Mueller Water Products, Inc. (MWA) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Mueller Water Products Conference Call. [Operator Instructions] Also, this call is being recorded. If you have any objection, please disconnect at this time. I will now turn the call over to Martie Zakas. You may begin.

Thank you. Good morning, everyone. Welcome to Mueller Water Products 2013 Third Quarter Conference Call. We issued our press release reporting results of operations for the quarter ended June 30, 2013, yesterday afternoon. A copy of it is available on our website, muellerwaterproducts.com. Mueller Water Products had a 158 million shares outstanding at June 30, 2013. Discussing the third quarter's results this morning are Greg Hyland, our Chairman, President and CEO; and Evan Hart, our CFO. This morning's call is being recorded and webcast live on the Internet. We have also posted slides on our website to help illustrate the quarter's results, as well as to address forward-looking statements and our non-GAAP disclosure requirements. At this time, please refer to Slide 2. This slide identifies certain non-GAAP financial measures referenced in our press release, on our slides and on this call, and discloses the reasons why we believe that these measures provide useful information to investors. Reconciliations between non-GAAP and GAAP financial measures are included in the supplemental information within our press release and on our website. Slide 3 addresses our forward-looking statements made on this call. This slide includes cautionary information identifying important factors that could cause actual results to differ materially from those included in forward-looking statements, as well as specific examples of forward-looking statements. Please review Slides 2 and 3 in their entirety. During this call, all references to a specific year or quarter refer to our fiscal year, which ends on September 30. All operating results discussed in these prepared remarks are from continuing operations unless specified otherwise. A replay of this morning's call would be available for 30 days after the call at 1 (866) 470-7045. The archived webcast and the corresponding slides will be available for at least 90 days in the Investor Relations section of our website. In addition, we will furnish a copy of our prepared remarks on Form 8-K later this morning. After the prepared remarks, we will open the call for questions. I'll now turn the call over to Greg.

Thanks, Martie, and thank you for joining us today as we discuss our results for the 2013 third quarter. I'll begin with a brief overview of the quarter followed by Evan's detailed financial report, which covers key drivers affecting our business. I will then provide additional comments on the quarter's results and developments in our end markets, as well as our outlook for the fourth quarter. We are pleased with our third quarter results with an 8.5% increase in net sales and a 25.4% increase in adjusted operating income. Net sales and adjusted operating margins at both Mueller Co. and Anvil increased both year-over-year and sequentially. These results contributed to our best overall quarter in the past 5 years. We continue to benefit from improved operating leverage at Mueller Co. and the ongoing recovery of our end markets. With Mueller Co.'s net sales increasing 9.1% and adjusted operating margin improving 180 basis points to 15.3% in the quarter compared to the prior year. We saw a nice increase in net sales for our metering and leak detection products and services in the third quarter, demonstrating the progress we continue to make in the marketplace. Anvil had a solid quarter, with net sales up 7.3% and adjusted operating income up 24.2% year-over-year. Finally, we had a very strong free cash flow of $37.7 million for the quarter, which was driven by both growth in operating income and working capital management. I'll now turn the call over to Evan.

Thanks, Greg, and good morning, everyone. I'll first review our consolidated financial results and then discuss segment performance. Net sales for the 2013 third quarter of $299.4 million, increased $23.5 million or 8.5% from the 2012 third quarter net sales of $275.9 million due mostly to higher shipment volumes at both Mueller Co. and Anvil. Gross profit improved 13.1% to $90 million for the 2013 third quarter compared to $79.6 million for the 2012 third quarter. Gross profit margin of 30.1% improved 120 basis points from 28.9%. This improvement was driven primarily by higher shipment volumes and higher sales prices. Selling, general and administrative expenses as a percent of net sales declined to 19% for the 2013 third quarter from 19.3% for the 2012 third quarter. Selling, general and administrative expenses were $56.9 million for the 2013 third quarter compared to $53.2 million for the 2012 third quarter. Adjusted operating income for the 2013 third quarter increased 25.4% to $33.1 million from adjusted operating income of $26.4 million for the 2012 third quarter. This increase was driven primarily by higher shipment volumes and higher sales prices partially offset by higher selling, general and administrative expenses. Adjusted EBITDA for the 2013 third quarter increased to $47.7 million from $41.4 million for the 2012 third quarter. Trailing 12 months adjusted EBITDA through June 30, 2013, was $147.9 million, an improvement of $29.2 million or 24.6% from a year ago. Interest expense net for the 2013 third quarter declined $900,000 to $12.7 million from $13.6 million for the 2012 third quarter excluding $1.3 million of noncash cost for terminated interest rate swap contracts for the 2012 third quarter. This decrease was due to lower levels of total debt outstanding. During the 2013 third quarter, income tax expense was $4.2 million on pretax income of $20.2 million or an effective income tax rate of 20.8%. The 2013 third quarter expense was reduced by $4 million related to a deferred tax asset valuation allowance adjustment. Excluding this adjustment, the effective tax rate for the 2013 third quarter was 40.5%. Net operating loss carryforwards remain available to offset future taxable earnings. Adjusted net income for diluted shares for the 2013 third quarter was $0.08 compared to an adjusted net income for diluted share for the 2012 third quarter of $0.05, an improvement of $0.03. I'll now walk you through the after-tax adjustments for both the 2013 and 2012 third quarters. 2013 EPS from continuing operations of $0.10 was adjusted by the following items: restructuring expenses of $100,000 offset by deferred tax asset valuation allowance adjustment benefit of $4 million. 2012 EPS from continuing operations of $0.04 was adjusted by the following items: loss on early extinguishment of debt of $900,000; terminated interest rate swap contract costs of $800,000; and restructuring expenses of $400,000. There was a weighted average of 160.7 million diluted shares of our common stock outstanding for the 2013 third quarter compared to a weighted average of 158 million diluted shares outstanding for the 2012 third quarter. I'll now move on to segment performance and begin with Mueller Co. Net sales for the 2013 third quarter increased 9.1% to $199.3 million from net sales of $182.6 million for the 2012 third quarter. This increase was due primarily to higher shipment volumes, particularly of our metering products and higher prices. Net sales of the metering and leak detection products and services increased 67% year-over-year and accounted for 2/3 of Mueller Co.'s net sales growth in the third quarter. Adjusted operating income for the 2013 third quarter improved 23.6% to $30.4 million from adjusted operating income of $24.6 million for the 2012 third quarter. Adjusted operating margin for the 2013 third quarter improved 180 basis points to 15.3% from adjusted operating margin for the 2012 third quarter of 13.5%. Adjusted EBITDA for the 2013 third quarter grew to $41.3 million compared to adjusted EBITDA for the 2012 third quarter of $35.9 million. I'll now turn to Anvil. Net sales for the 2013 third quarter increased 7.3% to $100.1 million compared to net sales of $93.3 million for the 2012 third quarter. The increase resulted from higher shipment volumes and higher prices. Adjusted operating income for the 2013 third quarter improved 24.2% to $12.3 million compared to adjusted operating income for the 2012 third quarter of $9.9 million. Anvil's adjusted operating margin for the 2013 third quarter was 12.3% compared to 10.6% for the 2012 third quarter. Adjusted EBITDA for the 2013 third quarter increased 17.8% to $15.9 million compared to adjusted EBITDA for the 2012 third quarter of $13.5 million. Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures, was $37.7 million for the 2013 third quarter compared to negative $3.4 million for the 2012 third quarter. The increase was generated by both our growth in operating income and working capital management. Year-to-date, free cash flow was $19.8 million compared to $5 million in 2012. For the 2013 third quarter, trailing 4-quarter average accounts receivable, inventory and accounts payable as a percent of net sales improved 170 basis points from the 2012 third quarter. At June 30, 2013, total debt was $600.9 million, down $21.9 million from a year ago. Total debt outstanding included $420 million of 7 3/8% Senior Subordinated Notes due 2017, $177.9 million of 8 3/4% Senior Unsecured Notes due 2020 and $3 million of Other. Net debt leverage declined to 3.6x at June 30, 2013, due to improved operating performance and free cash flow generation. Using June 30, 2013 data, we had $157.8 million of excess availability under our asset-based credit agreement. During the quarter, Standard & Poor's Ratings Services raised its corporate credit rating on Mueller Water Products to BB- from B. I'll now turn the call back to Greg.

Thanks, Evan. I'll now elaborate on our 2013 third quarter performance and end markets and provide an outlook for our fourth quarter. I'll begin with Mueller Co. Mueller Co.'s results came in about as we expected with top line year-over-year growth of 9.1% and growth across all of our product lines. Net sales of our metering and leak detection products and services grew 67% year-over-year. However, sales were down in Canada by $3 million year-over-year. We believe the flooding in Western Canada coupled with the construction worker strike in Quebec contributed to the decline. As we mentioned on our last call, we believe distributor inventory levels were generally greater entering the third quarter of this year than they were last year. This increase was due to several factors, primarily the timing of our January price increase and weather-related impact on construction in some parts of the country. We believe that our Mueller distributors reduced inventories throughout the quarter, and their inventories were lower at the end of the third quarter than they were at the end of the second quarter and generally flat year-over-year. We believe the distributors met some of the end market demand during the third quarter by pulling down inventory. During the quarter, domestic unit shipments of our valves were down slightly under 5%, hydrants were down slightly more than 6% and brass products were up almost 9%. This was expected since our distributors ended the quarter with higher inventories of valves and hydrants, again as a result of the January price increase. However, domestic orders for these products and units were all up: valves more than 8%, hydrants more than 5% and brass products more than 20%. Mueller Co. adjusted operating margins expanded by 180 basis points during the quarter as we continue to benefit from increased volumes, higher sales prices and operating leverage. Margins in the third quarter were the highest we have seen since the fourth quarter of 2010. We believe that most of the growth in our base Mueller Co. business in the quarter came from new residential construction. We think that municipal spending is mixed and in total, was up only slightly on a year-over-year basis. Before discussing our outlook for the fourth quarter, I'll provide an overview of some of the macro drivers in our end markets. While the recently reported macroeconomic data has mix -- has remained mixed, the macro factors that impact our markets appear to be holding their own and for the most part remain positive. While state and local seasonally adjusted tax receipts continue to increase and hit new highs, budgets in many areas remain stressed by health care costs and underfunded retirement plans. On the municipal bond front, with interest rates rising sharply recently, total issuances have slowed and are now showing a 9% decline through the first 6 months of calendar 2013 compared to the prior year period. New money issuances are barely positive at 1.4%. However, the CPI for water and sewage rates increased by an annualized rate of 5% in June year-over-year. Single-family housing starts, which significantly impact demand for our products, averaged about 600,000 on an annualized basis for the 9 months through June compared to about 500,000 last year, up 20%. According to a June survey by Ivy Zelman & Associates, demand for land and lots hit a record high for their survey. With strong activity especially in the Central and West regions although the pace of improvement has slowed slightly. Anvil also had a solid quarter with adjusted operating margin expanding by 170 basis points to 12.3%. In particular, we saw a nice pickup in demand for our mechanical products in certain regions of the country, which were driven -- which was driven by commercial construction. This is the highest margin that we have achieved since the first quarter of 2009. Turning now to our outlook for the fourth quarter. We expect Mueller Co.'s fourth quarter net sales to increase year-over-year. However, we expect the year-over-year growth rate to be less in the fourth quarter than it was in the third quarter. We expect only modest year-over-year growth in our metering product line because we have passed the 1-year anniversary of a significant meter supply agreement. Additionally, as we have said, this product line is more dependent on specific projects and we have seen a delay on certain meter projects, which may push orders and shipments into fiscal 2014. All in all, we expect total Mueller Co. net sales in the fourth quarter to be slightly less than in the third quarter's, with a year-over-year growth rate in the mid-single digits. We expect Mueller Co.'s adjusted operating margin to improve substantially and for fourth quarter adjusted operating income to improve year-over-year across all of its key product categories. Mueller Co.'s adjusted operating income is also expected to decline slightly sequentially, which is consistent with the seasonality of the business. We previously said that we expected our metering and leak detection products and services to be profitable for the full year based on the backlog and the expected timing of being awarded additional contracts. Today, we believe that certain contracts which we had expected to be awarded and shipped in 2013 may be awarded in 2013, but shipments would be delayed into fiscal 2014. As a result, today, we do not think these products and services will be profitable in 2013. However, we have seen significant improvement this year. Year-to-date through the third quarter, we reduced year-over-year operating losses by approximately $9 million. In addition, we recently introduced new technologies in fixed leak detection during the third quarter. These are in the pilot stage and we are very bullish about their potential. All in all for the fourth quarter, we expect a richer conversion margin than what we saw in the third quarter due primarily to expected growth in our base domestic valve, hydrant and brass products. At Anvil, we expect net sales to be both slightly higher than in the third quarter and to increase year-over-year. The increase in volume should also result in higher year-over-year adjusted operating income. For the company as a whole, we believe that 2013 fourth quarter net sales will increase year-over-year, primarily due to volume increases at both Mueller Co. and Anvil. We expect a solid increase in adjusted operating income year-over-year and to see an improvement in our adjusted operating margin. Raw material costs continue to decline. We expect material costs for all of 2013 will be slightly favorable year-over-year as we should benefit from lower raw material costs partially offset by higher costs of purchase component. Other key variables for 2013 include corporate expenses are estimated to be $32 million to $33 million; depreciation and amortization is estimated to be $59 million to $60 million; and interest expense is estimated to be approximately $52 million. Our adjusted effective income tax rate should be about 40% for the full year. Capital expenditures should be between $32 million and $34 million. For the full year, we expect free cash flow to be stronger than 2012. Most of our improved free cash flow generation should come from increased income from operations. Additionally, we expect income tax payments and pension contributions to be minimal this year. We are pleased with our third quarter results, especially the margin expansion at Mueller Co. and Anvil. Although our metering and leak detection products and services will not likely be profitable in 2013, we believe they will be profitable soon. They continue to make progress in the marketplace, and we are excited about the potential of our new fixed leak detection products and the overall opportunities in the smart meter and leak detection markets. With that, I will open this call for your questions.

[Operator Instructions] Your first question today comes from Seth Weber of RBC Capital Markets.

Couple of questions. Can you just give us a sense for the price increases that you pushed through earlier this year, whether they're sticking, how much of that you're capturing? And kind of what -- how you're feeling about the pricing environment?

Yes, Seth, I would say that the pricing environment is typical to what we see. And that's not to say from time to time, some projects can be -- can get competitive, but I think that the price increase is sticking. And in fact, when you look at our Mueller Co. year-over-year improvement in margins, about 70 basis points of that improvement came from higher pricing, which was about 40% of the improvement. So yes, I think our price increase is, we're still getting in that 50% to 60% that we generally expect to achieve of a price increase.

Okay, great. I guess, going back to your comments about the systems and Echologics profitability pushout -- can you give us a little bit more color there? I mean, is that just budgeting issues? Is the customer kind of rethinking the process? Or is it budgeting or -- give us any more color on what gives you confidence that, that's kind of still -- those awards are still coming.

No. I think what we are finding is it's just taking longer for municipalities to make decisions on AMI systems. I think it goes through a longer review process, and it's not just the meter. It's just not -- maybe the head of the meter department making a decision. And I think the mayor even gets involved because it's a much bigger decision and higher dollar spend. But I think it takes a little more time. Actually looking at our sales funnel today, as compared to 3 months ago, we did lose one contract where we thought we had a better than 50% chance of winning. However, all the other projects that were in our funnel that were the basis of our comments are still in our funnel. They're moving along. And we remain confident that those -- in our ability to win those. And additionally, new opportunities have been added. So I think when we look at just the timing, it's been several contracts that we would have expected to have been awarded in the third quarter that we could have start shipping in the fourth quarter. Those decisions have not been made yet. So I don't -- we don't see an overall, I'd say, drop off in market interest or market demand. But I do think that we're finding it is a little more difficult to predict when the project decision will be actually made.

Okay. And then, can you just frame -- I think that, that business collectively is doing something like high $20 million revenue a quarter. Is that fair? I mean...

I'd say more in the mid-20s.

Mid-20s, okay. So I mean, collectively -- can you just maybe help frame what order of magnitude of these projects are out there? I mean, how -- in the first half of next year, can you talk about what you think that run rate could be up to?

Yes. I mean, we're talking project, let me say projects that can fall within a range of a $5 million project to a $15 million project. It certainly is over the board -- across-the-board. And I would say to date, we haven't had many of those projects flowing through our income statement. So while we've had some AMI projects that have been smaller projects, I think that as we progress, as our technology is progressing, we're getting the opportunity to look at these bigger projects. So I think it could have certainly as those close that they could have a more, I'd say, more meaningful impacts on our quarterly shipments.

And so I'm just trying to understand. So what the kind of breakeven revenue run rate that you're targeting, is it like a $30 million quarterly run rate is where you think you'd get profitable or...

Well, let me look in our metering business, and it certainly is mix dependent. But if we look at this quarter, our sales were about $25 million and we lost $600,000 in that business. So it just needs a -- and that's the meter business, just a little shift in mix certainly more towards AMI and then $25 million that, that business could be profitable. So I would say certainly, the revenue -- revenues will impact it, but mix would have almost just as much of an impact.

Next we have Mike Wood, Macquarie.

Since you had said the inventories were flat at the end of the quarter, year-on-year, can you give us a sense of how sales are trending in the Mueller Co. business, in the base business in July, just to get a sense of where maybe the end market demand is?

Mike, we -- I would say that it's probably pretty consistent with the outlook that we just gave. We think overall sales for the quarter are going to be up year-over-year, but we do think that it will -- they'll be down somewhat sequentially which, again, is consistent -- was consistent with what the seasonality of this business. But I will point out back to your point is that given the movement as we said -- given the movement that we are seeing in and I would say our base, what we expect to see in our base domestic valve hydrant and brass products and the shift on from our Mueller Systems that we do probably -- we do expect to see a richer conversion margin for Mueller Co. in the fourth quarter than what we saw in the third quarter, again because of that mix and that movement on valves and hydrants.

And does your outlook for the next quarter consider a snapback in the Canadian business or do you expect that...

Actually, we think our Canadian -- the Canadian business in units could be up slightly, but we're actually expecting that to be down because of currency exchange. So on a year-over-year basis, Canada will have a somewhat negative impact on our year-over-year growth, primarily due to our exchange assumptions.

Great. And finally, can you give us some color in terms of what end markets drove the Anvil acceleration in growth? And were there any large projects in there that had an impact in terms of the incremental margin fall-through in that business?

Yes. Mike, it was -- as I said it was coming out of the commercial construction market, but a little more regional. We saw some nice activity coming out of Texas. And I wouldn't say that where any large particular projects, it was just overall a little higher capacity utilization that then gives us -- lowers our per-unit overhead costs and that drops to the -- that certainly drops to the bottom line. So I think a combination of higher pricing and somewhat, some higher production contributed to the improvement in operating margins.

Next is Jerry Revich, Goldman Sachs.

I'm wondering if you could talk about just over all cadence of orders over the course of the quarter and into July here, if just you're talking about shipments slowing in Mueller Co. I'm wondering if that's just a function of tougher comps or is any part of the environment slowing at all as you see it?

Yes, Jerry, right. Actually we're slowing. We'll say, we'll slow sequentially. We still expect their shipments to be up year-over-year. And again we say that, that typical are -- we'll see going at the end of the second quarter as a result of our price increase and certainly going into construction season in the third quarter. Our shipments will be up. Distributors will carry greater inventory as we start getting towards the end of our, generally, in the end of our fourth quarter of our fiscal year. When we start getting a couple of months out, construction season starts to drop off. So from a sequential standpoint, this is a very typical pattern for us. Year-over-year, we do expect to see sales growth at the Mueller business. But I would say that when we look at the fourth quarter that we think that the municipal market may be a little flattish. And we still expect to see growth in the residential market. So when we look over the next, I would say next 12 months, 15 months in the municipal market based on our input from our field, based on our input from our distributors, we still expect to see growth. But I would say as were looking 3 months out that the feedback we're getting is that the market could be flat and we probably won't see much or any year-over-year growth in the fourth quarter coming from the municipal market.

Okay. That's helpful context there. And in terms of the lead times that you see now or your order growth, can you just put that into context for what you saw in the quarter?

Yes. Our lead times of our products still fall in the 3, 4, 5 weeks for our domestic business. Certainly, international business can be longer.

And, Greg, I apologize if I missed it. I know you mentioned the Mueller Systems and Echologics business faced a tougher comp in the fourth fiscal quarter. Do you still expect double-digit growth in that business? Can you just put that into context for us, what you mean by moderated growth?

Yes. I would say that we don't expect to see double-digit growth. And I'd say based on the pushout of projects, I would say that -- we said modest growth, modest sales growth, I would say that we're looking at it just to be up a couple million dollars.

Okay. And lastly, in terms of material costs, can you just talk about are they a greater benefit in Mueller Co. than Anvil? It sounds like based from the point on purchased components, it's probably a greater benefit in Mueller Co., but I'm wondering if you could just confirm that for us?

Jerry, there are -- it's pretty close, the benefits actually maybe a little better at Anvil because we source more components in the Mueller products than we do in the Anvil products. And we're seeing lower raw material cost, we said, but we're seeing some of that being offset by some of the components that we source. And as I said, we source more product -- I'm sorry, more components for Mueller products than we do on the Anvil side. So I'd say Anvil in this year -- in this quarter had a little more of a benefit from lower raw material costs than Mueller did.

Walt Liptak.

I wanted to ask a follow-on to the material cost question. Is there anything change -- that changes in terms of material cost hedges or material pricing as you get further into the year?

Yes, this is Evan. We do not hedge any raw material -- raw materials. As Greg mentioned, we have seen some favorability with respect to what we've classified as raw materials, but purchased components are up a little bit on a year-over-year basis. So as we've gone through the year, we had the benefit both in our Mueller Co. operations as well as Anvil, slightly more weighted to Anvil because they are a little bit more raw material dependent. But I would say that we've seen that favorability kind of throughout the year on a consistent basis and don't expect any changes as we finish up fiscal '13.

The next question comes from Brent Thielman, D.A. Davidson. Brent Thielman - D.A. Davidson & Co., Research Division: Yes. Greg, I'm not sure if you've mentioned this, but could you quantify the negative impact of Canada on Mueller Co. this quarter?

Yes. On the sales side, it was -- sales were down $3 million from the previous year. Brent Thielman - D.A. Davidson & Co., Research Division: Perfect. And then, obviously great margins here in Anvil, would you characterize these sort of towards the higher end of your expectations for this segment or do you think there's more to go?

Brent, we think as capacity utilization increases that we could see higher -- we could still see higher margins in the Anvil business. And I think as we've over the last couple of years talked about the restructuring we've done, we have -- and our Lean initiative, I think we've continue to get more efficient in our facility. So I think as we see overall capacity utilization increasing and I think that our commercial construction markets still are, I think, forecasted to have a very slow growth, but at least growing in the next couple of years, then I think that we should -- we would expect to see -- have the ability to earn some higher margins. And -- but it's also dependent as we've mentioned several times in the past, we do import products, branded products from offshore and sell into the marketplace and we produce domestically. Obviously, the more we produce domestically, the higher our margins are going to be. But I think all in all, that we said that on an EBITDA margin range that we think the 15%, 16% can be achievable. And I think if our capacity utilization goes up and we had that -- if our mixed stays the same relative to domestic produce versus what we bring in offshore, we could still see a little more upside in these margins. Brent Thielman - D.A. Davidson & Co., Research Division: Okay, that's great. And then, I imagine debt reduction is still the focus here, but thinking a little further out as you to continue to lever the balance sheet to a point where you like, can you talk about your views on sort of share buybacks or potentially a larger dividend?

Yes, Brent. We've always -- that's a topic that we discussed with our board and we discuss it regularly. You're right, share buyback was not something that was -- that we discussed the last several years. But as we move forward, I think it certainly could be something that comes on the agenda, as well as the dividend. A couple of years ago when our markets were really depressed that we elected to still continue to pay a dividend, that was very important for us to continue to do so. So that is analyzing dividends and what is the right dividend. It's something that's on the table, though I will say, and I'll ask Evan to comment on this, that probably -- what we could do on dividends and share buyback is somewhat limited by our covenants.

That's right. Under our indentures, we are limited to the amount of dividends that we can pay on an annual basis, roughly about $15 million [ph] as well as limited on the share buyback as well. But certainly we evaluate all these alternatives as well as evaluate the capital structure. But as you mentioned, certainly, debt reduction as we move forward continues to be a focus. And we have the ability under our indentures to take out $65 million of our subordinated notes under restricted payment baskets. So that would be the next deleveraging opportunities that we have going forward. So all of these capital structure options are things that we consider. Brent Thielman - D.A. Davidson & Co., Research Division: Okay. And then lastly, one for you Evan. Obviously, you have some NOLs available offset cash taxes this year. Are those available for next year as well or how do we kind of think about payment of cash taxes into 2014?

Certainly, we've said that cash income taxes would be minimal this year. Coming into this year, we had about tax value of $64 million of NOLs coming into fiscal 2013. We have utilized some in this year, but we will provide the actual ending balance when we finalize and close the year and publish our 10-K. But there will be NOLs that will continue on into 2014 to shield cash taxes. And the NOLs that we have don't expire until 2029, so we can utilize those with -- commensurate with generation of net income.

Our final question today comes from Sean Wondrack, Deutsche Bank.

As you look at the Mueller Co. business -- and I appreciate all the color you've given on the call, can you talk a little bit about how much [indiscernible] AMI business impact the overall margin in the segment this quarter?

Yes. When you look at our new technology businesses, we improved about $3 million year-over-year, but we still had a negative $1 million from these businesses. So it reduced Mueller's overall operating income by $1 million.

Okay, great. And then, as you look at both of your segments, can you let us know where capacity utilization is please?

Yes. When you look at -- our Mueller business we're in about the mid-60% range and Anvil's just slightly less than that. So we're in the -- as I said, we're up slightly, we're up from where we were a year ago, but I think still, I'd like to call [ph] Mueller in the mid-60% and Anvil slightly less.

Okay, great. And then last question, with regard to Anvil, I know you talked about how regionally you had said commercial construction has been picking up a bit. When you talked about Texas, where exactly are your parts going in Texas? What kind of jobs or what kind of end markets exactly?

Well, actually, it was more on the hospitality side. I think that there was a nice hotel project. And what we're seeing on the Anvil business and I said it's a little spotty, institutional investment is down, industrial is mixed but some of the other areas, such as hospitality is -- and it's project related that we saw a nice opportunity. We saw some real opportunities this past quarter.

Okay, great. You seem with the pullback commodities and just the commodity-like nature of the products, are you seeing more competition coming at Anvil?

I would not say any more competition, but I think that we're always watching is if there's a shift going from the domestic-produced products to offshore. As I said earlier, I answered one of the questions, we source our products offshore, branded products offshore. And I think that while we would probably -- what we could expect is we may see the offshore products gaining a little more share as the markets improve.

Nic Prendergast, BB&T Capital Markets. Nicholas V. Prendergast - BB&T Capital Markets Inc.: Just to piggyback on some of these earlier questions about your Mueller Systems or your newer tech products, did you say they're running somewhere around in the mid-20s per quarter?

Yes. Step back, and when you look at -- I think over the last couple of quarters on a revenue basis, combining our leak detection and Mueller Systems, I'd say the mid-20s anywhere from 20 to the mid-20s is a pretty good range. Nicholas V. Prendergast - BB&T Capital Markets Inc.: Okay. And just sort of quick -- I know that sales were up pretty, pretty strong, like about 70% in the quarter for those newer tech products. Did I understand correctly, but you currently don't see that going forward in Q4?

Well, no. We don't see it going up into Q4. And the biggest reason contributing to that is 2 reasons. One, we anniversaried late in the third quarter the big contract that we received last year. So that is now in our comparison numbers, plus we've seen a bit of a pushout on some projects that we thought were going to be awarded and that we would win and be awarded in the third quarter and they have yet to be awarded. So we think it's very unlikely that we will be able to ship those in the fourth quarter if we win those.

And that does conclude the question-and-answer segment of today's conference.

Well, thanks, again for your interest in Mueller Water Products in your questions today, and look forward to seeing you on the road and talking with you next quarter.