UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007 Commission file number 1-6770
MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-0790410
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8285 Tournament Drive, Suite 150
Memphis, Tennessee 38125
(Address of principal executive offices) (Zip Code)
(901) 753-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock outstanding as of
April 30, 2007, was 37,044,248.
-1-
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2007
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Condensed Consolidated Statements of Income
for the quarters ended March 31, 2007
and April 1, 2006 3
b.) Condensed Consolidated Balance Sheets
as of March 31, 2007 and December 30, 2006 5
c.) Condensed Consolidated Statements of Cash Flows
for the quarters ended March 31, 2007
and April 1, 2006 7
d.) Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 26
Part II. Other Information
Item 1. Legal Proceedings 27
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 30
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information 31
Item 6. Exhibits 32
Signatures 33
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands)
Net sales $ 609,782 $ 551,039
Cost of goods sold 536,578 457,069
---------- ----------
Gross profit 73,204 93,970
Depreciation and amortization 10,966 10,195
Selling, general, and
administrative expense 34,927 34,959
---------- ----------
Operating income 27,311 48,816
Interest expense (5,494) (4,862)
Other income, net 4,953 2,013
---------- ----------
Income before income taxes 26,770 45,967
Current income tax expense (9,013) (16,493)
Deferred income tax benefit 1,156 3,891
---------- ----------
Total income tax expense (7,857) (12,602)
---------- ----------
Net income $ 18,913 $ 33,365
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 37,027 36,691
Effect of dilutive stock options 117 390
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,144 37,081
---------- ----------
Basic earnings per share $ 0.51 $ 0.91
========== ==========
Diluted earnings per share $ 0.51 $ 0.90
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to condensed consolidated financial statements.
-4-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2007 December 30, 2006
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 194,489 $ 200,471
Accounts receivable, less allowance
for doubtful accounts of $7,645
2007 and $6,806 in 2006 370,957 281,679
Inventories 218,980 258,647
Other current assets 32,981 35,397
---------- ----------
Total current assets 817,407 776,194
Property, plant, and equipment, net 328,742 315,064
Goodwill 155,358 155,653
Other assets 32,080 21,996
---------- ----------
$ 1,333,587 $ 1,268,907
========== ==========
See accompanying notes to condensed consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
March 31, 2007 December 30, 2006
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 34,555 $ 35,998
Accounts payable 136,888 96,095
Accrued wages and other employee costs 30,398 43,281
Other current liabilities 93,988 80,145
---------- ----------
Total current liabilities 295,829 255,519
Long-term debt 308,130 308,154
Pension liabilities 20,028 19,900
Postretirement liabilities other
than pensions 27,419 16,699
Environmental reserves 9,197 8,907
Deferred income taxes 43,716 46,408
Other noncurrent liabilities 2,007 2,206
---------- ----------
Total liabilities 706,326 657,793
---------- ----------
Minority interest in subsidiaries 22,994 22,300
Stockholders' equity:
Preferred stock - shares authorized
5,000,000; none outstanding - -
Common stock - $.01 par value; shares
authorized 100,000,000; issued
40,091,502; outstanding 37,032,912
in 2007 and 37,025,285 in 2006 401 401
Additional paid-in capital, common 257,224 256,906
Retained earnings 399,095 386,038
Accumulated other comprehensive income 14,414 12,503
Treasury common stock, at cost (66,867) (67,034)
---------- ----------
Total stockholders' equity 604,267 588,814
---------- ----------
Commitments and contingencies - -
---------- ----------
$ 1,333,587 $ 1,268,907
========== ==========
See accompanying notes to condensed consolidated financial statements.
-6-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands)
Cash flows from operating activities
Net income $ 18,913 $ 33,365
Reconciliation of net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 11,012 10,240
Minority interest in subsidiary 402 393
Equity in earnings of
unconsolidated subsidiary - (964)
Deferred income taxes (1,156) (3,891)
Gain on disposal of properties (3,132) (121)
Stock-based compensation expense 628 607
Income tax benefit from exercise
of stock options (66) (228)
Changes in assets and liabilities:
Receivables (59,857) (51,641)
Inventories 66,512 (14,813)
Other assets (314) (4,676)
Current liabilities 13,445 (17,960)
Other liabilities 23 (175)
Other, net 719 104
---------- ----------
Net cash provided by (used in)
operating activities 47,129 (49,760)
---------- ----------
Cash flows from investing activities
Capital expenditures (8,725) (12,015)
Acquisition of business, net of
cash received (31,970) 3,632
Proceeds from sales of properties 3,032 253
---------- ----------
Net cash used in investing activities (37,663) (8,130)
---------- ----------
See accompanying notes to condensed consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands)
Cash flows from financing activities
Acquisition of treasury stock $ - $ (388)
Dividends paid (3,703) (3,684)
Repayments of long-term debt (17,429) (162)
Issuance of debt by joint venture 5,434 11,164
Issuance of shares under incentive
stock option plans from treasury 155 4,200
Income tax benefit from exercise
of stock options 66 228
---------- ----------
Net cash (used in) provided by
financing activities (15,477) 11,358
---------- ----------
Effect of exchange rate changes on cash 29 69
---------- ----------
Decrease in cash and cash equivalents (5,982) (46,463)
Cash and cash equivalents at the
beginning of the period 200,471 129,685
---------- ----------
Cash and cash equivalents at the
end of the period $ 194,489 $ 83,222
========== ==========
See accompanying notes to condensed consolidated financial statements.
-8-
MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. Results of operations for the interim periods presented are not
necessarily indicative of results which may be expected for any other
interim period or for the year as a whole. This quarterly report on Form
10-Q should be read in conjunction with the Company's Annual Report on Form
10-K, including the annual financial statements incorporated therein.
The accompanying unaudited interim financial statements include all
normal recurring adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods
presented. Certain amounts in the prior year's Condensed Consolidated
Financial Statements have been reclassified to conform to the current year
presentation.
Note 1 - Earnings per Common Share
Basic per share amounts have been computed based on the average number
of common shares outstanding. Diluted per share amounts reflect the
increase in average common shares outstanding that would result from the
assumed exercise of outstanding stock options, computed using the treasury
stock method.
Note 2 - Commitments and Contingencies
The Company is involved in certain litigation as a result of claims
that arose in the ordinary course of business, which management believes
will not have a material adverse effect on the Company's financial position
or results of operations. Additionally, the Company may realize the benefit
of certain legal claims and litigation in the future; these gain
contingencies are not recognized in the Condensed Consolidated Financial
Statements.
Beginning in September 2004, the Company has been named as a defendant
in several purported class action complaints brought by direct and indirect
purchasers alleging anticompetitive activities with respect to the sale of
copper tubes in the United States (the Copper Tube Actions). Two such
purported class actions were filed in the United States District Court for
the Western District of Tennessee (the Federal Actions). The remaining
Copper Tube Actions were filed in state courts in Tennessee, California and
Massachusetts.
Certain of the Copper Tube Actions purport to address the sale of
copper plumbing tube in particular. Plaintiffs' motions to consolidate the
Federal Actions and the actions pending in California state court,
respectively, have been granted. All of the Copper Tube Actions, which are
similar, seek monetary and other relief.
-9-
Wholly owned Company subsidiaries, WTC Holding Company, Inc., Deno
Holding Company, Inc., and Mueller Europe Ltd. (Mueller Europe), are named
in all of the Copper Tube Actions, and Deno Acquisition Eurl is currently
named in two of the Copper Tube Actions but has not been served with the
complaints in those actions. The claims against WTC Holding Company, Inc.
and Deno Holding Company Inc. have been dismissed without prejudice in the
Copper Tube Actions pending in California and Massachusetts state courts.
In September 2006, the Federal Actions were dismissed as to Mueller
Europe for lack of personal jurisdiction. In October 2006, the Federal
Actions were dismissed in their entirety for lack of subject matter
jurisdiction as to all defendants. Although plaintiffs filed a motion for
reconsideration of the dismissal of Mueller Europe, the court has held that
such motion was mooted by its dismissal of the case for lack of subject
matter jurisdiction. Plaintiffs filed a motion to alter or amend the
judgment dismissing the complaint for lack of subject matter jurisdiction,
which the court denied in May 2007. Plaintiffs' time to file a notice of
appeal has not yet expired.
The Company's demurrer to the complaint and the Company's motion to
dismiss for failure to state a claim have been filed in the state court
actions filed in California and Tennessee, respectively. The Company has
not yet been required to respond to the complaint in the action pending in
Massachusetts state court. Mueller Europe has not yet been required to
respond to the complaints in any of the state court actions pending in
Tennessee, California or Massachusetts. The courts overseeing the
California and Massachusetts state court actions have stayed those actions
conditioned upon the parties' submitting periodic status reports on the
Federal Actions. Plaintiffs in the Massachusetts state court action have
filed a voluntary motion to dismiss that action without prejudice.
The Company believes that the claims for relief in the Copper Tube
Actions are without merit and intends to defend the Copper Tube Actions
vigorously.
In March 2006, the Company and Mueller Europe were named in a complaint
brought by Carrier Corporation, Carrier S.A., and Carrier Italia S.p.A.
alleging anticompetitive activities with respect to the sale of copper tubes
used in the manufacturing of air-conditioning and refrigeration units (ACR
copper tubes) in the United States and elsewhere (the Carrier Action). The
Carrier Action was filed in United States District Court for the Western
District of Tennessee.
In addition, beginning in April 2006, the Company has been named as a
defendant in several purported class action lawsuits brought by direct and
indirect purchasers alleging anticompetitive activities with respect to the
sale of ACR copper tubes in the United States and elsewhere (the ACR Class
Actions, and with the Carrier Action, the ACR Actions). Two of the ACR Class
Actions were filed by indirect purchasers in the United States District
Court for the Northern District of California, one of which alleges
anticompetitive activities with respect to plumbing tubes as well as ACR
copper tubes. Five of the ACR Class Actions (two of which have been
consolidated to become the Indirect ACR Class Actions and three of which
have been consolidated to become the Direct ACR Class Actions) were filed in
the United States District Court for the Western District of Tennessee.
-10-
Mueller Europe and the Company are named in all of the ACR Actions.
WTC Holding Company, Inc., Deno Holding Company, Inc., and Deno Acquisition
Eurl are named in one of the ACR Class Actions filed in the United States
District Court for the Northern District of California. Motions to dismiss
by the Company and by Mueller Europe are pending in the Carrier Action and
the Direct ACR Class Actions. The Company and Mueller Europe have been
served, but have not yet been required to respond, in the Indirect ACR Class
Actions. The Company, Mueller Europe, WTC Holding Company, Inc., and Deno
Holding Company, Inc. have been served, but have not yet been required to
respond, in one of the ACR Class Actions filed in the United States District
Court for the Northern District of California. Plaintiffs in the second of
the ACR Class Actions filed in the United States District Court for the
Northern District of California (which addressed only ACR copper tubes) have
voluntarily dismissed that action without prejudice.
The Company believes that the claims for relief in the ACR Actions are
without merit and intends to defend the ACR Actions vigorously.
Two of the Company's subsidiaries, Mueller Copper Tube Products Inc.
and Mueller Copper Tube Company Inc., brought a lawsuit (the Price
Manipulation Action) against J.P. Morgan Chase & Co. and Morgan Guaranty
Trust Company of New York (collectively Morgan) to recover damages the
Company believes it suffered on first purchases of copper cathode resulting
from an alleged conspiracy to manipulate the price of copper cathode by
Morgan (and certain of its predecessors and affiliates) and others in
violation of the federal antitrust laws. The lawsuit was filed on June 12,
2003, in the U.S. District Court for the Western District of Wisconsin. The
Company's lawsuit was consolidated with those of certain other first
purchasers of copper cathode and rod under the name In re Copper Antitrust
Litigation. Although the Price Manipulation Action was dismissed by the
district court on March 2, 2004, as barred by the statute of limitations,
the U.S. Court of Appeals for the Seventh Circuit, on February 6, 2006,
reversed the district court's decision in part and remanded the Price
Manipulation Action for further proceedings in the district court. On
January 16, 2007, Morgan filed a Motion for Summary Judgment which the
District Court denied on April 24, 2007. Trial is set for May 29, 2007.
Although the Company is unable to predict the likely outcome of the Price
Manipulation Action at this time, the Company is prosecuting the case
vigorously, and intends to continue to do so in the future.
In June 2006, the Canada Border Services Agency (CBSA) initiated an
investigation into the alleged dumping of certain copper pipe fittings from
the United States and from South Korea, and the dumping and subsidizing of
these same goods from China. The Company and certain affiliated companies
were identified by the CBSA as exporters and importers of these goods.
On January 18, 2007, the CBSA issued a final determination in its
investigation. The Company was found to have dumped subject goods during
the CBSA's investigation period. On February 19, 2007, the Canadian
International Trade Tribunal (CITT) concluded that the dumping of the
subject goods from the United States had caused injury to the Canadian
industry.
-11-
As a result of these findings, exports of subject goods to Canada by
the Company made on or after October 20, 2006 will be subject to antidumping
measures. Under Canada's system of prospective antidumping enforcement, the
Canada Border Services Agency has issued normal values to the Company.
Antidumping duties will be imposed on the Company's Canadian customers only
to the extent that the Company's future exports of copper pipe fittings are
made at net export prices which are below these normal values. If net
export prices for subject goods exceed normal values, no antidumping duties
will be payable. These measures will remain in place for five years, at
which time an expiry review will be conducted by Canadian authorities to
determine whether these measures should be maintained for another five years
or allowed to expire.
The Company is currently participating in a review process that will
lead to the issuance of revised normal values on July 16, 2007. Depending
on the level of these normal values, the Company's ability to compete in
Canada may be facilitated or impaired. However, given the small percentage
of its products that are sold for export to Canada, the Company does not
anticipate any material adverse effect on its financial condition as a
result of the antidumping case in Canada.
The Company is aware of an investigation of competition in markets in
which it participates, or has participated in the past, in Canada. The
Company does not anticipate any material adverse effect on its business or
financial condition as a result of that investigation.
The Company has assessed its risk and provided estimated accruals for
various potential tax matters in a number of jurisdictions. The ultimate
amount of the liabilities, if any, may vary, however, the Company believes
it has adequate reserves for its assessed risk.
Guarantees, in the form of letters of credit, are issued by the Company
generally to guarantee the payment of insurance deductibles, retiree health
benefits, and certain operating costs of a foreign subsidiary. The terms of
the Company's guarantees are generally one year but are renewable annually
as required. The maximum potential amount of future payments the Company
could have been required to make under its guarantees at March 31, 2007 was
$10.0 million.
-12-
Note 3 - Inventories
March 31, 2007 December 30, 2006
(In thousands)
Raw materials and supplies $ 29,706 $ 48,265
Work-in-process 34,191 40,209
Finished goods 160,351 188,457
Valuation reserves (5,268) (18,284)
---------- ----------
Inventories $ 218,980 $ 258,647
========== ==========
Inventories valued using the LIFO method totaled $18.9 million at
March 31, 2007 and $32.6 million at December 30, 2006. At March 31, 2007 and
December 30, 2006, the approximate FIFO cost of such inventories was $85.0
million and $143.1 million, respectively. The Company has deferred
recognizing potential gains resulting from liquidation of LIFO inventories
during the first three months of 2007. The Company expects to replenish
these inventories by the end of 2007 and, as such, has not recognized the
effects of liquidating LIFO layers. During the fourth quarter of 2006,
certain inventories valued using the FIFO method and certain firm commitments
to purchase inventories were written down to the lower of cost or market.
The write down of approximately $14.2 million resulted from the open market
price of copper falling below the inventories' net book value.
Note 4 - Industry Segments
The Company's reportable segments are Plumbing & Refrigeration and OEM.
For disclosure purposes, as permitted under Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information," certain operating segments are aggregated into
reportable segments. The Plumbing & Refrigeration segment is composed of
Standard Products (SPD), European Operations, and Mexican Operations. The
OEM segment is composed of Industrial Products (IPD) and Engineered Products
(EPD). These segments are classified primarily by the markets for their
products. Performance of segments is generally evaluated by their operating
income.
SPD manufactures copper tube and fittings, plastic fittings, and line
sets. These products are manufactured in the U.S. SPD also imports and
resells in North America brass and plastic plumbing valves, malleable iron
fittings, faucets, and plumbing specialty products. European Operations
consist of copper tube manufacturing, with such products being sold in Europe
and the Middle East, and import distribution of fittings, valves, and
plumbing specialties primarily in the U.K. and Ireland. Mexican Operations
consist of pipe nipple manufacturing and import distribution businesses
including product lines of malleable iron fittings and other plumbing
specialties. The Plumbing & Refrigeration segment's products are sold
primarily to plumbing, refrigeration, and air-conditioning wholesalers,
hardware wholesalers and co-ops, and building product retailers.
-13-
IPD manufactures brass rod, impact extrusions, and forgings as well as a
variety of end products including plumbing brass; automotive components;
valves and fittings; and specialty copper, copper-alloy, and aluminum tubing.
EPD manufactures and fabricates valves and assemblies for the refrigeration,
air-conditioning, gas appliance, and barbecue grill markets. The OEM segment
sells its products primarily to original equipment manufacturers, many of
which are in the HVAC, plumbing, and refrigeration markets. Included in the
OEM segment are the results of operations, from the date of acquisition, and
assets of Extruded Metals, Inc.
Summarized segment information is as follows:
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands)
Net sales:
Plumbing & Refrigeration $ 369,996 $ 386,941
OEM 243,730 167,972
Elimination of intersegment sales (3,944) (3,874)
---------- ----------
$ 609,782 $ 551,039
========== ==========
Operating income:
Plumbing & Refrigeration $ 26,854 $ 44,193
OEM 5,494 10,953
Unallocated expenses (5,037) (6,330)
---------- ----------
Total operating income 27,311 48,816
Interest expense (5,494) (4,862)
Other income, net 4,953 2,013
---------- ----------
Income before income taxes $ 26,770 $ 45,967
========== ==========
March 31, 2007 December 30, 2006
(In thousands)
Segment assets:
Plumbing & Refrigeration $ 730,530 $ 760,147
OEM 376,628 280,692
General corporate 226,429 228,068
---------- ----------
Total operating income $ 1,333,587 $ 1,268,907
========== ==========
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Note 5 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands)
Comprehensive income:
Net income $ 18,913 $ 33,365
Other comprehensive income:
Foreign currency translation 1,393 256
Change in the fair value
of derivatives, net of tax 518 156
---------- ----------
$ 20,824 $ 33,777
========== ==========
The change in cumulative foreign currency translation adjustment
primarily relates to the Company's investment in its foreign subsidiaries and
fluctuations in exchange rates between their local currencies and the U.S.
dollar, plus the tax effect of certain intercompany transactions. During the
first quarter of 2007, the value of the British pound sterling and the
Chinese renminbi increased 1 percent and 2 percent, respectively, compared to
the U.S. dollar and the value of the Mexican peso decreased 2 percent
compared to the U.S. dollar.
Note 6 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. During
the first quarter of 2007, the Company assumed certain pension and
postretirement obligations totaling $25.8 million and $11.6 million,
respectively, and pension trust assets of $31.9 million in the acquisition of
Extruded Metals, Inc. Net periodic pension benefit related to the pension
plan is expected to be $0.7 million annually and net periodic pension cost
related to the postretirement plan is expected to be $0.9 million annually.
-15-
The net periodic benefit cost is based on estimated values provided by
independent actuaries. The components of net periodic benefit cost are as
follows:
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands)
Pension benefits:
Service cost $ 539 $ 527
Interest cost 2,131 2,023
Expected return on plan assets (2,796) (2,608)
Amortization of prior service cost 93 93
Amortization of net loss 233 312
---------- ----------
Net periodic benefit cost $ 200 $ 347
========== ==========
Other benefits:
Service cost $ 76 $ 2
Interest cost 158 158
Amortization of prior service cost 2 2
Amortization of net loss 46 33
---------- ----------
Net periodic benefit cost $ 282 $ 195
========== ==========
The Company anticipates contributions to its pension plans for 2007 to
be approximately $2.5 million. During the first quarter of 2007,
approximately $0.6 million of contributions have been made to certain
pension plans.
Note 7 - Acquisitions
On February 27, 2007, the Company acquired 100 percent of the
outstanding stock of Extruded Metals, Inc. (Extruded) for $32.6 million in
cash, including transaction costs of $0.6 million. Extruded, located in
Belding, Michigan, manufactures brass rod products, and during 2006 had
annual sales of approximately $350 million. The acquisition of Extruded
will complement the Company's existing brass rod product line. The total
estimated fair values of the assets acquired totaled $78.8 million,
consisting primarily of receivables of $29.5 million, inventories of $26.8
million, property, plant, and equipment of $15.3 million, and prepaid
pension asset of $6.1 million. The total estimated fair values of
liabilities assumed totaled $46.2 million, consisting primarily of a working
capital debt facility of $10.0 million, accounts payable and accrued
expenses of $24.0 million, and postretirement obligations of $11.6 million.
The debt assumed was extinguished by the Company immediately following the
acquisition. The purchase price allocation of Extruded is considered
preliminary. The Company expects to finalize the purchase price accounting
estimates during 2007 and, as a result, this purchase price allocation is
subject to change.
-16-
The results of operations for Extruded are reported in the Company's
OEM segment and have been included in the accompanying Condensed
Consolidated Financial Statements from the acquisition date. The following
table presents condensed pro forma consolidated results of operations as if
the Extruded acquisition had occurred at the beginning of the periods
presented. This information combines the historical results of operations
of the Company and Extruded after the effects of estimated preliminary
purchase accounting adjustments. Actual adjustments may differ from those
reflected below. The pro forma information does not purport to be
indicative of the results that would have been obtained if the operations
had actually been combined during the periods presented and is not
necessarily indicative of operating results to be expected in future
periods.
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands, except per share data)
Net sales $ 667,210 $ 631,991
Net income 18,844 33,947
Pro forma earnings per share:
Basic earning per share $ 0.51 $ 0.93
Diluted earning per share $ 0.51 $ 0.92
In December 2005, two subsidiaries of the Company received a business
license from a Chinese industry and commerce authority, establishing a joint
venture with Jiangsu Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang
Industries Ltd. The joint venture, in which the Company holds a 50.5 percent
interest, produces inner groove and smooth tube in level-wound coils, pancake
coils, and straight lengths, primarily to serve the Chinese domestic original
equipment manufactures' air-conditioning market as well as to complement the
Company's U.S. product line. The joint venture is located primarily in
Jintan City, Jiangsu Province, China. The joint venture entity is named
Jiangsu Mueller-Xingrong Copper Industries Limited (Mueller-Xingrong).
During the first quarter of 2006, the Company contributed an additional $12.4
million, which completed its initial planned cash investment. Non-cash
contributions from the other joint venture parties included long-lived assets
of approximately $8.5 million during the first quarter of 2006. The results
of operations of this joint venture are reported in the OEM segment and are
included in the Company's Condensed Consolidated Financial Statements from
January 1, 2006.
-17-
Note 8 - Income Taxes
FIN 48 Adoption and First Quarter Activity:
At the beginning of fiscal 2007, the Company adopted the provisions of
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"
(FIN 48). As a result of the adoption, the Company recorded an adjustment of
approximately $2.2 million to reduce the opening balance of retained
earnings. Additionally, as a result of the adoption of FIN 48, $3.5 million
of federal income tax benefits associated with state tax uncertainties, which
had been used to reduce the tax contingency liability in prior periods, were
reclassified to deferred income taxes on the Company's Condensed Consolidated
Balance Sheet. At adoption, the Company's unrecognized tax benefits totaled
$25.6 million. Cumulative potential interest and penalties accrued related
to unrecognized tax benefits at the date of adoption totaled $3.2 million.
The Company includes interest and penalties related to income tax matters as
a component of income tax expense. All unrecognized tax benefits at adoption
would affect the effective tax rate, if recognized.
During the first quarter of 2007, total unrecognized tax benefits
increased to $26.8 million. The increase is primarily the result of $1.2
million of state income tax credit carryforwards that were derecognized ($0.8
million net of federal benefit) as a result of audit activity during the
period.
The Company files numerous consolidated and separate income tax returns
in the U.S. Federal jurisdiction and in many state, local, and foreign
jurisdictions. The Company is no longer subject to U.S. Federal income tax
examinations for years before 2003 and with few exceptions is no longer
subject to state, local, or foreign income tax examinations by tax
authorities for years before 2000. The Mississippi State Tax Commission and
the California Franchise Tax Board are currently examining the Company's
state income tax returns for years 2002 through 2005. Additionally, during
April 2007, the Company received notification from the Internal Revenue
Service that it would conduct an examination of Extruded's 2005 U.S. Federal
income tax return. The results of these examinations are not expected to have
a material impact on the Company's financial position or results of operations.
Discussion of First Quarter Effective Tax Rate:
Income tax expense for the first quarter of 2007 includes a benefit of
$7.6 million, or $0.20 per diluted share, for a reduction in the valuation
allowance for state income tax credit carryforwards. During the first
quarter, the Company changed its estimates regarding the future realization
of these credit carryforwards as a result of tax plans initiated in the
period which management determined were feasible and would be implemented.
The estimates related to the future realization of these credit carryforwards
are highly subjective and could be affected by changes in business conditions
and the feasibility of tax planning strategies. Changes in any of these
factors could have a material impact on future income tax expense. Also
included in income tax expense are adjustments of $2.2 million, or $0.06 per
diluted share, to correct the prior year income tax provision for deferred
tax liabilities on U.S. pension plans, and $2.6 million, or $0.07 per diluted
share, for a change in estimate which reduced deferred tax assets related to
the determination that a certain tax plan was no longer economically
beneficial to the Company and thus would not be executed. The effect of the
correction is not material to the current period or the prior period
presented.
-18-
The Company's effective tax rate for the first quarter of 2007 was 29.4
percent compared with 27.4 percent for the same period last year. The net
effect of the adjustments described above was a benefit of $2.8 million, or a
reduction in the Company's effective tax rate of 10.7 percent for the period.
Other factors that explain the difference between the effective tax rate and
what would be computed using the U.S. Federal statutory tax rate for the
first quarter of 2007 were (i) the provision for state taxes of $0.9 million,
net of federal benefit, (ii) a provision for repatriation of certain foreign
earnings of $0.6 million, and (iii) additional expense of $0.8 million, net
of federal benefit, resulting from unrecognized tax benefits. These items
were partially offset by the recognition of a benefit from the U.S.
manufacturer's deduction of $0.5 million and the recognition of a benefit of
a foreign tax holiday of approximately $0.3 million (without consideration of
minority interest).
Note 9 - Other Income, Net
For the Quarter Ended
March 31, 2007 April 1, 2006
(In thousands)
Rent, royalties, and other, net $ 62 $ 486
Interest income 2,272 960
Gain on disposal of properties, net 3,132 121
Minority interest in income of
subsidiaries (402) (393)
Environmental expense (111) (125)
Equity in earning of unconsolidated
subsidiary - 964
---------- ----------
Other income, net $ 4,953 $ 2,013
========== ==========
Note 10 - Recently Issued Accounting Standards
The FASB has issued SFAS No. 157, "Fair Value Measurements," which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosure about
fair value measurements. The Company is required to adopt the provisions of
this statement in the first quarter of fiscal 2008. Management is reviewing
the potential effects of this statement; however, it does not expect the
adoption of SFAS No. 157 to have a material impact on the Company's Condensed
Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities." SFAS No. 159 permits
entities to choose to measure eligible items at fair value at specified
election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after
-19-
November 15, 2007. Management is currently evaluating the effect that
adoption of this statement will have on the Company's Condensed Consolidated
Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Overview
The Company is a leading manufacturer of copper, brass, plastic, and
aluminum products. The range of these products is broad: copper tube and
fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and valves;
refrigeration valves and fittings; and fabricated tubular products. The
Company also resells imported brass and plastic plumbing valves, malleable
iron fittings, steel nipples, faucets and plumbing specialty products. The
Company's operations are located throughout the United States, and in Canada,
Mexico, Great Britain, and China.
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the OEM segment. For disclosure
purposes, as permitted under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," certain operating segments are aggregated
into reportable segments. The Plumbing & Refrigeration segment is composed
of the Standard Products Division (SPD), European Operations, and Mexican
Operations. The OEM segment is composed of the Industrial Products Division
(IPD) and Engineered Products Division (EPD). These reportable segments are
described in more detail below. SPD manufactures and sells copper tube,
copper and plastic fittings, and valves in North America and sources products
for import distribution in North America. European Operations manufactures
copper tube in Europe, which is sold in Europe and the Middle East;
activities also include import distribution in the U.K. and Ireland. Mexican
Operations include pipe nipple manufacturing and import distribution
businesses including product lines of malleable iron fittings and other
plumbing specialties. The Plumbing & Refrigeration segment sells products to
wholesalers in the HVAC (heating, ventilation, and air-conditioning),
plumbing, and refrigeration markets, to distributors to the manufactured
housing and recreational vehicle industries, and to building material
retailers. The OEM segment manufactures and sells brass and copper alloy
rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact
extrusions; refrigeration valves and fittings; fabricated tubular products;
and gas valves and assemblies. The OEM segment sells its products primarily
to original equipment manufacturers, many of which are in the HVAC, plumbing,
and refrigeration markets.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration, and plumbing
markets because the principal end use of a significant portion of the
Company's products is in the construction of single and multi-family housing
and commercial buildings. Repairs and remodeling projects are also important
factors affecting the underlying demand for these products.
-20-
Profitability of certain of the Company's product lines depends upon the
"spreads" between the cost of raw material and the selling prices of its
completed products. The open market prices for copper cathode and scrap, for
example, influence the selling price of copper tubing, a principal product
manufactured by the Company. The Company attempts to minimize the effects on
profitability from fluctuations in material costs by passing through these
costs to its customers. The Company's earnings and cash flow are dependent
upon these spreads that fluctuate based upon market conditions.
Earnings and profitability are also subject to market trends such as
substitute products and imports. Plastic plumbing systems are the primary
substitute product; these products represent an increasing share of
consumption. Imports of copper tubing from Mexico have increased in recent
years, although U.S. consumption is still predominantly supplied by U.S.
manufacturers.
Results of Operations
During the first quarter of 2007, the Company's net sales were $609.8
million, which compares with net sales of $551.0 million over the same period
of 2006. The increase in net sales was primarily attributable to acquired
businesses including Mueller-Xingrong, which started operations during the
first quarter of 2006, and Extruded Metals, Inc. (Extruded), which was
acquired during the first quarter of 2007. The change in net sales was also
affected by the increased cost of copper, the Company's principal raw
material, which was largely passed through to customers, offset by lower unit
volume. The COMEX average price of copper was $2.70 per pound in the first
quarter of 2007, which compares with $2.25 in the first quarter of 2006.
Cost of goods sold increased from $457.1 million in the first quarter of
2006 to $536.6 million in the same period of 2007. This increase was
primarily attributable to higher material costs and acquired businesses
partially offset by reductions in total manufacturing conversion costs.
Gross profit decreased from $94.0 million to $73.2 million due primarily to
lower unit volume. Inventories valued using the LIFO method totaled $18.9
million at March 31, 2007 and $32.6 million at December 30, 2006. At March
31, 2007 and December 30, 2006, the approximate FIFO cost of such inventories
was $85.0 million and $143.1 million, respectively. The Company has deferred
recognizing potential gains resulting from liquidation of LIFO inventories
during the first three months of 2007. The Company expects to replenish
these inventories by the end of 2007 and, as such, has not recognized the
effects of liquidating LIFO layers.
Depreciation and amortization expense was $11.0 million in the first
quarter of 2007 compared with $10.2 million during the first quarter of 2006.
The increase in 2007 is attributable to businesses acquired. Selling,
general, and administrative expense was $34.9 million for the first quarter
of 2007 compared with $35.0 million for the same period of 2006. Increases
attributable to businesses acquired were offset by expense reductions at
existing business units.
-21-
The Plumbing & Refrigeration segment posted operating earnings of $26.9
million on net sales of $370.0 million, which compares with prior year
earnings of $44.2 million on net sales of $386.9 million. Gross profit
declined due to lower unit volumes. Additionally, higher unit costs on lower
production volume contributed to reduced operating margins. Net sales for
trading operations trended up but operating income was off slightly.
European operations were profitable due to earnings of the trading
businesses.
Operating income at the OEM segment was $5.5 million on net sales of
$243.7 million in the first quarter of 2007 compared with operating income of
$11.0 million on net sales of $168.0 million in the first quarter of 2006.
For 2007, the results include the operations of Extruded following its date
of acquisition. Our Chinese joint venture reported total operating income of
$1.7 million in the first quarter of 2007.
Interest expense for the first quarter of 2007 totaled $5.5 million,
compared with $4.9 million for the same period of 2006. The increase
resulted from increased borrowing at Mueller-Xingrong. Other income, net was
$5.0 million for the first quarter of 2007 compared with $2.0 million for the
same period of 2006. The increase is primarily due to the recognition of a
$3.1 million gain in the first quarter of 2007 from the sale of non-operating
royalty producing properties.
Income tax expense for the first quarter of 2007 includes a benefit of
$7.6 million, or $0.20 per diluted share, for a reduction in the valuation
allowance for state income tax credit carryforwards. During the first
quarter of 2007, the Company changed its estimates regarding the future
realization of these credit carryforwards as a result of tax plans initiated
in the period which management determined were feasible and would be
implemented. The estimates related to the future realization of these credit
carryforwards are highly subjective and could be affected by changes in
business conditions and the feasibility of tax planning strategies. Changes
in any of these factors could have a material impact on future income tax
expense. Also included in income tax expense are adjustments of $2.2
million, or $0.06 per diluted share, to correct the prior year income tax
provision for deferred tax liabilities on U.S. pension plans, and $2.6
million, or $0.07 per diluted share, for a change in estimate which reduced
deferred tax assets related to the determination that a certain tax plan was
no longer economically beneficial to the Company and thus would not be
executed.
The Company's effective tax rate for the first quarter of 2007 was 29.4
percent compared with 27.4 percent for the same period last year. The net
effect of the adjustments described above was a benefit of $2.8 million, or a
reduction in the Company's effective tax rate of 10.7 percent for the period.
Other factors that explain the difference between the effective tax rate and
what would be computed using the U.S. Federal statutory tax rate for the
first quarter of 2007 were (i) the provision for state taxes of $0.9 million,
net of federal benefit, (ii) a provision for repatriation of certain foreign
earnings of $0.6 million, and (iii) additional expense of $0.8 million, net
of federal benefit, resulting from unrecognized tax benefits. These items
were partially offset by the recognition of a benefit from the U.S.
manufacturer's deduction of $0.5 million and the recognition of a benefit of
a foreign tax holiday of approximately $0.3 million (without consideration of
minority interest).
-22-
Liquidity and Capital Resources
Cash provided by operating activities in the first quarter of 2007
totaled $47.1 million, which is primarily attributable to net income plus
depreciation and amortization, decreased inventories and increased current
liabilities partially offset by increased receivables. Fluctuations in the
cost of copper and other raw materials affect the Company's liquidity.
Changes in material costs directly impact components of working capital,
primarily inventories and accounts receivable. During the first three months
of 2007, the average COMEX copper price was approximately $2.70 per pound,
which represents a 20 percent increase over the average price during the
first three months of 2006. This rise in the price of cathode has also
resulted in increases in the open market price for copper scrap and, to a
lesser extent, the price of brass scrap. Subsequent to the end of the first
quarter, copper prices continued to rise, trading above $3.60 per pound.
Consequently, the Company has funded increases in inventories and accounts
receivable with cash on hand.
During the first quarter of 2007, cash used in investing activities
totaled $37.7 million, consisting primarily of $32.0 million for the
acquisition of Extruded, $8.7 million for capital expenditures, of which $1.2
million relates to Mueller-Xingrong, offset by $3.0 million of proceeds from
the sales of properties. Cash used in financing activities during the first
quarter totaled $15.5 million consisting primarily of $17.4 million for
repayments of long-term debt, of which $10.0 million related to debt assumed
in the acquisition of Extruded, $3.7 million for payment of dividends, offset
by $5.4 million from the issuance of debt by Mueller-Xingrong.
The Company has a $200 million unsecured line-of-credit (Credit
Facility) which expires in December 2011. At March 31, 2007, the Company had
no borrowings against the Credit Facility. Approximately $9.5 million in
letters of credit were backed by the Credit Facility at the end of the first
quarter of 2007. As of March 31, 2007, the Company's total debt was $342.7
million or 36 percent of its total capitalization.
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of tangible net worth
and the satisfaction of certain minimum financial ratios. As of March 31,
2007, the Company was in compliance with all of its debt covenants.
The Company declared and paid a regular quarterly cash dividend of ten
cents per common share in the first quarter of 2007. Payment of dividends in
the future is dependent upon the Company's financial condition, cash flows,
capital requirements, earnings, and other factors. On May 1, 2007, the
Company will pay approximately $8.9 million in interest on its 6%
Subordinated Debentures.
Management believes that cash provided by operations and currently
available cash of $194.5 million will be adequate to meet the Company's
normal future capital expenditures and operational needs. The Company's
current ratio was 2.8 to 1 at March 31, 2007.
-23-
The Company's Board of Directors has authorized the repurchase until
October 2007 of up to ten million shares of the Company's common stock
through open market transactions or through privately negotiated
transactions. The Company has no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at any
time. Any purchases will be funded primarily through existing cash and cash
from operations. The Company may hold any shares purchased in treasury or
use a portion of the repurchased shares for employee benefit plans, as well
as for other corporate purposes. Through March 31, 2007, the Company has
repurchased approximately 2.4 million shares under this authorization.
There have been no significant changes in the Company's contractual cash
obligations reported at December 30, 2006.
Recently Adopted Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48).
FIN 48 clarifies the accounting for income taxes by prescribing a minimum
threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognizing,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company adopted the provisions of FIN
48 at the beginning of fiscal 2007. As a result of the adoption, the Company
recorded an adjustment of approximately $2.2 million to reduce the opening
balance of retained earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in raw material and
energy costs, interest rates, and foreign currency exchange rates. To reduce
such risks, the Company may periodically use financial instruments. All
hedging transactions are authorized and executed pursuant to policies and
procedures. Further, the Company does not buy or sell financial instruments
for trading purposes.
Cost and Availability of Raw Materials and Energy
Copper and brass represent the largest component of the Company's
variable costs of production. The cost of these materials is subject to
global market fluctuations caused by factors beyond the Company's control.
Significant increases in the cost of metal, to the extent not reflected in
prices for the Company's finished products, or the lack of availability could
materially and adversely affect the Company's business, results of operations
and financial condition.
-24-
The Company occasionally enters into forward fixed-price arrangements
with certain customers. The Company may utilize forward contracts to hedge
risks associated with forward fixed-price arrangements. The Company may also
utilize forward contracts to manage price risk associated with inventory.
Depending on the nature of the hedge, changes in the fair value of the
forward contracts will either be offset against the change in fair value of
the inventory through earnings or recognized as a component of comprehensive
income and reflected in earnings upon the sale of inventory. Periodic value
fluctuations of the contracts generally offset the value fluctuations of the
underlying fixed-price transactions or inventory. At March 31, 2007, the
Company held open forward contracts to purchase approximately $5.5 million of
copper over the next four months related to fixed-price sales orders.
Futures contracts may also be used to manage price risk associated with
natural gas purchases. The effective portion of gains and losses with
respect to these positions are deferred in stockholders' equity as a
component of comprehensive income and reflected in earnings upon consumption
of natural gas. Periodic value fluctuations of the contracts generally
offset the value fluctuations of the underlying natural gas prices. At March
31, 2007, the Company held no open forward contracts to purchase natural gas.
Interest Rates
At March 31, 2007, the Company had variable-rate debt outstanding of
$34.7 million, the majority of which related to the debt issued by Mueller-
Xingrong. At these borrowing levels, a hypothetical 10 percent increase in
interest rates would have had an insignificant unfavorable impact on the
Company's pretax earnings and cash flows. The primary interest rate exposure
on floating-rate debt is based on LIBOR and on the base-lending rate
published by the People's Bank of China.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other than
an entity's functional currency. The Company and its subsidiaries generally
enter into transactions denominated in their respective functional
currencies. Foreign currency exposures arising from transactions denominated
in currencies other than the functional currency are not material; however,
the Company may utilize certain forward fixed-rate contracts to hedge such
transactional exposures. Gains and losses with respect to these positions
are deferred in stockholders' equity as a component of comprehensive income
and reflected in earnings upon collection of receivables. At March 31, 2007,
the Company held open forward contracts to purchase approximately $2.0
million U.S. dollars.
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars.
The primary currencies to which the Company is exposed include the Canadian
dollar, the British pound sterling, the Euro, the Mexican peso, and the
Chinese renminbi. The Company generally views as long-term its investments
in foreign subsidiaries with a functional currency other than the U.S.
dollar. As a result, the Company generally does not hedge these net
investments.
-25-
Cautionary Statement Regarding Forward Looking Information
Statements in this Quarterly Report on Form 10-Q that are not strictly
historical may be "forward-looking" statements, which involve risks and
uncertainties. These include economic and currency conditions, continued
availability of raw materials and energy, market demand, pricing, competitive
and technological factors, and the availability of financing, among others,
as set forth in the Company's filings with the Securities and Exchange
Commission. The words "outlook," "estimate," "project," "intend," "expect,"
"believe," "target," and similar expressions are intended to identify
forward-looking statements. The reader should not place undue reliance on
forward-looking statements, which speak only as of the date of this report.
The Company has no obligation to publicly update or revise any forward-
looking statements to reflect events after the date of this report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure information required to be disclosed in Company reports filed under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in Company reports filed
under the Exchange Act is accumulated and communicated to management,
including the Company's Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures pursuant to
Rule 13a-15(b) of the Exchange Act as of the end of the period covered by
this report. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were effective as of March 31, 2007.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending March 31, 2007, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
-26-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
General
The Company is involved in certain litigation as a result of claims that
arose in the ordinary course of business, which management believes will not
have a material adverse effect on the Company's financial position or results
of operations. Additionally, the Company may realize the benefit of certain
legal claims and litigation in the future; these gain contingencies are not
recognized in the Condensed Consolidated Financial Statements.
Copper Tube Antitrust Litigation
Beginning in September 2004, the Company has been named as a defendant
in several purported class action complaints brought by direct and indirect
purchasers alleging anticompetitive activities with respect to the sale of
copper tubes in the United States (the Copper Tube Actions). Two such
purported class actions were filed in the United States District Court for
the Western District of Tennessee (the Federal Actions). The remaining
Copper Tube Actions were filed in state courts in Tennessee, California and
Massachusetts.
Certain of the Copper Tube Actions purport to address the sale of copper
plumbing tube in particular. Plaintiffs' motions to consolidate the Federal
Actions and the actions pending in California state court, respectively, have
been granted. All of the Copper Tube Actions, which are similar, seek
monetary and other relief.
Wholly owned Company subsidiaries, WTC Holding Company, Inc., Deno
Holding Company, Inc., and Mueller Europe Ltd. (Mueller Europe), are named in
all of the Copper Tube Actions, and Deno Acquisition Eurl is currently named
in two of the Copper Tube Actions but has not been served with the complaints
in those actions. The claims against WTC Holding Company, Inc. and Deno
Holding Company Inc. have been dismissed without prejudice in the Copper Tube
Actions pending in California and Massachusetts state courts.
In September 2006, the Federal Actions were dismissed as to Mueller
Europe for lack of personal jurisdiction. In October 2006, the Federal
Actions were dismissed in their entirety for lack of subject matter
jurisdiction as to all defendants. Although plaintiffs filed a motion for
reconsideration of the dismissal of Mueller Europe, the court has held that
such motion was mooted by its dismissal of the case for lack of subject
matter jurisdiction. Plaintiffs filed a motion to alter or amend the
judgment dismissing the complaint for lack of subject matter jurisdiction,
which the court denied in May 2007. Plaintiffs' time to file a notice of
appeal has not yet expired.
-27-
The Company's demurrer to the complaint and the Company's motion to
dismiss for failure to state a claim have been filed in the state court
actions filed in California and Tennessee, respectively. The Company has not
yet been required to respond to the complaint in the action pending in
Massachusetts state court. Mueller Europe has not yet been required to
respond to the complaints in any of the state court actions pending in
Tennessee, California or Massachusetts. The courts overseeing the California
and Massachusetts state court actions have stayed those actions conditioned
upon the parties' submitting periodic status reports on the Federal Actions.
Plaintiffs in the Massachusetts state court action have filed a voluntary
motion to dismiss that action without prejudice.
The Company believes that the claims for relief in the Copper Tube
Actions are without merit and intends to defend the Copper Tube Actions
vigorously.
In March 2006, the Company and Mueller Europe were named in a complaint
brought by Carrier Corporation, Carrier S.A., and Carrier Italia S.p.A.
alleging anticompetitive activities with respect to the sale of copper tubes
used in the manufacturing of air-conditioning and refrigeration units (ACR
copper tubes) in the United States and elsewhere (the Carrier Action). The
Carrier Action was filed in United States District Court for the Western
District of Tennessee.
In addition, beginning in April 2006, the Company has been named as a
defendant in several purported class action lawsuits brought by direct and
indirect purchasers alleging anticompetitive activities with respect to the
sale of ACR copper tubes in the United States and elsewhere (the ACR Class
Actions, and with the Carrier Action, the ACR Actions). Two of the ACR Class
Actions were filed by indirect purchasers in the United States District Court
for the Northern District of California, one of which alleges anticompetitive
activities with respect to plumbing tubes as well as ACR copper tubes. Five
of the ACR Class Actions (two of which have been consolidated to become the
Indirect ACR Class Actions and three of which have been consolidated to
become the Direct ACR Class Actions) were filed in the United States District
Court for the Western District of Tennessee.
Mueller Europe and the Company are named in all of the ACR Actions. WTC
Holding Company, Inc., Deno Holding Company, Inc., and Deno Acquisition Eurl
are named in one of the ACR Class Actions filed in the United States District
Court for the Northern District of California. Motions to dismiss by the
Company and by Mueller Europe are pending in the Carrier Action and the
Direct ACR Class Actions. The Company and Mueller Europe have been served,
but have not yet been required to respond, in the Indirect ACR Class Actions.
The Company, Mueller Europe, WTC Holding Company, Inc., and Deno Holding
Company, Inc. have been served, but have not yet been required to respond, in
one of the ACR Class Actions filed in the United States District Court for
the Northern District of California. Plaintiffs in the second of the ACR
Class Actions filed in the United States District Court for the Northern
District of California (which addressed only ACR copper tubes) have
voluntarily dismissed that action without prejudice.
The Company believes that the claims for relief in the ACR Actions are
without merit and intends to defend the ACR Actions vigorously.
-28-
Copper Price Manipulation Litigation
Two of the Company's subsidiaries, Mueller Copper Tube Products Inc. and
Mueller Copper Tube Company Inc., brought a lawsuit (the Price Manipulation
Action) against J.P. Morgan Chase & Co. and Morgan Guaranty Trust Company of
New York (collectively Morgan) to recover damages the Company believes it
suffered on first purchases of copper cathode resulting from an alleged
conspiracy to manipulate the price of copper cathode by Morgan (and certain
of its predecessors and affiliates) and others in violation of the federal
antitrust laws. The lawsuit was filed on June 12, 2003, in the U.S. District
Court for the Western District of Wisconsin. The Company's lawsuit was
consolidated with those of certain other first purchasers of copper cathode
and rod under the name In re Copper Antitrust Litigation. Although the Price
Manipulation Action was dismissed by the district court on March 2, 2004, as
barred by the statute of limitations, the U.S. Court of Appeals for the
Seventh Circuit, on February 6, 2006, reversed the district court's decision
in part and remanded the Price Manipulation Action for further proceedings in
the district court. On January 16, 2007, Morgan filed a Motion for Summary
Judgment which the District Court denied on April 24, 2007. Trial is set for
May 29, 2007. Although the Company is unable to predict the likely outcome
of the Price Manipulation Action at this time, the Company is prosecuting the
case vigorously, and intends to continue to do so in the future.
Canadian Dumping and Countervail Investigation
In June 2006, the Canada Border Services Agency (CBSA) initiated an
investigation into the alleged dumping of certain copper pipe fittings from
the United States and from South Korea, and the dumping and subsidizing of
these same goods from China. The Company and certain affiliated companies
were identified by the CBSA as exporters and importers of these goods.
On January 18, 2007, the CBSA issued a final determination in its
investigation. The Company was found to have dumped subject goods during the
CBSA's investigation period. On February 19, 2007, the Canadian
International Trade Tribunal (CITT) concluded that the dumping of the subject
goods from the United States had caused injury to the Canadian industry.
As a result of these findings, exports of subject goods to Canada by the
Company made on or after October 20, 2006 will be subject to antidumping
measures. Under Canada's system of prospective antidumping enforcement, the
Canada Border Services Agency has issued normal values to the Company.
Antidumping duties will be imposed on the Company's Canadian customers only
to the extent that the Company's future exports of copper pipe fittings are
made at net export prices which are below these normal values. If net export
prices for subject goods exceed normal values, no antidumping duties will be
payable. These measures will remain in place for five years, at which time
an expiry review will be conducted by Canadian authorities to determine
whether these measures should be maintained for another five years or allowed
to expire.
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The Company is currently participating in a review process that will
lead to the issuance of revised normal values on July 16, 2007. Depending on
the level of these normal values, the Company's ability to compete in Canada
may be facilitated or impaired. However, given the small percentage of its
products that are sold for export to Canada, the Company does not anticipate
any material adverse effect on its financial condition as a result of the
antidumping case in Canada.
Other Matters
The Company is aware of an investigation of competition in markets in
which it participates, or has participated in the past, in Canada. The
Company does not anticipate any material adverse effect on its business or
financial condition as a result of that investigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The Company's Board of Directors has authorized the repurchase, until
October 2007, of up to ten million shares of the Company's Common Stock
through open market transactions or through privately negotiated
transactions. The Company has no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at any
time. Any purchases will be funded primarily through existing cash and cash
from operations. The Company may hold any shares purchased in treasury or
use a portion of the repurchased shares for employee benefit plans, as well
as for other corporate purposes. Through March 31, 2007, the Company had
repurchased approximately 2.4 million shares under this authorization. Below
is a summary of the Company's stock repurchases for the quarterly period
ended March 31, 2007.
(a) (b) (c) (d)
Total
Number of Maximum
Shares Number of
Purchased Shares that
as Part of May Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Purchased per Share Programs Programs
7,647,030(1)
December 31, 2006 -
January 27, 2007 - $ -
January 28 -
February 24, 2007 - -
February 25 -
March 31, 2007 - -
(1) Shares available to be purchased under the Company's 10 million share
repurchase authorization until October 2007. This repurchase plan was
announced on October 30, 2006.
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Item 4. Submission of Matters to a Vote of Security Holders
On May 3, 2007, the Company held its Annual Meeting of Stockholders at
which two proposals were voted upon: (i) the election of directors and
(ii) the approval of the appointment of independent auditors. The following
persons were duly elected to serve, subject to the Company's Bylaws, as
Directors of the Company until the next Annual Meeting, or until election
and qualification of their successors:
Votes in Favor Votes Withheld
Alexander P. Federbush 34,167,158 726,967
Gennaro J. Fulvio 34,167,058 727,067
Gary S. Gladstein 34,147,380 746,745
Terry Hermanson 34,137,990 756,135
Robert B. Hodes 31,014,221 3,879,904
Harvey L. Karp 33,795,130 1,098,995
William D. O'Hagan 33,974,770 919,355
The proposal to approve the appointment of Ernst & Young LLP as the
Company's independent registered public accounting firm was ratified by
34,668,804 votes in favor, 201,072 votes against, and 24,248 votes abstaining.
Item 5. Other Information
Labor Relations Update
On April 29, 2007, the Company's unions located in Port Huron, Michigan
rejected proposed labor contracts. The employees will continue to work under
the existing contracts, which were extended through May 31, 2007. Management
believes that the labor contracts will be agreed to in the near-term.
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Item 6. Exhibits
10.1 Stock Purchase Agreement, dated February 27, 2007, by and
between TBG Holdings N.V. Hollandsch-Amerikaansche
Beleggingsmaatschappij Holland-American Investment
Corporation as Sellers, amd Mueller Industries, Inc. as Buyer
(incorporated herein by reference to Exhibit 10.1 of the
Registrant's current report dated March 5, 2007).
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended March 31, 2007.
Such report is being furnished for the information of
the Securities and Exchange Commission only and is not
to be deemed filed as part of this Quarterly Report on
Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Items 1A and 3 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUELLER INDUSTRIES, INC.
May 4, 2007 /s/ Kent A. McKee
Date Kent A. McKee
Executive Vice President and
Chief Financial Officer
May 4, 2007 /s/ Richard W. Corman
Date Richard W. Corman
Vice President - Controller
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EXHIBIT INDEX
Exhibits Description
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders
for the quarter ended March 31, 2007. Such report is being
furnished for the information of the Securities and
Exchange Commission only and is not to be deemed filed as
part of this Quarterly Report on Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.