UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

(Amendment No. )

Filed by the Registrant          þ
Filed by a Party other than the Registrant          o

Check the appropriate box:
o   Preliminary Proxy Statement
o   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ   Definitive Proxy Statement
o   Definitive Additional Materials
o   Soliciting Material Pursuant to § 240.14a-12

Mueller Water Products, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
þ   No fee required.
o   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	1)		Title of each class of securities to which transaction applies:
	2)		Aggregate number of securities to which transaction applies:
	3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	4)		Proposed maximum aggregate value of transaction:
	5)		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	1)		Amount Previously Paid:
	2)		Form, Schedule or Registration Statement No.:
	3)		Filing Party:
	4)		Date Filed:

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On JANUARY 30, 2008

 

 

 

To the Stockholders:

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Mueller Water Products, Inc., a Delaware corporation (“Mueller Water Products” or the “Company”), will be held at 10:00 A.M., local time, on Wednesday, January 30, 2008 at the Four Seasons Hotel, 75 14^th Street, N.E., Atlanta, Georgia 30309, for the following purposes:

 

1. To elect ten members to the Board of Directors to serve for the ensuing year;

 

2. To approve the Amended and Restated 2006 Stock Incentive Plan;

 

3. To approve the Executive Incentive Plan;

 

4. To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for fiscal 2008; and

 

5. To transact such other business as may properly come before the Annual Meeting and any adjournment thereof.

 

Holders of record of the Company’s common stock at the close of business on December 5, 2007, the record date for voting at the Annual Meeting, are entitled to notice of and to vote at the Annual Meeting or any adjournment thereof.

 

By Order of the Board of Directors

 

 

ROBERT BARKER
Corporate Secretary

 

Atlanta, Georgia

December 27, 2007

 

TABLE OF CONTENTS

 

 

1200 Abernathy Road, N.E.
Suite 1200
Atlanta, Georgia 30328

 

 

 

 

PROXY STATEMENT

 

 

 

 

The Company is furnishing this Proxy Statement in connection with the solicitation by the Board of Directors (the “Board”) of Mueller Water Products, Inc. (“Mueller Water Products” or the “Company”) of proxies for its Annual Meeting of Stockholders and any adjournments of the meeting (the “Annual Meeting”) for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held on Wednesday, January 30, 2008 at 10:00 A.M., local time, at the Four Seasons Hotel, 75 14^th Street, N.E., Atlanta, Georgia 30309.

 

QUESTIONS AND ANSWERS ABOUT VOTING AND THE ANNUAL MEETING

 

What is the purpose of this Proxy Statement?

 

This Proxy Statement provides information regarding matters to be voted on at the Annual Meeting. Additionally, it contains certain information that the Securities and Exchange Commission requires the Company to provide annually to its stockholders. The Proxy Statement is also used by the Company’s Board of Directors to solicit proxies to be used at the Annual Meeting. Proxies are solicited to give all stockholders of record an opportunity to vote on the matters to be presented at the Annual Meeting, even if they cannot attend the meeting. The Board has designated a Proxy Committee, which will vote the shares represented by proxies at the Annual Meeting in the manner indicated by the proxies. The members of the Proxy Committee are Gregory E. Hyland, Michael T. Vollkommer and Robert Barker.

 

The Proxy Statement is being made available to the Series A stockholders and Series B stockholders of the Company beginning on or about December 27, 2007.

 

Who is entitled to vote on the matters discussed in the Proxy Statement?

 

The Company has issued and outstanding shares of two series of common stock: Series A common stock and Series B common stock, which are together referred to as the “common stock”. You are entitled to vote if you were a stockholder of record of Series A common stock or Series B common stock of Mueller Water Products as of the close of business on December 5, 2007. Your shares can be voted at the meeting only if you are present or represented by a valid proxy.

 

What constitutes a quorum for the Annual Meeting?

 

The holders of a majority of the voting power of the outstanding shares of common stock as of the close of business on the record date, December 5, 2007, must be present, either in person or represented by proxy, to constitute a quorum necessary to conduct the Annual Meeting. On the record date, there were issued and outstanding 29,051,147 shares of Series A common stock and 85,844,920 shares of Series B common stock. This total excludes treasury shares, which are not considered outstanding for financial reporting purposes. Shares represented by proxies received but marked as abstentions or as withholding voting authority for any or all director nominees, and shares represented by proxies received but reflecting broker non-votes, will be counted as present at the meeting for purposes of establishing a quorum.

How many votes am I entitled to per share?

 

Each share of Series A common stock represented at the Annual Meeting is entitled to one vote per share and each share of Series B common stock represented at the Annual Meeting is entitled to eight votes per share. All shares entitled to vote and represented by properly executed proxies received before the polls are closed at the Annual Meeting, and not revoked or superseded, will be voted at the Annual Meeting in accordance with the instructions indicated by those proxies.

 

What proposals will require my vote?

 

You are being asked to vote on the following:

 

 

What vote is required to approve each proposal, and how will my vote be counted?

 

Election of Directors:  Directors are elected by a plurality of the votes, which means that the ten nominees who receive the highest number of properly executed votes will be elected as directors, even if those nominees do not receive a majority of the votes cast.

 

Approval of the Amended and Restated 2006 Stock Incentive Plan:  Approval of this proposal requires the affirmative vote of a majority of the votes cast. Any shares that are not voted (whether by abstention or otherwise) will have no impact on the vote.

 

Approval of the Executive Incentive Plan:  Approval of this proposal requires the affirmative vote of a majority of the votes cast. Any shares that are not voted (whether by abstention or otherwise) will have no impact on the vote.

 

Ratification of the Appointment of the Independent Registered Public Accounting Firm:  Approval of this proposal requires the affirmative vote of a majority of the votes cast. Any shares that are not voted (whether by abstention or otherwise) will have no impact on the vote.

 

How does the Board of Directors recommend that I vote?

 

The Board recommends that you vote:

 

 

How can I vote?

 

You can vote in person by completing a ballot at the Annual Meeting, or you can vote prior to the meeting by proxy. Even if you plan to attend the meeting, we encourage you to vote your shares as soon as possible by proxy. You can vote by proxy using the Internet, by telephone or by mail, as discussed below.

How do I vote by proxy?

 

Vote by Internet:  You can vote your shares using the Internet. Go to the website indicated on the proxy card or voting instruction form and follow the instructions. Internet voting is available twenty-four hours a day, seven days a week until 5:00 p.m. Eastern time on January 29, 2008. You will be given the opportunity to confirm that your instructions have been properly recorded. If you vote on the Internet, you do NOT need to return a proxy card or voting instruction form.

 

If you hold your shares in “street or beneficial name” (that is, you hold your shares through a broker, bank, or other nominee), your ability to vote by Internet depends on the voting processes of the broker, bank or other nominee. Please follow the instructions on the voting instruction form or proxy card carefully.

 

Vote by Telephone:  You can vote your shares by telephone if you have a Touch-Tone phone. Dial the toll-free telephone number indicated on the proxy card or voting instruction form and follow the instructions. Telephone voting is available twenty-four hours a day, seven days a week until 5:00 p.m. Eastern time on January 29, 2008. Easy-to-follow voice prompts allow you to vote your shares and confirm that your instructions have been properly recorded. If you vote by telephone, you do NOT need to return a proxy card or voting instruction form.

 

If you hold your shares in “street or beneficial name” (that is, you hold your shares through a broker, bank, or other nominee), your ability to vote by telephone depends on the voting processes of the broker, bank or other nominee. Please follow the instructions on the voting instruction form or proxy card carefully.

 

Vote by Mail:  If you prefer to vote by mail, mark the proxy card, date and sign it, and return it in the postage-paid envelope provided. If you sign the proxy card but do not specify how you want your shares to be voted, your shares will be voted by the Proxy Committee in favor of the election of all of the director nominees and in accordance with the directors’ recommendations on the other proposals listed on the proxy card. All properly executed proxy cards received before the polls are closed at the Annual Meeting, and not revoked or superseded, will be voted at the Annual Meeting in accordance with the instructions indicated by those proxy cards.

 

Shares Held by Employee Stock Purchase Plans:  If you hold (A) shares of the Company’s Series A common stock through the Mueller Water Products Employee Stock Purchase Plan or (B) shares of the Company’s Series B common stock through the Walter Industries Employee Stock Purchase Plan, then your vote must be received by 5:00 p.m. Eastern time on January 29, 2008, unless you vote in person at the Annual Meeting.

 

Can I assign my proxy to someone else?

 

If you want to assign your proxy to someone other than the Proxy Committee, you should cross out the names of the Committee members appearing on the proxy card and insert the name(s) of up to three other people. The person(s) you have assigned to represent you must present your signed proxy card and a completed ballot at the meeting to vote your shares.

 

Can I change my mind after I vote?

 

If you vote by proxy, you can revoke that proxy at any time before it is voted at the meeting. You can do this in one of the following three ways:

 

(A) Vote again on the Internet or by telephone prior to the meeting; or

 

(B) Sign another proxy card with a later date and return it to us prior to the meeting; or

 

(C) Attend the Annual Meeting in person and cast a ballot.

How will a proposal or other matter that was not included in the Proxy Statement be handled for voting purposes if it comes up at the Annual Meeting?

 

If any matter that is not described in this Proxy Statement should properly come before the meeting, the Proxy Committee will vote the shares represented by it in accordance with its members’ best judgment. The Proxy Committee will not use its discretionary voting authority with respect to any validly conducted solicitation in opposition. In addition, shares represented by proxy cards that are marked to deny discretionary authority to the Proxy Committee on other matters considered at the meeting will not be voted on these matters and will not be counted in determining the number of votes cast with respect to those matters. At the time this Proxy Statement was printed, the Company did not know of any other matters that might be presented for stockholder action at the Annual Meeting.

 

Who will tabulate and certify the vote?

 

Representatives of the Company’s transfer agent, BNY Mellon (formerly known as The Bank of New York), will tabulate and certify the vote, and will act as the Company’s inspector of elections.

 

What is the difference between a registered stockholder and a beneficial holder of shares?

 

If your Mueller Water Products shares are registered directly in your name with our transfer agent, BNY Mellon, you are considered a “registered stockholder” with respect to those shares. If this is the case, the proxy materials have been sent or provided directly to you by Mueller Water Products. “Proxy materials” may include an annual report, a proxy statement and a proxy card or voting instruction form, as applicable.

 

If your Mueller Water Products shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial holder” of the shares held for you in what is known as “street name.” If this is the case, the proxy materials have been forwarded to you by your brokerage firm, bank or other nominee, or their agent, which is considered the stockholder of record with respect to these shares. As the beneficial holder, you have the right to direct your broker, bank or other nominee as to how to vote your shares by using the voting instruction form or proxy card included in the proxy materials, or by voting via telephone or the Internet. Follow the voting instructions provided in your proxy materials.

 

I am a beneficial holder. How are my shares voted if I do not return voting instructions?

 

Your shares may be voted if they are held in the name of a brokerage firm, even if you do not provide the brokerage firm with voting instructions. Brokerage firms have the authority, under the rules of the New York Stock Exchange, to vote shares on certain “routine” matters for which their customers do not provide voting instructions by the tenth day before the meeting. The election of directors, the approval of the Executive Incentive Plan and the ratification of the appointment of Ernst & Young LLP as the independent registered public accounting firm of the Company are considered routine matters. The approval of the Amended and Restated 2006 Stock Incentive Plan is not considered “routine” under the applicable rules. When a proposal is not a routine matter and the brokerage firm has not received voting instructions from the beneficial holder of the shares with respect to that proposal, the brokerage firm cannot vote the shares on that proposal. This is called a “broker non-vote.” In tabulating the voting result for any particular proposal, shares that are subject to broker non-votes with respect to that proposal will not be considered voted either for or against it. Because all four proposals scheduled to be voted on at the Annual Meeting will be decided by a majority or plurality of the votes cast, broker non-votes on any proposal will have no effect on the outcome of the vote on that proposal at the Annual Meeting, assuming that a quorum is obtained.

 

What does it mean if I receive more than one Mueller Water Products stockholder package?

 

If you receive more than one package of proxy materials, this means that you have multiple accounts holding Mueller Water Products shares with brokers and/or our transfer agent. Please vote

all of your shares by voting the control number on the proxy card included in each package that you receive.

 

How are my Employee Stock Purchase Plan shares voted?

 

If you are a registered stockholder and/or own Mueller Water Products stock in an Employee Stock Purchase Plan and the accounts are registered in the same name, you will receive one package of proxy materials representing your combined shares.

 

What happens if I abstain from voting?

 

If your shares are represented at the Annual Meeting, in person or by proxy, but you abstain from voting on a matter, or include instructions in your proxy to abstain from voting on a matter, your shares will be counted for the purpose of determining if a quorum is present, but will not be counted as either an affirmative vote or a negative vote with respect to that matter. Because all four proposals scheduled to come before the meeting will be decided by a majority or plurality of the votes cast, an abstention on any proposal will have no effect on the outcome of the vote on that proposal, assuming that a quorum is obtained.

 

What do I need to do if I want to attend the Annual Meeting?

 

You do not need to make a reservation to attend the Annual Meeting. However, attendance at the Annual Meeting is limited to Mueller Water Products stockholders, members of their immediate families or their named representatives. The Company reserves the right to limit the number of representatives who may attend the meeting.

 

Who is soliciting proxies?

 

The Company will bear the cost of soliciting proxies. In addition to soliciting stockholders by mail, the Company will request banks, brokerage houses, and other custodians, nominees, and fiduciaries to forward solicitation materials to the beneficial owners of the stock held of record by such persons and the Company will reimburse them for their reasonable out-of-pocket expenses incurred in doing so. The Company may use the services of its officers and other employees of the Company who will receive no compensation for their services, other than their regular compensation, to solicit proxies personally, by telephone or by facsimile transmission. The Company has retained the services of The Altman Group to aid in the solicitation of proxies, including the solicitation of proxies from brokerage firms, banks, nominees, custodians, and fiduciaries, for a fee not anticipated to exceed $6,500 plus expenses. Your cooperation in promptly voting by proxy via the medium of your choice will help to avoid additional expense.

 

IN ORDER THAT YOUR SHARES OF COMMON STOCK MAY BE REPRESENTED AT THIS MEETING IN CASE YOU ARE NOT PERSONALLY PRESENT, YOU ARE REQUESTED TO PLEASE SIGN, DATE, AND MAIL THE PROXY PROMPTLY OR FOLLOW THE DIRECTIONS PROVIDED ON YOUR PROXY CARD.

 

CORPORATE GOVERNANCE

 

The Board has adopted Corporate Governance Guidelines that are posted on the corporate governance page of the Company’s website at www.muellerwaterproducts.com and are available in print to stockholders who request a copy. The Corporate Governance Guidelines set forth the practices the Board will follow with respect matters such as director responsibilities, compensation, and access to management. In addition, the Corporate Governance Guidelines address the use of outside advisors, management succession, and an annual self-evaluation of the Board.

 

Independence of Directors

 

Mr. Hyland, our Chairman and Chief Executive Officer, is not independent because he is a member of management and an employee of the Company. The New York Stock Exchange does not consider Mr. O’Brien independent under Section 303A.02(b) of the New York Stock Exchange Listed Company Manual because he has served as an employee of the Company’s former parent within the last three years. Mr. O’Brien has been Chairman and Chief Executive Officer of Walter Industries’ Home Business since March 2006; he currently has no relationship, material or otherwise, with the Company.

 

The Board annually assesses the outside affiliations of each director to determine if any of these affiliations could cause a potential conflict of interest or could interfere with the independence of the director. Based on information furnished by all members regarding their relationships with Mueller Water Products and its subsidiaries and research conducted by management with respect to outside affiliations, the Board has determined that none of the directors has a material relationship with Mueller Water Products other than his role as director, and, except as set forth above each is independent because:

 

 

Categorical Standards of Independence

 

The Company has established categorical standards of independence for the Board of Directors. These standards are outlined in the Company’s Corporate Governance Guidelines. To be considered “independent” for purposes of the director qualification standards, (A) the director must meet bright-line independence standards under the New York Stock Exchange listing standards, and (B) the Board must affirmatively determine that the director otherwise has no material relationship with the Company, directly or as an officer, shareowner or partner of an organization that has a relationship with the Company.

 

The following relationships will be considered to be immaterial relationships that would not impair a director’s independence if they are conducted in the ordinary course of business:

 

(i) The director is a director or trustee but not an executive officer or any member of his or her immediate family is a director, trustee or employee, but not an executive officer, of any other organization (other than the Company’s outside auditing firm) that does business with, or receives donations from, the Company;

 

(ii) The director or any member of his or her immediate family is an executive officer of any other organization which is indebted to the Company, or to which the Company is indebted, and the total amount of either Company’s indebtedness to the other is less than $1 million or 2% of the total consolidated assets of the organization on which the director or any member of his or her immediate family serves as an executive officer, whichever is more; or

 

(iii) The director or any member of his or her immediate family serves as an executive officer of a charitable or educational organization that receives discretionary charitable contributions from the Company in a single fiscal year of less than $1 million or 2% of that organization’s consolidated gross revenues, whichever is more.

 

Independence of Committee Members

 

Each of the members of the Audit, Compensation and Human Resources, and Nominating and Corporate Governance Committees is independent in accordance with the New York Stock Exchange listing standards and the director independence standards set forth above. No member of the Audit Committee receives any compensation from the Company other than directors’ fees or is an affiliated person of the Company (other than by virtue of his or her directorship). Members of the Audit Committee meet the additional standards required by the Sarbanes-Oxley act of 2002. Members of the Compensation and Human Resources Committee meet the additional standards applicable to “outside directors” under Internal Revenue Code Section 162(m) and qualify as “non-employee directors” as defined in Rule 16b-3 under the Exchange Act.

 

Policy for Approval of Related Person Transactions

 

The Board of Directors has adopted a written Related Person Transaction Policy that is administered by the Nominating and Corporate Governance Committee. This policy applies to any transaction or series of transactions in which the Company or a subsidiary is a participant, the amount involved exceeds or may be expected to exceed $100,000 and a related person has a direct or indirect material interest. Under the Policy, a “related person” includes (A) any person who is or was, since the beginning of the last fiscal year, an executive officer, director or nominee for election as a director of the Company, (B) a greater than 5% beneficial owner of either series of the Company’s common stock or (C) an immediate family member of either of the foregoing. Under the Policy, management will determine whether a transaction meets the requirements of a Related Person Transaction requiring review by the Committee. Transactions that fall within this definition will be referred to the Committee for approval, ratification or other action. Based on its consideration of all of the relevant facts and circumstances, the Committee will decide whether or not to approve such transaction and will approve only those transactions that are in the best interests of the Company. In addition, the Board of Directors has delegated to the Chair of the Nominating and Corporate Governance Committee the authority to pre-approve or ratify any transaction with a related person in which the aggregate amount involved is expected to be less than $500,000.

 

Related Person Transactions

 

The Company did not engage in any transaction during fiscal 2007, and has no currently proposed transaction, in which the amount involved exceeds $120,000 and a related person had or will have a direct or indirect material interest.

 

Director Attendance at Board, Committee and Annual Meetings

 

During the fiscal year ended September 30, 2007, the Board held eight meetings. Each director attended at least 75% of all meetings of the Board and of the committees of the Board on which he served during fiscal 2007. The non-management directors meet in executive session on at least a quarterly basis. The Chairman of the Nominating and Corporate Governance Committee, currently Howard L. Clark, Jr., presides at the executive session of the independent directors.

 

Directors are expected to attend annual meetings of the stockholders of the Company. All of the directors attended the Company’s Annual Meeting of Stockholders held on March 22, 2007.

 

Committees of the Board

 

The Board has four standing committees that assist the Board in carrying out its duties: the Audit Committee; the Compensation and Human Resources Committee; the Nominating and Corporate Governance Committee; and the Environmental Health and Safety Committee. An additional committee, the Executive Committee, meets only when called by the Chairman of the Board. The charter of each of these committees is available on the Company’s website at www.muellerwaterproducts.com and may be obtained, without charge, by contacting the Corporate

Secretary, Mueller Water Products, Inc., 1200 Abernathy Road, N.E., Suite 1200, Atlanta, Georgia 30328.

 

The Board of Directors has affirmatively determined that the Audit Committee, the Compensation and Human Resources Committee, and the Nominating and Corporate Governance Committee consist entirely of independent directors under the rules established by the New York Stock Exchange and, as applicable, the Securities and Exchange Commission. The following chart shows information regarding the membership of each of the Board’s committees:

 

 

Audit Committee.  The Audit Committee’s primary purpose is to assist the Board in fulfilling its responsibility to the Company’s stockholders relating to the Company’s financial reporting process and systems of internal control. The Audit Committee is also responsible for determining whether the Company’s financial systems and reporting practices are in accordance with applicable requirements. Further, the Audit Committee retains and terminates the Company’s independent auditors, and approves services and fees of the independent auditors.

 

The Board of Directors has determined that all Audit Committee members are financially literate under the New York Stock Exchange listing standards. All of the members of the Audit Committee qualify as audit committee financial experts within the meaning of the rules and regulations of the Securities and Exchange Commission.

 

The Audit Committee has adopted procedures for pre-approving all audit and non-audit services provided by the independent auditors. For both types of pre-approval, the Audit Committee considers whether such services are consistent with the Securities and Exchange Commission’s rules on auditor independence. The Audit Committee also considers whether the independent auditors are able to provide the most effective services, for reasons such as their familiarity with the Company’s current and past business, accounting systems and internal operations, and whether the services enhance the Company’s ability to manage or control risks and improve audit quality. The Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee with respect to individual projects up to $100,000. The Audit Committee periodically monitors the services rendered and actual fees paid to the independent auditors to ensure that such services are within the parameters approved by the Audit Committee.

 

Compensation and Human Resources Committee.  The Compensation and Human Resources Committee is responsible for reviewing and approving salaries of senior officers of the Company and the presidents of its significant subsidiaries and for reviewing and recommending for approval by the Board executive and key employee compensation plans, including incentive compensation, stock incentives and other benefits. The Compensation and Human Resources Committee is also responsible for reviewing and recommending to the full Board compensation of directors as well as director’s and officer’s indemnification and insurance matters.

Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee is responsible for establishing the criteria for and the qualifications of persons suitable for nomination as directors and reporting its recommendations to the Board. The Board determines the number of directors that shall constitute the Board of Directors, subject to the requirement set forth in the Company’s by-laws that the number of directors shall be not less than six nor more than eleven. The Nominating and Corporate Governance Committee will consider candidates for election as directors of the Company submitted by stockholders. In identifying candidates for membership on the Board of Directors, the Committee takes into account all factors it considers appropriate, which may include strength of character, mature judgment, career specializations, relevant technical skills, diversity, and the extent to which a candidate would fill a need on the Board of Directors. The Committee’s policy with regard to director candidates submitted by stockholders is to consider such submissions in accordance with the procedures described under “— Director Nomination Process” beginning on page 10 of this Proxy Statement.

 

Environmental, Health and Safety Committee.  The Environmental, Health and Safety Committee reviews and updates, as appropriate, the policies and procedures of the Company regarding compliance with the various laws, regulations and rules pertaining to health, safety and the environment. The Committee also monitors the Company’s compliance with its policies and procedures concerning health, safety and the environment, and obtains periodic reports from Company and subsidiary management, environmental counsel and health and safety personnel. The Environmental, Health and Safety Committee reviews and approves the proposed scope of internal and independent environmental, health and safety audits.

 

Executive Committee.  The Executive Committee’s principal function is to exercise the interim powers delegated to the Committee at any time when any matter requires expeditious action by the Board or when it would not be practical for the full Board to meet to review or act upon any matter. In addition, if the Board of Directors expressly provides by resolution, the Executive Committee can declare dividends payable on the securities of the Company during months when the Board is not regularly scheduled to meet or does not meet.

 

The Executive Committee has and may exercise, during the intervals between meetings of the Board, all the powers and authority vested in the Board of Directors except the following: (A) the power or authority to amend the Company’s Certificate of Incorporation; (B) the power or authority to amend the Company’s By-Laws; (C) the power or authority to adopt an agreement of merger; (D) the power or authority to exchange, consolidate, sell, lease, pledge or exchange all or substantially all of the Company’s assets; (E) the power or authority to adopt or revoke a plan of dissolution; (F) the power or authority delegated to any other committee of the Board of Directors; and (G) such other powers or authority as are restricted in the Business Corporation Laws or the By-Laws.

 

Other Committees.  The Board also established an Integration Committee, consisting of Messrs. Boyce, Hyland, Rethore and Springer, and a Finance Committee, consisting of Messrs. Boyce, Hyland and Tokarz. The Integration Committee was created to oversee the Company’s synergy plan and it was disbanded in October 2007 upon completion of the plan. The Finance Committee reviewed and approved documents relating to the Company’s financial restructuring that was completed in May 2007. Members were paid for meeting fees for meetings of the Integration Committee but not for meetings of the Finance Committee.

 

Compensation Committee Interlocks and Insider Participation

 

The Compensation and Human Resources Committee consists of Donald N. Boyce, Jerry W. Kolb, Bernard G. Rethore and Neil A. Springer. None of the members of the Compensation and Human Resources Committee is a former or current officer or employee of the Company or any of its subsidiaries.

 

Communicating with our Board of Directors

 

Stockholders and other interested persons may communicate to the Chairman of the Audit Committee or the Chairman of the Nominating and Corporate Governance Committee, in care of the Company’s Corporate Secretary at the Company’s principal executive office address — 1200 Abernathy Road, N.E., Suite 1200, Atlanta, Georgia 30328. Stockholders and other interested persons may also communicate with any of the non-management directors, in care of the Company’s Corporate Secretary at the Company’s principal executive office address or by sending an e-mail message to the directors at boardofdirectors@muellerwp.com or to the Audit Committee at auditcommittee@muellerwp.com. If the correspondence is specifically marked as a private communication for the Board of Directors (or a specific member or members of the Board), the Corporate Secretary will not open or read the correspondence, but will forward it to the addressee or the Chairman of the Audit Committee. These procedures may change from time to time, and you are encouraged to visit our website for the most current means of contacting our directors.

 

Director Nomination Process

 

In discharging its responsibility, the Nominating and Corporate Governance Committee receives input from the Chairman of the Board, other Board members and the Committee’s professional search firm. It also considers and evaluates any candidates recommended by stockholders, as described below.

 

The Committee decides whether to further evaluate each candidate and has selected an independent recruiting firm to assist in the discharge of its duties. The evaluation includes a thorough reference check, interaction and interviews, and discussions about the candidate’s availability and commitment. After discussion of each candidate’s qualifications, the Chairman of the Nominating and Corporate Governance Committee interviews each candidate. The Committee Chairman will select certain candidates to be interviewed by the Chairman of the Board and other members of the Committee. The Committee reviews the results of all interviews and makes a recommendation to the full Board that the candidate be elected to the Board. The Board expects all candidates recommended to the full Board to have received the approval of all members of the Committee.

 

In determining the best candidate, the Board has directed the Committee to consider the key criteria and competencies for the Directors described below. In addition, the Board has determined that its members should bring to the Company a broad range of experience, knowledge and judgment. The candidate must be prepared to represent the interests of the Company and all its stockholders, not the interests of particular constituencies.

 

The Committee uses a matrix of key criteria and competencies to evaluate potential candidates. The Committee carefully reviews all current Directors and Director candidates in light of these qualifications based on the context of the current and anticipated composition of the Board, the current and anticipated operating requirements of the Company and the long-term interests of the stockholders. In reviewing a candidate, the Committee considers the integrity of the candidate and whether the candidate would be independent as defined in the Corporate Governance Guidelines and in the listing standards of the New York Stock Exchange. The Committee expects a high level of involvement from its Directors and reviews, if applicable, a candidate’s service on other boards to assess whether the candidate has sufficient time to devote to Board duties.

 

Key Criteria (required for all directors):

 

 

 

Key Competencies (not necessary for all directors)

 

 

Any stockholder who wishes to have the Nominating and Corporate Governance Committee consider a candidate is required to give written notice of the stockholder’s intention to make such a nomination. Notices of nomination for the 2009 Annual Meeting of Stockholders of the Company must be received no later than September 18, 2008 at the Company’s principal executive offices, at 1200 Abernathy Road, N.E., Suite 1200, Atlanta, Georgia 30328, directed to the attention of the Corporate Secretary, to be considered for inclusion in the Company’s proxy materials for the 2009 Annual Meeting. The notice of nomination is required to contain certain information about both the nominee and the stockholder making the nomination, and such other information as set forth in the Company’s by-laws. A proposed nomination which does not comply with the above requirements will not be considered.

 

Code of Conduct Policy and Compliance Program

 

The Board has adopted a Code of Business Conduct (“Code of Conduct”) that is applicable to all employees, directors, and officers of the Company and its subsidiaries. The Code of Conduct is posted on the corporate governance page of the Company’s website at www.muellerwaterproducts.com and is available in print to stockholders who request a copy. The Company also has made available an Ethics Hotline, where employees can anonymously report an alleged violation of the Code of Conduct.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

This Compensation Discussion and Analysis describes the compensation philosophy and structure under which the Company compensated its executive officers for the fiscal year ended September 30, 2007 (“fiscal 2007”).

 

Named Executive Officers

 

Throughout this Proxy Statement, the following individuals are collectively referred to as the “named executive officers”:

 

Corporate Executives

 

 

Operations Executives

 

The Company is currently organized into three business segments, each led by a senior executive. Mueller Group is defined as the Mueller Co. and Anvil segments. Other than Mr. Smith, who oversees two business segments, these operations executives have comparable responsibilities. We are including all four as named executive officers in this Proxy Statement even though we are only required to include the three highest paid.

 

For Mueller Group:

 

 

For Anvil:

 

 

For U.S. Pipe:

 

 

For Mueller Co.:

 

 

Executive Compensation Philosophy

 

The Compensation and Human Resources Committee of the Board (the “Compensation Committee”), which consists entirely of independent directors, is responsible for establishing and reviewing our overall compensation philosophy. The Compensation Committee believes that the compensation paid to executives should be structured to provide our executives with meaningful rewards, while maintaining alignment with stockholder interests, corporate values and management initiatives. Our executive compensation program is designed to:

 

 

 

In accordance with this philosophy, the Compensation Committee believes that the executive compensation package should consist of cash and equity based compensation, including base salary, annual cash incentive compensation, long-term equity-based compensation (that may include equity or cash), perquisites and other personal benefits.

 

Oversight of Compensation Program

 

The Compensation Committee establishes new executive compensation plans, including incentive-compensation plans and equity-based plans, and oversees management’s administration of those plans. The Compensation Committee also reviews and approves annually all compensation decisions affecting our key officers, including our named executive officers.

 

The Compensation Committee performs the following functions in carrying out its responsibilities:

 

 

The Compensation Committee’s responsibilities are described in its charter, which is available on the corporate governance page of our website at www.muellerwaterproducts.com. The Compensation Committee reviews the charter annually and recommends to the Board any improvements to the Charter that it considers necessary or important. The Board annually determines membership of the Compensation Committee.

 

Determining Executive Compensation

 

During fiscal 2007, the Compensation Committee retained Hewitt Associates (“Hewitt”) as its outside consultant to advise the Compensation Committee on executive compensation. Hewitt assists the Compensation Committee by providing external market data on compensation practices and programs of peer group companies. Specifically, the Compensation Committee asked Hewitt to collect data from the peer group companies to assess base pay, bonus opportunity, bonus paid and long-term incentive practice.

 

Hewitt and management recommended to the Compensation Committee a peer group of 26 companies whose executive compensation programs would be analyzed for benchmarking purposes. Hewitt selected companies for the peer group (for review by management and the Compensation Committee) that have a primary manufacturing component to their business, are publicly traded and registered with the Securities and Exchange Commission and have annual revenue between $800 million and $6.5 billion. The median annual revenue for the peer group is $2.4 billion. Further, Hewitt and management proposed companies that, they believed, based on their

industry and size, could potentially compete with the Company for talented executives. The Compensation Committee approved the following peer group for fiscal 2007:

 

 

In November 2006, July 2007 and November 2007, the Compensation Committee reviewed compensation tally sheets for each executive officer. These tally sheets, which were prepared by management, illustrate current and historical levels of each executive officer’s compensation and, in some cases, target compensation. The tally sheets affix current and historical dollar amounts to each component of the executive officer’s compensation, including salary, annual incentive pay (target and actual), outstanding equity awards, other benefits, potential change-in-control payments, severance payments and any other compensation arrangements.

 

In determining compensation, the Compensation Committee considered the impact on each executive officer’s total compensation of its decisions with respect to each specific element of compensation. Further, the Compensation Committee reviewed the tally sheets of the executive officers against survey data provided by Hewitt as well as internal and external adjustment factors such as individual performance, overall contribution to the business, future potential, retention concerns and budgetary constraints. The Compensation Committee uses tally sheets to regularly assess each executive officer’s total compensation package and the individual components of the compensation package. In addition, the Compensation Committee intends to review tally sheets at any time that an executive officer is being considered for promotion or other change in responsibilities and in connection with special awards.

 

In setting compensation levels, the Compensation Committee considers the evaluation by the Company’s chief executive officer of the executive officers and other key employees. The Chief Executive Officer considers the recommendations of supervising executive officers regarding total compensation for those executive officers reporting directly to them.

 

Role of Chief Executive Officer in Setting Executive Compensation

 

Our Chief Executive Officer, Mr. Gregory E. Hyland, is not a member of the Compensation Committee and does not vote at Compensation Committee meetings. Mr. Hyland may call meetings of the Compensation Committee and he regularly attends Compensation Committee meetings. In fiscal 2007, Mr. Hyland was present at all of the Committee’s meetings. He does not participate in executive sessions or discussions about his compensation. Mr. Hyland also participated in meetings between management, Hewitt and the chair of the Compensation Committee. Mr. Hyland proposes to the Compensation Committee compensation packages for new executive officers and salary increases, as well as short-term and long-term incentive compensation awards, for each of the executive officers other than himself. From time to time, Mr. Hyland recommends that the Compensation Committee consider additional compensation arrangements for one or more executive officers. In fiscal 2007,

Mr. Hyland recommended that the Compensation Committee adopt a special bonus program for Anvil executives.

 

Compensation Elements

 

Base Salary

 

The Company provides named executive officers and other employees with base salary to compensate them for services rendered during the fiscal year. Base salaries for executive officers for fiscal 2007 were developed based on position-specific market data using the approved peer group. The Compensation Committee targeted the base salary for each position at the 50^th percentile of the approved peer group. In determining actual salary for each executive officer, the Compensation Committee assessed the responsibilities associated with the position, individual contribution and performance, Company performance and the compensation paid to the other executive officers. On an aggregate basis, the base salary of the named executive officers in fiscal 2007 was 99.6% of the 50^th percentile of the approved peer group. Salaries earned by named executive officers in fiscal 2007 are reflected in the “Salary” column of the Summary Compensation Table on page 24 of this Proxy Statement.

 

Annual Cash Incentive Compensation

 

The Company has established annual bonus opportunities for executive officers and other key employees to promote a “pay for performance” culture and to provide a competitive element of executive compensation. Annual incentive compensation for fiscal 2007 was awarded under our Executive Incentive Plan (the “Executive Incentive Plan”), which provides executive officers and other key employees with the opportunity to earn cash awards based on the achievement of pre-established measurable financial and individual objectives. The Compensation Committee sets target bonuses to motivate and focus each executive on the achievement of annual financial and individual performance goals and to remain competitive with the approved peer group.

 

For corporate-level executive officers and Mr. Torok from our U.S. Pipe segment, annual incentive opportunities, expressed as a percentage of base salary, were targeted at the 50^th percentile relative to the approved peer group. Historically, annual incentive opportunities for each executive of Mueller Co., Anvil and Mueller Group were based on a designated percentage of a pre-established bonus pool. The bonus pool was calculated as a designated percentage of a financial metric that measures overall profitability and that metric varied over time. As a result, for Mr. Gaskin from Mueller Co., Mr. Fish from Anvil and Mr. Smith from Mueller Group, annual incentive opportunities for fiscal 2007 are substantially above the 50^th percentile of the approved peer group. When compared to the 50th percentile of the approved peer group, Mr. Smith’s targeted bonus for fiscal 2007 represents approximately six times, Mr. Gaskin’s target bonus represents approximately two times and Mr. Fish’s targeted bonus represents approximately 1.4 times.

 

The Compensation Committee approved annual financial and individual goals for each executive officer in the first quarter of fiscal 2007. The executive officer must achieve minimum individual performance goals for any portion of the annual cash award to be payable. In fiscal 2007, the potential incentive opportunity for each executive under the Executive Incentive Plan was weighted 20% on the achievement of specific individual goals and 80% on the achievement of financial goals. With respect to financial goals, the potential incentive opportunities for corporate executives were based 50% on consolidated net income and 30% of operating income after taxes as a percentage of certain net assets used by the business (“RONA”). For operations executives, the potential incentive opportunities were based 50% on operating income and 30% on RONA, in each case of their respective business units. All dollar targets for the financial goals are calculated using a percentage increase of year over year growth.

 

Payouts under the Executive Incentive Plan can range from 0% to 200% of the target incentive award, as set forth in the table below, depending on the degree of financial and individual performance relative to pre-established goals for that particular year.

Individual Goals.  With regard to individual goals, the table below shows the performance range and percent of target that may be earned in connection with the satisfaction of individual goals by the executive officers. Individual goals are quantifiable to the extent practicable. Any individual goals that are not quantifiable are reviewed subjectively and the percent of goal achieved is determined by the executive’s direct supervisor and agreed to by the Chief Executive Officer and the Compensation Committee. In the case of the Chief Executive Officer, the Compensation Committee determines the percent achievement of any non-quantifiable goal. Performance results may fall within the specified amounts indicated in the table below and the Compensation Committee may apply discretion so long as the award complies with the terms of the Executive Incentive Plan. The Compensation Committee considers matters such as market conditions, strategic plans and executive contribution in using discretion to determine individual awards.

 

Individual Performance
(Individual Goals Have a Total Weight of 20% of the Incentive Target)

 

 

Financial Goals.  With regard to the Company’s or business unit’s financial goals, the following table shows the fiscal 2007 performance targets for each executive officer along with the attained results. The targets vary by business unit to reflect historical performance, competitive standing and other relevant matters.

 

The net income/segment operating income target for fiscal 2007 is achieved at 100% if actual results improve by 6% over fiscal 2006 consolidated net income or segment operating income, respectively. The return on net assets (RONA) target is achieved at 100% if actual results improve by 25 basis points (in the case of corporate and Messrs. Gaskin and Smith) and 30 basis points (in the case of Messrs. Fish and Torok) over fiscal 2006 RONA. The Compensation Committee made certain adjustments to the fiscal 2007 calculations for the executive officers to account for events it believes should not be considered in the calculation, such as the effect of the refinancing completed in May 2007, the direct out-of-pocket costs of achieving synergy-related projects, costs to close certain facilities and changes in inventory valuation.

Financial Performance

(Financial Goals Have a Total Weight of 80% of the Incentive Target)

 

 

Payout Amounts

 

Individual cash incentive payments for each executive officer were determined using the following calculation:

 

Incentive Payout = (Income Goal: 50% of Target Bonus x Payout Factor) + (RONA Goal: 30% of Target Bonus x Payout Factor) + (Personal Goals: 20% of Target Bonus x Payout Factor)

 

For services rendered to the Company in fiscal 2007, the Compensation Committee approved payment of an aggregate of $2,086,351 in performance-based awards to ten executive officers. These amounts were paid in December 2007. Because Walter Industries paid Mr. Hyland’s incentive compensation for the period from October 1, 2006 through December 31, 2006, Mr. Hyland was entitled to pro rated incentive compensation for fiscal 2007 reflecting nine months of Company and individual performance. Mr. Vollkommer, who joined the Company in May 2007, was entitled to pro rated incentive compensation for fiscal 2007 based on his start date. Actual amounts earned by the named executive officers under the Executive Incentive Plan for performance in fiscal 2007 are reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 24 of this Proxy Statement.

Long-Term Equity-Based Compensation

 

The Compensation Committee awards long-term equity-based incentive compensation to executive officers and certain key employees and consultants under the Company’s 2006 Stock Incentive Plan, which was approved by the sole stockholder of the Company on May 25, 2006. The Compensation Committee approved an Amended and Restated Stock Incentive Plan (the “Stock Incentive Plan”) on November 29, 2007. The amendments were made primarily to comply with Section 409A of the Internal Revenue Code, as amended. The Company is asking stockholders to approve the Stock Incentive Plan as Proposal 3 of this Proxy Statement.

 

The Stock Incentive Plan provides an opportunity for key employees to increase their stake in the Company through grants and issuance of stock options and other equity based awards. The Compensation Committee believes that providing equity as a component of executive compensation assures external competitiveness of total compensation, and motivates executive officers and key employees to focus on long-term Company performance and aligns the interests of key employees with the interests of the stockholders. In addition, equity awards serve to retain executives during the vesting period since, in most circumstances, the awards will be forfeited if the executive leaves the employ of the Company before the award vests or the applicable restrictions lapse.

 

The Compensation Committee based the annual equity awards made during fiscal 2007 on a target economic value of the award equal to the 50th percentile relative to the approved peer group, but made adjustments as appropriate based on the responsibilities of each executive officer, the strategic and operational goals and performance of each executive officer. In determining the actual number of stock options and restricted stock or restricted stock units to be granted, the Compensation Committee relied upon a detailed and consistent methodology, developed by Hewitt, to assign a value (the “economic value”) to each equity award. The resulting economic value calculated for each award is based, in part, on the actual design features of the grant, including term, vesting schedule, and the impact of certain employment terminations, among others. The economic value derived for each award will generally differ from the FAS 123R grant date fair value used for accounting purposes.

 

Before determining final awards, the Compensation Committee also considered the evaluation of each executive officer by our CEO. The actual award to Mr. Smith was 36.5% higher than the 50th percentile in order to satisfy the terms of the employment agreement entered into in January 2006. The actual award to Mr. Gaskin was 20.2% higher than the 50th percentile in order to satisfy the terms of the employment agreement entered into in July 2006. The Compensation Committee approved these employment agreements, which provided for equity awards that exceeded the 50th percentile of the approved peer group, before it adopted a compensation philosophy that targets compensation levels at the 50^th percentile of the approved peer group. The actual awards to the other named executive officers were between 20% and 40% below the 50^th percentile because the Compensation Committee considered the value of all of the outstanding equity awards held by such executive officers.

 

Prior to completion of the Spin-off (defined below) in December 2006, the Company followed Walter Industries’ compensation structure and granted to each executive officer a combination of stock options and performance-accelerated restricted stock units. Stock options were used to focus executives on increasing stockholder value through stock price appreciation.

 

Performance-accelerated restricted stock units were used to further focus executives on stock price appreciation while encouraging long-term retention of the executive. The equity grants made to the executive officers in November 2006 were intended to deliver the targeted economic value through a mix of 1/3 non-qualified stock options and 2/3 performance-accelerated restricted stock units. In January 2007, the Compensation Committee evaluated its equity grants practice and modified the mix to enhance the retention value of the long-term equity grants. Therefore, the Compensation Committee determined that the economic value of future long-term equity grants would be based on a mix of 50% non-qualified stock options and 50% time-based restricted stock units.

Non-Qualified Stock Options.  The Compensation Committee awarded each executive officer an annual grant of non-qualified stock options in November 2006. The annual grant is made as of the date of the Compensation Committee meeting and is not timed to the release of material nonpublic information. Executive officers who joined the Company after November 2006 received non-qualified stock options in connection with their commencement of employment. Information related to the stock options awarded to the named executive officers in fiscal 2007 is reflected in the Grants of Plan-Based Awards Table on page 26 of this Proxy Statement.

 

Restricted Stock Units and Shares of Restricted Stock.  The Compensation Committee awarded each executive officer an annual grant of restricted stock units in November 2006. These restricted stock units vest after seven years unless pre-determined stock prices are achieved and maintained for defined periods of time. Upon achievement and maintenance of each price target, 25% of the restricted stock units will vest on the next anniversary of the grant date. Accelerated vesting occurs if price appreciation of the Company’s Series A common stock exceeds 13% compounded annually from the grant date for a period of sixty consecutive calendar days.

 

In January 2007, the Compensation Committee determined that time-based vesting would enhance the retention value of the grants. Restricted stock units granted to executive officers who joined the Company after November 2006 vest in full on the third anniversary of the grant date. Mr. Vollkommer, the Company’s Chief Financial Officer, was granted shares of restricted stock, rather than restricted stock units, in connection with his commencement of employment in May 2007. Information related to the restricted stock units/shares of restricted stock awarded to the named executive officers in fiscal 2007 are reflected in the Grants of Plan-Based Awards Table on page 26 of this Proxy Statement.

 

Replacement Equity Grants.  On December 14, 2006, Walter Industries, the Company’s former parent, distributed to its stockholders all of the outstanding shares of the Company’s Series B common stock (the “Spin-off”).

 

In connection with the Spin-off in December 2006, the Company replaced equity grants relating to Walter Industries common stock that the executive officers had previously received from Walter Industries with equity grants from the Company. Each Walter Industries restricted stock unit was replaced by 3.239 restricted stock units of the Company’s Series A common stock, representing the conversion ratio that was used to value outstanding equity grants in connection with the Spin-off. Each option to purchase one share of Walter Industries common stock was replaced by an option to purchase 3.239 shares of Series A common stock of the Company, and the exercise price for the replacement options is the exercise price of the original Walter Industries stock option divided by 3.239. The vesting period and termination date of the replacement long-term equity grants is unchanged from the vesting period and termination date of the original Walter Industries grants. Information related to replacement equity grants awarded to the named executive officers in fiscal 2007 is reflected in the Grants of Plan-Based Awards Table on page 26 of this Proxy Statement.

 

Grants made in November 2007.  The Compensation Committee awarded each executive officer an annual grant of non-qualified stock options and restricted stock units in November 2007. The Compensation Committee based the annual equity award on a target economic value of the award equal to the 50^th percentile relative to the approved peer group, but made adjustments as appropriate based on the responsibilities of each executive officer and the strategic and operational goals and performance of each executive officer. Before determining final awards, the Compensation Committee also considered the evaluation by our CEO of each executive officer. The economic value of these grants was based on a mix of 50% non-qualified stock options and 50% time-based restricted stock units.

 

The stock options granted in November 2007 have a term of ten years and vest in equal installments on the first, second and third anniversary of the grant date. The exercise price of all such options is the closing price of the Company’s Series A common stock on the grant date. The

restricted stock units granted in November 2007 vest in equal installments on the first, second and third anniversary of the grant date.

 

Retirement Plans

 

The Company offers retirement benefits to its executive officers and other employees to provide a competitive source of retirement income. These retirement benefits are provided through a variety of vehicles described below.

 

Retirement Savings Plan Applicable to Employees Generally.  The Mueller Water Products, Inc. Retirement Savings Plan (“Savings Plan”) provides retirement benefits for non-union employees of the Company and participating subsidiaries after such employees complete a specified period of service. Messrs. Hyland, Sprick and Torok participate in the Savings Plan. Messrs. Gaskin, Smith and Fish participate in the Mueller Group, Inc. Retirement Savings and Investment Plan I, a 401(k) plan sponsored by Mueller Water Products, Inc.

 

Retirement Plan Applicable to Mr. Hyland.  In accordance with the terms of Mr. Hyland’s employment agreement, the Company adopted a limited retirement savings plan effective April 1, 2007 (the “Retirement Plan”) for the benefit of Mr. Hyland, the Company’s Chairman and Chief Executive Officer. That employment agreement was originally adopted by Walter Industries, and was assigned to and assumed by the Company on December 14, 2006 in connection with the completion of the Spin-off.

 

The Retirement Plan is intended to constitute an unfunded plan of deferred compensation for Mr. Hyland. Under the Retirement Plan, the Company credits a bookkeeping account for Mr. Hyland. Commencing April 16, 2007 and as of the 16th day of each calendar month thereafter until the earlier of September 16, 2010 or Mr. Hyland’s death, disability or termination of employment for any reason other than cause, an amount equal to 10% of Mr. Hyland’s then current base salary is credited to such account. The amounts credited to the Retirement Plan bear interest at 120% of the long term Applicable Federal Rate (as defined in the Internal Revenue Code) until payment. To date, $237,024 has been accrued and credited to Mr. Hyland’s deferral account.

 

Upon termination of Mr. Hyland’s employment at the Company, other than for cause, all deferred compensation under the Retirement Plan will be paid as a lump sum to Mr. Hyland or his designated beneficiary, subject to early withdrawal and deferral rights detailed in the Retirement Plan. Upon a termination of employment for cause, the entire Retirement Plan account will be forfeited.

 

The Company’s contributions to the Retirement Plan for Mr. Hyland can be found in the “All Other Compensation” column and footnote 2 of the Summary Compensation Table on page 24 of this Proxy Statement.

 

Perquisites and Other Personal Benefits

 

The Company provides perquisites to the named executive officers that the Compensation Committee believes are reasonable and consistent with its overall compensation program. The perquisites are intended to better enable the Company to attract and retain superior employees for key positions. In fiscal 2007, the Compensation Committee offered its named executive officers an automobile allowance or Company-leased vehicle, financial planning services, an executive physical exam and, in some cases, club memberships. The Compensation Committee annually reviews the level of perquisites provided to the named executive officers against the approved peer group. Certain perquisites provided to the named executive officers in fiscal 2007 are set forth in the “All Other Compensation” column and footnote 2 of the Summary Compensation Table on page 24 of this Proxy Statement.

 

Severance Benefits

 

All of the named executive officers are entitled to general severance benefits. Information regarding applicable payments under such arrangements and agreements for the named executive

officers is provided under the heading “Potential Payments Upon Termination or Change-in-Control” beginning on page 35 of this Proxy Statement.

 

Change-in-Control Agreements

 

The Compensation Committee believes that change-in-control agreements are an important component of executive officer compensation. Specifically, the Compensation Committee adopted change-in-control agreements that are intended to create incentives for our executive team to build stockholder value and to obtain the highest value possible should we be acquired in the future, despite the risk of losing employment and potentially not having the opportunity to otherwise vest in equity awards which comprise a significant component of each executive’s compensation. The change-in-control arrangements for our executive officers are “double trigger,” meaning that acceleration of vesting and severance payments are not awarded upon a change of control unless the executive’s employment is involuntarily terminated (other than for cause) within 24 months following the transaction. The Compensation Committee believes this structure strikes a balance between the incentives and the executive hiring and retention effects described above, without providing these benefits to executives who continue to enjoy employment with an acquiring company in the event of a change of control transaction. The Committee also believes this structure is more attractive to potential acquiring companies, who may place significant value on retaining members of our executive team and who may perceive this goal to be undermined if executives receive significant acceleration payments in connection with such a transaction and are no longer required to continue employment to earn the remainder of their equity awards.

 

Change-in-control agreements with the Company’s executive officers who were employed by the Company prior to the Spin-off were entered into when the Company was wholly owned by Walter Industries. The Compensation Committee approved change-in-control agreements for executive officers who were hired by the Company subsequent to the Spin-off. Key terms, such as triggering events, multiples of pay that would be paid upon the occurrence of those events and the acceleration of equity awards, were based on the agreements previously adopted by Walter Industries. Messrs. Fish, Gaskin, and Smith do not have change-in-control agreements because their severance arrangements generally protect them in the event of a termination following a change-in-control of the Company.

 

Compensation Program for Anvil Executives.  In December 2007, the Company adopted a new compensation program for its Anvil International business segment in which Mr. Fish, Anvil’s President, participates. Mr. Fish is entitled to receive (A) a special bonus award equal to 100% of his base salary if he remains employed by Anvil through September 30, 2009; and (B) an incentive award equal to 25% of his annual bonus for the period between October 1, 2007 and September 30, 2009 (or an earlier date, under certain circumstances) so long as he (i) remains continuously employed by Anvil through the date of payment of such award and (ii) achieves his annual performance targets.

 

Mr. Fish is also entitled to the special bonus award if there is a change of control of Anvil, and he is entitled to a termination payment equal to 100% of his salary and 100% of the greater of his target bonus and most recently paid bonus, if there is a change of control of Anvil and his employment is terminated without cause during the two year period thereafter. Cause is defined as (A) conviction of a felony or any other crime involving dishonesty, fraud or moral turpitude; (B) fiduciary breach against the Company, Anvil or the successor to Anvil; (C) failure to adequately perform his duties; and (d) negligence in the performance of his duties.

 

Change of Control means that (A) any person that is not affiliated with the Company and is not a trustee or other fiduciary holding securities under an employee benefit plan of the Company becomes the beneficial owner of partnership interests of Anvil representing more than 51% of the combined voting power of Anvil’s then outstanding partnership interests or (B) the Company sells or disposes of fifty one percent 51% or more of Anvil’s assets to a person that is not an affiliate of the Company.

Income Tax Consequences of Executive Compensation

 

Section 162(m) of the Internal Revenue Code of 1986 (the “Code”), limits the tax deductibility of compensation paid to each of the principal executive officer and the next three highest paid executive officers (excluding the chief financial officer) to $1 million in any year. However, performance-based compensation that has been approved by stockholders is excluded from the $1 million limit if, among other requirements, the compensation is payable only upon attainment of pre-established, objective performance goals. Performance-based compensation such as annual cash incentive compensation and stock option awards meet these requirements, and as such are deductible by the Company when they are paid to the executive officer. It is the intent of the Compensation Committee to maximize the extent of tax deductibility of executive compensation under the provisions of Section 162(m) of the Code so long as doing so is compatible with its determinations as to the most appropriate methods and approaches for the design and delivery of compensation.

 

Compensation Recovery Policy

 

The Board has given the Compensation Committee authority to make retroactive adjustments to any cash or equity-based incentive compensation paid to executive officers where the payment was predicated upon the achievement of certain financial results. In the event that those financial results are subject to restatement, the Compensation Committee will evaluate the nature and impact of the restatement and may make appropriate retroactive adjustments.

 

Stock Ownership Guidelines

 

The Compensation Committee believes that equity ownership serves a fundamental role in aligning the interests of executives and outside directors with the Company’s stockholders. Therefore, in July 2007 the Compensation Committee implemented stock ownership guidelines for executive officers and outside directors. The total stock value of the participant’s holdings of shares of Series A or Series B common stock of the Company (including direct ownership, ownership by immediate family members, shares owned in retirement, savings and profit sharing plans and unvested shares of restricted stock) must equal or exceed the specified target value, as follows:

 

 

Each individual has until the later of July 30, 2012, or five years from his or her date of employment, to achieve their respective ownership targets. If a participant is promoted, he or she will have at least three years to increase his or her holdings to meet the new higher ownership requirement. Outstanding stock options and unvested restricted stock units and restricted shares do not count toward the achievement of target ownership levels. Further long-term incentive grants can be modified in size and/or vehicle types to either penalize or to assist an executive in fulfilling the guidelines. The CEO and the Compensation Committee review the ownership of each executive officer and outside director annually.

 

Prior to attaining the target ownership levels, each executive officer and outside director may not sell shares of stock obtained through the Company’s compensation programs unless he or she holds (and after such sale will continue to hold) shares representing at least 60% of his or her ownership target. Any sales in excess of the allowable amount must be approved in advance by the Compensation Committee. Tendering shares to pay taxes, selling shares pursuant to a 10b5-1 Agreement to pay taxes, and tendering shares to pay the exercise price upon stock price exercises,

are permitted to the extent, in the Compensation Committee’s discretion, the individual is making adequate progress in achieving his or her ownership target.

 

Information regarding the beneficial stock ownership of the directors and named executive officers can be found under the heading “Beneficial Ownership of Common Stock — Ownership of Directors and Executive Officers” on page 42 of this Proxy Statement.

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following narrative, tables and footnotes describe total compensation earned during the fiscal year ended September 30, 2007 (“fiscal 2007”) for our named executive officers. The individual components of the total compensation calculation reflected in the Summary Compensation Table are described below:

 

Salary.  This column reflects base salary earned by our named executive officers during fiscal 2007. Refer to “Compensation Discussion and Analysis — Compensation Elements — Base Salary” on page 15 of this Proxy Statement

 

Bonus.  The Company did not pay its named executive officers non-performance based cash incentive awards for fiscal 2007.

 

Stock Awards.  The awards disclosed under the heading “Stock Awards” consist of (A) stock awards made to the named executive officers in fiscal 2007 and (B) replacement stock awards made as of December 15, 2006 as a result of the Spin-off to replace outstanding Walter Industries stock awards that were unvested or restricted. The dollar amounts for the awards represent the grant-date fair value-based compensation expense recognized in fiscal 2007 under Statement of Financial Accounting Standard No. 123(R) (“FAS 123R”) for each named executive officer as reported in our audited financial statements contained in our fiscal 2007 annual report. FAS 123R addresses the accounting for transactions in which a company issues equity instruments in exchange for goods or services. The recognized compensation expense of the stock awards for financial reporting purposes will vary from the actual amount ultimately realized by the named executive officers based on a number of factors. The ultimate value of the award will depend on the price of our Series A common stock on the vesting date. All stock awards are made with or in reference to the Company’s Series A common stock.

 

Option Awards.  The awards disclosed under the heading “Option Awards” consist of (A) option awards made to the named executive officers in fiscal 2007 and (B) replacement option awards made as of December 15, 2006 as a result of the Spin-off to replace outstanding Walter Industries options. The dollar amounts for the awards represent the grant-date fair value-based compensation expense recognized in fiscal 2007 under FAS 123R for each named executive officer and as reported in our audited financial statements contained in our fiscal 2007 annual report. Details about these awards are included in the Grant of Plan-Based Awards Table below. The recognized compensation expense of the option awards for financial reporting purposes will vary from the actual amount ultimately realized by the named executive officers due to stock price fluctuations, the fact that the valuation assumptions used may not be borne out over time, and the timing of the executive officer’s exercise or applicable vesting of the relevant stock grant.

 

Non-Equity Incentive Plan Compensation.  Non-Equity Incentive Plan Compensation consists of the Executive Incentive Plan awards earned in fiscal 2007. The earned amounts, which were paid in December 2007, were based on Company and individual performance during fiscal 2007.

 

All Other Compensation.  The amount disclosed under the heading “All Other Compensation” consists of the combined value of the named executive officer’s perquisites.

Fiscal 2007 Summary Compensation Table

 

 

 

 

 

 

 

Additional Calculation of Total Compensation

 

The rules of the Securities and Exchange Commission (the “SEC”) require that the Summary Compensation Table present the dollar amounts recognized for financial statement reporting purposes with respect to outstanding equity awards. However, these amounts have not been recognized as taxable income by the named executive officers. Set forth below is an additional calculation of total compensation for each named executive officer based on the grant date economic values of stock awards and option awards made in fiscal 2007. The economic value on the grant date was determined by Hewitt based upon an internally-developed methodology. This information is not a substitute for the information required by the SEC rules.

 

 

 

 

 

Grants of Plan-Based Awards Table

 

The following narrative, table and footnotes summarize the equity awards made to our named executive officers during fiscal 2007. All equity awards were granted under our 2006 Stock Incentive Plan. During fiscal 2007, we granted the following plan-based awards to our named executive officers:

 

 

The table below sets forth information with respect to each of these awards on a grant-by-grant basis.

 

Fiscal 2007 Grants of Plan-Based Awards Table