Mueller Water Products - Earnings Call - Q3 2013
July 31, 2013
Transcript
Speaker 0
Good morning and welcome to the Mueller Water Products Conference Call. I would like to remind all parties that your lines are on a listen only mode until the question and answer segment of today's conference. Also, this call is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Marty Zacchus.
You may begin. Thank you. Good morning, everyone. Welcome to Mueller Water Products' twenty thirteen third quarter conference call. Issued our press release reporting results of operations for the quarter ended June 3033 yesterday afternoon.
A copy of it is available on our website muellerwaterproducts.com. Mueller Water Products had 158,000,000 shares outstanding at June 3033. Discussing the third quarter's results this morning are Greg Highland, 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 two. 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 measures are included in the supplemental information within our press release and on our website. Slide three 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 two and three 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 will be available for thirty days after the call at 6045. The archived webcast and corresponding slides will be available for at least ninety days in the Investor Relations section of our website.
In addition, we will furnish a copy of our prepared remarks on Form eight ks later this morning. After the prepared remarks, we will open the call to questions. I'll now turn the call over to Greg.
Speaker 1
Thanks, Marty, and thank you for joining us today as we discuss our results for the twenty thirteen 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 businesses. 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 Company and Anvil increased both year over year and sequentially.
These results contributed to our best overall quarter in the past five years. We continue to benefit from improved operating leverage of Mueller Company and the ongoing recovery of our end markets with Mueller Company'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. AmVel 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 $37,700,000 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.
Speaker 2
Thanks, Greg, and good morning, everyone. I'll first review our consolidated financial results and then discuss segment performance. Net sales for the twenty thirteen third quarter of $299,400,000 increased $23,500,000 or 8.5% from the twenty twelve third quarter net sales of $275,900,000 due mostly to higher shipment volumes at both Mueller Company and Anvil. Gross profit improved 13.1% to $90,000,000 for the twenty thirteen third quarter compared to seventy nine point six million dollars for the twenty twelve 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 twenty thirteen third quarter from 19.3% for the twenty twelve third quarter. Selling, general and administrative expenses were $56,900,000 for the twenty thirteen third quarter compared to $53,200,000 for the twenty twelve third quarter. Adjusted operating income for the twenty thirteen third quarter increased 25.4% to $33,100,000 from adjusted operating income of $26,400,000 for the twenty twelve 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 twenty thirteen third quarter increased to $47,700,000 from $41,400,000 for the twenty twelve third quarter. Trailing twelve months adjusted EBITDA through June 3033 was $147,900,000 an improvement of $29,200,000 or 24.6% from a year ago. Interest expense net for the twenty thirteen third quarter declined 900,000 to $12,700,000 from $13,600,000 for the twenty twelve third quarter, excluding $1,300,000 of non cash costs for terminated interest rate swap contracts for the twenty twelve third quarter. This decrease was due to lower levels of total debt outstanding. During the twenty thirteen third quarter, income tax expense was $4,200,000 on pretax income of $20,200,000 or an effective income tax rate of 20.8%.
The twenty thirteen third quarter expense was reduced by $4,000,000 related to a deferred tax asset valuation allowance adjustment. Excluding this adjustment, the effective tax rate for the twenty thirteen third quarter was 40.5%. Net operating loss carryforwards remain available to offset future taxable earnings. Adjusted net income per diluted share for the twenty thirteen third quarter was $08 compared to an adjusted net income per diluted share for the twenty twelve third quarter of $05 an improvement of $03 I'll now walk you through the after tax adjustments for both the 2013 and twenty twelve 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 $4,000,000 2012 EPS from continuing operations of $04 was adjusted by the following items loss on early extinguishment of debt of $900,000 terminated interest rate swap contract cost of $800,000 and restructuring expenses of 400,000 There was a weighted average of 160,700,000.0 diluted shares of our common stock outstanding for the twenty thirteen third quarter compared to a weighted average of 158,000,000 diluted shares outstanding for the twenty twelve third quarter.
I'll now move on to segment performance and begin with Mueller Company. Net sales for the twenty thirteen third quarter increased 9.1 to $199,300,000 from net sales of $182,600,000 for the twenty twelve 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 two thirds of Mural Company's net sales growth in the third quarter. Adjusted operating income for the twenty thirteen third quarter improved 23.6% to 30,400,000 from adjusted operating income of $24,600,000 for the twenty twelve third quarter.
Adjusted operating margin for the twenty thirteen third quarter improved 180 basis points to 15.3% from adjusted operating margin for the twenty twelve third quarter of 13.5%. Adjusted EBITDA for the twenty thirteen third quarter grew to $41,300,000 compared to adjusted EBITDA for the twenty twelve third quarter of $35,900,000 I'll now turn to anvil. Net sales for the twenty thirteen third quarter increased 7.3% to $100,100,000 compared to net sales of $93,300,000 for the twenty twelve third quarter. The increase resulted from higher shipment volumes and higher prices. Adjusted operating income for the twenty thirteen third quarter improved 24.2% to $12,300,000 compared to adjusted operating income for the twenty twelve third quarter of $9,900,000 Hanville's adjusted operating margin for the twenty thirteen third quarter was 12.3% compared to 10.6% for the twenty twelve third quarter.
Adjusted EBITDA for the twenty thirteen third quarter increased 17.8% to $15,900,000 compared to adjusted EBITDA for the twenty twelve third quarter of $13,500,000 Turning now to a discussion of our liquidity. Free cash flow, which is cash flows from operating activities less capital expenditures was $37,700,000 for the twenty thirteen third quarter compared to negative $3,400,000 for the twenty twelve third quarter. The increase was generated by both our growth in operating income and working capital management. Year to date free cash flow was $19,800,000 compared to $5,000,000 in 2012. For the twenty thirteen third quarter, trailing four quarter average accounts receivable, inventory and accounts payable as a percent of net sales improved 170 basis points from the twenty twelve third quarter.
At June 3033, total debt was $600,900,000 down $21,900,000 from a year ago. Total debt outstanding included $420,000,000 of 7.32% senior subordinated notes due 2017, dollars 177,900,000.0 of 8.75% senior unsecured notes due $20.20 and $3,000,000 of other. Net debt leverage declined to 3.6 times at June 3033 due to improved operating performance and free cash flow generation. Using June 3033 data, we had $157,800,000 of excess availability under our asset based credit agreement. During the quarter, Standard and Poor's Rating Services raised its corporate credit rating on Mueller Water Products to BB- from B.
I'll now turn the call back to Greg.
Speaker 1
Thanks, Evan. I'll now elaborate on our twenty thirteen third quarter performance and end markets and provide an outlook for our fourth quarter. I'll begin with Mueller Company. Mueller Company'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 $3,000,000 year over year. We believe the flooding in Western Canada coupled with the construction workers' 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 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 Company 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 2010. We believe that most of the growth in our base Mueller Company business in the quarter came from new residential construction. We think that municipal spending is mix 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 mixed 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 six months of calendar twenty thirteen 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 nine months through June compared to about $500,000 last year, up 20%.
According to a June survey by I. B. Zelman and 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 we have achieved since the 2009. Turning now to our outlook for the fourth quarter. We expect Mueller Company'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 one 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 twenty fourteen. All in all, we expect total Mueller Company net sales in the fourth quarter to be slightly less than in the third quarter with a year over year growth rate in the mid single digits. We expect Mueller Company'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 Company'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 twenty fourteen. 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 $9,000,000 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 twenty thirteen fourth quarter net sales will increase year over year, primarily due to volume increases at both Mueller Company 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 cost of purchased components. Other key variables for 2013 include corporate expenses are estimated to be $32,000,000 to $33,000,000 Depreciation and amortization is estimated to be $59,000,000 to $60,000,000 and interest expense is estimated to be approximately $52,000,000 Our adjusted effective income tax rate should be about 40% for the full year. Capital expenditures should be between 32,000,000 and $34,000,000 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 Company 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.
Speaker 0
Thank you. Our first question today comes from Seth Weber of RBC Capital Markets.
Speaker 3
Hey, good morning everybody.
Speaker 1
Good morning, Seth. Good morning.
Speaker 3
A 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 you're how you're feeling about the pricing environment?
Speaker 1
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 increases is sticking.
And in fact, when you look at our Mueller Company 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, I think that our our price increases, we're still getting in that 50% to 60% that we generally expect to achieve of a price increase.
Speaker 3
Okay, great. Thank you. I guess going back to your comments about the Systems and Ecologics profitability push out. 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 No. Those awards are still
Speaker 1
I think what we're finding is is 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. I think the mayor even gets involved because it's a much bigger decision and higher dollar spend. So I think it takes a little more time.
Actually looking at our sales funnel today as compared to three 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 that in 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 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.
Speaker 3
Okay. I mean can you just frame I think that that business collectively is doing something like high $20,000,000 in revenue a quarter. Is that fair? I mean
Speaker 1
I'd say more in the mid-20s.
Speaker 3
Mid-20s. Okay. So I mean, can you just maybe help frame what order of magnitude of these projects are out there? I mean, in the first half of next year, can you talk about what you think that run rate could be up to?
Speaker 1
Yes. I mean we're talking projects, let me say projects that could fall within the range of a $5,000,000 project to a $15,000,000 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 impact on our quarterly shipments.
Speaker 3
And so I'm just trying to understand. So is what the kind of breakeven revenue run rate that you're is it like a $30,000,000 quarterly run rate is where you think you get profitable or?
Speaker 1
Well, let me let in our metering business, it certainly is mix dependent. But if we look at this quarter, our sales were about $25,000,000 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 $25,000,000 that business could be profitable. So I would say certainly the revenues will impact it, but mix would have almost just as much of an impact.
Speaker 3
Okay. That's actually very helpful. Thank you very much.
Speaker 0
Thanks, Seth. Next we have Mike Wood, Macquarie. Your line is open.
Speaker 4
Hi. Thank you. Since you had said inventories were flat at the end of quarter year on year, can you give us a sense of how sales are trending in the Mueller Co. Business and the base business in July, just to get a sense of where maybe the end market demand is?
Speaker 1
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 be down somewhat sequentially, which again is 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.
Speaker 4
And does your outlook for next quarter consider a snapback in the Canadian business? Or do you
Speaker 1
we think our Canadian the Canadian business over 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.
Speaker 4
Great. And finally, 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?
Speaker 1
Yes. 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 there were 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.
Speaker 5
Great. Thank you.
Speaker 1
Thank you.
Speaker 0
Next is Jerry Revich, Goldman Sachs. Your line is open.
Speaker 5
Hi, good morning. Good morning,
Speaker 4
I'm wondering if you could talk about just overall cadence of orders over the course of the quarter and into July here, I guess 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 that environment slowing at all as you see it?
Speaker 1
Yes, Jerry, you're right. Actually, where it's slowing, we're saying it will slow sequentially. We still expect their shipments to be up year over year. And again, we'd say that that's typical. Our 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 at the end of our fourth quarter of our fiscal year, 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 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 twelve months, fifteen 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 we're looking three months out, 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.
Speaker 4
Okay. That's helpful context. And in terms of the lead times that you see now or year over year order growth, can you just put that into context for what you saw in the quarter?
Speaker 1
Yes. Our lead times of our products still fall in the three, four, five weeks for our domestic business. Certainly, business can be longer.
Speaker 4
Greg, I apologize if I missed it. I know you mentioned the Mueller Systems and Ecologics 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?
Speaker 1
Yes. I would say that we don't expect to see double digit growth. And I'd say based on the push out of projects, I would say that we said modest growth, modest sales growth, I would say we're looking at it just to be up a couple of million dollars.
Speaker 4
Okay. And lastly, in terms of material costs, can you just talk about are they a greater benefit in Mueller Code than Anvil? It sounds like based on the point on purchase components, it's probably a greater benefit in Mueller Co. But I'm wondering if you could just confirm that for us?
Speaker 1
Jerry, they're it's pretty close. The benefits actually maybe a little better at Anvil, because we source more components in the Mueller product than we do in the Anvil product. And we're seeing lower raw material costs we said, but we're seeing some that's being offset by some of the components that we source. And as I said, we source more products I'm sorry more components for Mueller products than we do on the Anvil side. So I'd say Anvil in this year and this quarter had a little more of a benefit from lower raw material costs than Mueller did.
Speaker 4
Thank you very much.
Speaker 1
Thanks, Eric.
Speaker 0
Walt Liptak, your line is open.
Speaker 3
Hi, thanks. Good quarter. And 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?
Speaker 2
Yes. This is Evan. No, we do not hedge any raw materials. As Greg mentioned, we have seen some favorability with respect to what we classify as raw materials, but purchase components are up a little bit on a year over year basis. So as we've gone through the year, we've had a benefit both at our Mueller Company operations as well as anvil, slightly more weighted anvil because they're 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 twenty thirteen.
Speaker 3
Okay, great. Okay. Thank you.
Speaker 1
Thanks, Paul.
Speaker 0
Next question comes from Brent Thielman, D. A. Davidson. Your line is open, sir.
Speaker 1
Hi, good morning. Good morning, Good Brent.
Speaker 4
Yes. Greg, I'm not sure if you'd mentioned this, but could you quantify the negative impact of Canada on Mueller Co. This quarter?
Speaker 1
Yes. On the sales side, it was sales were down $3,000,000 from the previous year.
Speaker 4
Perfect. Thanks. And then obviously great margins here in Anvil. Would you characterize these sort of towards the higher end of your expectations for this segment? Do you think there's more to go?
Speaker 1
Brett, we think as capacity utilization increases that we could see higher we could still see higher margins in the Anvil business. And I think that as we've over the last couple of years talked about the restructuring we've done, we have and our lean initiatives. I think we've continued to get more efficient in our facilities. 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 that I think that we should we would expect to see the 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. The obviously, more we produce domestically, the higher our margins are going to be. But I think all in all that we've said that on an EBITDA margin range that we think the 15%, 16% can be achievable. And I think as our capacity utilization goes up and we have that if our mix stays the same relative to domestic produced versus what we bring in offshore, we could still see a little more upside in these margins.
Speaker 4
Okay. That's great. And then I imagine debt reduction is still the focus here, but thinking a little further out as you continue to delever 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?
Speaker 1
Yes, Brent. We've always we that's a topic that we discuss 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 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 our what we can do on dividends and share buyback is somewhat limited by our covenants.
Speaker 2
That's right. Under our integers, we are limited to the amount of dividends we can pay on an annual basis roughly about $15,000,000 as well as limited on the share buyback as well. But certainly we evaluate all of 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 $65,000,000 of our subordinated notes under restricted payment basket.
So that would be the next deleveraging opportunity that we have going forward. So all of these capital structure options are things that we consider.
Speaker 4
Okay. And then and lastly one for you Evan. Obviously, have some NOLs available to 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?
Speaker 2
Certainly, we said that cash income taxes would be minimal this year. Coming into this year, we had about a tax value of $64,000,000 of NOLs coming into fiscal twenty thirteen. 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 ks. 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 the generation of net income.
Speaker 1
Great. Thanks guys. Thanks, Brent.
Speaker 0
Our final question today comes from Sean Wondrich, Deutsche Bank. Your line is open.
Speaker 5
Hi, good morning guys.
Speaker 1
Good morning. Good morning, Sean.
Speaker 5
As you look at the Mueller Company business and I appreciate all the color you've given in the call. Can you talk a little bit about how much did the renewing AMI business impact the overall margin in the segment this quarter?
Speaker 1
Yes. When you look at our new technology businesses, we improved about $3,000,000 year over year, but we still had a negative $1,000,000 from these businesses. So it reduced Mueller's overall operating income by $1,000,000
Speaker 5
Okay, great. Thank you. And then as you look at both of your segments, can you let us know where capacity utilization is please?
Speaker 1
Yes. When you look at our Mueller business, we're estimating we're in about the mid-sixty percent range and Anvil 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 think, little bit Mueller in the mid-sixty percent and Anvil slightly less.
Speaker 5
Okay, great. Thank you. 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?
Speaker 1
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 opportunity this past quarter.
Speaker 5
Okay, great. And are you seeing with the pullback commodities and just the commodity like nature of the products, are you seeing more competition coming at Anvil?
Speaker 1
I would not say any more competition, but I think that what we're always watching is if there's a shift going from the domestic produced product to offshore. As I said earlier, I answered one of the questions, we source our products offshore branded products offshore. And I think that what we would probably what we could expect is we may see the offshore products gaining a little more share as these markets improve.
Speaker 5
Okay. All right. Thank you very much. I appreciate it. Good luck next quarter.
Speaker 1
Thank Nick you very
Speaker 0
Prendergast, BB and T Capital Markets. Your line is open.
Speaker 3
Hi. Just to piggyback on some of these earlier questions about your newer systems or your newer tech products. Did you say they're running somewhere around in the mid-20s per quarter?
Speaker 1
Yes. Step back. And when you look at, I think, the last couple of quarters on the revenue basis combining our leak detection and Mueller systems, I'd say in the mid-20s, anywhere from 20 to the mid-20s is a pretty good range.
Speaker 3
Okay. And just real quick, I know that sales were up pretty strong like about 70% in the quarter for those newer tech products. Did I understand correctly, but you clearly don't see that going forward in Q4?
Speaker 1
Well, no. We don't see it going up in the Q4. And the biggest reason contributing to that, the two 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 push out 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 would be able to ship those in the fourth quarter if we win those. Okay.
Speaker 3
All right. Great. Thank you.
Speaker 1
Thank you. Thank you.
Speaker 0
And that does conclude the question and answer segment of today's conference.
Speaker 1
Well, thanks again for your interest in Mueller Water Products and your questions today and look forward to seeing you on the road and talking with you next quarter.
Speaker 0
That does conclude today's presentation. Thank you all for joining. You may now disconnect.