment  sales:**                    | ** ** |                                                 | ** ** | ** **                                          |       |   | ** ** | ** ** |   |
| Mueller segment                             |       |                                                 | 3.8        |                                                |       |   | 10.6 |   |   |
| Anvil segment                               |       |                                                 | 0.3        |                                                |       |   | 0.6 |   |   |
| Consolidated                                |       |                                                 | 4.1        |                                                |       |   | 11.2 |   |   |
| **Operating  income (expense):**            | ** ** |                                                 | ** ** | ** **                                          |       |   | ** ** | ** ** |   |
| Mueller segment                             |       |                                                 | 47.8       |                                                |       |   | 115.0 |   |   |
| Anvil segment                               |       |                                                 | 12.9       |                                                |       |   | 34.6 |   |   |
| Corporate  expense(1)                       |       |                                                 | (11.8      | )                                                   |       |   | (29.8 | ) |   |
| Consolidated                                |       |                                                 | 48.9       |                                                |       |   | 119.8 |   |   |
| **Depreciation  and amortization expense:** | ** ** |                                                 | ** ** | ** **                                          |       |   | ** ** | ** ** |   |
| Mueller segment                             |       |                                                 | 4.9        |                                                |       |   | 16.9 |   |   |
| Anvil segment                               |       |                                                 | 4.3        |                                                |       |   | 12.9 |   |   |
| Corporate                                   |       |                                                 | 2.2        |                                                |       |   | 7.0 |   |   |
| Consolidated                                |       |                                                 | 11.4       |                                                |       |   | 36.8 |   |   |
| **Capital  expenditures:**                  | ** ** |                                                 | ** ** | ** **                                          |       |   | ** ** | ** ** |   |
| Mueller segment                             |       |                                                 | 4.0        |                                                |       |   | 13.0 |   |   |
| Anvil segment                               |       |                                                 | 2.9        |                                                |       |   | 6.8 |   |   |
| Corporate                                   |       |                                                 | 0.3        |                                                |       |   | 1.0 |   |   |
| Consolidated                                |       |                                                 | 7.2        |                                                |       |   | 20.8 |   |   |
|                                             |            |                                                      |            |                                                     |            |  |  |  |  |  |  |

----

       (1) Includes certain expenses not allocated to segments.

| ** **                | ** ** | **At September 30,**      | ** ** |
|---------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2005**                            | ** ** |
| ** **                | ** ** | **(dollars in millions)** | ** ** |
| Total assets:             |       |                                |       |   |   |
| Mueller segment           |       |                                | $          | 516.6 |   |   |
| Anvil segment             |       |                                | 303.6      |   |   |
| Corporate                 |       |                                | 256.8      |   |   |
| Consolidated              |       |                                | $          | 1,077.0 |   |   |
| Goodwill:                 |       |                                |       |   |   |
| Mueller segment           |       |                                | $          | 149.1 |   |   |
| Anvil segment             |       |                                | 14.1       |   |   |
| Consolidated              |       |                                | $          | 163.2 |   |   |
| Identifiable intangibles: |       |                                |       |   |   |
| Mueller segment           |       |                                | $          | 4.4 |   |   |
| Anvil segment             |       |                                | 5.3        |   |   |
| Corporate                 |       |                                | 42.7       |   |   |
| Consolidated              |       |                                | $          | 52.4 |   |   |

 

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Geographicalarea information with respect to net sales, as determined by the location ofthe customer invoiced, and property, plant and equipment—net, as determined bythe physical location of the assets, were as follows for the three and ninemonths ended July 2, 2005:

| ** **      | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net sales:      |       |                                                 |       |                                                |       |   |   |   |   |
| United States   |       |                                                 | $          | 238.2                                               |       |   |   | $ | 686.3 |   |   |
| Canada          |       |                                                 | 55.2       |                                                |       |   | 144.5 |   |   |
| Other Countries |       |                                                 | 3.5        |                                                |       |   | 7.4 |   |   |
|            |       |                                                 | $          | 296.9                                               |       |   |   | $ | 838.2 |   |   |

 

| ** **                           | ** ** | **At September 30, 2005** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in millions)**      | ** ** |
| Property, plant and  equipment, net: |       |                                     |       |   |   |
| United States                        |       |                                     | $          | 152.8 |   |   |
| Canada                               |       |                                     | 12.6       |   |   |
| Other Countries                      |       |                                     | 2.6        |   |   |
|                                 |       |                                     | $          | 168.0 |   |   |

 

**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, inventorylevels and ultimate product sales value. As such, these factors may change overtime 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  July 2, 2005** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Balance at  beginning of period |       |                                                 | $          | 1.4                                                 |       |   |   | $ | 1.6 |   |   |
| Accruals for  warranties        |       |                                                 | 0.5        |                                                |       |   | 1.6 |   |   |
| Settlement of  warranty claims  |       |                                                 | (0.2       | )                                                   |       |   | (1.5 | ) |   |
| Balance at end of period        |       |                                                 | $          | 1.7                                                 |       |   |   | $ | 1.7 |   |   |

 

Comprehensive Income—The Company’s comprehensiveincome for the three months ended July 2, 2005 includes foreign currencytranslation losses of $(1.2) million. The Company’s comprehensive incomefor the nine months ended July 2, 2005 includes foreign currencytranslation gains of $2.2 million.

Related Party Transactions—Substantiallyall of the outstanding shares of the common stock of our parent company,Mueller Water Products, Inc., are held by the Donaldson, Lufkin &Jenrette (“DLJ”) Merchant Banking funds. We pay DLJ an annual advisory fee inconnection with a financial advisory agreement. Credit Suisse First Boston LLC,an affiliate of DLJ, has received and will receive customary fees andreimbursement of expenses in connection with the arrangement and syndication ofour senior 

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creditfacility and as a lender and agent thereunder. The aggregate amount of all feesincurred by the Company with these related parties in connection with advisoryservices and financing arrangements was approximately $0.2 million for thethree-month period ended July 2, 2005 and $0.4 million for thenine-month period ended July 2, 2005.

**BorrowingArrangements**

*Long-Term Debt—Long-term***debt consists of thefollowing obligations:

| ** **                                          | ** ** | **September 30,**              | ** ** |
|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **2005**                            | ** ** |
| ** **                                          | ** ** | **(dollars in millions)** | ** ** |
| Senior credit facility  term loans                  |       |                                | $          | 512.8 |   |   |
| Second priority  senior secured floating rate notes |       |                                | 100.0      |   |   |
| 10% senior  subordinated notes                      |       |                                | 315.0      |   |   |
| Capital lease  obligations                          |       |                                | 2.2        |   |   |
|                                                |       |                                | 930.0      |   |   |
| Less current  portion                               |       |                                | (3.8       | ) |   |
|                                                |       |                                | $          | 926.2 |   |   |

 

Aschedule of debt maturities as of September 30, 2005 is as follows:

| ** **                            | ** ** | **Less than  1 year**     | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **After  5 years** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|----------------|------------|----------------|------------|-------------------------|------------|-----------|------------|
| ** **                            | ** ** | **(dollars in millions)** | ** ** |
| Senior credit  facility term loans    |       |                                | $          | 2.9            |       |           |       | $                       | 5.8        |      |       |   | $ | 5.8 |   |   | $ | 498.3 |   | $ | 512.8 |   |
| Second Priority  Senior Secured Notes |       |                                | —     |           |       |           | —     |                    |       |      | —     |   |   | 100.0 |   | 100.0 |   |
| 10% Senior  Subordinated Notes        |       |                                | —     |           |       |           | —     |                    |       |      | —     |   |   | 315.0 |   | 315.0 |   |
| Capital lease  obligations            |       |                                | 0.9        |           |       |           | 1.2        |                    |       |      | 0.1        |   |   | — |   | 2.2 |   |
| Total debt maturities                 |       |                                | $          | 3.8            |       |           |       | $                       | 7.0        |      |       |   | $ | 5.9 |   |   | $ | 913.3 |   | $ | 930.0 |   |

 

*2004Mueller Credit Facility:*   TheCompany entered into a senior credit facility, which includes a$545 million amortizing senior credit facility term loan($32.2 million of which has since been repaid) maturing seven years afterclosing and an $80.0 million revolving credit facility that will terminatefive years after closing. The revolving credit facility and/or the term loanfacility are subject to a potential, although uncommitted, increase of up to anaggregate of $50.0 million at the Company’s request at any time prior tomaturity. In addition, although uncommitted, a foreign currency sub-facilitymay be made available to one or more of the Company’s restricted foreignsubsidiaries in an aggregate principal amount of up to the U.S. dollarequivalent of $30.0 million. This increase and the additional foreigncurrency sub-facility will only be available if one or more financialinstitutions agree to provide them. The Company had no borrowings under therevolving credit facility at September 30, 2005.

Borrowings 2004 Mueller Credit Facility bore interestbased on a margin over, at the Company’s option, the base rate or LIBOR. Theapplicable margin was 2.75% over LIBOR and 1.50% over the base rate for termloans. The applicable margin under the revolving senior credit facility was arange of 2.25% to 3.25% over LIBOR and a range of 1.00% to 2.00% over thebase rate, depending on our ratio of consolidated debt to EBITDA as defined inthe senior credit facility. At September 30, 2005 the applicable margin onthe revolving senior credit facility was 2.75% over LIBOR and 1.50% over thebase rate. The Company’s obligations under the senior credit facility areguaranteed by Mueller Water and all of the Company’s existing or futuredomestic restricted subsidiaries and is secured by substantially all of theassets of the Company and its subsidiary guarantors, including a pledge of thecapital stock of all of the Company’s existing and future domesticsubsidiaries, a pledge of no more than 65.0% of the voting stock of 

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any of the Company’sforeign subsidiaries, a pledge of all intercompany indebtedness in favor of theCompany and its domestic restricted subsidiaries, and a pledge of its capitalstock by Mueller Water. The 2004 Mueller Credit Facility contained customarycovenants, including covenants that limit the Company’s ability to incur debtand liens, pay dividends and make investments and capital expenditures, andevents of default. Mueller Group was permitted to make payments of up to$2.0 million in any fiscal year to Mueller Water Products to pay overheadexpenses of Mueller Water Products. These restrictions expired October 3,2005 in connection with the acquisition by Walter.

*SecondPriority Senior Secured Floating Rate Notes:*   TheCompany issued $100 million of such notes. Interest on the secured notesis payable at a rate equal to the three-month reserve-adjustedLondon-interbank offered rate, or LIBOR, which is reset quarterly, plus4.75% on February 1, May 1, August 1 and November 1 of eachyear, beginning on August 1, 2004. The interest rate for the interestperiod beginning August 1, 2005 is 8.44% per annum. The secured notesmature in 2011 and are guaranteed by each of the existing domestic restrictedsubsidiaries and secured by second-priority liens on the assets securingthe senior credit facility (other than certain subsidiary stock and assets ofWater). The secured notes contain customary covenants and events of default,including covenants that limit the Company’s ability to incur debt, paydividends and make investments and also include a maintenance covenant limitingthe Company’s senior total leverage as a multiple of EBITDA, as defined in theindenture.

*10%Senior Subordinated Notes:*   TheCompany issued $315 million of such notes. Interest on the subordinatednotes is payable at an annual rate of 10% on May 1 and November 1 ofeach year, beginning on November 1, 2004. The subordinated notes mature in2012 and are guaranteed by each of the Company’s existing domestic restrictedsubsidiaries. The subordinated notes contain customary covenants and events ofdefault, including covenants that limit the Company’s ability to incur debt,pay dividends and make investments. Generally, the notes only permit us to paydividends if there is no default or event of default and our fixed charge ratio(as defined) is at least 2.5 to 1, and the maximum amount we may paycannot exceed 50% of our cumulative net income (as defined) since January 1,2004, subject to specified exceptions. The Company is permitted to makedividends or loans to Mueller Water of up to $2 million in any fiscal year forcosts and expenses incurred by Mueller Water in its capacity as a holdingcompany for services rendered on behalf of the Company.

*CapitalLeases—The***Company leases automobiles undercapital lease arrangements that expire over the next four years.

Futureminimum lease payments under scheduled capital leases that have initial orremaining non-cancelable terms in excess of one year are as follows:

| ** **                        | ** ** | **(dollars in millions)** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| Fiscal 2006                       |       |                                | $          | 1.1 |   |   |
| Fiscal 2007                       |       |                                | 0.9        |   |   |
| Fiscal 2008                       |       |                                | 0.5        |   |   |
| Fiscal 2009                       |       |                                | 0.1        |   |   |
| Total minimum  lease payments     |       |                                | 2.6        |   |   |
| Amount  representing interest     |       |                                | (0.4       | ) |   |
| Obligations under  capital leases |       |                                | 2.2        |   |   |
| Obligations due  within one year  |       |                                | (0.9       | ) |   |
| Long term obligations             |       |                                | $          | 1.3 |   |   |

 

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**Interest Rate Swap****—The**Company hasentered into interest rate swap agreements in order to reduce interest raterisks and manage interest expense. As of September 30, 2005, a notionalprincipal amount of $100 million in swap agreements is still outstanding andscheduled to mature in April 2007 and May 2007. At September 30,2005, the fair value of interest rate swaps was an asset of $0.5 million. Theswap agreements effectively convert floating-rate debt into fixed-rate debt andcarry an average fixed interest rate of 4.09% at September 30, 2005.Interest differentials to be paid or received because of swap agreements arereflected as an adjustment to interest expense over the related debt period.For the nine months ended July 2, 2005 Group recorded gains on interestrate swaps of $4.2 million. While Group is exposed to credit loss on itsinterest rate swaps in the event of non-performance by the counterparties tosuch swaps, management believes such nonperformance is unlikely to occur giventhe financial resources of the counterparties.

**Distributions to Water****—Mueller**Water hasno material assets other than its ownership of the Company’s capital stock andaccordingly depends upon distributions from the Company to satisfy its cashneeds. Mueller Water’s principal cash needs will be debt service on its SeniorDiscount Notes due 2014. These notes do not require cash interest paymentsuntil 2009 and contain restrictive covenants that will, among other things,limit the ability of Mueller Water and its subsidiaries (including the Company)to incur debt, pay dividends and make investments. Neither the Company nor anyof its subsidiaries guarantee these notes. Mueller Water, however, is a holdingcompany and its ability to pay interest on the notes will be dependent upon thereceipt of dividends from its subsidiaries. The Company is Mueller Water’s onlydirect subsidiary. However, the terms of the Company’s borrowing arrangementssignificantly restrict its ability to pay dividends to Mueller Water.

**Fair Value of Debt****—Based**on the levelof interest rates prevailing at September 30, 2005, the fair value of theCompany’s fixed-rate debt exceeded its carrying value by approximately $18.9million. Unrealized gains or losses on debt do not result in the realization orexpenditure of cash and generally are not recognized for financial reportingpurposes unless the debt is retired prior to its maturity.

**Net PeriodicBenefit Cost—Defined Benefit Plans**

For a detailed disclosure on the Company’s pension andemployee benefits plans, please refer to Note 10 of the Company’s AuditedConsolidated Financial Statements for the year ended September 30, 2005,as found on Form 10-K (File No. 333-117473).

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 July 2, 2005:

| ** **                          | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in millions)**                  | ** ** |
| Service cost                        |       |                                                 | $          | 0.8                                                 |       |   |   | $ | 2.3 |   |   |
| Interest cost                       |       |                                                 | 1.4        |                                                |       |   | 4.1 |   |   |
| Expected return  on plan assets     |       |                                                 | (1.3       | )                                                   |       |   | (3.8 | ) |   |
| Amortization of  prior service cost |       |                                                 | —     |                                                |       |   | 0.1 |   |   |
| Amortization of  net actuarial loss |       |                                                 | 0.7        |                                                |       |   | 2.0 |   |   |
| Net periodic benefit  cost          |       |                                                 | $          | 1.6                                                 |       |   |   | $ | 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.

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**SupplementaryBalance Sheet Information**

Selectedsupplementary balance sheet information is presented below:

| ** **                                  | ** ** | **September 30,  2005**        | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **(dollars in millions)** | ** ** |
| **Inventories**                             |       |                                |       |   |   |
| Purchased  materials and manufactured parts |       |                                | $          | 33.5 |   |   |
| Work in process                             |       |                                | 90.6       |   |   |
| Finished goods                              |       |                                | 178.9      |   |   |
|                                        |       |                                | $          | 303.0 |   |   |
| **Property,  plant and equipment**          |       |                                |       |   |   |
| Land                                        |       |                                | $          | 9.2 |   |   |
| Buildings                                   |       |                                | 63.0       |   |   |
| Machinery and  equipment                    |       |                                | 300.0      |   |   |
| Other                                       |       |                                | 14.9       |   |   |
| Accumulated  depreciation                   |       |                                | (219.1     | ) |   |
|                                        |       |                                | $          | 168.0 |   |   |
| **Accrued  expenses and other liabilities** |       |                                |       |   |   |
| Vacations and  holidays                     |       |                                | $          | 9.7 |   |   |
| Workers  compensation                       |       |                                | 8.8        |   |   |
| Accrued interest                            |       |                                | 15.2       |   |   |
| Accrued payroll  and bonus                  |       |                                | 20.0       |   |   |
| Accrued sales  commissions                  |       |                                | 3.8        |   |   |
| Accrued cash discounts  and rebates         |       |                                | 15.8       |   |   |
| Accrued federal  and state income taxes     |       |                                | 4.4        |   |   |
| Accrued other  taxes                        |       |                                | 4.1        |   |   |
| Accrued medical  claims                     |       |                                | 4.0        |   |   |
| Other                                       |       |                                | 17.2       |   |   |
|                                        |       |                                | $          | 103.0 |   |   |

 

**SupplementaryIncome Statement Information**

The components of interest expense are presentedbelow:

| ** **                                        | ** ** | **Three months  ended  July 2, 2005** | ** ** | **Nine months  ended  July 2, 2005** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                        | ** ** | **(dollars in millions)**                  | ** ** |
| **Interest  expense and early repayment costs:**  | ** ** |                                                 | ** ** | ** **                                          |       |   | ** ** | ** ** |   |
| Contractual interest expense                      |       |                                                 | $          | 18.6                                                |       |   |   | $ | 54.2 |   |   |
| Deferred financing fee amortization               |       |                                                 | 1.2        |                                                |       |   | 3.6 |   |   |
| Senior subordinated debt early redemption penalty |       |                                                 | —     |                                                |       |   | — |   |   |
| Write off of deferred financing fees              |       |                                                 | —     |                                                |       |   | — |   |   |
| Interest rate swap gains                          |       |                                                 | (1.3       | )                                                   |       |   | (4.2 | ) |   |
| Total interest expense  and early repayment costs |       |                                                 | $          | 18.5                                                |       |   |   | $ | 53.6 |   |   |

 

**Facility Rationalization,Restructuring and Related Costs**

In the first quarter offiscal 2005, the Company announced that it would cease manufacturing and beginoutsourcing a product line it produced at its water infrastructure plant inColorado. A restructuring charge of $0.1 million in the first quarter offiscal 2005 related to severance payments. An additional 

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chargeof $1.5 million, related primarily to the termination of operating leasesfor the plant building and machinery, is reflected in the second quarter offiscal 2005.

**ConsolidatingGuarantor and Non-Guarantor Financial Information**

The following tables setforth the Consolidating Statements of Operations for the three andnine months ended July 2, 2005 and the Consolidating Statement ofCash Flows for the nine months ended July 2, 2005 and the ConsolidatingBalance Sheet as of September 30, 2005. The following information isincluded as a result of the guarantee by certain of the Company’s wholly ownedU.S. subsidiaries (“Guarantor Companies”) of the second priority senior securednotes and senior subordinated notes issued by the Company. None of the Company’sother subsidiaries guarantee the debt. Each of the guarantees is joint andseveral and full and unconditional. “Mueller Group, Inc.” (“Issuer”)includes the consolidated financial results of Mueller Group, Inc. withall of its wholly-owned subsidiaries accounted for under the equitymethod.

**ConsolidatingStatement of OperationsFor the Three Months Ended July 2, 2005**

| ** **                                                                              | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                                                               |       | $          | —     |                        |       | $                            | 233.2      |                           |       |             | $          | 63.7 |   |   |   | $ | — |   |   |   | $ | 296.9 |   |   |
| Cost of sales                                                                           |       | —     |       |                        | 152.4      |                         |       |                           | 49.7       |             |       |   | — |   |   |   | 202.1 |   |   |
| Royalty expense                                                                         |       | —     |       |                        | —     |                         |       |                           | —     |             |       |   | — |   |   |   | — |   |   |
| Gross profit                                                                            |       | —     |       |                        | 80.8       |                         |       |                           | 14.0       |             |       |   | — |   |   |   | 94.8 |   |   |
| Selling, general  and administrative expense, including stock compensation expense |       | 1.8        |       |                        | 36.2       |                         |       |                           | 7.9        |             |       |   | — |   |   |   | 45.9 |   |   |
| Facility  rationalization and related  costs                                            |       | —     |       |                        | —     |                         |       |                           | —     |             |       |   | — |   |   |   | — |   |   |
| Operating income  (loss)                                                                |       | (1.8       | )          |                        | 44.6       |                         |       |                           | 6.1        |             |       |   | — |   |   |   | 48.9 |   |   |
| Interest expense                                                                        |       | (18.5      | )          |                        | (0.1       | )                            |       |                           | —     |             |       |   | 0.1 |   |   |   | (18.5 | ) |   |
| Interest income                                                                         |       | 0.3        |       |                        | 0.1        |                         |       |                           | 0.1        |             |       |   | (0.1 | ) |   |   | 0.4 |   |   |
| Income (loss)  before income taxes                                                      |       | (20.0      | )          |                        | 44.6       |                         |       |                           | 6.2        |             |       |   | — |   |   |   | 30.8 |   |   |
| Income tax  expense (benefit)                                                           |       | (7.7       | )          |                        | 16.7       |                         |       |                           | 2.0        |             |       |   | — |   |   |   | 11.0 |   |   |
| Equity income  from subsidiaries                                                        |       | 32.1       |       |                        | 4.2        |                         |       |                           | —     |             |       |   | (36.3 | ) |   |   | — |   |   |
| Net income                                                                              |       | $          | 19.8       |                        |       | $                            | 32.1       |                           |       |             | $          | 4.2 |   |   |   | $ | (36.3 | ) |   |   | $ | 19.8 |   |   |

 

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**ConsolidatingStatement of OperationsFor the Nine Months Ended July 2, 2005**

| ** **                                                                              | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminating** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                                                               |       | $          | —     |                        |       | $                            | 666.5      |                           |       |             | $          | 171.7 |   |   |   | $ | — |   |   |   | $ | 838.2 |   |   |
| Cost of sales                                                                           |       | —     |       |                        | 446.7      |                         |       |                           | 136.3      |             |       |   | — |   |   |   | 583.0 |   |   |
| Royalty expense                                                                         |       | —     |       |                        | —     |                         |       |                           | —     |             |       |   | — |   |   |   | — |   |   |
| Gross profit                                                                            |       | —     |       |                        | 219.8      |                         |       |                           | 35.4       |             |       |   | — |   |   |   | 255.2 |   |   |
| Selling, general  and administrative expense, including stock compensation expense |       | 6.0        |       |                        | 105.3      |                         |       |                           | 22.5       |             |       |   | — |   |   |   | 133.8 |   |   |
| Facility  rationalization and related  costs                                            |       | —     |       |                        | 1.6        |                         |       |                           | —     |             |       |   | — |   |   |   | 1.6 |   |   |
| Operating income  (loss)                                                                |       | (6.0       | )          |                        | 112.9      |                         |       |                           | 12.9       |             |       |   | — |   |   |   | 119.8 |   |   |
| Interest expense                                                                        |       | (53.5      | )          |                        | (0.4       | )                            |       |                           | —     |             |       |   | 0.3 |   |   |   | (53.6 | ) |   |
| Interest income                                                                         |       | 0.7        |       |                        | 0.3        |                         |       |                           | 0.3        |             |       |   | (0.3 | ) |   |   | 1.0 |   |   |
| Income (loss)  before income taxes                                                      |       | (58.8      | )          |                        | 112.8      |                         |       |                           | 13.2       |             |       |   | — |   |   |   | 67.2 |   |   |
| Income tax  expense (benefit)                                                           |       | (22.7      | )          |                        | 43.3       |                         |       |                           | 4.5        |             |       |   | — |   |   |   | 25.1 |   |   |
| Equity income  from subsidiaries                                                        |       | 78.2       |       |                        | 8.7        |                         |       |                           | —     |             |       |   | (86.9 | ) |   |   | — |   |   |
| Net income                                                                              |       | $          | 42.1       |                        |       | $                            | 78.2       |                           |       |             | $          | 8.7 |   |   |   | $ | (86.9 | ) |   |   | $ | 42.1 |   |   |

 

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**Consolidating Balance SheetFor Predecessor Mueller GroupSeptember 30, 2005**

| ** **                                                 | ** ** | **Issuer**                          | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **(dollars in millions)** | ** ** |
| **Assets**                                                 | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                 |       | $                                   | 94.5       |                        |       | $                            | (11.4      | )                               |       |             | $          | 29.7 |   |   |   | $ | — |   |   |   | $ | 112.8 |   |   |
| Receivables, net                                           |       | —                              |       |                        | 143.6      |                         |       |                            | 33.8       |             |       |   | — |   |   |   | 177.4 |   |   |
| Inventories                                                |       | —                              |       |                        | 247.1      |                         |       |                            | 55.9       |             |       |   | — |   |   |   | 303.0 |   |   |
| Deferred income  taxes                                     |       | —                              |       |                        | 27.7       |                         |       |                            | —     |             |       |   | — |   |   |   | 27.7 |   |   |
| Prepaid expenses                                           |       | —                              |       |                        | 28.7       |                         |       |                            | 2.4        |             |       |   | — |   |   |   | 31.1 |   |   |
| Total current  assets                                      |       | 94.5                                |       |                        | 435.7      |                         |       |                            | 121.8      |             |       |   | — |   |   |   | 652.0 |   |   |
| Property, plant  and equipment, net                        |       | —                              |       |                        | 153.9      |                         |       |                            | 14.1       |             |       |   | — |   |   |   | 168.0 |   |   |
| Deferred  financing fees, net                              |       | 29.0                                |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 29.0 |   |   |
| Deferred income  taxes                                     |       | (4.1                                | )          |                        | 15.6       |                         |       |                            | (0.6       | )                |       |   | — |   |   |   | 10.9 |   |   |
| Other long-term  assets                                    |       | 0.5                                 |       |                        | 1.0        |                         |       |                            | —     |             |       |   | — |   |   |   | 1.5 |   |   |
| Identifiable  intangibles, net                             |       | —                              |       |                        | 52.4       |                         |       |                            | —     |             |       |   | — |   |   |   | 52.4 |   |   |
| Goodwill                                                   |       | —                              |       |                        | 163.2      |                         |       |                            | —     |             |       |   | — |   |   |   | 163.2 |   |   |
| Investment in  subsidiaires                                |       | 1,190.1                             |       |                        | 42.4       |                         |       |                            | —     |             |       |   | (1,232.5 | ) |   |   | — |   |   |
| Total assets                                               |       | $                                   | 1,310.0    |                        |       | $                            | 864.2      |                            |       |             | $          | 135.3 |   |   |   | $ | (1,232.5 | ) |   |   | $ | 1,077.0 |   |   |
| **Liabilities**                                            | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Accounts payable                                           |       | $                                   | 10.0       |                        |       | $                            | 37.2       |                            |       |             | $          | 16.1 |   |   |   | $ | — |   |   |   | $ | 63.3 |   |   |
| Current portion  of long-term debt                         |       | 2.8                                 |       |                        | 1.0        |                         |       |                            | —     |             |       |   | — |   |   |   | 3.8 |   |   |
| Accrued expenses                                           |       | 18.3                                |       |                        | 74.6       |                         |       |                            | 10.1       |             |       |   | — |   |   |   | 103.0 |   |   |
| Total current  liabilities                                 |       | 31.1                                |       |                        | 112.8      |                         |       |                            | 26.2       |             |       |   | — |   |   |   | 170.1 |   |   |
| Intercompany  accounts                                     |       | 410.9                               |       |                        | (478.1     | )                            |       |                            | 67.2       |             |       |   | — |   |   |   | — |   |   |
| Long-term  debt                                            |       | 925.0                               |       |                        | 1.2        |                         |       |                            | —     |             |       |   | — |   |   |   | 926.2 |   |   |
| Accrued pension  liability                                 |       | —                              |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 37.7 |   |   |
| Other long-term  liabilities                               |       | 1.5                                 |       |                        | 38.2       |                         |       |                            | (0.5       | )                |       |   | — |   |   |   | 1.5 |   |   |
| Total liabilities                                          |       | 1,368.5                             |       |                        | (325.9     | )                            |       |                            | 92.9       |             |       |   | — |   |   |   | 1,135.5 |   |   |
| **Shareholders’  equity**                             | ** ** | ** **                          | ** ** |                        | ** ** | ** **                   |       |                            | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Total  shareholders’ equity (deficit)                 |       | (58.5                               | )          |                        | 1,190.1    |                         |       |                            | 42.4       |             |       |   | (1,232.5 | ) |   |   | (58.5 | ) |   |
| Total liabilities and  shareholders’ equity (deficit) |       | $                                   | 1,310.0    |                        |       | $                            | 864.2      |                            |       |             | $          | 135.3 |   |   |   | $ | (1,232.5 | ) |   |   | $ | 1,077.0 |   |   |

 

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**Consolidating Statement of Cash FlowsFor the Nine Months Ended July 2, 2005**

| ** **                                                           | ** ** | **Issuer** | ** ** | **Guarantor  Companies(1)** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidating  Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------|------------|
| Net cash provided by  (used in) operating activities                 |       | $          | (39.9      | )                           |       | $                            | 69.9       |                            |       |             | $          | 3.1 |   |   |   | — |   |   |   | $ | 33.1 |   |   |
| **Cash flows from investing activities**                             | ** ** | ** ** |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                 |       | —     |       |                        | (18.8      | )                            |       |                            | (2.0       | )                |       |   | — |   |   |   | (20.8 | ) |   |
| Net cash used in  investing activities                               |       | —     |       |                        | (18.8      | )                            |       |                            | (2.0       | )                |       |   | — |   |   |   | (20.8 | ) |   |
| **Cash flows from financing activities**                             | ** ** | ** ** |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Book overdrafts                                                      |       | 3.6        |       |                        | —     |                         |       |                            | —     |             |       |   | — |   |   |   | 3.6 |   |   |
| Intercompany change                                                  |       | 54.7       |       |                        | (54.9      | )                            |       |                            | 0.2        |             |       |   | — |   |   |   | — |   |   |
| Payment of long-term  debt, including capital lease obligations |       | (1.5       | )          |                        | (0.9       | )                            |       |                            | —     |             |       |   | — |   |   |   | (2.4 | ) |   |
| Net cash provided by  (used in) financing activities                 |       | 56.8       |       |                        | (55.8      | )                            |       |                            | 0.2        |             |       |   | — |   |   |   | 1.2 |   |   |
| Effect of exchange rate  changes on cash                             |       | —     |       |                        | —     |                         |       |                            | 0.3        |             |       |   | — |   |   |   | 0.3 |   |   |
| Increase (decrease) in  cash                                         |       | 16.9       |       |                        | (4.7       | )                            |       |                            | 1.6        |             |       |   | — |   |   |   | 13.8 |   |   |
| **Cash and cash equivalents**                                        | ** ** | ** ** |       |                        |       |                         |       |                            |       |             |       |   |   |   |   |   |   |   |   |
| Beginning of period                                                  |       | 49.8       |       |                        | (7.9       | )                            |       |                            | 18.6       |             |       |   | — |   |   |   | 60.5 |   |   |
| End of period                                                        |       | $          | 66.7       |                        |       | $                            | (12.6      | )                               |       |             | $          | 20.2 |   |   |   | — |   |   |   | $ | 74.3 |   |   |

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       (1) Guarantors include the accounts of the following direct and indirectsubsidiaries of Mueller Group, LLC:

| **Name**                                  | ** ** | ** ** | ** ** | **State of Incorporation** | ** ** |
|-------------------------------------------|------------|------------|------------|--------------------------------------|------------|
| AnvilStar, LLC                            |       |       | Delaware   |                                 |       |
| Anvil  International, Inc.           |       |       | Delaware   |                                 |       |
| Henry Pratt  Company                      |       |       | Delaware   |                                 |       |
| Henry Pratt  International Ltd            |       |       | Delaware   |                                 |       |
| Hersey Meters Co.                         |       |       | Delaware   |                                 |       |
| Hydro Gate  Acquisition Corp.             |       |       | Delaware   |                                 |       |
| James Jones  Company                      |       |       | California |                                 |       |
| J.B. Smith Mfg.  Co.                      |       |       | Oklahoma   |                                 |       |
| Mueller Co.                               |       |       | Illinois   |                                 |       |
| Mueller Service  Co.                      |       |       | Delaware   |                                 |       |
| Milliken  Acquisition Corp.               |       |       | Delaware   |                                 |       |
| Mueller  International, Inc.         |       |       | Delaware   |                                 |       |
| Mueller  International, LLC               |       |       | Delaware   |                                 |       |
| Mueller  International Finance, Inc. |       |       | Delaware   |                                 |       |
| Mueller International  Finance, LLC       |       |       | Delaware   |                                 |       |

 

 

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this report, each of the terms “Group,” the “Company,”“we,” “us” or “our” refers to Mueller Group, LLC and its subsidiaries, exceptwhere the context makes clear that the reference is only to Mueller Group, LLCitself, and is not inclusive of its subsidiaries.

Except as otherwise noted,we present all financial and operating data on a fiscal year and fiscal quarterbasis. Our fiscal year ends on September 30, and our third fiscal quarterends on June 30.

**Overview**

*Organization*

Mueller Group, LLC (the “Company”) is a wholly-ownedsubsidiary of Mueller Water Products, Inc. (“Mueller Water”), a Delawarecorporation. Mueller Water is the surviving corporation of the merger on February 2,2006 of Mueller Water Products, LLC (Commission File Number: 333-116590)and Mueller Water Products Co-Issuer, Inc. with and into Mueller HoldingCompany, Inc., a Delaware corporation.

On June 1, 2006, Mueller Water completed its initialpublic offering (“IPO”) of its Series A common stock (NYSE: MWA). WalterIndustries, Inc. (“Walter”) is the holder of all of Mueller Water’soutstanding Series B common stock. Mueller Water is a majority-ownedsubsidiary of Walter. The Company continues to be a wholly-owned subsidiary ofMueller Water.

On October 3, 2005, through a series oftransactions (the “Acquisition”), Walter, through a wholly-ownedsubsidiary, acquired all outstanding shares of capital stock of our parentcompany, Mueller Water Products, Inc. (“Predecessor Mueller Water”), whichimmediately was converted into Mueller Water Products, LLC, a Delaware limitedliability company and contributed United States Pipe and Foundry Company, LLC,(“U.S. Pipe”), owned by Walter since 1969, to the acquired company’swholly-owned subsidiary, Mueller Group, LLC (“Predecessor Mueller Group”). Inaccordance with generally accepted accounting principles, for accountingpurposes U.S. Pipe is treated as the acquirer of Predecessor Mueller Group.Accordingly, effective October 3, 2005, U.S. Pipe’s basis of accounting isused for the Company and all historical financial data of the Company includedin this report on Form 10-Q, is that of U.S. Pipe. The results ofoperations of Predecessor Mueller Group are included in the ConsolidatedStatements of Operations beginning October 3, 2005.

The Company was originally organized as United StatesPipe and Foundry Company, Inc. (“Inc.”) and was a wholly-owned subsidiaryof Walter, a diversified New York Stock Exchange traded company (NYSE: WLT).On September 23, 2005, Inc. was dissolved and United States Pipe andFoundry Company, LLC was organized in the state of Alabama, and the operationsof Inc. were conducted under the form of a limited liability company.

In December 2005, U.S. Pipe changed its fiscalyear-end to September 30, which coincides with the fiscal year end ofPredecessor Mueller Group. Beginning with the quarter ended December 31,2005, the Company has three operating segments which are named after our leadingbrands in each segment: Mueller, U.S. Pipe, and Anvil.

Consistent with generallyaccepted accounting principles, the discussion of the Company’s results ofoperations for the three and nine months ended June 30, 2006 includes thefinancial results of Predecessor Mueller Group from the Acquisition date. Theinclusion of these results, plus the continuing integration process, may renderdirect comparison with the results for prior periods less meaningful.Accordingly, the discussion below addresses, where appropriate, trends that webelieve are significant, separate and apart from the impact of the Acquisition.Supplemental information with comparisons of the three and nine months ended June 30,2006 Statements of Operations data to the pro forma three and nine months ended

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June 30,2005 Statements of Operations data is provided below under the subheadings “SupplementalInformation—Results of Operations for the Three Months Ended June 30, 2006Compared to Pro Forma Results of Operations for the Three Months Ended June 30,2005” and “Supplemental Information—Results of Operations for the Nine MonthsEnded June 30, 2006 Compared to Pro Forma Results of Operations for theNIne Months Ended June 30, 2005.”

**Business**

We are a leading North American manufacturer of a broad range ofwater infrastructure and flow control products for use in water distributionnetworks, water and wastewater treatment facilities, gas distribution andpiping systems. We manage our business and report operations through threeoperating segments, based largely on the products they sell and the marketsthey serve. Our segments are named after lead brands in each segment:

·       *Mueller*.   The Mueller segment produces and sells hydrants, valves andrelated products primarily to the water and wastewater infrastructure markets.Sales of our Mueller segment products are driven principally by spending onwater and wastewater infrastructure upgrade, repair and replacement and newwater and wastewater infrastructure. Subsequent to the Acquisition, effective January 1,2006, U.S. Pipe transferred its valve and hydrant business to our Muellersegment. Mueller segment sales are estimated to be approximately 50% for newinfrastructure, with the remainder for upgrade, repair and replacement. Asignificant portion of Mueller’s sales are made through its broad distributornetwork. For most of our Mueller segment products, which are sold throughindependent distributors, end-users choose the brand or establish productspecifications. We believe our reputation for quality, extensive distributorrelationships, installed base and coordinated marketing approach have helpedour Mueller segment products to be “specified” as an approved product for usein most major metropolitan areas throughout the United States.

·       *U.S. Pipe*.   The U.S. Pipe segment produces and sells ductile iron pressurepipe, restraint joints and fittings and related products to the waterinfrastructure market. U.S. Pipe products are sold primarily to water worksdistributors, contractors, municipalities, private utilities and othergovernmental agencies. A substantial percentage of ductile iron pressure pipeorders result from contracts that are bid by contractors or directly issued bymunicipalities or private utilities. To support our customers’ inventory anddelivery requirements, U.S. Pipe utilizes numerous storage depots throughoutthe country.

·       *Anvil*.   The Anvil segment produces, sources and sells pipe fittings, pipehangers and pipe nipples and a variety of related products primarily to thecommercial fire protection piping systems and HVAC applications market. Salesof our Anvil segment products are driven principally by spending onnon-residential construction projects.

*Developments andTrends*

The Acquisition of Predecessor Mueller Water on October 3,2005, as well as other developments, trends and factors may impact our futureresults including the following:

·       Recent price increases in brass ingot, which containsapproximately 85% copper, have increased the overall cost of manufacturingcertain Mueller segment products, including certain hydrant and valvecomponents. During the current period, the Mueller segment raised prices oncertain brass products by 22%, as well as raising prices 12% on hydrants andiron gate valves containing brass components, which are expected to offsethigher material costs and improve margins. The cost of copper has recentlystabilized; however, it may rise again in the future and we may need toimplement further pricing actions to offset higher raw material costs.

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·       As presented herein, the operating results from the Acquisition ofPredecessor Mueller Group will be consolidated with those of U.S. Pipe’sresults from October 3, 2005, the date of Acquisition.

·       In the quarter ended December 31, 2005, the Company, enteredinto the 2005 Mueller Credit Agreement. Proceeds of the 2005 Mueller CreditAgreement were approximately $1,053.4 million, net of approximately $21.6million of underwriting fees and expenses which will be amortized over the lifeof the loans. The proceeds were used to refinance Predecessor Mueller Group’s2004 Credit Facility (“2004 Mueller Credit Facility”), redeem PredecessorMueller Group’s second priority senior secured floating rate notes, and financethe acquisition of Predecessor Mueller Group by Walter Industries. During theperiod subsequent to September 30, 2005, and prior to Walter Industriesacquiring Predecessor Mueller Group on October 3, 2005, PredecessorMueller Group expensed $18.4 million of deferred financing fees related to the2004 Mueller Credit Facility and wrote off $2.4 million of deferred financingfees related to the second priority senior secured floating rate notes. Theseexpenses are excluded from the results of operations for the periods presented.

·       OnJune 1, 2006, the Company used $246.0 million of the $369.1 millioncontributed to it by Mueller Water from the proceeds from Mueller Water’s IPOfor a partial redemption of the outstanding 2005 Mueller Term Loan. On July 3,2006, the Company used $123.1 million of cash proceeds from the IPO as follows:$110.3 million for the partial redemption of the 10% senior subordinated notes;$1.8 million for accrued interest on the 10% senior subordinated notes; and$11.0 million for prepayment premiums and other debt repayment costs.

·        TheCompany expects to expense deferred financing fees of approximately$7.7 million, pre-tax, associated with the early redemption of debtduring the quarter ending September 30, 2006. Excluding the write-off ofdeferred financing fees, the Company expects interest expense to beapproximately $20 million per quarter.

·        In the period subsequent to September 30,2005 and prior to Walter Industries acquiring Predecessor Mueller Group on October 3,2005, Predecessor Mueller Group expensed transaction fees of approximately$20.1 million and transaction bonuses of $10.0 million. These fees werecontingent upon completion of the sale of Predecessor Mueller Group to WalterIndustries. Non-contingent legal and other fees and expenses of approximately$3.1 million associated solely with the Acquisition were expensed byPredecessor Mueller Group during the fiscal year ended September 30, 2005.These expenses are excluded from the results of operations for the periodspresented.

·        We haveinitiated a synergy plan designed to streamline our manufacturing operations,add incremental volume through combining sales efforts for complementaryproducts and create savings through a coordinated purchasing plan to reduce rawmaterial and overall production costs. We expect to substantially complete theimplementation of the synergy plan by early fiscal 2008, producing ongoingincremental annual operating income improvements at the high end of ourpreviously announced expected benefit range of $40 million to $50 million. Weachieved run-rate synergy benefits of approximately $30.0 million, of which$14.0 million has been recognized to date, excluding certain costs to achievethese benefits, as discussed below.

As part of the synergy plan, we announced and have initiatedseveral plant closures and transferred production to existing facilities:

·       *Closure of the U.S. Pipe Chattanooga, TennesseePlant.**  *Effective January 1, 2006, we transferred the valve andhydrant production of the U.S. Pipe Chattanooga, Tennessee plant to our Muellersegment’s Chattanooga, Tennessee and Albertville, Alabama plants. The eventualclosure of the U.S. Pipe Chattanooga, Tennessee plant will occur sometime infiscal 

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2006. Total costs related to this plant closure are expected to beapproximately $49.9 million, which will be expensed and included as a componentof operating income in accordance with generally accepted accountingprinciples. Costs recorded as components of operating income for the threemonths and nine months ended June 30, 2006 were $3.1 million and $21.3million, respectively, charged to cost of sales related to inventoryobsolescence and additional facility expenses and $0.2 million and $28.6million, respectively, of restructuring costs primarily related to fixed assetimpairments, severance, and net pension curtailment settlement.

·       *Closure of the Mueller segment’s Henry Pratt (“Pratt”) ValveManufacturing Facility in Dixon, Illinois*.   OnJanuary 26, 2006 we announced the closure of this facility by the end offiscal 2006. The process of transferring the Dixon plant’s operations to otherPratt facilities has begun. Severance costs associated with this plant closureof approximately $1.0 million and fixed asset impairment charges ofapproximately $1.4 million were recorded as adjustments to goodwill. Costsassociated with relocating equipment will be expensed as incurred. For thethree months and nine months ended June 30, 2006, the Company has recorded$2.1 million and $2.4 million , respectively, related to severance costs andfixed asset impairments as adjustments to goodwill.

·       *Closure ofthe Mueller Canada Milton, Ontario (“Milton”) Valve and Hydrant ManufacturingFacility.**  *On April 20, 2006, weannounced the closure of this facility by the end of fiscal 2006. The transferof production to other Mueller facilities began in the third quarter of fiscal2006. Severance costs associated with this plant closure of approximately $2.5million and fixed asset impairment charges of approximately $0.2 million wererecorded as adjustments to goodwill. Costs associated with relocating theMilton warehouse and equipment will be expensed as incurred. The Company hasrecorded $2.5 million related to severance costs and $0.2 million related tofixed asset impairments as adjustments to goodwill for the three months ended June 30, 2006.

·       The Company has other plansthat were formalized prior to the Acquisition to rationalize facilities and substantialcash expenditures in the form of severance and new equipment may be required toimplement these plans. Although certain expenditures related to future plantrationalizations are expected to qualify for purchase accounting treatment andare not expected to be charged to operations, all costs of future facilityrationalizations may not qualify for purchase accounting treatment.

·        In 2005, Walter Industriesannounced its plan to undertake an initial public offering (“the IPO”) andspin-off of Mueller Water. The IPO was completed on June 1, 2006. WalterIndustries has announced its intention to divest its entire ownership positionin the form of a tax-free spin-off to its shareholders prior to December 31,2006.

·        On January 4, 2006, theCompany acquired Hunt Industries, Inc. (“Hunt”) for $6.8 million in cash.Hunt, based in Murfreesboro, Tennessee, is a manufacturer of meter pits andmeter yokes which are sold by the Company’s Mueller segment.

·        On January 27, 2006,the Company acquired the operating assets of CCNE, L.L.C. (“CCNE”), aConnecticut-based manufacturer and seller of check valves to the water andwastewater treatment markets, for $8.8 million in cash. The Company acquiredcertain identifiable intangible assets in conjunction with the CCNE acquisition,resulting in additional annual amortization expense of approximately $1.5million over the next four and a half years.

·        Mueller Water has entered into a tax allocation agreement (“TaxAllocation Agreement”) with Walter Industries in connection with the IPO of theCompany’s Common Stock and the 

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announced spin-off ofMueller Water by Walter Industries. Pursuant to the Tax Allocation Agreement,Mueller Water and Walter Industries will make payments to each other tocompensate the payee for income taxes owed and paid by the payee, subject tocertain adjustments, that would not have been payable by that party had eachparty filed separate federal, state and local income tax returns for thoseperiods prior to the spin-off in which Mueller Water filed combined,consolidated or unitary (as applicable) federal, state and local returns as aconsolidated subsidiary of Walter Industries. With respect to our tax assets,our right to reimbursement from Walter Industries will be determined based onthe usage of such tax assets by the Walter Industries consolidated federalincome tax group or the combined, consolidated or unitary state or local incometax group. For all periods prior to the spin-off, Walter Industries willcontinue to have all the rights of a parent of a consolidated group, will bethe sole and exclusive agent for us in any and all matters relating to thecombined, consolidated or unitary federal, state and local income taxliabilities of us, will have sole and exclusive responsibility for the preparationand filing of consolidated federal income and consolidated or combined stateand local tax returns (or amended returns), and will have the power to contestor compromise any asserted tax adjustment or deficiency and to file, litigateor compromise any claim for refund on behalf of us related to any suchcombined, consolidated or unitary (as applicable) federal, state or local taxreturn.

·        Mueller Water and Walterhave also entered into a transition services agreement, effective as of May 26,2006, pursuant to which Mueller Water and Walter and certain of theirrespective subsidiaries (including the Company) will provide to each othercertain services, including the provision by Walter to the Company of certaintax and accounting services, certain occupancy rights, certain human resourcesservices (including benefit plan administration), certain communicationssystems and certain insurance. Services under the agreement are to be providedat a price sufficient to cover the provider’s reasonable estimate of its actualcosts and, if applicable, consistent with the prices such provider would chargeto an affiliate, in each case without taking into account any profit margin orprojected savings from increased efficiency. The term of the services to beprovided varies on a service-by-service basis.

·        MuellerWater has adopted a new 2006 Stock Incentive Plan designed to promote long-termgrowth and financial success by providing incentives to employees and directorsthrough grants of stock-based awards. Stock compensation expense, pre-tax,resulting from the issuance of restricted stock and stock options in connectionwith the IPO is estimated to be $2.1 million in 2006.

·        As of June 30, 2006,scrap metal costs for our U.S. Pipe segment declined nearly 10% from their peakin 2004. The average cost of scrap iron per ton produced during the threemonths ended June 30, 2006 increased nearly 6% compared to the averagecost during the three months ended June 30, 2005. Recently scrap costshave increased: the average cost of scrap iron per ton produced during themonth of June 2006 increased 9.8% over the average cost during the threemonths ended March 31, 2006.

·        In the fiscal year ended September 30,2005 and the nine months ended June 30, 2006, on a pro forma basis,approximately 37% and 40%, respectively, of our pro forma sales were to our tenlargest distributors, and approximately 30% and 33%, respectively, of our proforma sales were to our three largest distributors: Home Depot, FergusonEnterprises and American Waterworks. While our relationships with our tenlargest distributors have been long-lasting, distributors in our industry haveexperienced significant consolidation in recent years. As consolidation amongdistributors continues, pricing pressure may result, which could lead to asignificant decline in our profitability. For example, Home Depot acquiredNational Waterworks in 2005 and then acquired Hughes Supply in March 2006.As a result, two of our 

53

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three previouslargest distributors have been combined under common control. Moreover, theloss of either of Home Depot or Ferguson Enterprises as a distributor couldsignificantly reduce our levels of sales and profitability.

**Forward-LookingStatements**

This report containscertain statements that may be deemed “forward-looking statements” within themeaning of Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historicalfact are statements that could be deemed forward looking statements. In thiscontext, forward-looking statements often address our future business andfinancial performance, and may be characterized by terminology such as “believe”,“anticipate”, “should”, “intend”, “plan”, “will”, “expects”, “estimates”, “projects”,“positioned”, “strategy”, and similar expressions. These statements are basedon assumptions and assessments made by the Company’s management in light of itsexperience and its perception of historical trends, current conditions,expected future developments and other factors it believes to be appropriate.These forward looking statements are subject to a number of risks anduncertainties, including but not limited to: the Company’s ability to continuelong-standing relationships with major customers; increased competition; demandfor and market acceptance of new and existing products in the markets we serve;adverse changes in currency exchange rates or raw material prices, specificallysteel scrap, steel pipe and brass ingot; unanticipated developments that couldoccur with respect to contingencies such as litigation, product liabilityexposures and environmental matters; the Company’s ability to integrateacquired businesses into its operations; and other risks and uncertainties thataffect the manufacturing sector generally including, but not limited to,economic, political, governmental and technological factors affecting theCompany’s operations, markets, products, services and prices. Any such forwardlooking statements are not guarantees of future performances and actualresults, developments and business decisions may differ from those envisaged bysuch forward looking statements. These forward looking statements speak only asof the date of this Quarterly Report. The Company disclaims any duty to updateany forward looking statement, all of which are expressly qualified by theforegoing Forward-Looking Statements.

54

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**Results ofOperations**

***Three Months Ended June 30,2006 As Compared to the Three Months Ended June 30, 2005 (dollarsin millions)***

| ** **                                                          | ** ** | **Three months ended June 30,** | ** ** | ** **                            | ** ** | ** **                                  | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                            | ** ** | **2005**                              | ** ** | **FY06 Q3 vs. FY05 Q3** | ** ** |
| ** **                                                          | ** ** | ** **                                          | ** ** | **Percentage  of net  sales(1)** | ** ** | ** **                                  | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                          | ** ** | **(dollars in millions)**                 | ** ** |
| Net sales                                                           |       |                                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                   | 225.5      |                                  |       | 45.1                                        | %          |   | $ | — |   |   | — | % |   |   | $ | 225.5 |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 143.8                                               |       |                                  | 28.8       |                                        |       | 162.0 |   |   | 100.0 |   |   |   | (18.2 | ) |   |   | (11.2 | )% |   |
| Anvil                                                               |       | 136.5                                               |       |                                  | 27.3       |                                        |       | — |   |   | — |   |   |   | 136.5 |   |   |   |   |   |   |
| Consolidating eliminations                                          |       | (5.8                                                | )          |                                  | (1.2       | )                                           |       | — |   |   | — |   |   |   | (5.8 | ) |   |   |   |   |   |
| Consolidated                                                        |       | $                                                   | 500.0      |                                  |       | 100.0                                       |       |   | $ | 162.0 |   |   | 100.0 |   |   |   | $ | 338.0 |   |   |   |   |   |   |
| Gross profit                                                        |       |                                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                   | 77.1       |                                  |       | 34.2                                        |       |   | $ | — |   |   | — |   |   |   | $ | 77.1 |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 20.8                                                |       |                                  | 14.5       |                                        |       | 22.8 |   |   | 14.1 |   |   |   | (2.0 | ) |   |   | (8.8 | ) |   |
| Anvil                                                               |       | 36.4                                                |       |                                  | 26.7       |                                        |       | — |   |   | — |   |   |   | 36.4 |   |   |   |   |   |   |
| Consolidating eliminations                                          |       | 0.2                                                 |       |                                  | —     |                                        |       | — |   |   | — |   |   |   | 0.2 |   |   |   |   |   |   |
| Consolidated                                                        |       | $                                                   | 134.5      |                                  |       | 26.9                                        |       |   | $ | 22.8 |   |   | 14.1 |   |   |   | $ | 111.7 |   |   |   |   |   |   |
| Selling, general and administrative                                 |       |                                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                   | 20.3       |                                  |       | 9.0                                         |       |   | $ | — |   |   | — |   |   |   | $ | 20.3 |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 11.0                                                |       |                                  | 7.6        |                                        |       | 10.7 |   |   | 6.6 |   |   |   | 0.3 |   |   |   | 2.8 |   |   |
| Anvil                                                               |       | 24.2                                                |       |                                  | 17.7       |                                        |       | — |   |   | — |   |   |   | 24.2 |   |   |   |   |   |   |
| Corporate                                                           |       | 7.1                                                 |       |                                  | 1.4        |                                        |       | — |   |   | — |   |   |   | 7.1 |   |   |   |   |   |   |
| Consolidated                                                        |       | $                                                   | 62.6       |                                  |       | 12.5                                        |       |   | $ | 10.7 |   |   | 6.6 |   |   |   | $ | 51.9 |   |   |   |   |   |   |
| Related party corporate charges                                     |       |                                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                   | —     |                                  |       | —                                      |       |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 2.0                                                 |       |                                  | 1.4        |                                        |       | 1.8 |   |   | 1.1 |   |   |   | 0.2 |   |   |   | 11.1 |   |   |
| Anvil                                                               |       | —                                              |       |                                  | —     |                                        |       | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Corporate                                                           |       | 0.3                                                 |       |                                  | 0.1        |                                        |       | — |   |   | — |   |   |   | 0.3 |   |   |   |   |   |   |
| Consolidated                                                        |       | $                                                   | 2.3        |                                  |       | 0.5                                         |       |   | $ | 1.8 |   |   | 1.1 |   |   |   | $ | 0.5 |   |   |   |   |   |   |
| Facility rationalization, restructuring and related  costs          |       |                                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                   | —     |                                  |       | —                                      |       |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 0.2                                                 |       |                                  | 0.1        |                                        |       | — |   |   | — |   |   |   | 0.2 |   |   |   |   |   |   |
| Anvil                                                               |       | —                                              |       |                                  | —     |                                        |       | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                                        |       | $                                                   | 0.2        |                                  |       | —                                      |       |   | $ | — |   |   | — |   |   |   | $ | 0.2 |   |   |   |   |   |   |
| Income from operations                                              |       |                                                |       |                                  |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                   | 56.8       |                                  |       | 25.2                                        |       |   | $ | — |   |   | — |   |   |   | $ | 56.8 |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 7.6                                                 |       |                                  | 5.3        |                                        |       | 10.3 |   |   | 6.4 |   |   |   | (2.7 | ) |   |   | (26.2 | ) |   |
| Anvil                                                               |       | 12.2                                                |       |                                  | 8.9        |                                        |       | — |   |   | — |   |   |   | 12.2 |   |   |   |   |   |   |
| Corporate                                                           |       | (7.4                                                | )          |                                  | (1.5       | )                                           |       | — |   |   | — |   |   |   | (7.4 | ) |   |   |   |   |   |
| Consolidating eliminations                                          |       | 0.2                                                 |       |                                  | —     |                                        |       | — |   |   | — |   |   |   | 0.2 |   |   |   |   |   |   |
| Consolidated                                                        |       | $                                                   | 69.4       |                                  |       | 13.9                                        |       |   | $ | 10.3 |   |   | 6.4 |   |   |   | $ | 59.1 |   |   |   |   |   |   |
| Interest expense arising  from related party payable to Walter |       | $                                                   | —     |                                  |       | —                                      |       |   | $ | (4.9 | ) |   | (3.0 | ) |   |   | $ | 4.9 |   |   |   |   |   |   |
| Interest expense, net of  interest income                           |       | (27.6                                               | )          |                                  | (5.5       | )                                           |       | — |   |   | — |   |   |   | (27.6 | ) |   |   |   |   |   |
| Income before income  taxes                                         |       | 41.8                                                |       |                                  | 8.4        |                                        |       | 5.4 |   |   | 3.3 |   |   |   | 36.4 |   |   |   |   |   |   |
| Income tax expense                                                  |       | 18.2                                                |       |                                  | 3.6        |                                        |       | 1.8 |   |   | 1.1 |   |   |   | 16.4 |   |   |   |   |   |   |
| Net income                                                          |       | $                                                   | 23.6       |                                  |       | 4.7                                         |       |   | $ | 3.6 |   |   | 2.2 |   |   |   | $ | 20.0 |   |   |   |   |   |   |

----

       (1) Percentages are by segment, if applicable.

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*NetSales.**  *Consolidatednet sales for the three months ended June 30, 2006 were $500.0 million, anincrease of $338.0 million from $162.0 million in the prior yearperiod. The increase was primarily related to the October 3, 2005Acquisition of Predecessor Mueller.

Mueller segment net sales for the three months ended June 30,2006 were $225.5 million.

U.S. Pipe segment net sales for the three months endedJune 30, 2006 were $143.8 million, a decrease of $18.2 million, or11.2% from $162.0 million in the prior year period. Net sales in theprior-year period included $14.6 million from the valve and hydrant business.As of January 1, 2006, the valve and hydrant business was transferred tothe Mueller segment. The effect of this decrease was partially offset byincreases in ductile iron pipe selling prices. Prices were higher than theprior year as the industry has been raising prices to mitigate rising scrapmetal cost increases.

Anvil segment net sales for the three months ended June 30,2006 were $136.5 million.

*GrossProfit.**  *Consolidatedgross profit for the three months ended June 30, 2006 was $134.5 million,an increase of $111.7 million compared to $22.8 million in the prior yearperiod. The Acquisition of Predecessor Mueller contributed $113.7 million ofthe increase.

Mueller segment gross profit for the three monthsended June 30, 2006 was $77.1 million.

U.S. Pipe segment gross profit for the three monthsended June 30, 2006 was $20.8 million, a decrease of $2.0 million, or8.8%, compared to $22.8 million in the prior year period. Gross marginincreased to 14.5% in the current period compared to 14.1% in the prior yearperiod. Due to the plant closure process, current period actual productioncapacity at the U.S. Pipe Chattanooga facility was significantly lower than normalcapacity, resulting in facility expenses of $1.4 million charged directly tocost of sales. In addition, inventory obsolescence write-offs of $0.8 millionassociated with the plant closure and $0.9 million of other costs associatedwith the plant closure were recorded to cost of sales during the three monthsended June 30, 2006. Excluding the charges for facility expenses of $1.4million, inventory write-offs of $0.8 million and other costs of $0.9 million,U.S. Pipe gross margins would have been 16.6% for the current period, comparedto 14.1% in the prior year period. This increase is primarily due to higherductile iron pipe selling prices.

Anvil segment gross profit for the three months ended June 30,2006 was $36.4 million.

*Selling,General & Administrative.**  *Consolidated expenses for the threemonths ended June 30, 2006 were $62.6 million, an increase of$51.9 million, compared to $10.7 million in the prior year period.The acquisition of Predecessor Mueller accounted for $51.6 million of theincrease.

Mueller segment expenses for the three months ended June 30,2006 were $20.3 million.

U.S. Pipe segment expenses for the three months ended June 30,2006 were $11.0 million, compared to $10.7 million for the prior yearperiod. As a percentage of net sales, expenses increased to 7.6% in the currentperiod compared to 6.6% in the prior year period, as a result of transferringvalve and hydrant production and related revenues to the Mueller segment.

Anvil segment expenses for the three months ended June 30,2006 were $24.2 million.

Corporate segment expenses for the three months ended June 30,2006 were $7.1 million.

*RelatedParty Corporate Charges.*   Certain costs incurredby Walter such as insurance, executive salaries, professional service fees,human resources, transportation, and other centralized business functions areallocated to its subsidiaries. Costs incurred by Walter that cannot be directlyattributed to its subsidiaries are allocated to its subsidiaries based onestimated annual revenues.

*FacilityRationalization, Restructuring and Related Costs.**  *The Company expensed$0.2 million of restructuring costs for the three months ended June 30,2006, related to the closure of the U.S. Pipe 

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Chattanooga, Tennesseeplant. These costs are comprised of fixed asset impairments of $2.2 million,severance for terminated hourly and salaried employees of $0.4 million, areduction of pension and other post-employment benefit costs of $(0.6) million,and a reduction of other previously estimated environmental costs of $(1.8)million.

*InterestExpense Arising from Related Party Payable to Walter.*   Interestexpense was allocated to the Company up to the date of the Acquisition basedupon the outstanding balance of the intercompany note. The intercompany note toWalter of $443.6 million was forgiven by Walter prior to October 3, 2005.There was no intercompany interest expense for the three months ended June 30,2006 and there was $4.9 million for the three months ended June 30, 2005.

*InterestExpense, Other, Net of Interest Income.*   Interest expense, net of interest income, for thecurrent period was $27.6 million and includes $24.5 million of interestexpense on the $1,050.0 million senior secured term loan entered into on October 3,2005 and the 10% Senior Subordinated Notes assumed by the Company as part ofthe October 3, 2005 Acquisition; $1.1 million of amortization of deferredfinancing fees; and $4.1 million for write-off of deferred financing fees as aresult of the early retirement of $246.0 million of the senior secured termloan, partially offset by $2.1 million of interest income earned on cashbalances for the current period.

*IncomeTax Expense.*   The provision forincome taxes for the current period was an expense of $18.2 million ascompared to expense of $1.8 million in the prior year period. During the thirdquarter of 2006, the Company determined that its fiscal year effective tax rateincreased from 33% to 40% based on its latest earnings projection for fiscal2006 pre-tax income. The Company recorded an income tax expense during thethird quarter of 2006 of $1.8 million to account for the change in rates. Theeffective tax rate for the third quarter of 2006 was 43.5%. The effective taxrate for the third quarter of 2005 was 33%. The estimated effective tax ratediffers from the statutory rate primarily due to manufacturing productiondeductions and state income taxes.

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**Results of Operations**

***Nine Months Ended June 30,2006 As Compared to the Nine Months Ended June 30, 2005 (dollarsin millions)***

| ** **                                                          | ** ** | **Nine months ended June 30,** | ** ** | ** **                            | ** ** | ** **                  | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **2006**                                           | ** ** | **2005**                              | ** ** | **2006 vs. 2005** | ** ** |
| ** **                                                          | ** ** | ** **                                         | ** ** | **Percentage  of net  sales(1)** | ** ** | ** **                  | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                          | ** ** | **(dollars in millions)**                | ** ** |
| Net sales                                                           |       |                                               |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                  | 599.0      |                                  |       | 42.3                        | %          |   | $ | — |   |   | — | % |   |   | $ | 599.0 |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 434.6                                              |       |                                  | 30.7       |                        |       | 427.8 |   |   | 100.0 |   |   |   | 6.8 |   |   |   | 1.6 | % |   |
| Anvil                                                               |       | 396.7                                              |       |                                  | 28.0       |                        |       | — |   |   | — |   |   |   | 396.7 |   |   |   |   |   |   |
| Consolidating  eliminations                                         |       | (15.0                                              | )          |                                  | (1.0       | )                           |       | — |   |   | — |   |   |   | (15.0 | ) |   |   |   |   |   |
| Consolidated                                                        |       | $                                                  | 1,415.3    |                                  |       | 100.0                       |       |   | $ | 427.8 |   |   | 100.0 |   |   |   | $ | 987.5 |   |   |   |   |   |   |
| Gross profit                                                        |       |                                               |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                  | 150.6      |                                  |       | 25.1                        |       |   | $ | — |   |   | — |   |   |   | $ | 150.6 |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 39.3                                               |       |                                  | 9.0        |                        |       | 46.1 |   |   | 10.8 |   |   |   | (6.8 | ) |   |   | (14.8 | ) |   |
| Anvil                                                               |       | 83.1                                               |       |                                  | 20.9       |                        |       | — |   |   | — |   |   |   | 83.1 |   |   |   |   |   |   |
| Consolidating  eliminations                                         |       | (0.4                                               | )          |                                  | —     |                        |       | — |   |   | — |   |   |   | (0.4 | ) |   |   |   |   |   |
| Consolidated                                                        |       | $                                                  | 272.6      |                                  |       | 19.3                        |       |   | $ | 46.1 |   |   | 10.8 |   |   |   | $ | 226.5 |   |   |   |   |   |   |
| Selling, general and administrative                                 |       |                                               |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                  | 58.4       |                                  |       | 9.7                         |       |   | $ | — |   |   | — |   |   |   | $ | 58.4 |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 32.3                                               |       |                                  | 7.4        |                        |       | 29.0 |   |   | 6.8 |   |   |   | 3.3 |   |   |   | 11.4 |   |   |
| Anvil                                                               |       | 67.4                                               |       |                                  | 17.0       |                        |       | — |   |   | — |   |   |   | 67.4 |   |   |   |   |   |   |
| Corporate                                                           |       | 22.4                                               |       |                                  | 1.6        |                        |       | — |   |   | — |   |   |   | 22.4 |   |   |   |   |   |   |
| Consolidated                                                        |       | $                                                  | 180.5      |                                  |       | 12.8                        |       |   | $ | 29.0 |   |   | 6.8 |   |   |   | $ | 151.5 |   |   |   |   |   |   |
| Related party corporate charges                                     |       |                                               |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                  | —     |                                  |       | —                      |       |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 5.8                                                |       |                                  | 1.3        |                        |       | 5.5 |   |   | 1.3 |   |   |   | 0.3 |   |   |   | 5.5 |   |   |
| Anvil                                                               |       | —                                             |       |                                  | —     |                        |       | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Corporate                                                           |       | 0.3                                                |       |                                  | —     |                        |       | — |   |   | — |   |   |   | 0.3 |   |   |   |   |   |   |
| Consolidated                                                        |       | $                                                  | 6.1        |                                  |       | 0.4                         |       |   | $ | 5.5 |   |   | 1.3 |   |   |   | $ | 0.6 |   |   |   |   |   |   |
| Facility rationalization, restructuring and related  costs          |       |                                               |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                  | —     |                                  |       | —                      |       |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | 28.6                                               |       |                                  | 6.6        |                        |       | — |   |   | — |   |   |   | 28.6 |   |   |   |   |   |   |
| Anvil                                                               |       | —                                             |       |                                  | —     |                        |       | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                                        |       | $                                                  | 28.6       |                                  |       | 2.0                         |       |   | $ | — |   |   | — |   |   |   | $ | 28.6 |   |   |   |   |   |   |
| Income (loss) from operations                                       |       |                                               |       |                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                             |       | $                                                  | 92.2       |                                  |       | 15.4                        |       |   | $ | — |   |   | — |   |   |   | $ | 92.2 |   |   |   |   |   |   |
| U.S. Pipe                                                           |       | (27.4                                              | )          |                                  | (6.3       | )                           |       | 11.6 |   |   | 2.7 |   |   |   | (39.0 | ) |   |   |   |   |   |
| Anvil                                                               |       | 15.7                                               |       |                                  | 4.0        |                        |       | — |   |   | — |   |   |   | 15.7 |   |   |   |   |   |   |
| Corporate                                                           |       | (22.7                                              | )          |                                  | (1.6       | )                           |       | — |   |   | — |   |   |   | (22.7 | ) |   |   |   |   |   |
| Consolidating  eliminations                                         |       | (0.4                                               | )          |                                  | —     |                        |       | — |   |   | — |   |   |   | (0.4 | ) |   |   |   |   |   |
| Consolidated                                                        |       | $                                                  | 57.4       |                                  |       | 4.1                         |       |   | $ | 11.6 |   |   | 2.7 |   |   |   | $ | 45.8 |   |   |   |   |   |   |
| Interest expense arising  from related party payable to Walter |       | $                                                  | —     |                                  |       | —                      |       |   | $ | (15.9 | ) |   | (3.7 | ) |   |   | $ | 15.9 |   |   |   |   |   |   |
| Interest expense, net of  interest income                           |       | (81.6                                              | )          |                                  | (5.8       | )                           |       | (0.3 | ) |   | (0.1 | ) |   |   | (81.3 | ) |   |   |   |   |   |
| Loss before income taxes                                            |       | (24.2                                              | )          |                                  | (1.7       | )                           |       | (4.6 | ) |   | (1.1 | ) |   |   | (19.6 | ) |   |   |   |   |   |
| Income tax expense  (benefit)                                       |       | (7.9                                               | )          |                                  | (0.6       | )                           |       | 2.5 |   |   | 0.6 |   |   |   | (10.4 | ) |   |   |   |   |   |
| Net loss                                                            |       | $                                                  | (16.3      | )                                     |       | (1.2                        | )          |   | $ | (7.1 | ) |   | (1.7 | ) |   |   | $ | (9.2 | ) |   |   |   |   |   |

----

       (1) Percentages are by segment, if applicable.

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*Net Sales.**  *Consolidated net sales for the ninemonths ended June 30, 2006 were $1,415.3 million, an increase of$987.5 million from $427.8 million in the prior year period. Theincrease was primarily related to the October 3, 2005 Acquisition ofPredecessor Mueller, which accounted for $980.7 million or approximately 99% ofthe overall increase.

Mueller segment net sales for the nine months ended June 30,2006 were $599.0 million.

U.S. Pipe segment net sales for the nine months ended June 30,2006 were $434.6 million, an increase of $6.8 million, or 1.6% from$427.8 million in the prior year period. This increase was drivenprimarily by increases in ductile iron pipe selling prices and higher shipmentsin the first half of the fiscal year. Prices were higher than the prior year asthe industry has been raising prices to mitigate rising scrap metal costincreases. Partially offsetting this increase was the transfer of $27.8 millionof the U.S. Pipe segment valve and hydrant business to the Mueller segment.

Anvil segment net sales for the nine months ended June 30,2006 were $396.7 million.

*GrossProfit.**  *Consolidatedgross profit for the nine months ended June 30, 2006 was $272.6 million,an increase of $226.5 million compared to $46.1 million in the prior yearperiod. The Acquisition of Predecessor Mueller contributed $233.3 million ofthe increase. Included in cost of sales for the nine months ended June 30,2006 was $70.2 million of purchase accounting adjustments related to valuinginventory acquired in the Acquisition at fair value and $20.4 million ofinventory write-offs and unabsorbed overhead costs resulting from the closureof the U.S. Pipe Chattanooga manufacturing facility.

Mueller segment gross profit for the nine months endedJune 30, 2006 was $150.6 million. Included in cost of sales for the ninemonths ended June 30, 2006 was $52.9 million of purchase accountingadjustments related to valuing inventory at fair value.

U.S. Pipe segment gross profit for the nine monthsended June 30, 2006 was $39.3 million, a decrease of $6.8 million, or14.8%, compared to $46.1 million in the prior year period. Gross margindecreased to 9.0% in the current period compared to 10.8% in the prior yearperiod. On October 26, 2005 the Company announced that the U.S. PipeChattanooga plant would be closed during fiscal 2006 and that production of theU.S. Pipe valves and hydrants would be transferred to the Mueller manufacturingfacilities at Albertville, Alabama and Chattanooga, Tennessee. In addition totransferring production to Mueller facilities, the sales responsibility forU.S. Pipe valve and hydrant product sales was transferred to the Muellersegment. In conjunction with this transfer, it was determined that certain U.S.Pipe inventory would not ultimately be sold. As a result, inventoryobsolescence write-offs of $11.4 million were recorded to cost of sales duringthe first nine months of 2006.

In addition, because of the plant closure process,actual production capacity at the U.S. Pipe Chattanooga facility wassignificantly lower than normal capacity, resulting in year-to-date facilityexpenses of $9.0 million and $0.9 million of other costs associated with theplant closure charged directly to cost of sales, which was expensed in thefirst nine months of 2006.

Excluding the charges for inventory write-offs of$11.4 million, facility expenses of $9.0 million and other costs of $0.9million, U.S. Pipe gross margins would have been $60.6 million, or 13.9% forthe year-to-date period, compared to 10.8% in the prior year period. Thisincrease is primarily due to higher ductile iron pipe selling prices.

Anvil segment gross profit for the nine months ended June 30,2006 was $83.1 million. Included in cost of sales for the nine months ended June 30,2006 was $17.3 million of purchase accounting adjustments related to valuinginventory acquired in the Acquisition at fair value.

*Selling,General & Administrative.**  *Consolidated expenses for the ninemonths ended June 30, 2006 were $180.5 million, an increase of$151.5 million, compared to $29.0 million in the prior year period.The prior year period included a favorable $5.1 million insurance claimsettlement. The Acquisition of 

59

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Predecessor Muelleraccounted for $148.2 million of the increase. Expenses as a percentage of netsales increased to 12.8% in the current period compared to 6.8% in the prioryear period. Excluding the $5.1 million favorable insurance settlement,prior year expenses were 8.0% as a percentage of net sales.

Mueller segment expenses for the nine months ended June 30,2006 were $58.4 million.

U.S. Pipe segment expenses for the nine months ended June 30,2006 were $32.3 million, compared to $29.0 million for the prior yearperiod. As a percentage of net sales, expenses increased to 7.4% in the currentperiod compared to 6.8% in the prior year period. The prior period expense wasfavorably impacted by a $5.1 million insurance claim settlement. Current periodcosts include higher management incentive accruals and increased outside salescommissions.

Anvil segment expenses for the nine months ended June 30,2006 were $67.4 million.

Corporate segment expenses for the nine months ended June 30,2006 were $22.4 million.

*RelatedParty Corporate Charges.*   Certain costs incurredby Walter such as insurance, executive salaries, professional service fees,human resources, transportation, and other centralized business functions areallocated to its subsidiaries. Costs incurred by Walter that cannot be directlyattributed to its subsidiaries are allocated to its subsidiaries based onestimated annual revenues.

*FacilityRationalization, Restructuring and Related Costs.**  *The Company expensed$28.6 million of restructuring costs for the nine months ended June 30,2006, related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $21.2 million,severance for terminated hourly and salaried employees of $3.8 million, pensionand other post-employment benefit costs of $3.3 million, and other costsof $0.3 million, primarily related to selling the property.

*InterestExpense Arising from Related Party Payable to Walter.  *Interestexpense was allocated to the Company up to the date of the Acquisition basedupon the outstanding balance of the intercompany note. The intercompany note toWalter of $443.6 million was forgiven by Walter prior to October 3, 2005.There was no intercompany interest expense for the nine months ended June 30,2006 and $15.9 million for the nine months ended June 30, 2005.

*InterestExpense, Other, Net of Interest Income.**  *Interest expense, net of interestincome, for the current period was $81.6 million and includes $75.1million of interest expense on the $1,050.0 million senior secured term loanentered into on October 3, 2005, and the 10% Senior Subordinated Notesassumed by the Company as part of the October 3, 2005 Acquisition;$2.5 million in commitment fees for a bridge loan which were expensed atthe expiration of the bridge loan period during the current period; $3.3 millionof amortization of deferred financing fees; and $4.1 million for write-off ofdeferred financing fees as a result of the early retirement of $247.0 millionof the senior secured term loan, partially offset by $0.5 million of gains oninterest rate swaps and $2.9 million of interest income earned on unrestrictedcash balances for the current period.

*Income Tax Expense (Benefit).**  *The provision for income taxes for the current period was abenefit of $7.9 million as compared to an expense of $2.5 million inthe prior year period. The effective tax rate for the first nine months of 2006was 33%. The estimated effective tax rate differs from the statutory rateprimarily due to manufacturing production deductions and state income taxes.The effective tax rate for the nine months ended June 30, 2005 was (54)%and was impacted by the recording of a $3.6 million valuation allowance againststate deferred tax assets at the U.S. Pipe segment.

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**SupplementalInformation—Results of Operations for the Three Months Ended June 30, 2006Compared to Pro FormaResults of Operations for the Three Months Ended June 30, 2005**

The unaudited pro formaresults of operations for the three months ended June 30, 2005 ispresented as if the Acquisition of Predecessor Mueller and borrowings under the2005 Mueller Credit Agreement had taken place on October 1, 2004 and werecarried forward through June 30, 2005.

**Pro Forma Resultsof Operations**

***Actual Three MonthsEnded June 30, 2006 As Compared to the Pro Forma Three Months Ended June 30,2005 (dollars in millions)***

| ** **                                                 | ** ** | **Three months ended June 30,** | ** ** | **Actual FY06 Q3 vs.** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **Actual 2006**                                | ** ** | **Pro Forma 2005**          | ** ** | **Pro Forma FY05 Q3** | ** ** |
| ** **                                                 | ** ** | ** **                                          | ** ** | **Percentage  of net  sales(1)** | ** ** | ** ** | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                 | ** ** | **(dollars in millions)**                 | ** ** |
| Net sales                                                  |       |                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                   | 225.5      |                                  |       | 45.1 | % |   | $ | 172.1 |   |   | 37.5 | % |   |   | $ | 53.4 |   |   |   | 31.0 | % |   |
| U.S. Pipe                                                  |       | 143.8                                               |       |                                  | 28.8       |   |   | 162.0 |   |   | 35.3 |   |   |   | (18.2 | ) |   |   | (11.2 | ) |   |
| Anvil                                                      |       | 136.5                                               |       |                                  | 27.3       |   |   | 124.8 |   |   | 27.2 |   |   |   | 11.7 |   |   |   | 9.4 |   |   |
| Consolidating  eliminations                                |       | (5.8                                                | )          |                                  | (1.2       | ) |   | — |   |   | — |   |   |   | (5.8 | ) |   |   |   |   |   |
| Consolidated                                               |       | $                                                   | 500.0      |                                  |       | 100.0 |   |   | $ | 458.9 |   |   | 100.0 |   |   |   | $ | 41.1 |   |   |   | 9.0 |   |   |
| Gross profit                                               |       |                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                   | 77.1       |                                  |       | 34.2 |   |   | $ | 61.7 |   |   | 35.9 |   |   |   | $ | 15.4 |   |   |   | 25.0 |   |   |
| U.S. Pipe                                                  |       | 20.8                                                |       |                                  | 14.5       |   |   | 22.8 |   |   | 14.1 |   |   |   | (2.0 | ) |   |   | (8.8 | ) |   |
| Anvil                                                      |       | 36.4                                                |       |                                  | 26.7       |   |   | 31.8 |   |   | 25.5 |   |   |   | 4.6 |   |   |   | 14.5 |   |   |
| Consolidating  eliminations                                |       | 0.2                                                 |       |                                  | —     |   |   | — |   |   | — |   |   |   | 0.2 |   |   |   |   |   |   |
| Consolidated                                               |       | $                                                   | 134.5      |                                  |       | 26.9 |   |   | $ | 116.3 |   |   | 25.3 |   |   |   | $ | 18.2 |   |   |   | 15.6 |   |   |
| Selling, general and administrative                        |       |                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                   | 20.3       |                                  |       | 9.0 |   |   | $ | 21.6 |   |   | 12.6 |   |   |   | $ | (1.3 | ) |   |   | (6.0 | ) |   |
| U.S. Pipe                                                  |       | 11.0                                                |       |                                  | 7.6        |   |   | 10.7 |   |   | 6.6 |   |   |   | 0.3 |   |   |   | 2.8 |   |   |
| Anvil                                                      |       | 24.2                                                |       |                                  | 17.7       |   |   | 20.3 |   |   | 16.3 |   |   |   | 3.9 |   |   |   | 19.2 |   |   |
| Corporate                                                  |       | 7.1                                                 |       |                                  | 1.4        |   |   | 8.4 |   |   | 1.8 |   |   |   | (1.3 | ) |   |   | (15.5 | ) |   |
| Consolidated                                               |       | $                                                   | 62.6       |                                  |       | 12.5 |   |   | $ | 61.0 |   |   | 13.3 |   |   |   | $ | 1.6 |   |   |   | 2.6 |   |   |
| Related party corporate charges                            |       |                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                   | —     |                                  |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                  |       | 2.0                                                 |       |                                  | 1.4        |   |   | 1.8 |   |   | 1.1 |   |   |   | 0.2 |   |   |   | 11.1 |   |   |
| Anvil                                                      |       | —                                              |       |                                  | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Corporate                                                  |       | 0.3                                                 |       |                                  | 0.1        |   |   | — |   |   | — |   |   |   | 0.3 |   |   |   |   |   |   |
| Consolidated                                               |       | $                                                   | 2.3        |                                  |       | 1.6 |   |   | $ | 1.8 |   |   | 0.4 |   |   |   | $ | 0.5 |   |   |   | 27.8 |   |   |
| Facility rationalization, restructuring and related  costs |       |                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                   | —     |                                  |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                  |       | 0.2                                                 |       |                                  | 0.1        |   |   | — |   |   | — |   |   |   | 0.2 |   |   |   |   |   |   |
| Anvil                                                      |       | —                                              |       |                                  | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                               |       | $                                                   | 0.2        |                                  |       | — |   |   | $ | — |   |   | — |   |   |   | $ | 0.2 |   |   |   |   |   |   |
| Income from operations                                     |       |                                                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                   | 56.8       |                                  |       | 25.2 |   |   | $ | 40.1 |   |   | 23.3 |   |   |   | $ | 16.7 |   |   |   | 41.6 |   |   |
| U.S. Pipe                                                  |       | 7.6                                                 |       |                                  | 5.3        |   |   | 10.3 |   |   | 6.4 |   |   |   | (2.7 | ) |   |   | (26.2 | ) |   |
| Anvil                                                      |       | 12.2                                                |       |                                  | 8.9        |   |   | 11.5 |   |   | 9.2 |   |   |   | 0.7 |   |   |   | 6.1 |   |   |
| Corporate                                                  |       | (7.4                                                | )          |                                  | (1.5       | ) |   | (8.4 | ) |   | (1.8 | ) |   |   | (1.0 | ) |   |   | 11.9 |   |   |
| Consolidating  eliminations                                |       | 0.2                                                 |       |                                  | —     |   |   | — |   |   | — |   |   |   | 0.2 |   |   |   |   |   |   |
| Consolidated                                               |       | $                                                   | 69.4       |                                  |       | 13.9 |   |   | $ | 53.5 |   |   | 11.7 |   |   |   | $ | 15.9 |   |   |   | 29.7 |   |   |
| Interest expense, net of  interest income                  |       | (27.6                                               | )          |                                  | (5.5       | ) |   | (28.8 | ) |   | (6.3 | ) |   |   | 1.2 |   |   |   | 4.2 |   |   |
| Income before income  taxes                                |       | 41.8                                                |       |                                  | 8.4        |   |   | 24.7 |   |   | 5.4 |   |   |   | 17.1 |   |   |   | 69.2 |   |   |
| Income tax expense                                         |       | 18.2                                                |       |                                  | 3.6        |   |   | 8.2 |   |   | 1.8 |   |   |   | 10.0 |   |   |   |   |   |   |
| Net income                                                 |       | $                                                   | 23.6       |                                  |       | 4.7 |   |   | $ | 16.5 |   |   | 3.6 |   |   |   | $ | 7.1 |   |   |   | 43.0 |   |   |

----

          (1) Percentagesare by segment, if applicable.

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Management’s discussion below reflects its analysis ofthe pro forma data presented above. Management believes that the pro formacomparisons will assist in understanding trends in the Company’s business inthe factors that management considers critical to assessing the Company’soperating and financial performance.

*Net Sales.**  *Consolidated net sales for thethree months ended June 30, 2006 were $500.0 million, an increase of$41.1 million from $458.9 million in the prior year period.

Mueller segment net sales for the three months ended June 30,2006 were $225.5 million, an increase of $53.4 million, or 31.0% from $172.1million in the prior year period. This increase was primarily driven by higherpricing and volumes in hydrants, brass water products and iron gate valves,plus the addition of the U.S. Pipe segment’s valve and hydrant volume,transferred to the Mueller segment effective January 1, 2006.

U.S. Pipe segment net sales for the three months endedJune 30, 2006 were $143.8 million, a decrease of $18.2 million, or11.2% from $162.0 million in the prior year period. Net sales in theprior-year period included $14.6 million from the valve and hydrant business.As of January 1, 2006, the valve and hydrant business was transferred tothe Mueller segment. The effect of this decrease was partially offset byincreases in ductile iron pipe selling prices. Prices were higher than theprior year as the industry has been raising prices to mitigate rising scrapmetal cost increases.

Anvil segment net sales for the three months ended June 30,2006 were $136.5 million, an increase of $11.7 million, or 9.4% from $124.8million in the prior year period. This increase was primarily driven by highervolume and pricing on its commercial construction and oilfield market products,higher volume in its foreign-sourced products and the relatively strong buyingpower of the Canadian dollar.

*GrossProfit.**  *Consolidated gross profit for the threemonths ended June 30, 2006 was $134.5 million, an increase of$18.2 million compared to $116.3 million in the prior year period.

Mueller segment gross profit for the three monthsended June 30, 2006 was $77.1 million, an increase of $15.4 million, or25.0% from $61.7 million in the prior year period. Gross margin decreased to34.2% in the current period compared to 35.9% in the prior year period. Thisincrease was primarily due to higher pricing in hydrants, brass water productsand gate valves, partially offset by $5.4 million of incremental higher brassingot raw material costs.

U.S. Pipe segment gross profit for the three monthsended June 30, 2006 was $20.8 million, a decrease of $2.0 million, or8.8%, compared to $22.8 million in the prior year period. Gross marginincreased to 14.5% in the current period compared to 14.1% in the prior yearperiod. Due to the plant closure process, current period actual productioncapacity at the U.S. Pipe Chattanooga facility was significantly lower thannormal capacity, resulting in facility expenses of $1.4 million chargeddirectly to cost of sales. In addition, inventory obsolescence write-offs of$0.8 million associated with the plant closure and $0.9 million of other costsassociated with the plant closure were recorded to cost of sales during thethree months ended June 30, 2006. Excluding the charges for facilityexpenses of $1.4 million, inventory write-offs of $0.8 million and othercosts of $0.9 million, U.S. Pipe gross margins would have been 16.6% for thecurrent period, compared to 14.1% in the prior year period. This increase isprimarily due to higher ductile iron pipe selling prices.

Anvil segment gross profit for the three months ended June 30,2006 was $36.4 million, an increase of $4.6 million, or 14.5%, compared to$31.8 million in the prior year period. This increase was primarily due tohigher volume and pricing on its commercial construction and oilfield marketproducts, partially offset by cost increases in raw materials.

*Selling,General & Administrative.**  *Consolidated expenses for the threemonths ended June 30, 2006 were $62.6 million, an increase of$1.6 million, compared to $61.0 million in the prior year period. 

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Expenses as a percentageof net sales improved to 12.5% in the current period compared to 13.3% in theprior year period.

Mueller segment expenses for the three months ended June 30,2006 were $20.3 million, a decrease of $1.3 million, or 6.0%, compared to $21.6million in the prior year period. Expenses as a percentage of net salesimproved to 9.0% in the current period compared to 12.6% in the prior yearperiod.

U.S. Pipe segment expenses for the three months ended June 30,2006 were $11.0 million, compared to $10.7 million for the prior yearperiod. As a percentage of net sales, expenses increased to 7.6% in the currentperiod compared to 6.6% in the prior year period, primarily as a result of thetransfer of valve and hydrant production to the Mueller segment, which was$14.6 million in the prior year period.

Anvil segment expenses for the three months ended June 30,2006 were $24.2 million, an increase of $3.9 million, or 19.2%, comparedto $20.3 million in the prior year period. Expenses as a percentage of netsales increased to 17.7% in the current period compared to 16.3% in the prioryear period. This increase is primarily due to higher salaries and wages andsales commissions associated with higher sales volumes and a $0.9 million assetimpairment charge for an idled machine.

Corporate segment expenses for the three months ended June 30,2006 were $7.1 million, a decrease of $1.3 million compared to $8.4 million inthe prior year period. The prior year costs included $1.4 million of employeecompensation costs associated with a tax gross-up related to certainshare-based compensation at Predecessor Mueller and $1.4 million of feesassociated with the sale of Predecessor Mueller. This is partially offset inthe current period by $0.5 million of increased costs compared to the prioryear period related to efforts to achieve future compliance with Sarbanes-Oxleyrequirements and $0.7 million of share-based compensation costs associated withthe Company’s 2006 Incentive Plan.

*RelatedParty Corporate Charges.*   Certain costs incurred by Walter such asinsurance, executive salaries, professional service fees, human resources,transportation, and other centralized business functions are allocated to itssubsidiaries. Costs incurred by Walter that cannot be directly attributed toits subsidiaries are allocated to its subsidiaries based on estimated annualrevenues.

*FacilityRationalization, Restructuring and Related Costs.**  *The Company expensed$0.2 million of restructuring costs for the three months ended June 30,2006, related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $2.2 million, severancefor terminated hourly and salaried employees of $0.4 million, a reduction ofpension and other post-employment benefit costs of $(0.6) million, and areduction of other previously estimated environmental costs of $(1.8) million.

*InterestExpense, Net of Interest Income.**  *Interest expense, net of interestincome, for the current period was $27.6 million and includes $24.5million of interest expense on the $1,050.0 million senior secured term loanentered into on October 3, 2005 and the 10% Senior Subordinated Notesassumed by the Company as part of the October 3, 2005 Acquisition; $1.1million of amortization of deferred financing fees; and $4.1 million forwrite-off of deferred financing fees as a result of the early retirement of$247.0 million of the senior secured term loan, partially offset by $2.1million of interest income earned on cash balances for the current period.Interest expense, net of interest income, for the prior year period was $28.8million. The decrease is primarily due to the inclusion in the prior yearperiod of $4.9 million of interest expense arising from a related party payableto Walter.

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**SupplementalInformation—Results of Operations for the Nine Months Ended June 30, 2006Compared to Pro FormaResults of Operations for the Nine Months Ended June 30, 2005**

The unaudited pro formaresults of operations for the nine months ended June 30, 2005 is presentedas if the Acquisition of Predecessor Mueller and borrowings under the 2005Mueller Credit Agreement had taken place on October 1, 2004 and werecarried forward through June 30, 2005.

**Pro Forma Resultsof Operations**

***Actual Nine MonthsEnded June 30, 2006 As Compared to the Pro Forma Nine Months Ended June 30,2005 (dollars in millions)***

| ** **                                                 | ** ** | **Nine months ended June 30,** | ** ** | **Actual 2006 vs.**         | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **Actual 2006**                               | ** ** | **Pro Forma 2005**          | ** ** | **Pro Forma 2005** | ** ** |
| ** **                                                 | ** ** | ** **                                         | ** ** | **Percentage  of net  sales(1)** | ** ** | ** ** | ** ** | **Percentage  of net  sales(1)** | ** ** | **Increase/  (decrease)** | ** ** | **Percentage  increase/  (decrease)** | ** ** |
| ** **                                                 | ** ** | **(dollars in millions)**                | ** ** |
| Net sales                                                  |       |                                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                  | 599.0      |                                  |       | 42.3 | % |   | $ | 480.9 |   |   | 38.0 | % |   |   | $ | 118.1 |   |   |   | 24.6 | % |   |
| U.S. Pipe                                                  |       | 434.6                                              |       |                                  | 30.7       |   |   | 427.8 |   |   | 33.8 |   |   |   | 6.8 |   |   |   | 1.6 |   |   |
| Anvil                                                      |       | 396.7                                              |       |                                  | 28.0       |   |   | 357.4 |   |   | 28.2 |   |   |   | 39.3 |   |   |   | 11.0 |   |   |
| Consolidating  eliminations                                |       | (15.0                                              | )          |                                  | (1.0       | ) |   | — |   |   | — |   |   |   | (15.0 | ) |   |   |   |   |   |
| Consolidated                                               |       | $                                                  | 1,415.3    |                                  |       | 100.0 |   |   | $ | 1,266.1 |   |   | 100.0 |   |   |   | $ | 149.2 |   |   |   | 11.8 |   |   |
| Gross profit                                               |       |                                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                  | 150.6      |                                  |       | 25.1 |   |   | $ | 159.1 |   |   | 33.1 |   |   |   | $ | (8.5 | ) |   |   | (5.3 | ) |   |
| U.S. Pipe                                                  |       | 39.3                                               |       |                                  | 9.0        |   |   | 46.1 |   |   | 10.8 |   |   |   | (6.8 | ) |   |   | (14.8 | ) |   |
| Anvil                                                      |       | 83.1                                               |       |                                  | 20.9       |   |   | 92.3 |   |   | 25.8 |   |   |   | (9.2 | ) |   |   | (10.0 | ) |   |
| Consolidating  eliminations                                |       | (0.4                                               | )          |                                  | —     |   |   | — |   |   | — |   |   |   | (0.4 | ) |   |   |   |   |   |
| Consolidated                                               |       | $                                                  | 272.6      |                                  |       | 19.3 |   |   | $ | 297.5 |   |   | 23.5 |   |   |   | $ | (24.9 | ) |   |   | (8.4 | ) |   |
| Selling, general and administrative                        |       |                                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                  | 58.4       |                                  |       | 9.7 |   |   | $ | 64.2 |   |   | 13.3 |   |   |   | $ | (5.8 | ) |   |   | (9.0 | ) |   |
| U.S. Pipe                                                  |       | 32.3                                               |       |                                  | 7.4        |   |   | 29.0 |   |   | 6.8 |   |   |   | 3.3 |   |   |   | 11.4 |   |   |
| Anvil                                                      |       | 67.4                                               |       |                                  | 17.0       |   |   | 62.5 |   |   | 17.5 |   |   |   | 4.9 |   |   |   | 7.8 |   |   |
| Corporate                                                  |       | 22.4                                               |       |                                  | 1.6        |   |   | 20.6 |   |   | 1.6 |   |   |   | 1.8 |   |   |   | 8.7 |   |   |
| Consolidated                                               |       | $                                                  | 180.5      |                                  |       | 12.8 |   |   | $ | 176.3 |   |   | 13.9 |   |   |   | $ | 4.2 |   |   |   | 2.4 |   |   |
| Related party corporate charges                            |       |                                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                  | —     |                                  |       | — |   |   | $ | — |   |   | — |   |   |   | $ | — |   |   |   |   |   |   |
| U.S. Pipe                                                  |       | 5.8                                                |       |                                  | 1.3        |   |   | 5.5 |   |   | 1.3 |   |   |   | 0.3 |   |   |   | 5.5 |   |   |
| Anvil                                                      |       | —                                             |       |                                  | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Corporate                                                  |       | 0.3                                                |       |                                  | —     |   |   | — |   |   | — |   |   |   | 0.3 |   |   |   |   |   |   |
| Consolidated                                               |       | $                                                  | 6.1        |                                  |       | 0.4 |   |   | $ | 5.5 |   |   | 0.4 |   |   |   | $ | 0.6 |   |   |   | 10.9 |   |   |
| Facility rationalization, restructuring and related  costs |       |                                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                  | —     |                                  |       | — |   |   | $ | 1.6 |   |   | 0.3 |   |   |   | $ | (1.6 | ) |   |   |   |   |   |
| U.S. Pipe                                                  |       | 28.6                                               |       |                                  | 6.6        |   |   | — |   |   | — |   |   |   | 28.6 |   |   |   |   |   |   |
| Anvil                                                      |       | —                                             |       |                                  | —     |   |   | — |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Consolidated                                               |       | $                                                  | 28.6       |                                  |       | 2.0 |   |   | $ | 1.6 |   |   | 0.1 |   |   |   | $ | 27.0 |   |   |   |   |   |   |
| Income (loss) from operations                              |       |                                               |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mueller                                                    |       | $                                                  | 92.2       |                                  |       | 15.4 |   |   | $ | 93.3 |   |   | 19.4 |   |   |   | $ | (1.1 | ) |   |   | (1.2 | ) |   |
| U.S. Pipe                                                  |       | (27.4                                              | )          |                                  | (6.3       | ) |   | 11.6 |   |   | 2.7 |   |   |   | (39.0 | ) |   |   |   |   |   |
| Anvil                                                      |       | 15.7                                               |       |                                  | 4.0        |   |   | 29.8 |   |   | 8.3 |   |   |   | (14.1 | ) |   |   | (47.3 | ) |   |
| Corporate                                                  |       | (22.7                                              | )          |                                  | (1.6       | ) |   | (20.6 | ) |   | (1.6 | ) |   |   | (2.1 | ) |   |   | (10.2 | ) |   |
| Consolidating  eliminations                                |       | (0.4                                               | )          |                                  | —     |   |   | — |   |   | — |   |   |   | (0.4 | ) |   |   |   |   |   |
| Consolidated                                               |       | $                                                  | 57.4       |                                  |       | 4.1 |   |   | $ | 114.1 |   |   | 9.0 |   |   |   | $ | (56.7 | ) |   |   | (49.7 | ) |   |
| Interest expense,  net of interest income                  |       | (81.6                                              | )          |                                  | (5.8       | ) |   | (89.8 | ) |   | (7.1 | ) |   |   | 8.2 |   |   |   | 9.1 |   |   |
| Income (loss)  before income taxes                         |       | (24.2                                              | )          |                                  | (1.7       | ) |   | 24.3 |   |   | 1.9 |   |   |   | (48.5 | ) |   |   |   |   |   |
| Income tax expense  (benefit)                              |       | (7.9                                               | )          |                                  | (0.6       | ) |   | 12.3 |   |   | 1.0 |   |   |   | (20.2 | ) |   |   |   |   |   |
| Net income (loss)                                          |       | $                                                  | (16.3      | )                                     |       | (1.2 | ) |   | $ | 12.0 |   |   | 0.9 |   |   |   | $ | (28.3 | ) |   |   |   |   |   |

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          (1) Percentagesare by segment, if applicable.

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Management’s discussion below reflects its analysis ofthe pro forma data presented above. Management believes that the pro formacomparisons will assist in understanding trends in the Company’s business inthe factors that management considers critical to assessing the Company’soperating and financial performance.

*NetSales.**  *Consolidatednet sales for the nine months ended June 30, 2006 were $1,415.3 million,an increase of $149.2 million from $1,266.1 million in the prior yearperiod.

Mueller segment net sales for the nine months ended June 30,2006 were $599.0 million, an increase of $118.1 million, or 24.6% from $480.9million in the prior year period. This increase was primarily driven by higherpricing and volumes in hydrants and water valves, plus the addition of the U.S.Pipe segment’s valve and hydrant volume, transferred to the Mueller segmenteffective January 1, 2006.

U.S. Pipe segment net sales for the nine months ended June 30,2006 were $434.6 million, an increase of $6.8 million, or 1.6% from$427.8 million in the prior year period. This increase was driven primarilyby increases in ductile iron pipe selling prices and higher shipments in thefirst half of the fiscal year. Prices were higher than the prior year as theindustry has been raising prices to mitigate rising scrap metal cost increases.Partially offsetting this increase was the transfer of $27.8 million of theU.S. Pipe segment valve and hydrant business to the Mueller segment.

Anvil segment net sales for the nine months ended June 30,2006 were $396.7 million, an increase of $39.3 million, or 11.0% from $357.4million in the prior year period. This increase was primarily the result ofcontinued strength in the non-residential construction, oilfield and mechanicalmarkets for grooved and hanger products and growth in the sales offoreign-sourced products, price increases implemented in late fiscal 2005, andthe relatively strong buying power of the Canadian dollar.

*GrossProfit.**  *Consolidatedgross profit for the nine months ended June 30, 2006 was$272.6 million, a decrease of $24.9 million compared to$297.5 million in the prior year period. Included in cost of sales for thenine months ended June 30, 2006 was $70.2 million of purchase accountingadjustments related to valuing inventory acquired in the Acquisition at fairvalue and $20.4 million of inventory write-offs and unabsorbed overhead costsresulting from the closure of the U.S. Pipe Chattanooga manufacturing facility.

Mueller segment gross profit for the nine months endedJune 30, 2006 was $150.6 million, a decrease of $8.5 million, or 5.3% from$159.1 million in the prior year period. Gross margin decreased to 25.1% in thecurrent period compared to 33.1% in the prior year period. The current periodincludes $52.9 million related to the amortization expense resulting fromthe purchase accounting adjustment to increase acquired inventories to fairvalue on the date of acquisition. Excluding the effects of these purchase accountingadjustments, gross profit in the current period would have been $203.5 millionand gross margin would have been 34.0% compared to 33.1% in the prior yearperiod. This increase was primarily due to higher pricing and volumes,particularly in hydrants and water valves, partially offset by higher rawmaterial costs.

U.S. Pipe segment gross profit for the nine monthsended June 30, 2006 was $39.3 million, a decrease of $6.8 million, or14.8%, compared to $46.1 million in the prior year period. Gross margindecreased to 9.0% in the current period compared to 10.8% in the prior yearperiod. On October 26, 2005 the Company announced that the U.S. PipeChattanooga plant would be closed during fiscal 2006 and that production of theU.S. Pipe valves and hydrants would be transferred to the Mueller manufacturingfacilities at Albertville, Alabama and Chattanooga, Tennessee. In addition totransferring production to Mueller facilities, the sales responsibility forU.S. Pipe valve and hydrant product sales was transferred to the Muellersegment. In conjunction with this transfer, it was determined that certain U.S.Pipe inventory would not ultimately be sold. As a result, inventoryobsolescence write-offs of $11.4 million were recorded to cost of sales duringthe first nine months of 2006.

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In addition, because of the plant closure process,actual production capacity at the U.S. Pipe Chattanooga facility wassignificantly lower than normal capacity, resulting in year-to-date facilityexpenses of $9.0 million and $0.9 million of other costs associated with theplant closure charged directly to cost of sales, which was expensed in thefirst nine months of 2006.

Excluding the charges for inventory write-offs of$11.4 million, facility expenses of $9.0 million and other costs of $0.9million, U.S. Pipe gross margins would have been $60.6 million, or 13.9% forthe year-to-date period, compared to 10.8% in the prior year period. Thisincrease is primarily due to higher ductile iron pipe selling prices.

Anvil segment gross profit for the nine months ended June 30,2006 was $83.1 million, a decrease of $9.2 million, or 10.0%, compared to $92.3million in the prior year period. The current period includes $17.3 millionrelated to the amortization expense resulting from the purchase accountingadjustment related to valuing inventory acquired in the Acquisition at fairvalue. Excluding the effects of this purchase accounting adjustment, grossprofit would have been $100.4 million and gross margin would have been 25.3%compared to 25.8% in the prior year period.

*Selling,General & Administrative.**  *Consolidated expenses for the ninemonths ended June 30, 2006 were $180.5 million, an increase of$4.2 million, compared to $176.3 million in the prior year period.The prior period included a favorable $5.1 million insurance claim settlement.Expenses as a percentage of net sales improved to 12.8% in the current periodcompared to 13.9% in the prior year period. Excluding the $5.1 millionfavorable insurance settlement, prior year expenses were 14.3% as a percentageof net sales.

Mueller segment expenses for the nine months ended June 30,2006 were $58.4 million, a decrease of $5.8 million, or 9.0%, compared to $64.2million in the prior year period. Expenses as a percentage of net salesimproved to 9.7% in the current period compared to 13.3% in the prior yearperiod.

U.S. Pipe segment expenses for the nine months ended June 30,2006 were $32.3 million, compared to $29.0 million for the prior yearperiod. As a percentage of net sales, expenses increased to 7.4% in the currentperiod compared to 6.8% in the prior year period. The prior period expense wasfavorably impacted by a $5.1 million insurance claim settlement. In addition,period costs include higher management incentive accruals and increased outsidesales commissions.

Anvil segment expenses for the nine months ended June 30,2006 were $67.4 million, an increase of $4.9 million, or 7.8%, compared to$62.5 million in the prior year period. Expenses as a percentage of net salesimproved to 17.0% in the current period compared to 17.5% in the prior yearperiod. This increase is primarily due to higher salaries and wages, salescommissions and occupancy costs associated with the higher sales volumes.

Corporate segment expenses for the nine months ended June 30,2006 were $22.4 million, an increase of $1.8 million compared to $20.6 millionin the prior year period. This is primarily due to $1.7 million of increasedcosts compared to the prior year period related to efforts to achieve futurecompliance with Sarbanes-Oxley requirements, $0.7 million of share-basedcompensation costs, and increased workers’ compensation accruals of $2.5million, partially offset by a $0.6 million decrease in incentive compensationcosts related to changes in personnel, a decrease of $1.4 million of employeecompensation costs associated with a  taxgross-up related to certain share-based compensation at Predecessor Mueller anda decrease of $1.4 million for fees associated with the sale of PredecessorMueller.

*RelatedParty Corporate Charges.*   Certain costs incurredby Walter such as insurance, executive salaries, professional service fees,human resources, transportation, and other centralized business functions areallocated to its subsidiaries. Costs incurred by Walter that cannot be directlyattributed to its subsidiaries are allocated to its subsidiaries based onestimated annual revenues.

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*FacilityRationalization, Restructuring and Related Costs.**  *The Company expensed$28.6 million of restructuring costs for the nine months ended June 30,2006, related to the closure of the U.S. Pipe Chattanooga, Tennessee plant.These costs are comprised of fixed asset impairments of $21.2 million,severance for terminated hourly and salaried employees of $3.8 million, pensionand other post-employment benefit costs of $3.3 million, and other costsof $0.3 million, primarily related to selling the property. The prior yearperiod includes $1.6 million of severance expense related to the closure of aMueller segment manufacturing facility in Colorado.

*Interest Expense, Net ofInterest Income.**  *Interestexpense, net of interest income, for the current period was $81.6 millionand includes $75.1 million of interest expense on the $1,050.0 million seniorsecured term loan entered into on October 3, 2005, and the 10% SeniorSubordinated Notes assumed by the Company as part of the October 3, 2005Acquisition; $2.5 million in commitment fees for a bridge loan which wereexpensed at the expiration of the bridge loan period during the current period;$3.3 million of amortization of deferred financing fees; and $4.1 million forwrite-off of deferred financing fees as a result of the early retirement of$247.0 million of the senior secured term loan, partially offset by $0.5million of gains on interest rate swaps and $2.9 million of interest incomeearned on unrestricted cash balances for the current period. Interest expense,net of interest income, for the prior year period was $89.8 million. Thedecrease is primarily due to the inclusion in the prior year period of $15.9million of interest expense arising from a related party payable to Walter.

**Financial Condition**

Cash and cash equivalents increased from zero at September 30,2005 to $177.3 million at June 30, 2006, reflecting $99.7 million in cashflows provided by operations, $153.5 million in cash flows provided byfinancing activities, and a $0.1 million effect of exchange rate changes on cash,partially offset by $76.0 million of cash flows used in investingactivities. At September 30, 2005, U.S. Pipe was a wholly-ownedsubsidiary of Walter and all of its net cash activity was transferred intoWalter’s concentrated cash management system on a daily basis.

Net receivables, consisting principally of tradereceivables, were $309.2 million at June 30, 2006, an increase of $190.7million from September 30, 2005. The Acquisition accounted for an increaseof $177.4 million. The remainder of the increase is due to higher saleslevels for the quarter ended June 30, 2006 compared to the quarterended September 30, 2005 due primarily to higher volumes and pricing.

Inventories were $466.2 million at June 30, 2006,an increase of $319.0 million from September 30, 2005. The Acquisitionaccounted for an increase of $373.2 million, partially offset by $70.2 millionof purchase accounting adjustments related to valuing inventory acquired in theAcquisition at fair value and an $11.5 million inventory obsolescencewrite-down recorded during the nine months ended June 30, 2006. Theinventory obsolescence write-down was a result of the decision to close theU.S. Pipe Chattanooga, Tennessee plant and transfer the valve and hydrantproduction of the plant to Mueller’s Chattanooga, Tennessee and Albertville,Alabama plants. The remaining net increase of $27.5 million is driven by a$7.0 million increase at the Anvil segment’s U.S. manufacturing plants dueto higher production costs and to meet increased volume demand, a $15.0 millionincrease at the Mueller segment’s U.S. manufacturing plants primarily due tohigher raw material costs, and a $4.0 million planned inventory build at theMueller segment’s Milton, Canada facility in anticipation of its closure by theend of fiscal 2006 and the transition of those product lines to other Muellerfacilities.

Current deferred income taxes, net, were $58.1 millionat June 30, 2006, an increase of $47.0 million from September 30,2005. The Acquisition accounted for a decrease of $0.4 million. The remainderof the increase was primarily due to increases in non-deductible accruals andreserves and a net operating loss carryforward from the three day period endingOctober 3, 2005.

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Prepaid expenses, consisting principally ofmaintenance supplies and tooling parts and prepaid insurance premiums, were$30.8 million at June 30, 2006, an increase of $29.3 million from September 30, 2005.The Acquisition accounted for $31.1 million of the increase. This was partiallyoffset by $0.7 million of prepaid tooling depreciation expense.

Property, plant and equipment was $338.2 million at June 30,2006, an increase of $189.0 million from September 30, 2005, primarily dueto assets acquired in the Acquisition of $215.7 million and capitalexpenditures of $48.0 million, partially offset by fixed assetsimpairments resulting from the U.S. Pipe Chattanooga plant closure of $21.2million and fixed asset depreciation expense of $50.9 million.

Deferred financing fees, net, were $22.5 million at June 30,2006. There were no deferred financing fees at September 30, 2005. Allfees are related to the 2005 Mueller Credit Agreement entered into inconjunction with the October 3, 2005 Acquisition and the existing 10%Senior Subordinated Notes at Predecessor Mueller that were assumed as part ofthe Acquisition.

Due from parent, Walter Industries was $10.8 millionat June 30, 2006, representing a $20.0 million note receivable for cashloaned to Walter by the Company subsequent to the Acquisition, plus $1.3million of accrued interest receivable, partially offset by $10.5 millionpayable to Walter for certain costs incurred by Walter which benefited theCompany and are required to be settled in cash. There was no such amount at September 30,2005.

Identifiable intangibles, net, were $842.6 million at June 30,2006. There were no such intangibles at September 30, 2005. Certainintangibles were identified during the allocation of the purchase of theAcquisition: (a) indefinite-lived intangible assets consisting of tradenames and trademarks of $403.0 million; and (b) definite-livedintangible assets consisting of customer relationships of $397.6 millionand technology of $56.3 million. An additional $6.7 million was booked fortechnology acquired in the purchase of CCNE during the quarter ended March 31,2006. Amortization expense resulting from definite-lived intangible assets forthe nine months ended June 30, 2006 was $21.0 million.

Goodwill was $722.5 million at June 30, 2006, anincrease of $664.1 million from September 30, 2005. This increaserepresents goodwill identified during the allocation of the purchase price ofthe Acquisition of $651.2 million, $6.8 million related to the acquisition ofHunt Industries, $6.2 million related to the execution of certain restructuringplans identified by Walter prior to the Acquisition.

Other long-term assets were $9.5 million at June 30,2006, consisting of interest rate swap assets. There were no interest rateswaps at September 30, 2005.

Accounts payable were $117.1 million at June 30,2006, an increase of $64.6 million from September 30, 2005. TheAcquisition accounted for $63.3 million of the increase.

Accrued expenses and other liabilities were $119.9million at June 30, 2006, an increase of $85.2 million compared to September 30,2005. The Acquisition accounted for an increase of $90.4 million. Theoffsetting decrease is primarily due to a decline in current state and federalincome tax liability.

Long-term debt, including the current portion, was$1,129.8 million at June 30, 2006. There was no debt payable tonon-affiliates at September 30, 2005. The Acquisition increased debt by$1,411.1 million. The Company has made principal payments of $279.5 million,partially offset by accretion on the debt of $2.3 million.

Payable to parent, Walter Industries, was zero at June 30,2006 compared to $443.6 million at September 30, 2005. In conjunction withthe contribution of U.S. Pipe to Group at October 3, 2005, theintercompany balance was forgiven.

Accrued pension liability, net increased $50.7 millionto $104.3 million at June 30, 2006. The Acquisition accounted for anincrease of $40.1 million. The remainder of the increase was primarily due to 

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$9.0 million of normalprovision for net periodic benefit cost and $5.0 million of costs related tothe closure of the U.S. Pipe Chattanooga, Tennessee plant, partiallyoffset by pension funding contributions of $2.9 million.

Non-current deferred income taxes, net, were $316.7million at June 30, 2006. The Acquisition accounted for an increase of$311.1 million.

Other long-termliabilities were $25.4 million at June 30, 2006, an increase of $12.8million compared to September 30, 2005. The Acquisition accounted for anincrease of $8.9. An additional liability of $1.6 million relates toforeign currency hedges entered into during the year. The remaining differenceof $2.3 million is primarily due to increased liabilities related toworkers’ compensation.

***Statement of Cash Flows***

Historically, our financing requirements have beenfunded primarily through borrowings from Walter Industries. As of theAcquisition date, the Company’s financing requirements are funded through cashgenerated by operating activities and borrowings under our revolving creditfacility.

*Cashflows from operating activities.**  *Net cash provided by operations was$99.7 million for the first nine months of 2006, compared to net cash usedof $15.1 million for the first nine months of 2005. The difference was dueprimarily to the operations of Predecessor Mueller, acquired on October 3,2005.

*Cashflows used in investing activities.**  *In the first nine months of 2006net cash used in investing activities was $76.0 million compared to $17.4million of net cash provided in the first nine months of 2005. The differencewas due primarily to the operations of Predecessor Mueller, acquired on October 3,2005.

*Cash flows from financingactivities.**  *Netcash provided by financing activities was $153.5 million for the first ninemonths of 2006, compared to net cash used in the first nine months of 2005 of$2.4 million. This was primarily due to the operations of PredecessorMueller, acquired on October 3, 2005, a transaction which included$76.3 million due to the Walter contribution of Predecessor Mueller’s cash.Also, a contribution from Mueller Water of $369.1 million from the proceedsfrom the issuance of common stock associated with Mueller Water’s IPO provided$369.1 million during the first nine months of 2006, of which $246.0 millionwas used to prepay a portion of the outstanding 2005 Muller Term Loan.

**Liquidity andCapital Resources**

Our principal sources ofliquidity have been, and are expected to be, cash flow from operations andborrowings under the 2005 Mueller Credit Agreement. Our principal uses of cashwill be debt service requirements as described below, capital expenditures,working capital requirements, dividends to our parent, Mueller Water, tofinance our cash needs and possible acquisitions.

*Debt Service*

As of June 30, 2006, we had totalconsolidated indebtedness of approximately $1,129.8 million andapproximately $113.2 million of borrowings available under the revolverportion of the 2005 Mueller Credit Agreement, subject to customary conditions.As of June 30, 2006, the Company had $31.8 million in letters ofcredit outstanding under the 2005 Mueller Credit Agreement, which reducesavailability for borrowings thereunder. The significant debt serviceobligations under the credit facility and indentures could have materialconsequences to our security holders. Our key financial covenants are dependenton attaining certain levels of EBITDA, as defined in the respective debtarrangements. The most restrictive covenant in effect at June 30, 2006related to a coverage ratio, as defined in the 2005 Mueller Credit Agreement,which required approximately $233 million of EBITDA over the trailingtwelve months, based on net debt outstanding at June 30, 2006. We were incompliance with this covenant at June 30, 2006.

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*2005Mueller Credit Agreement:**  *OnOctober 3, 2005, the Company entered into a credit agreement (the “2005Mueller Credit Agreement”) consisting of a $145 million senior securedrevolving credit facility maturing in October 2010 (the “2005 MuellerRevolving Credit Facility”) and a $1,050 million senior secured term loanmaturing in October 2012 (the “2005 Mueller Term Loan”). The 2005 MuellerCredit Agreement is a secured obligation of the Company and substantially allof its wholly-owned domestic subsidiaries. The 2005 Mueller Term Loan requiresquarterly principal payments of $2.0 million through October 3, 2012,at which point in time the remaining principal outstanding is due. Thecommitment fee on the unused portion of the 2005 Mueller Revolving CreditFacility is 0.50% and the interest rate is a floating interest rate of 2.5%over LIBOR. The 2005 Mueller Term Loan carries a floating interest rate of2.25% over LIBOR. As of June 30, 2006, the weighted average interest rateincluding interest rate swaps was 7.2% and the weighted average interest rateexcluding interest rate swaps was 7.5%.

Proceeds from the 2005 Mueller Credit Agreement were$1,053.4 million, net of $21.6 million of underwriting fees andexpenses which will be amortized over the life of the loans. The proceeds wereused to finance the acquisition of our parent, Predecessor Mueller Water byWalter and to refinance existing indebtedness.

The 2005 Mueller Credit Agreement contains customaryevents of default and covenants, including covenants that restrict the abilityof the Company and certain of its subsidiaries to incur certain additionalindebtedness, pay dividends, create or permit liens on assets, engage inmergers or consolidations, and certain restrictive financial covenants.

The 2005 MuellerCredit Agreement also contains financial covenants requiring the Company tomaintain:

·       aninterest expense coverage ratio of at least 2.25 to 1.00 (increasing to 2.50 to1.00 beginning with the four quarter period ending December 31, 2007);

·       aconsolidated leverage ratio of not more than 5.50 to 1.00 (decreasing in annualincrements to 4.00 to 1.00 by the four quarter period ending December 31,2008); and

·       aconsolidated senior secured leverage ratio of not more than 4.25 to 1.00(decreasing in annual increments to 3.00 to 1.00 by the four quarter periodending December 31, 2008).

An amendment to the 2005 Mueller Credit Agreement madein January 2006 provides that in the event of an initial public offering,Group may pay annual dividends of up to $8.5 million to the Company to pay itscommon shareholders.

On June 1, 2006, the Company used $246.0 millionof the $369.1 million contributed to it by Mueller Water from the proceeds fromMueller Water’s IPO for a partial redemption of the outstanding 2005 MuellerTerm Loan. In addition to this transaction, the Company paid $1.0 million ofthe outstanding 2005 Mueller Term Loan during the three months ended June 30,2006.

*10%Senior Subordinated Notes:*   In 2004, the Company issued$315 million principal face amount of 10% senior subordinated notes due2012. The senior subordinated notes are guaranteed by each of theCompany’s existing domestic restricted subsidiaries. The subordinated notescontain customary covenants and events of default, including covenants thatlimit the Company’s ability to incur debt, pay dividends and make investments.The effective interest rate was 8.0% as of the June 30, 2006 market valueof the notes.

On July 3, 2006, theCompany used $123.1 million of the $369.1 million contributed to it by MuellerWater from the proceeds from Mueller Water’s IPO for a partial redemption of$110.3 million of the senior subordinated notes, plus accrued interest of $1.8million and a prepayment premium of $11.0 million.

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*CapitalExpenditures*

The 2005 Mueller CreditAgreement contains restrictions on our 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, our ability to make scheduled payments of principal of, to payinterest on or to refinance our indebtedness and to satisfy our other debtobligations will depend upon our future operating performance, which will beaffected by general economic, financial, competitive, legislative, regulatory,business and other factors beyond our control.

From time to time we mayexplore additional financing methods and other means to lower our cost ofcapital, which could include stock issuance or debt financing and theapplication of the proceeds therefrom to the repayment of bank debt or otherindebtedness. In addition, in connection with any future acquisitions, we mayrequire additional funding which may be provided in the form of additional debtor equity financing or a combination thereof. There can be no assurance thatany additional financing will be available to us on acceptable terms.

**Off-Balance SheetArrangements**

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 been establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually 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—Interest Rate Risk”) or synthetic leases. We are,therefore, not materially exposed to any financing, liquidity, market or creditrisk that could arise if we had engaged in such relationships.

We utilize letters ofcredit and surety bonds in the ordinary course of business to ensure ourperformance of contractual obligations. As of June 30, 2006, we had$31.8 million of letters of credit and $21.2 million of surety bondsoutstanding.

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**ContractualObligations**

Ourcontractual obligations as of June 30, 2006:

**PaymentsDue by Period**

| **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            |       |                                | $          | 8.0                             |       |               |       | $                  | 16.0       |                        |       |      | $          | 16.0 |   |   |   | $ | 1,070.7 |   |   | $ | 1,110.7 |   |
| Interest on long-term debt(1)          |       |                                | 93.8       |                            |       |               | 185.6      |               |       |                        | 183.0      |      |       |   | 100.4 |   |   | 562.8 |   |
| Capital lease  obligations             |       |                                | 1.0        |                            |       |               | 1.3        |               |       |                        | 0.1        |      |       |   | — |   |   | 2.4 |   |
| Operating leases                       |       |                                | 7.9        |                            |       |               | 8.0        |               |       |                        | 3.3        |      |       |   | 1.9 |   |   | 21.1 |   |
| Unconditional  purchase obligations(2) |       |                                | 18.2       |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | 18.2 |   |
| Other long-term  obligations(3)        |       |                                | —     |                            |       |               | —     |               |       |                        | —     |      |       |   | — |   |   | — |   |
| Total contractual  cash obligations    |       |                                | $          | 128.9                           |       |               |       | $                  | 210.9      |                        |       |      | $          | 202.4 |   |   |   | $ | 1,173.0 |   |   | $ | 1,715.2 |   |

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       (1) Interest on the senior credit facility is calculated using LIBOR of5.48%, the rate in effect on June 30, 2006. Each increase or decrease inLIBOR of 0.125% would result in an increase or decrease in annual interest onthe senior credit facility of $1.0 million. Because the interest rateunder the senior credit facility 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 ininterest rates and could vary significantly. The payments to be received on theexisting interest rate swaps are estimated to be approximately$10.3 million, net of LIBOR interest calculated at 5.48% received fromcounterparties.

       (2) Includes contractual obligations for purchases of raw materials andcapital expenditures.

       (3) Excludes the deferred payment portion of thepurchase price for Star Pipe, Inc. (“Star”), purchased by PredecessorMueller Group on January 15, 2004. The Star purchase price is subject toadjustment to reflect, among other things, a deferred payment to be made by usto the extent that the gross profit of the business exceeds the target grossprofit from February 1, 2004 to January 31, 2007. Although themaximum amount payable is $23.0 million, we estimate that the totaldeferred payment will be approximately $3.0 million to $6.0 million.This calculation of the potential Star purchase price adjustment is based onmanagement’s best estimate; however, the actual adjustment may be materiallydifferent.

**Effect ofInflation; Seasonality**

We do not believe that general inflation (except forraw material cost increases on scrap steel, brass ingot and steel pipe) has hada material impact on our financial position or results of operations.

Our business is dependentupon the construction industry, which is very seasonal due to the impact ofwinter or wet weather conditions. Our net sales and operating income havehistorically been lowest, and our working capital needs have been highest, inthe three month periods ending around December 31 and March 31, whenthe northern United States and all of Canada generally face weather thatrestricts significant construction activity and we build working capital inanticipation of the peak construction season, during which time our workingcapital needs tend to be reduced.

**Critical AccountingPolicies**

Our significant accounting policies include those of U.S. Pipe andPredecessor Mueller Group. While all significant accounting policies areimportant to our consolidated financial statements, some of these 

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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. We believe our most critical accountingpolicies are as follows:

***Pensions***

We sponsor a number of defined benefit retirement plans. We recordannual amounts relating to these plans based on calculations specified byaccounting principles generally accepted in the United States of America, whichinclude various actuarial assumptions including the following:

*U.S. Pipe*

| ** **                                                                          | ** ** | **Pension Benefits**    | ** ** | **Other Benefits**     | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                          | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Weighted-average assumptions used to determine benefit  obligations:                |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                                       |       |                         | 5.0        | %                           |       |   | 6.0 | % |   |   | 5.0 | % |   |   | 6.0 | % |   |
| Rate of compensation increase                                                       |       |                         | 3.5        | %                           |       |   | 3.5 | % |   |   | — |   |   |   | — |   |   |
| Weighted-average assumptions used to determine net  periodic costs:                 |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate:                                                                      |       |                         | 6.0        | %                           |       |   | 6.4 | % |   |   | 6.0 | % |   |   | 6.4 | % |   |
| Expected return on plan assets                                                      |       |                         | 8.9        | %                           |       |   | 8.9 | % |   |   | — |   |   |   | — |   |   |
| Rate of compensation increase                                                       |       |                         | 3.5        | %                           |       |   | 3.5 | % |   |   | — |   |   |   | — |   |   |
| Assumed health care cost trend rates:                                               |       |                         |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Health care cost trend rate assumed for next year                                   |       |                         | —     |                        |       |   | — |   |   |   | 10.0 | % |   |   | 10.0 | % |   |
| Rate to which cost trend rate is assumed to decline  (the ultimate trend rate) |       |                         | —     |                        |       |   | — |   |   |   | 5.0 | % |   |   | 5.0 | % |   |
| Year that the rate reaches the ultimate trend rate                                  |       |                         | —     |                        |       |   | — |   |   |   | 2010 |   |   |   | 2009 |   |   |

 

The discount rate used to determine pension expensewas decreased to 6.0% for 2005 from 6.4% used in 2004. The discount rate isbased on a proprietary bond defeasance model designed by the plans’ investmentconsultant to create a portfolio of high quality corporate bonds which, ifinvested on the measurement date, would provide the necessary future cash flowsto pay accumulated benefits when due. The premise of the model is that annualbenefit obligations are funded from the cash flows generated from periodic bondcoupon payments, principal maturities and the interest on excess cash flows,i.e. carry forward balances.

The model uses a statistical program to determine theoptimal mix of securities to offset benefit obligations. The model is populatedwith an array of Moody’s Aa-rated corporate fixed income securities that areactively traded in the bond market on the measurement date. None of thesecurities used in the model had embedded call, put or convertible features,and none were structured with par paydowns or deferred income streams. All ofthe securities in the model are considered appropriate for the analysis as theyare diversified by maturity date and issuer and offer predictable cash flowstreams. For diversification purposes, the model was constrained to purchasingno more than 20% of any outstanding issuance. Carry 

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forward interest iscredited at a rate determined by adding the appropriate implied forward Treasuryyield to the Aa-rated credit spread as of the measurement date.

The expected return on plan assets was based on U.S.Pipe’s expectation of the long-term average rate of return on assets in thepension funds, which was modeled based on the current and projected asset mixof the funds and considering the historical returns earned on the type ofassets in the funds. We will review our actuarial assumptions on an annualbasis and make modifications to the assumptions based on current rates andtrends when appropriate. As required by U.S. GAAP, the effects of themodifications are amortized over future periods.

Assumed health care cost trends, discountrates, expected return on plan assets and salary increases have a significanteffect on the amounts reported for the pension plans and health care plans. Aone-percentage-point change in the rate for each of these assumptions wouldhave the following effects: 

| ** **                                              | ** ** | **1-Percentage  Point Increase** | ** ** | **1-Percentage  Point Decrease** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **(dollars in millions)**   | ** ** |
| Discount rate:                                          |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  pension service and interest cost components |       |                                  | $          | (0.2                                  | )          |   |   | $ | 0.2 |   |   |
| Effect on  pension benefit obligation                   |       |                                  | (24.5      | )                                     |       |   | 29.8 |   |   |
| Effect on  current year pension expense                 |       |                                  | (1.5       | )                                     |       |   | 1.8 |   |   |
| Expected return on plan assets:                         |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  current year pension expense                 |       |                                  | (1.2       | )                                     |       |   | 1.2 |   |   |
| Rate of compensation increase:                          |       |                                  |       |                                  |       |   |   |   |   |
| Effect on  pension service and interest cost components |       |                                  | 0.3        |                                  |       |   | (0.3 | ) |   |
| Effect on  pension benefit obligation                   |       |                                  | 2.8        |                                  |       |   | (2.4 | ) |   |
| Effect on current year pension expense                  |       |                                  | 0.6        |                                  |       |   | (0.5 | ) |   |
|                                                         |            |                                       |            |                                       |            |  |  |  |  |  |  |

 

Among the items affectingU.S. Pipe’s net accrued retirement pension benefits were additional minimumpension liabilities recognized in 2005, which primarily resulted from a furtherdecline in the average discount rate from 6.0% to 5.0%. As a result, the netaccrued benefit was increased by $24.1 million and accumulated othercomprehensive loss (a component of equity) was increased by a similar amount,net of a tax benefit of $8.2 million. Depending on future plan asset performancesand interest rates, additional adjustments to our net accrued benefit andequity may be required.

***Workers’Compensation***

We are self-insured for workers’compensation benefits for work-related injuries. Liabilities, including thoserelated to claims incurred but not reported, are recorded principally usingannual valuations based on discounted future expected payments and usinghistorical data or combined insurance industry data when historical data islimited. Pursuant to the terms of the Tyco Purchase Agreement, PredecessorMueller Group is indemnified by Tyco for all liabilities that occurred prior toAugust 16, 1999. Workers’ compensation liabilities were as follows:

| ** **                                                          | ** ** | **March 31,  2006**            | ** ** | **September 30,  2005** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **(dollars in millions)** | ** ** |
| Workers’ compensation liability recorded on a discounted basis |       |                                | $          | 24.8                         |       |   |   | $ | 11.9 |   |   |
|                                                                     |            |                                     |            |                              |            |  |  |  |  |  |  |

 

A one-percentage-point increase in the discount rate on thediscounted claims liability would decrease the liability by $0.1 million,while a one-percentage-point decrease in the discount rate would increase theliability by $0.1 million.

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***Litigation,Investigations and Claims***

We are involved in litigation, investigations, and claims arisingout of the normal conduct of our business, including those relating tocommercial transactions, as well as environmental, health and safety matters.We estimate and accrue liabilities resulting from such matters based on avariety of factors, including outstanding legal claims and proposedsettlements; assessments by internal counsel of pending or threatened litigation;and assessments of potential environmental liabilities and remediation costs.We believe we have adequately accrued for these potential liabilities; however,facts and circumstances may change and could cause the actual liability toexceed the estimates, or that may require adjustments to the recorded liabilitybalances in the future.

***RevenueRecognition***

We recognize revenue based on the recognition criteria set forthin the Securities and Exchange Commission’s Staff Accounting Bulletin 104 “RevenueRecognition in Financial Statements,” which is when delivery of a product hasoccurred and there is persuasive evidence of a sales arrangement, sales pricesare fixed and determinable, and collectibility from the customers is reasonablyassured. Revenue from the sale of products is recognized when title passes upondelivery to the customer. Sales are recorded net of cash discounts and rebates.

***Receivables***

Receivables relateprimarily to customers located in North America. To reduce credit risk, weperform credit investigations prior to accepting an order and, when necessary,require letters of credit to insure payment.

Our estimate for uncollectible accounts receivable is based, inlarge part, upon judgments and estimates of expected losses and specific identificationof problem trade accounts. Significantly weaker than anticipated industry oreconomic conditions could impact customers’ ability to pay such that actuallosses are greater than the amounts provided for in these allowances. Ourperiodic evaluation of the adequacy of our allowance is based on our analysisof our prior collection experience, specific customer creditworthiness andcurrent economic trends within the industries we serve. In circumstances wherewe are aware of a specific customer’s inability to meet its financialobligation to us (e.g., bankruptcy filings or substantial downgrading of creditratings), we record a specific reserve to reduce the receivable to the amountwe reasonably believe will be collected.

***Inventories***

Inventories are recorded at the lower of cost (first-in,first-out) or market value. Additionally, we evaluate our inventory in terms ofexcess and obsolete exposures. This evaluation includes such factors asanticipated usage, inventory turnover, inventory levels and ultimate productsales value. Inventory cost includes an overhead component that can be affectedby levels of production and actual costs incurred. Management periodicallyevaluates the effects of production levels and actual costs incurred on thecosts capitalized as part of inventory cost.

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***Income Taxes***

Deferred taxliabilities and assets are recognized for the expected future tax consequencesof events that have been included in the financial statements or tax returns.Deferred tax liabilities and assets are determined based on the differencesbetween the financial statements and the tax basis of assets and liabilities,using tax rates in effect for the years in which the differences are expectedto reverse. A valuation allowance is provided to offset any net deferred taxassets if, based upon the available evidence, it is more likely than not thatsome or all of the deferred tax assets will not be realized. If we were toreduce our estimates of future taxable income, we could be required to record avaluation allowance against our deferred tax assets.

We have recorded provisions associated with income tax exposures.Such provisions require significant judgment and are adjusted when events orcircumstances occur that would require a change in the estimated accrual.

***Accounting for theImpairment of Long-Lived Assets Including Goodwill and Other Intangibles***

Long-lived assets, including goodwill and intangible assets thathave an indefinite life are tested for impairment annually (or more frequentlyif events or circumstances indicate possible impairments). Definite-livedintangible assets are amortized over their respective estimated useful livesand reviewed for impairment annually or more frequently if events orcircumstances indicate possible impairment. Any recognized intangible assetdetermined to have an indefinite useful life will not be amortized, but insteadtested for impairment in accordance with the standard until its life isdetermined to no longer be indefinite. We use an estimate of futureundiscounted net cash flows of the related asset or asset grouping over theremaining life in measuring whether long-lived assets other than goodwill andintangibles are impaired. If impaired, we may need to record impairment chargesto reduce the carrying value of our long-lived assets.

***Stock-Based Compensation***

*The Company issues awards under the 2006 Plan andparticipates in share-based compensation plans of its parent company, Walter. Historically,Walter did not allocate any costs of its plans to U.S. Pipe. Beginning October 1,2005, the Company adopted SFAS No. 123(R), “Share-Based Payment”, whichrequires that compensation costs related to share-based payment transactions berecognized in the financial statements over the period that an employeeprovides service in exchange for the award. The Company uses the modifiedprospective method, under which we record compensation cost for new andmodified awards over the related vesting period of such awards. The Company hadapproximately 1.1 million restricted stock units and 0.1 million stockoptions outstanding at June 30, 2006. Certain of the Company’s employeeshave been granted Walter restricted stock units and stock options under Walter’sshare-based compensation plans.*

***DerivativeInstruments and Hedging Activities***

We currently useinterest rate swaps as required in the 2005 Mueller Credit Agreement to reducethe risk of interest rate volatility. The amount to be paid or received frominterest rate swaps is charged or credited to interest expense over the livesof the interest rate swap agreements. Changes in the fair value of derivativesare recorded each period in earnings or Accumulated Other Comprehensive Income(Loss), depending on whether a derivative is designated and effective as partof a hedge transaction and meets the applicable requirements associated withStatement of Financial Accounting Standards (SFAS) No. 133, as amended.

For a derivativeto qualify as a hedge at inception and throughout the hedge period, we mustformally document the nature and relationships between the hedging instrumentsand hedged items, as well as its risk-management objectives, strategies forundertaking the various hedge transactions and method of 

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assessing hedge effectiveness. Any financial instrumentsqualifying for hedge accounting must maintain a specified level ofeffectiveness between the hedging instrument and the item being hedged, both atinception and throughout the hedged period.

Additionally, we utilize forward contracts to mitigate exposure tochanges in foreign currency exchange rates from third party and intercompanytransactions. The primary currency to which we are exposed and to which wehedge the exposure is the Canadian dollar. The effective portion of unrealizedgains and losses associated with forward contracts are deferred as a componentof Accumulated Other Comprehensive Income (Loss) until the underlying hedgedtransactions are reported in our consolidated statement of earnings. Thebalance was less than $0.1 million at June 30, 2006.

**Recently IssuedAccounting Standards**

In June 2006, the FASB ratified EITF No. 06-3“How Taxes Collected from Customers and Remitted to Governmental AuthoritiesShould Be Presented in the Income Statement (That Is, Gross versus NetPresentation)” (“EITF 06-3”). EITF 06-3 addresses the incomestatement presentation of any tax collected from customers and remitted to agovernment authority and concludes the presentation of taxes on either a grossbasis or a net basis is an accounting policy decision that should be disclosedpursuant to APB Opinion No. 22 “Disclosure of Accounting Policies.”This is effective for interim and annual reporting periods beginning after December 15,2006 and will require the financial statement disclosure of any significanttaxes recognized on a gross basis. The Company has not yet determined whateffect, if any, the adoption of this interpretation will have on itsconsolidated financial statements.

In July 2006, theFASB issued final Interpretation (“FIN”) No. 48, “Accounting forUncertainty in Income Taxes”, which defines the minimum recognition threshold atax provision must meet before being recognized in the financial statements. Thisinterpretation also provides guidance on derecognition of income tax assets andliabilities, classification of current and deferred income tax assets andliabilities, accounting for interest and penalties associated with taxpositions, accounting for income taxes in interim periods, and income taxdisclosures. FIN No. 48 applies to all tax positions related to incometaxes subject to SFAS No. 109, “Accounting for Income Taxes”. The Companyhas not yet determined what effect, if any, the adoption of thisinterpretation, which becomes effective October 1, 2007, will have on itsconsolidated financial statements.

**ITEM 3.**                QUALITATIVEAND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed tovarious market risks, which are potential losses arising from adverse changesin market rates and prices, such as interest rates and foreign exchangefluctuations. We do not enter into derivatives or other financial instrumentsfor trading or speculative purposes.

Our primary financial instruments are cash and cash equivalents.This includes cash in banks and highly rated, liquid money market investmentsand U.S. government securities. We believe that those instruments are notsubject to material potential near-term losses in future earnings fromreasonably possible near-term changes in market rates or prices.

***Interest Rate Risk***

At June 30,2006, the Company had fixed rate debt of $334.1 million and variable ratedebt of $795.7 million. The pre-tax earnings and cash flows impact resulting froma 100 basis point increase in interest rates on variable rate debt, holdingother variables constant and excluding the impact of the hedging agreementsdescribed below, would be approximately $8.0 million per year.

On October 27, 2005, the Company entered into sixinterest rate hedge transactions with a cumulative notional amount of$350 million. The swap terms are between one and seven years with fiveseparate 

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counter-parties. Theobjective of the hedges is to protect the Company against rising LIBOR interestrates that would have a negative effect on the Company’s cash flows due tochanges in interest payments on its 2005 Mueller Term Loan. The structure ofthe hedges are a one-year 4.617% LIBOR swap of $25 million, a three-year4.740% LIBOR swap of $50 million, a four-year 4.800% LIBOR swap of$50 million, a five-year 4.814% LIBOR swap of $100 million, asix-year 4.915% LIBOR swap of $50 million, and a seven year 4.960%LIBOR swap of $75 million. These swap agreements call for the Company tomake fixed rate payments over the term at each swap’s stated fixed rate and toreceive payments based on three month LIBOR from the counter-parties. Theseswaps will be settled quarterly over their lives and will be accounted for ascash flow hedges. As such, changes in the fair value of these swaps that takeplace through the date of maturity will be recorded in Accumulated OtherComprehensive Income (Loss). These hedges comply with covenants contained inthe 2005 Mueller Credit Agreement.

The Company has two interest rate hedge agreementswith a cumulative notional value amount of $100 million that existed as ofOctober 3, 2005: a $50 million two-year 3.928% LIBOR swap thatmatures in May 2007 and a $50 million two-year 4.249% LIBOR swap thatmatures in April 2007. The changes in fair value of these two swaps wererecorded immediately as interest expense in the Statements of Operations untilachieving hedge effectiveness in October 2005 and November 2005,respectively, at which times such changes in fair value were recorded inAccumulated Other Comprehensive Income (Loss).

The Company recorded an unrealized gain from itsinterest rate swap contracts, net of tax, of $5.3 million at June 30,2006 in Accumulated Other Comprehensive Income (Loss).

We will consider entering into additional interestrate swaps or other interest rate hedging instruments to protect againstinterest rate fluctuations on our floating rate debt.

The 2005 Mueller Credit Agreementrequires that at least 50% of the funded debt of the Company and its restrictedsubsidiaries on a consolidated basis be fixed for a period beginning no laterthan January 1, 2006 and ending October 3, 2008. This requirement canbe met with any combination of fixed rate debt and rate protection agreements.The Company is currently in compliance with this requirement.

***Currency Risk***

Outside of theUnited States, we maintain assets and operations in Canada and, to a muchlesser extent, China. The results of operations and financial position of ourforeign operations are principally measured in their respective currency andtranslated into United States dollars. As a result, exposure to foreigncurrency gains and losses exists. The reported income of these subsidiarieswill be higher or lower depending on a weakening or strengthening of the UnitedStates dollar against the respective foreign currency. Our subsidiaries andaffiliates also purchase and sell products and services in various currencies.As a result, we may be exposed to cost increases relative to the localcurrencies in the markets in which we sell. Because a different percentage ofour revenues is in foreign currency than our costs, a change in the relativevalue of the United States dollar could have a disproportionate impact on ourrevenues compared to our cost, which could impact our margins.

A portion of ourassets are based in our foreign locations and are translated into United Statesdollars at foreign currency exchange rates in effect as of the end of eachperiod, with the effect of such translation reflected in other comprehensiveincome (loss). Accordingly, our consolidated stockholders’ equity willfluctuate depending upon the weakening or strengthening of the United Statesdollar against the respective foreign currency.

We have entered into forward exchange contractsprincipally to hedge currency fluctuations in transactions (primarily anintercompany loan and anticipated inventory purchases) denominated in foreigncurrencies, thereby limiting the risk that would otherwise result from changesin exchange rates. The majority of the Company’s exposure to currency movementsis in Canada. Gains and losses on the forward 

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contracts are expected tobe offset by losses / gains in recognized net underlying foreign currencytransactions. As of June 30, 2006, the Company had entered into forwardcontracts in a notional amount of $8.7 million to protect anticipated inventorypurchases over the next three months by its Canadian operations. With thesehedges, the Company purchases U.S. dollars and sells Canadian dollars at anaverage exchange rate of $0.885.

The Company has also entered into hedges protecting intercompanyloan payments to be made over the next three years by its Canadian subsidiaryto a U.S. subsidiary totaling $37.3 million. With these hedges, the Companysells Canadian dollars for U.S. dollars at an exchange rate of $0.8681. Gainsor losses on these hedges will be recorded in earnings. The loss on the hedgesduring the three months and nine months ended June 30, 2006 was $1.6million and $1.6 million, respectively.

***Raw Materials Risk***

Our products are made from several basic raw materials, includingsteel pipe, scrap steel, iron, brass ingot, sand, resin and natural gas, whoseprices fluctuate as market supply and demand change. Accordingly, productmargins and the level of profitability can fluctuate if we are not able to passraw material costs on to our customers. Management estimates for our Muellerand Anvil segments that raw material accounted for approximately 18% of ourcost of goods sold due to increasing raw material prices in 2005. Managementestimates U.S. Pipe’s scrap metal and ferrous alloys used in the manufacturingprocess accounted for 40% of the cost to manufacture ductile iron pipe as of September 30,2005. Historically, we have been able to obtain an adequate supply of rawmaterials and do not anticipate any shortage of these materials. We generallypurchase raw materials at spot prices but may, from time to time, enter intocommodity derivatives to reduce our exposure to fluctuation in the price of rawmaterials.

**ITEM 4.**                CONTROLS ANDPROCEDURES

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

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the reports filed or submitted under the Securities Exchange Actof 1934, as amended (“Exchange Act”), is recorded, processed, summarized, andreported within the time periods specified in the Commission’s rules andforms and that such information is accumulated and communicated to the Company’smanagement including its principal executive and financial officers, asappropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report,the Company’s management evaluated the effectiveness of the design andoperation of disclosure controls and procedures pursuant to Rule 13a-15(b) ofthe Exchange Act. This evaluation was done under the supervision and with theparticipation of management, including Dale B. Smith, President and ChiefExecutive Officer, and Jeffery W. Sprick, Chief Financial Officer.

Based on this evaluationand because of the material weakness described below, the Company’s ChiefExecutive Officer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures were not effective as of June 30, 2006.Notwithstanding this material weakness, management concluded that the financialstatements included in this Form 10-Q for the period ended June 30,2006 fairly present in all material respects their financial position, resultsof operations and cash flows for the periods presented in conformity with GAAP.

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

A material weakness is a control deficiency or acombination of control deficiencies that results in more than a remotelikelihood that a material misstatement of the annual or interim consolidatedfinancial statements will not be prevented or detected.

As of September 30, 2005, the Company did notmaintain effective controls over the preparation, review and presentation anddisclosure of its consolidated financial statements, due to a lack of personnelwith experience in financial reporting and control procedures necessary for SECregistrants. Specifically, the Company’s controls failed to prevent or detectthe incorrect presentation of the following in the Predecessor Muellerconsolidated financial statements: (i) cash flows from the effect ofexchange rate changes on cash balances; (ii) cash flows from the loss ondisposal of property, plant and equipment; (iii) cash flows and balancesheet presentation of the dollar value of bank checks outstanding; (iv) thepresentation of current and non-current deferred income tax assets inPredecessor Mueller’s consolidated balance sheet; and (v) classificationof certain depreciation expense as selling, general and administrative expenseinstead of cost of sales in their consolidated statement of operations.Further, the Company’s controls failed to prevent or detect the incorrectpresentation of shipping and handling costs in the Company unauditedconsolidated statement of operations for the three months ended December 31,2004 as presented in the 10-Q for the period ended December 31,2005. The Company’s control deficiency resulted in the restatement ofPredecessor Mueller’s annual consolidated financial statements for fiscal 2004and 2003 and interim consolidated financial statements for the first threequarters of fiscal 2005, all interim periods of fiscal 2004, audit adjustmentsto the 2005 annual consolidated financial statements and the restatement of theCompany’s consolidated statement of operations for the three months ended December 31,2004. Additionally, this control deficiency could result in a misstatement ofthe presentation and disclosure of the Company’s consolidated financialstatements that would result in a material misstatement in the annual orinterim financial statements that would not be prevented or detected.Accordingly, management has determined that this control deficiency constitutesa material weakness.

As of September 30,2004****and 2005, Predecessor Mueller reportedthe following control deficiencies that, in the aggregate, constituted a materialweakness in internal control over preparation, review and presentation anddisclosure of their consolidated financial statements. Specifically PredecessorMueller’s control deficiencies included: (i) a lack of personnel withexperience in financial reporting and control procedures necessary for SECregistrants; (ii) a lack of sufficient controls to prevent or detect, on atimely basis, unauthorized journal entries; (iii) a lack of sufficientcontrols over information technology data conversion and program changes; (iv) alack of sufficient controls over the development and communication of incometax provisions; (v) a lack of effective controls surrounding “whistleblower”hotline complaints and internal certifications to ensure that issues werecommunicated on a more timely basis by management to the audit committee andthe independent registered public accounting firm; (vi) a lack ofeffective controls over revenue recognition associated with full truckloadshipments not immediately dispatched by freight carriers; and (vii) a lackof formal controls and procedures regarding assessment of financial exposuresand transactions, including consideration of accounting implications underGAAP. These control deficiencies resulted in audit adjustments to the consolidatedfinancial statements for the year ended September 30, 2004. Additionally,these control deficiencies, in the aggregate, could result in a misstatement toaccounts and disclosures that would result in a material misstatement to theannual or interim financial statements that would not be prevented or detected.While item (i) above remains unremediated and has been added as acomponent of the material weakness existing at June 30, 2006 describedabove, management has concluded that based on the remediation actions describedbelow, items (ii) through (vii) of this material weaknessdid not exist at June 30, 2006.

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***Remediation of Material Weakness***

In order to remediate the material weakness firstreported as of September 30, 2004, Predecessor Mueller: (i) reassignedits Chief Financial Officer, appointed an Interim Chief Financial Officer andhired additional accounting and finance staff; (ii) introduced increasedtraining for their existing financial and accounting and other staff; (iii) retainedthird-party consultants with significant SEC financial reporting experience toprovide assistance in complying with SEC reporting requirements; (iv) formeda disclosure committee to supervise the preparation of their Exchange ActReports and other public communications; (v) improved their controls over,and began developing written policies and procedures that cover all 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 controls over information technology; and (vii) implementedglobal compliance initiatives under the direction of their Chief ComplianceOfficer including controls surrounding “whistleblower” hotline complaints andinternal certifications. The Company continued these improvement efforts duringthe quarter ended March 31, 2006 and has concluded that it has remediateditems (ii) through (vii) of this material weakness. However, asdisclosed above, item (i) a lack of personnel with experience in financialreporting and control procedures necessary for SEC registrants is the onlyremaining item of the continuing material weakness at June 30, 2006.

During the quarter ended June 30, 2006, theCompany took steps to remediate the material weakness that continued as of June 30,2006. These steps included a thorough review, on a quarterly basis, of foreigncurrency translation cash flow statement effects, the dollar value of bankchecks outstanding and transactions related to property, plant and equipmentand an additional review, on a quarterly basis, of the classificationrequirements of each component line item and the individual elements thatcomprise each line item of the statement of cash flows, in accordance withStatement of Financial Accounting Standards, No.95, “Statement of Cash Flows.”Additionally, the classification of deferred income tax items in the balancesheet and cash flow statement, as well as depreciation in the statement ofoperations, will be evaluated quarterly as will the proper classification ofshipping and handling costs within our consolidated statement of operations.

In addition, duringthe quarter ended December 31, 2005, the Company made the followingchanges in internal control over financial reporting:

·       hireda full time Chief Financial Officer, Jeffery W. Sprick, and a CorporateController with SEC financial reporting experience;

·       hiredadditional finance and accounting personnel for its Pratt and Chattanoogafacilities;

·       designatedthe Walter Industries Audit Committee, which is fully independent under NewYork Stock Exchange listing rules and the rules of the SEC, as itsaudit committee (in April 2006, the Company formed its own auditcommittee, which is fully independent under the New York Stock Exchange and SECrules); and

·       beganto implement an internal quarterly review plan to review higher risk areas infinancial reporting, such as revenue recognition, inventory valuation and cashflow reporting.

The Company continues to upgrade the knowledge of itsfinance staff by implementing on-going United States GAAP training programs,consisting of providing appropriate technical resources to our finance team andtraining on the use of such resources, conducting a series of training sessionsfor plant controllers, periodically distributing summaries of changes inaccounting and reporting standards, and issuing and updating our accountingpolicies. Additionally, the Company terminated the former Chief ComplianceOfficer of Predecessor Mueller and reassigned those duties to the Director ofInternal Audit. While significant improvements have been implemented,management believes that additional remediation is needed and will requirechanges in personnel, processes and procedures to ensure timely 

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and accurate financialreporting on a sustainable basis. During the quarter ended June 30, 2006,the Company hired a Vice President of Internal Audit with significantSarbanes-Oxley implementation experience to direct the Company’s Sarbanes-Oxleyimplementation objectives.

The Company believes theadditional control procedures as designed, when implemented, will fullyremediate the above material weakness.

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

Except as described above, there were no changesinternal control over financial reporting during the quarter ended June 30,2006, that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

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**PART II**   OTHERINFORMATION

**Item 1.**                        LegalProceedings

See Note 14 of the “Notes to Condensed ConsolidatedFinancial Statements” in this Form 10-Q for a description of currentlegal proceedings.

We are involved in various legal proceedings whichhave arisen in the normal course of our operations, including the proceedingssummarized below. The effect of the outcome of these matters on the Company’sfuture results of operations cannot be predicted with certainty as any sucheffect depends on future results of operations and the amount and timing of theresolution of such matters. Other than the litigation described below, we donot believe that any of our outstanding litigation would have a materialadverse effect on our business, operations or prospects.

U.S. Pipe has implemented an Administrative ConsentOrder (“ACO”) for its Burlington, New Jersey plant that was required under theNew Jersey Environmental Cleanup Responsibility Act (now known as theIndustrial Site Recovery Act). The ACO required soil and ground water cleanup.U.S. Pipe has completed, and has received final approval for the soil cleanuprequired by the ACO. U.S. Pipe is continuing to address ground water issues atthis site. Further remediation could be required. These remediation costs are expectedto be minimal. Long term ground water monitoring will be required to verifynatural attenuation. It is not known how long ground water monitoring will berequired. Management does not believe monitoring or further cleanup costs, ifany, will have a material adverse effect on the financial condition or resultsof operations of the Company and its subsidiaries.

The Federal Comprehensive Environmental Response,Compensation and Liability Act (“CERCLA”), generally imposes liability, whichmay be joint and several and is without regard to fault or the legality ofwaste generation or disposal, on certain classes of persons, including ownersand operators of sites at which hazardous substances are released into theenvironment (or pose a threat of such release), persons that disposed orarranged for the disposal of hazardous substances at such sites, and personswho owned or operated such sites at the time of such disposal. CERCLAauthorizes the EPA, the States and, in some circumstances, private entities totake actions in response to public health or environmental threats and to seekto recover the costs they incur from the same classes of persons. Certaingovernmental authorities can also seek recovery for damages to naturalresources.

Currently, U.S. Pipe has been identified as apotentially responsible party (“PRP”) by the EPA under CERCLA with respect tocleanup of hazardous substances in Anniston, Alabama. U.S. Pipe is among manyPRP’s at such sites and a significant number of the PRP’s are substantial companies.The PRP’s have negotiated an Administrative Order of Consent (“ACO”) with theEPA and the PRP’s have agreed to divide clean-up costs pro-rata subject tolater adjustment based on the relative contribution by each PRP to thecontamination. Management estimates the Company’s share of liability forcleanup after allocation among the several PRP’s will be approximately$4.0 million which was accrued in 2004. Management does not believe thatU.S. Pipe’s share of any liability under the ACO will have a material adverseeffect on the financial condition of the Company, but could be material toresults of operations in future periods.

Solutia, Inc. and Pharmacia Corporation (“Solutia”)filed suit against United States Pipe and Foundry Company and Walter Industrieson January 5, 2003 (Solutia, Inc. and Pharmacia Corporation v. UnitedStates Pipe and Foundry Company, Walter Industries, Inc., et al, Case No. CV-03-PWG-1345-E)in US District court for the Northern District of Alabama. This is a civilaction for contribution and cost recovery by Solutia with respect to costsincurred and to be incurred in performing remediation of polychlorinatedbiphenyls (“PCB”) and heavy metals mandated by EPA in Anniston, Alabama withrespect to the ACO described above. The ACO provides protection againstcontribution claims by third parties, such as Solutia. Management believes thatthe likelihood of liability in the contribution litigation is remote.

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Walter Industries, Inc. and United States Pipeand Foundry Company have been named in a suit filed by Isaiah Evans on April 8,2005 (Isaiah Evans et al v. Walter Industries, Inc., United States Pipeand Foundry Company, Inc., et al, Case No. CV:05-258) in theCircuit Court of Calhoun County, Alabama. This is a purported civil classaction case filed against 18 foundries in the Anniston, Alabama area allegingstate law tort claims in the creation and disposal of foundry sand alleged tocontain lead and PCB’s. The plaintiffs are seeking damages for personal injuryand property damage. This matter is still in early stages of litigation and nosubstantive discovery has taken place yet. In addition, management believesthat both procedural and substantive defenses would be available to us shouldthis class action proceed. Accordingly, management believes that, presently,there is no reasonable procedural or factual basis for management to form aview with respect to the probability of liability in this matter.

The Los Angeles Department of Water and Power, ex rel.Nora Armenta (“Armenta”) filed suit against our subsidiaries, James JonesCompany and Mueller Co. (Superior Court, Los Angeles County, California; Case No. BC173487) on June 27, 1997. In a related case, on September 15, 2004,the City of Banning and other California municipalities (collectively, “City ofBanning”) filed suit against the Company’s subsidiaries, James Jones Companyand Mueller Co. (Superior Court, Los Angeles County; Case No. BC 321513).The Armenta matter is a false claims lawsuit brought on behalf of cities, waterdistricts and municipalities against our James Jones Company subsidiaryalleging that the defendants sold allegedly non-conforming public water systemparts to various government entities. The lawsuit seeks consequential damages,penalties and punitive damages relating to the repair and replacement of thewater systems to remove the allegedly non-conforming parts. Our subsidiary,Mueller Co., which had also been named as a defendant in the Armenta matter,brought a summary judgment motion and was dismissed from this litigation in January 2004:James Jones Company remains a defendant in the action. On September 15,2004, the Armenta trial court ruled against the intervention of approximately30 municipalities that had failed to intervene within the time deadlinespreviously specified by the court. The trial court also ruled that the majorityof municipalities that had purchased James Jones products from contractors ordistributors were not in privity with the James Jones Company and were notentitled to punitive damages. Following the Armenta court’s ruling, on September 15,2004, the water districts and municipalities filed the City of Banning actionagainst the James Jones Company and Watts (former parent company of James JonesCompany), alleging fraud and intentional misrepresentation. This lawsuit isbased on the same underlying facts as the Armenta lawsuit. Any liabilityassociated with these lawsuits is covered by the Tyco indemnity, describedbelow, and the defense is being paid for and conducted by Tyco, all inaccordance with the indemnity obligation of Tyco.

In the acquisition agreement pursuant to which TycoInternational sold the Company’s Mueller and Anvil segments to the prior ownersof these businesses in August 1999, Tyco agreed to indemnify the Companyand its affiliates for all “Excluded Liabilities.” Excluded Liabilitiesinclude, among other things, substantially all liabilities relating to the timeprior to the August 1999 Tyco transaction. The indemnity survivesindefinitely and is not subject to any deductibles or caps. However, theCompany may be responsible for these liabilities in the event that Tyco everbecomes financially unable to or otherwise fails to comply with, the terms ofthe indemnity. In addition, Tyco’s indemnity does not cover liabilities to theextent caused by the Company or the operation of its business after the August 1999Tyco transaction, nor does it cover liabilities arising with respect tobusinesses or sites acquired after the August 1999 Tyco transaction.

Some of our subsidiaries have been named as defendantsin a small number of asbestos-related lawsuits. We do not believe theselawsuits, either individually or in the aggregate, are material to ourfinancial position or results of operations.

The Company and its subsidiariesare parties to a number of other lawsuits arising in the ordinary course oftheir businesses. We provide for costs relating to these matters when a loss isprobable and the amount is reasonably estimable. The effect of the outcome ofthese matters on the our future results of 

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operationscannot be predicted with certainty as any such effect depends on future resultsof operations and the amount and timing of the resolution of such matters.While the results of litigation cannot be predicted with certainty, we believethat the final outcome of such other litigation will not have a materiallyadverse effect on our consolidated financial statements.

**Item 1A.**                Risk Factors

**Risks Relating toOur Business**

**Our business may suffer as a result of a downturn ingovernment spending related to infrastructure upgrades, repairs andreplacements, or in the cyclical residential or non-residential buildingmarkets.**

Our business is primarilydependent upon spending on water and wastewater infrastructure upgrades, repairsand replacement, new water and wastewater infrastructure spending (which isdependent upon residential construction) and spending on non-residentialconstruction. We are also subject to general economic conditions, the need forconstruction projects, interest rates and government incentives provided forpublic work projects. In addition, a significant percentage of our products areultimately used by municipalities or other governmental agencies in publicwater transmission and collection systems. As a result, our sales could declineas a result of declines in the number of projects planned by public wateragencies, government spending cuts, general budgetary constraints, difficultyin obtaining necessary permits or the inability of government entities to issuedebt. It is not unusual for water projects to be delayed and rescheduled for anumber of reasons, including changes in project priorities and difficulties incomplying with environmental and other government regulations. Spending growthin the infrastructure upgrades, repairs and replacement sector has slowed inrecent years as state and local governments’ budgets were negatively impactedby the downturn in the economy. Even if economic conditions were to continue toimprove, state and local governments may choose not to address deferredinfrastructure needs. Although the residential building market has experiencedgrowth in recent years, this growth may not continue in the future. Theresidential and non-residential building markets are cyclical, and,historically, down cycles have typically lasted approximately four to sixyears. Any significant decline in the residential or non-residential buildingmarkets or governmental spending on infrastructure could lead to a significantdecline in our sales, profitability and cash flows.

**Our industry isvery competitive and some of our products are commodities.**

The domestic andinternational markets for flow control products are competitive. While thereare only a few competitors for most of our product offerings, many of them arewell-established companies with strong brand recognition. In particular, ourmalleable iron and cast iron pipe fitting products, which together comprised 5%and 6% of our pro forma sales for the 2005 fiscal year, and for the nine monthsended June 30, 2006, respectively, face competition from less expensiveimports and our pipe nipple and hanger products and our pipe fittings andcouplings products, which together comprised 16% and 16% of our pro forma salesin 2005, and for the nine months ended June 30, 2006, respectively,compete on the basis of price and are sold in fragmented markets with lowbarriers to entry, allowing less expensive domestic and foreign producers togain market share and reduce our margins. Also, competition for ductile ironpressure pipe sold by our U.S. Pipe segment comes not only from ductile pipeproduced by a concentrated number of domestic manufacturers, but also from pipecomposed of other materials, such as polyvinylchloride (PVC), high densitypolyethylene (HDPE), concrete, fiberglass, reinforced plastic and steel.

**Foreign competitionis intense and could harm our sales, profitability and cash flows.**

In addition to domesticcompetition, we face intense foreign competition. The intensity of foreigncompetition is affected significantly by fluctuations in the value of the U.S.dollar against foreign 

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currencies,by the relative cost to ship competitive products into the North Americanmarkets and by the level of import duties imposed by the U.S. Department of Commerceon certain products. Foreign competition is likely to further increase andcertain product prices will continue to face downward pressure as our domesticcompetitors shift their operations or outsource manufacturing requirementsoverseas or source supplies from foreign vendors in an effort to reduceexpenses.

**We depend on a group of major distributors for asignificant portion of our sales; any loss of these distributors could reduceour sales and continuing consolidation could cause price pressure.**

In the fiscal year ended September 30, 2005 andthe nine months ended June 30, 2006, on a pro forma basis, approximately37% and 40%, respectively, of our pro forma sales were to our ten largestdistributors, and approximately 30% and 33%, respectively, of our pro formasales were to our three largest distributors: Home Depot, Ferguson Enterprisesand American Waterworks. Our business relationships with most of our majordistributor branches may be terminated at the option of either party upon zeroto 60 days’ notice.

While our relationshipswith our ten largest distributors have been long-lasting, distributors in ourindustry have experienced significant consolidation in recent years, and ourdistributors may be acquired by other distributors who buy products from ourcompetitors. Our ability to retain these customers in the face of othercompetitors generally depends on a variety of factors, including the qualityand price of our products and our ability to market these products effectively.As consolidation among distributors continues, pricing pressure may result,which could lead to a significant decline in our profitability. For example,Home Depot acquired National Waterworks in 2005 and then acquired Hughes Supplyin March 2006. As a result, two of our three previous largest distributorshave been combined under common control. Moreover, the loss of either of HomeDepot or Ferguson Enterprises as a distributor could significantly reduce ourlevels of sales and profitability.

**Our brass valveproducts contain lead, which may be replaced in the future.**

Our brass valve products,which constituted approximately 6% and 6% of our pro forma sales in the twelvemonths ended September 30, 2005 and the nine months ended June 30,2006, respectively, contain approximately 5.0% lead. Environmental advocacygroups, relying on standards established by California’s Proposition 65, areseeking to eliminate or reduce the content of lead in some of these products,including water meters and valves, and to limit their sale in California. Someof our business units have entered into settlement agreements with theseenvironmental advocacy groups that have required them to either modify some ofthese products or offer substitutes for them with respect to products sold inCalifornia. Modifications of or substitutions for our products to meet orconform with regulatory requirements will require incremental capital spendingof up to $8.0 million in the next two years and will require us topurchase more expensive raw materials, and we may not be able to pass thesecosts on to our customers. Legislation to substantially restrict lead contentin water products has been introduced in the United States Congress. Congressmay adopt legislation that would require us to reduce or eliminate lead in ourbrass products which could require us to incur substantial additionalproduction expenses. In addition, advocacy groups or other parties may filesuit against us under Proposition 65, which could result in additional costs inconnection with marketing and selling our brass products in California.

**Our business is subject to risk of price increases andfluctuations and delay in the delivery of raw materials and purchasedcomponents.**

Our business is subject to the risk of price increasesand fluctuations and periodic delays in the delivery of raw materials andpurchased components that are beyond our control. Our operations requiresubstantial amounts of raw materials or purchased components, such as steelpipe and scrap steel and iron, brass ingot, sand, resin, and natural gas.Management estimates that scrap metal and ferrous alloys used in 

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the U.S. Pipemanufacturing process account for approximately 40% of the U.S. Pipe cost tomanufacture ductile iron pipe and raw materials and purchased components usedin our manufacturing processes currently account for approximately 18% of theMueller and Anvil cost of goods sold. Fluctuations in the price and delivery ofthese materials may be driven by the supply/demand relationship for a materialand factors particular to that material. In addition, if any of our suppliersseeks bankruptcy relief or otherwise cannot continue its business asanticipated or we cannot renew our supply contracts on favorable terms, theavailability of raw materials could be reduced or the price of raw materialscould increase.

The availability and priceof certain raw materials or purchased components, such as steel scrap, brassingot and natural gas are subject to market forces largely beyond our control,including North American and international demand, freight costs, speculationand foreign exchange rates. We generally purchase raw materials at spot pricesand generally do not have the ability to hedge our exposure to price changes.We are not always able, and may not be able in the future, to pass on increasesin the price of these raw materials to our customers. In particular, when rawmaterial prices increase rapidly or to significantly higher than normal levels,we may not be able to pass price increases through to our customers on a timelybasis, if at all, which could lead to significant reductions of our operatingmargins and cash flow. Any fluctuations in the price or availability of rawmaterials or purchased components could significantly reduce our levels ofproduction and sales or impair our profitability.

**Interruption of normal operations at our keymanufacturing facilities may impair our production capabilities.**

Some of our keyproducts, including hydrants, valves and ductile iron pipe, are manufactured atfive of our largest manufacturing facilities. The operations at our majormanufacturing facilities may be impaired by various operating risks, including,but not limited to:

·       catastrophicevents such as fires, explosions, floods, earthquakes or other similar occurrences;

·       interruptionsin raw materials and energy supply;

·       adversegovernment regulation;

·       breakdownsor equipment failures;

·       violationsof our permit requirements or revocation of permits;

·       releasesof pollutants and hazardous substances to air, soil, surface water orgroundwater;

·       shortagesof equipment or spare parts; and

·       labordisputes.

To date, we havesuccessfully managed non-material occurrences of the foregoing events,including a fire at the Columbia, PA facility of our Anvil segment and California’sadoption of laws limiting the lead content of water infrastructure products,without significant disruption of our operations. More acute occurrences ofthese events could cause a decrease in, or the elimination of, the revenuesgenerated by our key facilities or a substantial increase in the costs ofoperating such facilities that, in turn, could, impair our cash flows andresults of operations.

**We may beunsuccessful in identifying or integrating suitable acquisitions, which couldimpair our growth.**

A part of our growthstrategy depends on the availability of acquisition candidates with businessesthat can be successfully integrated into our existing business and that willprovide us with complementary manufacturing capabilities, products or services.However, we may be unable to identify targets that will be suitable foracquisition. In addition, if we identify a suitable acquisition candidate, ourability to successfully implement the acquisition will depend on a variety offactors, including our ability to finance 

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theacquisition. Our ability to finance our acquisitions is subject to a number offactors, including the availability of adequate cash from operations or ofacceptable financing terms and the terms of our debt instruments. In addition,there are many challenges to integrating acquired companies and businesses inour company, including eliminating redundant operations, facilities andsystems, coordinating management and personnel, retaining key employees,managing different corporate cultures and achieving cost reductions andcross-selling opportunities. We may not be able to meet these challenges in thefuture.

**Businesses we haveacquired or will acquire may not perform as expected.**

Businesses we haverecently acquired or may acquire in the future may not perform as expected.Acquired businesses may perform below expectations after the acquisition forvarious reasons, including legislative or regulatory changes that affect theareas in which a business specializes, the loss of key customers after theacquisition has closed, general economic factors that affect a business in adirect way and the cultural incompatibility of an acquired management team withus. Any of these factors could impair our results of operations.

**We have recorded a significant amount of goodwill andother identifiable intangible assets, and we may never realize the fullvalue of our intangible assets.**

We have recorded asignificant amount of goodwill and other identifiable intangible assets. As ofJune 30, 2006, goodwill and other identifiable intangible assets wereapproximately $722.5 million and $842.6 million, respectively (orapproximately 52% of our total assets). Goodwill and identifiable intangibleassets of the Company were recorded at fair value on the date of acquisitionand goodwill of U.S. Pipe remains at historical cost. In accordance withFinancial Accounting Standards Board Statement of Financial AccountingStandards (“SFAS”) No. 142, goodwill and other intangible assets, arereviewed at least annually for impairment. Impairment may result from, amongother things, deterioration in our performance, adverse market conditions,adverse changes in applicable laws or regulations, including changes thatrestrict the activities of or affect the products and services sold by ourbusiness, and a variety of other factors. The amount of any quantifiedimpairment must be expensed immediately as a charge to results of operations.Depending on future circumstances, it is possible that we may never realize thefull value of our intangible assets. Any future determination of impairment ofa significant portion of goodwill or other identifiable intangible assets wouldresult in a non-cash impairment charge.

**We have asignificant amount of debt.**

As of June 30,2006, our total debt was $1,129.8 million. We may incur significant additionalindebtedness from time to time. The level of our indebtedness could haveimportant consequences, including:

·       makingit more difficult for us to satisfy our obligations under our debt instruments;

·       limitingcash flow available for general corporate purposes, including capitalexpenditures and acquisitions, because a substantial portion of our cash flowfrom operations must be dedicated to servicing our debt;

·       limitingour ability to obtain additional debt financing in the future for workingcapital, capital expenditures or acquisitions;

·       limitingour flexibility to react to competitive and other changes in our industry andeconomic conditions generally; and

·       exposing us to risksinherent in interest rate fluctuations because a substantial portion of ourborrowings is at variable rates of interest, which could result in higherinterest expense in the event of increases in interest rates.

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**We will require a significant amount of cash toservice our debt and our ability to generate cash depends on many factorsbeyond our control.**

Our ability to pay or to refinance our indebtednesswill depend upon our future operating performance, which will be affected bygeneral economic, financial, competitive, legislative, regulatory, business andother factors beyond our control. There is a risk that our business will notgenerate sufficient cash flow from operations, that currently anticipatedrevenue growth and operating improvements will not be realized or that futureborrowings will not be available to us in an amount sufficient to enable us topay our indebtedness, or to fund our other liquidity needs. If we are unable tomeet our debt service obligations or fund our other liquidity needs, we couldattempt to restructure or refinance our indebtedness or seek additional equitycapital, but we may not be able to accomplish those actions on satisfactoryterms, if at all.

**Restrictivecovenants in our debt instruments may limit our ability to engage in certaintransactions and may diminish our ability to make payments on our indebtedness.**

Our debt instrumentscontain various covenants that limit our ability to engage in certaintransactions. Our senior credit facilities also require the maintenance ofspecified financial ratios and the satisfaction of other financial conditiontests. In addition, our debt instruments require us to provide regularfinancial information to our lenders and bondholders. Such requirementsgenerally may be satisfied by our timely filing with the SEC of annual andquarterly reports under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Our ability to satisfy those financial ratios, tests or covenants can beaffected by events beyond our control, and there is a risk that we will notmeet those tests. A breach of any of these covenants could result in a defaultunder our debt instruments. If an event of default is not remedied after thedelivery of notice of default and lapse of any relevant grace period, theholders of our debt would be able to declare it immediately due and payable.Upon the occurrence of an event of default under our senior credit facilities,the lenders could also terminate all commitments to extend further credit. Ifwe were unable to repay those amounts, the lenders could proceed against thecollateral granted to them to secure the indebtedness under our senior creditfacilities. We have pledged substantially all of our assets (including our intellectualproperty), other than the assets of our foreign subsidiaries, as security underour senior credit facilities. If the lenders under our senior credit facilitiesor noteholders of the notes accelerate the repayment of borrowings, we may nothave sufficient assets to repay our senior credit facilities and our otherindebtedness, which could negatively impact the value of our stock and ourability to operate as a going concern.

**Certain of our brass valve products may not be incompliance with NSF standards, which could limit the ability of municipalitiesto buy our products.**

The National SanitaryFoundation (“NSF”) is a non-profit entity that was contracted by the U.S. EnvironmentalProtection Agency (“EPA”) to promulgate standards for the water industry. NSFhas issued NSF 61, which governs the leaching characteristics of valves anddevices that are part of drinking water distribution networks, includingcertain of our products made from brass. In recent years, a growing majority ofstates have adopted, by statute or regulation, a requirement that waterdistribution systems utilize products that comply with NSF 61 and/or arecertified as NSF 61 compliant. We, along with others in the industry, areengaged in the lengthy process of attempting to obtain certification of NSF 61compliance for all of our relevant products. In fiscal 2005 and in the ninemonths ended June 30, 2006, our sales of brass valve products wereapproximately 6% and 6%, respectively, of our total sales, on a pro formabasis. To date we have obtained certification of approximately 95% of our brassvalve and fitting products. Approximately 26% of our certified products use “lowlead” brass to comply with current NSF 61 requirements. The NSF 61certification process is ongoing with our goal to have all products requiringcertification completed by January 1, 2007. In the event that some of ourbrass valve products are found not to be in compliance with NSF 61, thoseproducts may not be accepted by various municipalities or we 

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may beforced to modify non-conforming products with substitute materials which mayrequire increased cost, thereby impairing our profitability. In addition, ifour competitors develop a complete line of NSF 61 compliant brass valveproducts before we do, we may be placed at a competitive disadvantage whichmay, in turn, impair our profitability.

**Our business may beharmed by work stoppages and other labor relations matters.**

We are subject to a riskof work stoppages and other labor relations matters because our hourly workforceis highly unionized. As of June 30, 2006, approximately 80% of our hourlyworkforce was represented by unions. These employees are represented by localsfrom approximately six different unions, including the Glass, Molders, Pottery,Plastics and Allied Workers International Union, which is our largest union.Our labor agreements will be negotiated as they expire at various times throughMarch 2010. Work stoppages for an extended period of time couldimpair our business. Labor costs are a significant element of the totalexpenditures involved in our manufacturing process, and an increase in thecosts of labor could therefore harm our business. In addition, the freightcompanies who deliver our products to our distributors generally use unionizedtruck drivers, and our business could suffer if our contractors face work stoppages orincreased labor costs.

**Our revenues are influenced by weather conditions andthe level of construction activity at different times of the year; we may not beable to generate revenues that are sufficient to cover our expenses duringcertain periods of the year.**

Some of our products,including ductile iron pipe, are moderately seasonal, with lower productioncapacity and lower sales in the winter months. This seasonality in demand hasresulted in fluctuations in our revenues and operating results. Because much ofour overhead and expenses are fixed payments, seasonal trends can causereductions in our profit margin and financial condition, especially during ourslower periods.

**We may be subject to product liability or warrantyclaims that could require us to make significant payments.**

We would be exposed toproduct liability claims in the event that the use of our products results, oris alleged to result, in bodily injury and/or property damage. There is a riskthat we will experience product liability or warranty losses in the future orthat we will incur significant costs to defend such claims. Such losses andcosts may be material. While we currently have product liability insurance, ourproduct liability insurance coverage may not be adequate for any liabilitiesthat may ultimately be incurred or the coverage may not continue to beavailable on terms acceptable to us. A successful claim brought against us inexcess of our available insurance coverage could require us to make significantpayments or a requirement to participate in a product recall may harm ourreputation or profitability.

**We rely on Tyco to indemnify us for certainliabilities and there is a risk that Tyco may become unable or fail to fulfill itsobligations.**

Under the terms of thepurchase agreement (the “Tyco Purchase Agreement”) relating to the August 1999sale by Tyco International Ltd. (“Tyco”) of the Mueller and Anvilbusinesses to our prior owners, we are indemnified by Tyco for all liabilitiesarising in connection with the operation of these businesses prior to theirsale by Tyco, including with respect to products manufactured or sold prior tothe closing of that transaction. The indemnity survives forever and is notsubject to any dollar limits. In the past, Tyco has made substantial paymentsand/or assumed defense of claims pursuant to this indemnification provision.However, we may be responsible for these liabilities in the event that Tycoever becomes financially unable or fails to comply with, the terms of theindemnity. In addition, Tyco’s indemnity does not cover product liabilities tothe extent caused by our products manufactured after that 

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transaction.On January 14, 2006, Tyco’s board of directors announced that it approveda plan to separate Tyco into three separate, publicly traded companies. At thistime, we do not know which of the new entities will assume the indemnityprovided under the terms of the Tyco Purchase Agreement if this plan isimplemented. Should the entity or entities that assume Tyco’s obligations underthe Tyco Purchase Agreement ever become financially unable or fail to complywith the terms of the indemnity, we may be responsible for such obligations orliabilities. For more information, see “Part II, Item 1—Legal Proceedings.”

**Environmental, health and safety laws and regulationscould subject us to liability for fines, clean-ups and other damages, require usto incur significant costs to modify our operations and increase ourmanufacturing costs.**

We are subject to various laws and regulationsrelating to the protection of the environment and human health and safety andmust incur capital and other expenditures to comply with these requirements.Failure to comply with any environmental, health or safety requirements couldresult in the assessment of damages, or imposition of penalties, suspension ofproduction, a required upgrade or change to equipment or processes or acessation of operations at one or more of our facilities. Because these lawsare complex, constantly changing and may be applied retroactively, there is arisk that these requirements, in particular as they change in the future, mayimpair our business, profitability and results of operations.

In addition, we will be required to incur costs tocomply with the EPA’s National Emissions Standards for Hazardous Air Pollutants(“NESHAP”) for iron and steel foundries and for our foundries’ paintingoperations. These costs may be substantial. See “Note 14—Commitments andContingencies—Environmental Matters.” We may be required to conductinvestigations and perform remedial activities that could require us to incurmaterial costs in the future. Our operations involve the use of hazardoussubstances and the disposal of hazardous wastes. We may incur costs to managethese substances and wastes and may be subject to claims for damage forpersonal injury, property damages or damage to natural resources.

Our U.S. Pipe segment hasbeen identified as a potentially responsible party liable under federalenvironmental laws for a portion of the clean-up costs with regard to twosites, one in Alabama and one in California, and is currently subject to anadministrative consent order requiring certain monitoring and clean-up with regardto its Burlington, New Jersey facility. Such clean-up costs could besubstantial and could have a negative effect on our profitability and cashflows in any given reporting period. As described in the immediately precedingrisk factor, we rely on Tyco to indemnify us for certain liabilities and thereis a risk that Tyco may become unable or fail to fulfill its obligation. Formore information about our environmental compliance and potential environmentalliabilities, see “Note 14—Commitments and Contingencies—Environmental Mattersand Miscellaneous Litigation.”

**We need to improve our disclosure controls andprocedures and internal control over financial reporting to comply with SECreporting requirements; public reporting obligations have put significantdemands on our financial, operational and management resources.**

The Public Company Accounting Oversight Board (“PCAOB”)defines a significant deficiency as a control deficiency, or a combination ofcontrol deficiencies, that adversely affects a company’s ability to initiate,authorize, record, process, or report external financial data reliably inaccordance with generally accepted accounting principles such that there ismore than a remote likelihood that a misstatement of the company’s annual orinterim financial statements that is more than inconsequential will not beprevented or detected. The PCAOB defines a material weakness as a singledeficiency, or a combination of deficiencies, that results in more than aremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.

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As of September 30, 2005, we did not maintaineffective controls over the preparation, review and presentation and disclosureof our consolidated financial statements due to a lack of personnel withexperience in financial reporting and control procedures necessary for SECregistrants. Specifically, our controls failed to prevent or detect theincorrect presentation of the following items in our consolidated financial statements:(i) cash flows from the effect of exchange rate changes on cash balances; (ii) cashflows from the loss on disposal of property, plant and equipment; (iii) cashflows and balance sheet presentation of the dollar value of bank checksoutstanding; (iv) the presentation of current and non-currentdeferred income tax assets in Predecessor Mueller’s consolidated balance sheet;and (v) classification of certain depreciation expense as selling, generaland administrative expense instead of cost of sales for the historicalconsolidated statement of operations for our Mueller and Anvil segments.Further, our controls failed to detect the incorrect presentation of shippingand handling costs in our unaudited consolidated statement of operations forthe three months ended December 31, 2004 as initially reported for thethree months ended December 31, 2005. These control deficiencies resultedin the restatement of the annual consolidated financial statements for fiscal2004 and 2003 and interim consolidated financial statements for the first threequarters of fiscal 2005, all interim periods of fiscal 2004, and auditadjustments to the 2005 annual consolidated financial statements for ourpredecessor company that included our Mueller and Anvil segments (“PredecessorMueller”) and the restatement of our consolidated statement of operations forthe three months ended December 31, 2004. Additionally, controldeficiencies could result in a misstatement of the presentation and disclosureof our consolidated financial statements that would result in a materialmisstatement in the annual or interim financial statements that would not beprevented or detected. Accordingly, management determined that these controldeficiencies constituted a material weakness.

As of September 30, 2004 and 2005, PredecessorMueller reported the following control deficiencies that, in the aggregate,constituted a material weakness in internal control over preparation, reviewand presentation and disclosure of their consolidated financial statements.Specifically Predecessor Mueller’s control deficiencies included: (i) alack of personnel with experience in financial reporting and control proceduresnecessary for SEC registrants; (ii) a lack of sufficient controls toprevent or detect, on a timely basis, unauthorized journal entries; (iii) alack of sufficient controls over information technology data conversion andprogram changes; (iv) a lack of sufficient controls over the developmentand communication of income tax provisions; (v) a lack of effectivecontrols surrounding “whistleblower” hotline complaints and internalcertifications to ensure that issues were communicated on a more timely basisby management to the audit committee and the independent registered publicaccounting firm; (vi) a lack of effective controls over revenuerecognition associated with full truckload shipments not immediately dispatchedby freight carriers; and (vii) a lack of formal controls and proceduresregarding assessment of financial exposures and transactions, includingconsideration of accounting implications under GAAP. These control deficienciesresulted in audit adjustments to the consolidated financial statements for theyear ended September 30, 2004. Additionally, these control deficiencies,in the aggregate, could result in a misstatement to accounts and disclosuresthat would result in a material misstatement to the annual or interim financialstatements that would not be prevented or detected. While item (i) above(lack of experienced financial reporting personnel) remains unremediated, it isthe only remaining item of the material weakness described above that continuedto exist at June 30, 2006; and management has concluded that, based on theremediation actions described below, items (ii) through (vii) of thismaterial weakness did not exist as of June 30, 2006.

The material weakness and control deficiency will needto be addressed as part of the evaluation of our internal controls overfinancial reporting pursuant to the Sarbanes-Oxley Act of 2002 and may impairour ability to comply with Section 404 of the Act.

While we have takennumerous actions described under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Previously Issued ConsolidatedFinancial Statements” to 

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addressthe material weakness, additional measures may be necessary and these actionsmay not be sufficient to address the issues identified by us or to ensure thatour internal controls over financial reporting is effective. If we are unableto correct existing or future material weaknesses in internal controls overfinancial reporting in a timely manner, we may not be able to record, process,summarize, and report financial information within the time periods specifiedin the rules and forms of the SEC. This failure could harm our businessand the market value of our securities and affect our ability to access thecapital markets. In addition, there could be a negative reaction in thefinancial markets due to a loss of confidence in reliability of future financialstatements and SEC filings.

**Compliance with internal control reportingrequirements and securities laws and regulations is likely to increase our compliancecosts.**

The Sarbanes-Oxley Act of2002, as well as rules subsequently implemented by the SEC and the PublicCompany Accounting Oversight Board (“PCAOB”), have required changes in thecorporate governance and securities disclosure or compliance practices ofpublic companies over the last few years. We expect these new rules andregulations to continue to increase our legal and financial compliance costs,as well as our ongoing audit costs, and to make legal, accounting andadministrative activities more time-consuming and costly. As a result ofthe Company being a consolidated subsidiary of Walter Industries, in 2006, wewill need to comply with the internal control reporting requirements of theSarbanes-Oxley Act, which will have a significant impact on our compliance costin 2006. We expect to spend approximately $6 million on our compliance costsin our fiscal year ending September 30, 2006.

**Compliance with the securities laws and regulations islikely to make it more difficult and expensive for us to obtain directors andofficers liability insurance and to attract and retain qualified members of ourboard of directors.**

We expect theSarbanes-Oxley Act and the rules and regulations subsequently implementedby the SEC and the PCAOB to make it more difficult and expensive for us toobtain director and officer liability insurance, and we may be required toaccept reduced coverage or incur substantially higher costs to obtain coverage.These new rules and regulations could also make it more difficult for usto attract and retain qualified members of our board of directors, particularlyto serve on our audit committee, and executive officers.

**We may not be able to achieve the anticipatedsynergies in connection with our integration and rationalization plans.**

We are pursuing severalinitiatives designed to rationalize our manufacturing facilities and to use ourmanufacturing expertise to reduce our costs. In fiscal 2006, we achievedintegration synergies between our Mueller and U.S. Pipe segments by closing theU.S. Pipe Chattanooga, Tennessee production facility and integrating it intothe Mueller Chattanooga and Albertville, Alabama production facilities. We haveinitiated the implementation of plant and distribution combination andproduction efficiency strategies within our Mueller and Anvil segments, whichefforts will continue through fiscal years 2006, 2007 and the beginning of2008. Our Mueller segment sales force has begun to integrate U.S. Pipe productsas complementary product offerings as part of their sales efforts. We also havebegun to use our combined purchasing leverage to reduce raw material andoverall product costs. If we fail to implement our integration andrationalization plans at the economic levels or within the time periodsexpected, we may not be able to achieve the projected levels of synergies andcost savings. In addition, we expect to incur substantial severance,environmental and impairment costs in connection with our integration andrationalization plans.

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**If we fail toprotect our intellectual property, our business and ability to compete couldsuffer.**

Our business depends uponour technology and know-how, which is largely developed internally. While webelieve that none of our operating units is substantially dependent on anysingle patent, trademark, copyright, or other form of intellectual property, werely on a combination of patent protection, copyright and trademark laws, tradesecrets protection, employee and third party confidentiality and nondisclosureagreements and technical measures to protect our intellectual property rights.There is a risk that the measures that we take to protect our intellectualproperty rights may not be adequate to deter infringement or misappropriationor independent third-party development of our technology or to prevent anunauthorized third party from obtaining or using information or intellectualproperty that we regard as proprietary or to keep others from using brand namessimilar to our own. The disclosure, misappropriation or infringement of ourintellectual property could harm our ability to protect our rights and ourcompetitive position In addition, our actions to enforce our rights may resultin substantial costs and diversion of management and other resources. We mayalso be subject to intellectual property infringement claims from time to time,which may result in our incurring additional expenses and diverting companyresources to respond to these claims.

**If transportation for our ductile iron pipe productsbecomes unavailable or uneconomic for our customers, our ability tosell ductile iron pipe products would suffer.**

Transportation costs are a critical factor in acustomer’s purchasing decision. Increases in transportation costs could makeour ductile iron pipe products less competitive with the same or alternativeproducts from competitors with lower transportation costs.

We typically depend uponrail, barge and trucking systems to deliver our products to customers. Whileour customers typically arrange and pay for transportation from our factory tothe point of use, disruption of these transportation services because ofweather-related problems, strikes, lock-outs or other events could temporarilyimpair our ability to supply our products to our customers thereby resulting inlost sales and reduced profitability.

**Risks Relating toour Relationship with Walter Industries**

**Walter Industriescontrols us and may have conflicts of interest with us or you in the future.**

Walter Industries beneficially owns all of our parentcompany’s outstanding Series B common stock (which Series B commonstock is entitled to eight votes per share on any matter submitted to a vote ofour stockholders). The common stock beneficially owned by Walter Industriesrepresents a majority of the voting power of all of Mueller Water’s issued andoutstanding common stock. For as long as Walter Industries continues to beneficiallyown shares of common stock representing more than 50% of the combined votingpower of Mueller Water’s common stock, Walter Industries will be able to directthe election of all of the members of our board of directors and exercise acontrolling influence over our business and affairs, including anydeterminations with respect to mergers or other business combinations, theacquisition or disposition of assets, the incurrence of indebtedness, theissuance of any additional common stock or other equity securities, therepurchase or redemption of common stock or preferred stock and the payment ofdividends. Similarly, Walter Industries will have the power to determine orsignificantly influence the outcome of matters submitted to a vote of Mueller Water’sstockholders, including the power to prevent an acquisition or any other changein control of us and could take other actions that might be favorable to WalterIndustries.

Pursuant to the corporateagreement between Walter Industries and the Company dated as of May 26,2006, Walter Industries has an option available to it to purchase additionalshares of Mueller Water’s Series B common stock and/or any nonvotingcapital stock to maintain its then-existing percentage of the total votingpower and value of Mueller Water. Additionally, with respect to shares of anynonvoting 

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capitalstock that may be issued in the future, Walter Industries has an option topurchase such additional shares so as to maintain ownership of 80% of eachoutstanding class of such stock. Beneficial ownership of at least 80% of thetotal voting power and 80% of each class of any nonvoting capital stock isrequired for Walter Industries to effect a tax-free spin-off of Mueller Wateror certain other tax-free transactions. In addition, the corporate agreementgrants registration rights to Walter Industries with respect to the Company’s Series Bcommon stock.

**We may havesubstantial additional liability for federal income tax allegedly owed byWalter Industries.**

Each member of a consolidated group for federal incometax purposes is severally liable for the federal income tax liability of eachother member of the consolidated group for any year in which it is a member ofthe group at any time during such year. Each member of the Walter Industriescontrolled group, which currently includes Walter Industries, the Company(including our subsidiaries) and Walter Industries’ other subsidiaries, is alsojointly and severally liable for pension and benefit funding and terminationliabilities of other group members, as well as certain benefit plan taxes.Accordingly, the Company could be liable under such provisions in the event anysuch liability is incurred, and not discharged, by any other member of theWalter Industries consolidated or controlled group for any period during whichthe Company was included in the Walter Industries consolidated or controlledgroup.

Controversy exists withregard to federal income taxes allegedly owed by the Walter consolidated group,which includes the Company, for fiscal years 1980 through 1994 and 1999 through2001. It is estimated that the amount of tax presently claimed by the IRS isapproximately $34.0 million for issues currently in dispute in bankruptcycourt and $80.4 million for the 1999 through 2001 period, each of which isfor matters unrelated to the Company. These amounts are subject to interest andpenalties. However, Walter Industries believes that its tax filing positionshave substantial merit and intends to defend vigorously any claims asserted. WalterIndustries believes that it has accruals sufficient to cover the estimatedprobable loss, including interest and penalties.

**The tax allocation agreement between the Company andWalter Industries gives Walter Industries control over our pre-IPO taxes andallocates to us certain tax risks associated with a planned spin-off of ourcommon stock.**

Walter Industrieseffectively controls all of our tax decisions for periods during which we are amember of the Walter Industries consolidated federal income tax group andcertain combined, consolidated or unitary state and local income tax groups.Under the terms of the income tax allocation agreement between WalterIndustries and the Company dated as of May 26, 2006, Walter Industries hassole authority to respond to and conduct all tax proceedings (including taxaudits) relating to our federal income and combined state returns, to file allsuch returns on behalf of us and to determine the amount of our liability to(or entitlement to payment from) Walter Industries for such periods. Thisarrangement may result in conflicts of interests between the Company and WalterIndustries. In addition, the tax allocation agreement will provide that in theevent that Walter Industries effectuates a spin-off of our common stock that itowns and such spin-off is not tax-free pursuant to Section 355 of theInternal Revenue Code of 1986, as amended, or the “Code,” the Company generallywill be responsible for any taxes incurred by Walter Industries or itsstockholders if such taxes result from certain of our actions or omissions andfor a percentage of any such taxes that are not a result of our actions oromissions or Walter Industries’ actions or omissions taxes based upon ourmarket value relative to Walter Industries’ market value.

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**Because we have limited experience operating as astand-alone entity, our future business prospects are difficult to evaluate andour business could suffer as a result of the separation of our business fromWalter Industries.**

Our company is acombination of the Predecessor Mueller business acquired by Walter Industrieson October 3, 2005 and the U.S. Pipe business. As of the date of thisreport, Walter Industries owns all outstanding shares of our common stock. Ouroperations as a stand-alone company may place significant demands on ourmanagement, operational, and technical resources. Our future performance willdepend on our ability to function as a stand-alone company and on our abilityto finance and manage expanding operations and to adapt our information systemsto changes in its business. We rely on contractual arrangements, including thetransition services agreement between Walter Industries and the Company datedas of May 26, 2006, that require Walter Industries and its affiliates toprovide or procure certain critical transitional services and sharedarrangements to us such as:

·       certaintax and accounting services;

·       certainhuman resources services, including benefit plan administration;

·       communicationssystems;

·       insurance;and

·       supplyarrangements.

After the termination of these arrangements, we maynot be able to replace these services and arrangements in a timely manner or onterms and conditions, including service levels and cost, as favorable as thosewe have received from Walter Industries and its affiliates. There is a riskthat our separation from Walter Industries will not be successful, which couldsignificantly impair our business, our results and our financial reportingability.

Furthermore, the financialinformation included in this prospectus may not necessarily reflect what theoperating results and financial condition would have been had we been aseparate, stand-alone entity during the periods presented or be indicative ofour future operating results and financial condition.

**Our governing documents, contractual arrangements andapplicable laws include provisions that may discourage a takeoverattempt.**

Provisions contained inour restated certificate of incorporation and by-laws, to be adoptedimmediately prior to the announced offering of Mueller Water’s series A commonstock, and Delaware law could make it difficult for a third party to acquireus, even if doing so might be beneficial to our stockholders. For example,stockholders who wish to nominate a director or present a matter forconsideration at an annual meeting are required to give us notice of suchproposal, which gives us time to respond. These provisions could limit theprice that certain investors might be willing to pay in the future for sharesof Mueller Water’s series A common stock and may have the effect ofdelaying or preventing a change in control.

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**Item 6.**                        Exhibits
| 3.1  |   | Certificate  of Formation of Mueller Group, LLC together with Certificate of Conversion to  Limited Liability Company of Mueller Group, Inc.(1) |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Limited Liability Company Agreement of Mueller  Group, LLC(1)                                                                                        |
| 31.1 |   | Certification of Chief Executive 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 Chief Executive Officer pursuant to  Section 906 of the Sarbanes Oxley Act of 2002.*                                      |
| 32.2 |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act  of 2002.*                                     |

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       (1) Previously filed as an Exhibit to the Company’s Annual Reporton Form 10-K for the fiscal year ended September 30, 2005 asfiled with the Securities and Exchange Commission on December 20, 2005.

                 * Filed herewith.

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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  GROUP, LLC |
|----------------------------|---------------------|
| Date:  August 9, 2006 | By:                 | /s/  DALE B. SMITH |
|                       |                | Dale B. Smith |
|                       | * *            | *President  and Chief Executive Officer* |
| Date:  August 9, 2006 | By:                 | /s/  JEFFERY W. SPRICK |
|                       |                | Jeffery W. Sprick |
|                       | * *            | *Chief  Financial Officer* |

 

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