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 September 30, 2006 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
October 27, 2006, was 37,008,458.
-1-
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2006
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Condensed Consolidated Statements of Income
for the quarters and nine months ended September 30, 2006
and October 1, 2005 3
b.) Condensed Consolidated Balance Sheets
as of September 30, 2006 and December 31, 2005 7
c.) Condensed Consolidated Statements of Cash Flows
for the nine months September 30, 2006
and October 1, 2005 9
d.) Notes to Condensed Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 36
Part II. Other Information
Item 1. Legal Proceedings 38
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 41
Item 6. Exhibits 42
Signatures 43
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
September 30, October 1,
2006 2005
(In thousands, except per share data)
Net sales $ 635,998 $ 434,130
Cost of goods sold 528,946 360,514
---------- ----------
Gross profit 107,052 73,616
Depreciation and amortization 10,462 10,082
Selling, general, and
administrative expense 34,787 33,297
---------- ----------
Operating income 61,803 30,237
Interest expense (5,085) (4,794)
Other income, net 1,452 5,421
---------- ----------
Income from continuing operations
before income taxes 58,170 30,864
Current income tax expense (12,838) (10,622)
Deferred income tax benefit 6,247 774
---------- ----------
Total income tax expense (6,591) (9,848)
---------- ----------
Income from continuing operations 51,579 21,016
Gain from discontinued operations,
net of tax - 3,324
---------- ----------
Net income $ 51,579 $ 24,340
========== ==========
See accompanying notes to condensed consolidated financial statements.
-3-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
September 30, October 1,
2006 2005
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 36,976 36,625
Effect of dilutive stock options 379 495
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,355 37,120
---------- ----------
Basic earnings per share:
From continuing operations $ 1.39 $ 0.57
From discontinued operations - 0.09
---------- ----------
Basic earnings per share $ 1.39 $ 0.66
========== ==========
Diluted earnings per share:
From continuing operations $ 1.38 $ 0.57
From discontinued operations - 0.09
---------- ----------
Diluted earnings per share $ 1.38 $ 0.66
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to condensed consolidated financial statements.
-4-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Nine Months Ended
September 30, October 1,
2006 2005
(In thousands, except per share data)
Net sales $ 1,966,700 $ 1,246,299
Cost of goods sold 1,623,053 1,040,201
---------- ----------
Gross profit 343,647 206,098
Depreciation and amortization 31,033 30,571
Selling, general, and
administrative expense 109,435 92,788
---------- ----------
Operating income 203,179 82,739
Interest expense (15,161) (14,730)
Other income, net 3,398 10,188
---------- ----------
Income from continuing operations
before income taxes 191,416 78,197
Current income tax expense (58,915) (26,603)
Deferred income tax benefit 11,193 1,813
---------- ----------
Total income tax expense (47,722) (24,790)
---------- ----------
Income from continuing operations 143,694 53,407
Gain from discontinued operations,
net of tax - 3,324
---------- ----------
Net income $ 143,694 $ 56,731
========== ==========
See accompanying notes to condensed consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Nine Months Ended
September 30, October 1,
2006 2005
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 36,853 36,576
Effect of dilutive stock options 396 536
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,249 37,112
---------- ----------
Basic earnings per share:
From continuing operations $ 3.90 $ 1.46
From discontinued operations - 0.09
---------- ----------
Basic earnings per share $ 3.90 $ 1.55
========== ==========
Diluted earnings per share:
From continuing operations $ 3.86 $ 1.44
From discontinued operations - 0.09
---------- ----------
Diluted earnings per share $ 3.86 $ 1.53
========== ==========
Dividends per share $ 0.30 $ 0.30
========== ==========
See accompanying notes to condensed consolidated financial statements.
-6-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2006 December 31, 2005
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 170,463 $ 129,685
Accounts receivable, less allowance
for doubtful accounts of $7,071 in
2006 and $5,778 in 2005 309,153 248,395
Inventories 298,140 196,987
Other current assets 43,294 36,919
---------- ----------
Total current assets 821,050 611,986
Property, plant, and equipment, net 315,649 307,046
Goodwill 153,263 152,171
Other assets 17,436 33,435
---------- ----------
$ 1,307,398 $ 1,104,638
========== ==========
See accompanying notes to condensed consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
September 30, 2006 December 31, 2005
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 33,255 $ 4,120
Accounts payable 142,577 124,216
Accrued wages and other employee costs 42,582 38,095
Other current liabilities 88,987 84,961
---------- ----------
Total current liabilities 307,401 251,392
Long-term debt 308,273 312,070
Pension liabilities 22,826 21,721
Postretirement liabilities other
than pensions 13,113 13,515
Environmental reserves 8,965 9,073
Deferred income taxes 44,662 63,944
Other noncurrent liabilities 3,062 3,078
---------- ----------
Total liabilities 708,302 674,793
---------- ----------
Minority interest in subsidiaries 21,738 6,937
Stockholders' equity:
Preferred stock - shares authorized
4,985,000; none outstanding - -
Series A junior participating
preferred stock - $1.00 par value;
shares authorized 15,000;
none outstanding - -
Common stock - $.01 par value; shares
authorized 100,000,000; issued
40,091,502; outstanding 37,008,458
in 2006 and 36,643,590 in 2005 401 401
Additional paid-in capital, common 254,932 252,889
Retained earnings 386,054 253,433
Accumulated other comprehensive
income (loss) 3,177 (8,848)
Treasury common stock, at cost (67,206) (74,967)
---------- ----------
Total stockholders' equity 577,358 422,908
---------- ----------
Commitments and contingencies (Note 2) - -
---------- ----------
$ 1,307,398 $ 1,104,638
========== ==========
See accompanying notes to condensed consolidated financial statements.
-8-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30, October 1,
2006 2005
(In thousands)
Cash flows from operating activities
Net income from continuing operations $ 143,694 $ 53,407
Reconciliation of net income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 31,225 30,691
Deferred income taxes (11,193) (1,813)
Minority interest in subsidiaries 2,526 7
Share-based compensation expense 2,041 -
Loss (gain) on disposal
of properties 1,913 (3,713)
Gain on sale of equity investment (1,876) -
Income tax benefit from exercise
of stock options (1,217) 529
Equity in earnings of
unconsolidated subsidiary (964) (4,005)
Gain on early retirement of debt (97) -
Changes in assets and liabilities,
net of businesses acquired:
Receivables (63,791) (49,665)
Inventories (96,979) 8,703
Other assets (5,340) (2,956)
Current liabilities 25,319 50,639
Other liabilities 2,770 367
Other, net (2,987) 960
---------- ----------
Net cash provided by
operating activities 25,044 83,151
---------- ----------
Cash flows from investing activities
Capital expenditures (32,975) (13,425)
Proceeds from sales of
properties and equity investment 23,227 10,059
Business acquired, net of
cash received 3,632 (10,891)
---------- ----------
Net cash used in
investing activities (6,116) (14,257)
---------- ----------
See accompanying notes to condensed consolidated financial statements.
-9-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Nine Months Ended
September 30, October 1,
2006 2005
(In thousands)
Cash flows from financing activities
Issuance of debt by joint venture $ 24,918 $ -
Dividends paid (11,073) (10,983)
Proceeds from the sale of
treasury stock 7,116 4,346
Repayments of long-term debt (1,922) (4,355)
Proceeds from the issuance of debt 1,902 -
Income tax benefit from exercise
of stock options 1,217 -
Acquisition of treasury stock (570) (168)
---------- ----------
Net cash provided by (used in)
financing activities 21,588 (11,160)
---------- ----------
Effect of exchange rate changes on cash 262 (495)
---------- ----------
Net cash provided by operating
activities of discontinued operations - 3,324
---------- ----------
Increase in cash and cash equivalents 40,778 60,563
Cash and cash equivalents at the
beginning of the period 129,685 47,449
---------- ----------
Cash and cash equivalents at the
end of the period $ 170,463 $ 108,012
========== ==========
See accompanying notes to condensed consolidated financial statements.
-10-
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 for Mueller Industries, Inc. (the Company) 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. The nine-month period ended September 30, 2006 contained 39
weeks while the nine-month period ended October 1, 2005 contained 40 weeks.
Note 1 - Earnings per Common Share and Stock-Based Compensation
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.
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123 (R), "Share-Based Payment", and began
recognizing compensation expense in its Condensed Consolidated Statements of
Income as a selling, general, and administrative expense, for its stock
option grants based on the fair value of the awards. Prior to January 1,
2006, the Company accounted for stock option grants under the recognition
and measurement provisions of APB Opinion 25, "Accounting for Stock Issued to
Employees", and related Interpretations, as permitted by SFAS 123, "Accounting
for Stock-Based Compensation". No stock-based compensation expense was
reflected in net income prior to adopting SFAS 123 (R) as all options were
granted at an exercise price equal to the market value of the underlying
common stock on the date of grant. SFAS 123 (R) was adopted using the
modified prospective transition method. Under this transition method,
compensation cost recognized in the periods after adoption includes: (i)
compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant-date fair value estimated
in accordance with the original provisions of SFAS 123, and (ii)
compensation cost for all share-based payments granted subsequent to January
1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123 (R). Results from prior periods have not been
restated. As a result of adopting SFAS 123 (R), the Company's income from
continuing operations before income taxes and income from continuing
operations was decreased by $0.7 million and $0.4 million, respectively,
for the third quarter of 2006 and $2.0 million and $1.3 million,
respectively, for the first nine months of 2006.
-11-
Prior to the adoption of SFAS 123 (R), the Company presented all tax
benefits of deductions resulting from the exercise of stock options as
operating cash flows in the Condensed Consolidated Statements of Cash Flows.
SFAS 123 (R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized
for those options to be classified as financing cash flows. The $1.2
million tax benefit classified as a financing cash inflow in the first nine
months of 2006 would have been classified as an operating cash flow under
previous guidance.
The following table illustrates the pro forma effect on the prior
year's net income and earnings per share as if the Company had applied the
fair value recognition provisions of SFAS 123 to options granted under the
Company's stock option plans. For purposes of this pro forma disclosure,
the value to the options is estimated using a Black-Scholes-Merton option
pricing model and amortized to expense over the options' vesting period.
For the For the Nine
Quarter Ended Months Ended
October 1, October 1,
2005 2005
(In thousands, except per share data)
Net income as reported $ 24,340 $ 56,731
Deduct: Total stock-based compensation
expense determined under a fair
value based method,
net of related tax effects (593) (1,813)
---------- ----------
SFAS No. 123 pro forma
net income $ 23,747 $ 54,918
========== ==========
Pro forma earnings per share:
Basic $ 0.65 $ 1.50
Diluted $ 0.64 $ 1.48
Earnings per share, as reported:
Basic $ 0.66 $ 1.55
Diluted $ 0.66 $ 1.53
Under existing plans, the Company may grant options to purchase shares
of common stock at prices not less than the fair market value of the stock
on the date of grant. Generally, the options vest annually in equal
increments over a five-year period beginning one year from the date of
grant. Any unexercised options expire after not more than ten years. The
fair value of each grant is estimated as a single award and amortized into
compensation expense on a straight-line basis over its vesting period.
-12-
The Company estimates the fair value of all stock option awards as of
the grant date by applying the Black-Scholes-Merton option pricing model.
The use of this valuation model involves assumptions that are judgmental
and highly sensitive in the determination of compensation expense and
include the expected life of the option, stock price volatility, risk-free
interest rate, dividend yield, and exercise price. Additionally under SFAS
123 (R), forfeitures are estimated at the time of valuation and reduce
expense ratably over the vesting period. The forfeiture rate, which is
estimated at a weighted average of 3.5 percent of unvested options
outstanding as of September 30, 2006, is adjusted periodically based on the
extent to which actual forfeitures differ, or are expected to differ, from
the previous estimate. Under SFAS 123 and APB 25, the Company elected to
account for forfeitures when awards were actually forfeited and reflected
the forfeitures as a cumulative adjustment to the pro forma expense. The
weighted average for key assumptions used in determining the fair value of
options granted and a discussion of the methodology used to develop each
assumption are as follows:
For the Nine Months Ended
September 30, October 1,
2006 2005
Expected lives 6.4 years 6.0 years
Expected price volatility 0.269 0.306
Risk-free interest rate 4.9% 3.8%
Dividend yield 1.2% 1.3%
Expected Lives - This is the period of time over which the options granted
are expected to remain outstanding. The Company uses the "simplified"
method found in the Securities and Exchange Commission's Staff Accounting
Bulletin No. 107 to estimate the expected life of stock option grants. An
increase in the expected term will increase compensation expense.
Expected Price Volatility - This is a measure of the amount by which a
price has fluctuated or is expected to fluctuate. The Company uses actual
historical changes in the market value of its stock to calculate the
volatility assumption. Daily market value changes from the date of grant
over a past period representative of the expected lives of the options are
used. An increase in the expected price volatility rate will increase
compensation expense.
Risk-Free Interest Rate - This is the U.S. Treasury rate for the week of
the grant, having a term representative of the expected life of the
options. An increase in the risk-free rate will increase compensation
expense.
Dividend Yield - This rate is the annual dividends per share as a
percentage of the Company's stock price. An increase in the dividend yield
will decrease compensation expense.
-13-
The Company generally issues treasury shares when options are
exercised. A summary of stock option activity since our most recent fiscal
year end follows:
Weighted Average
Options Exercise Price
(Shares in thousands)
Outstanding at December 31, 2005 1,912 $ 21.49
Granted 355 35.11
Exercised (383) 18.63
Cancelled (141) 26.96
--------
Outstanding at September 30, 2006 1,743 24.45
========
At September 30, 2006, the aggregate intrinsic value of all
outstanding options was $19.2 million with a weighted average remaining
contractual term of 7.1 years, of which 692,329 of the outstanding options
are currently exercisable with an aggregate intrinsic value of $10.5
million, a weighted average exercise price of $20.26, and a weighted average
remaining contractual term of 5.51 years. The total intrinsic value of
options exercised during the quarter and nine months ended September 30,
2006 was $1.1 million and $5.1 million, respectively. The total
compensation cost at September 30, 2006 related to non-vested awards not
yet recognized was $8.3 million with an average expense recognition period
of 3.7 years.
Under the Company's 1994 Non-Employee Director Stock Option Plan, each
member of the Company's Board of Directors who is neither an employee nor
an officer of the Company is automatically granted each year on the date of
the Company's Annual Meeting of Stockholders, without further action by the
Board, an option to purchase 2,000 shares of Common Stock at the fair
market value of the Common Stock on the date the option is granted. As of
September 30, 2006, options to purchase 54,232 shares of Common Stock were
outstanding under this Plan and 21,588 options are available under the Plan
for future issuance.
On February 16, 2006, the Board approved an amendment and restatement
of the 2002 Stock Option Plan, which, among other things, increased the
number of shares available for issuance by 1.0 million shares. The
amendment and restatement was approved by the Company's stockholders at the
Annual Meeting held on May 4, 2006. Shares available for future employee
grants were approximately 0.8 million at September 30, 2006.
-14-
Note 2 - Commitments and Contingencies
The Company is subject to normal environmental standards imposed by
federal, state, local, and foreign environmental laws and regulations. At
September 30, 2006, the Company had $9.0 million reserved for environmental
remediation, post-closure monitoring, and related obligations.
By letter dated October 10, 2006, the Kansas Department of Health and
Environment (KDHE) advised the Company that environmental contamination has
been identified at a former smelter in Altoona, Kansas. KDHE asserts that
the Company is a corporate successor to an entity that is alleged to have
owned and operated the smelter from 1915-1918. KDHE has requested that the
Company negotiate a consent order with KDHE to address contamination at the
site. The Company is in the process of evaluating this request.
Based upon information currently available, management believes that
the outcome of pending environmental matters will not materially affect the
overall financial position and results of operations of the Company.
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 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.
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 named in
two of the Copper Tube 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.
-15-
In September 2006, the Federal Actions were dismissed as to Mueller
Europe for lack of personal jurisdiction. Plaintiffs have filed a motion
for reconsideration of the dismissal of Mueller Europe. In October 2006,
the Federal Actions were dismissed in their entirety for lack of subject
matter jurisdiction as to all defendants. The time to file a notice of
appeal from the dismissal for lack of subject matter jurisdiction has not
yet expired.
The Company's demurrer to the complaint and the Company's motion to
dismiss for failure to state a claim are pending 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 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 in the United States District Court for the
Northern District of California. 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. All of the ACR Actions seek monetary and other
relief.
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
in the Direct ACR Class Actions. No defendant has yet been served with the
consolidated complaint in the Indirect ACR Class Actions. The Company,
Mueller Europe, WTC Holding Company, Inc., and Deno Holding Company, Inc.
have been served, but not yet required to respond, in one of the ACR Class
Actions filed in the United States District Court for the Northern District
of California. The Company, but not Mueller Europe, has been served in the
second of the ACR Class Actions filed in the United States District Court
for the Northern District of California, but has not yet been required to
respond.
-16-
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.
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 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 possible U.S. exporters and importers of these
goods and requested to provide information to Canadian authorities.
The Company responded to the CBSA's requests for information in the
investigation and will supply additional data as may be available. The
CBSA issued its Preliminary Determination on October 20, 2006, estimating
margins of dumping for these goods. Shipments of the subject goods into
Canada on or after October 20th will bear these significant duties until a
final determination is made on or about January 18, 2007. The Company does
not anticipate any material adverse effect on its financial condition as a
result of the Preliminary Determination by the CBSA.
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.
On September 22, 2005, the European Commission adopted a statement
alleging infringements in Europe of competition rules by manufacturers of
copper fittings including the Company and a business in England that it
acquired in 1997. The Company took the lead in bringing these copper-
fitting issues to the attention of the European Commission and has fully
cooperated in the resulting investigation from its inception. On September
20, 2006, the European Commission adopted its copper-fittings decision,
finding infringements in Europe of competition rules by various companies,
including the Company and certain of its subsidiaries, and imposing fines
on various companies. Neither the Company nor its subsidiaries were
assessed any fines.
-17-
The Company has assessed its risk and provided estimated accruals for
various potential tax matters in a number of jurisdictions. Although the
ultimate amount of the liabilities, if any, may vary, 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 September 30, 2006 was $11.8 million.
Note 3 - Inventories
September 30, 2006 December 31, 2005
(In thousands)
Raw material and supplies $ 57,930 $ 42,268
Work-in-process 34,890 24,610
Finished goods 205,320 130,109
---------- ----------
Inventories $ 298,140 $ 196,987
========== ==========
Inventories valued using the LIFO method totaled $40.0 million at
September 30, 2006 and $33.5 million at December 31, 2005. At September
30, 2006 and December 31, 2005, the approximate FIFO cost of such
inventories was $164.3 million and $87.8 million, respectively.
-18-
Note 4 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. 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
September 30, October 1,
2006 2005
(In thousands)
Pension benefits:
Service cost $ 592 $ 554
Interest cost 2,320 2,062
Expected return on plan assets (3,053) (2,468)
Amortization of prior service cost 94 93
Amortization of net (gain) loss 345 (139)
---------- ----------
Net periodic benefit cost $ 298 $ 102
========== ==========
Other benefits:
Service cost $ 1 $ 1
Interest cost 159 162
Amortization of prior service cost 2 (2)
Amortization of net loss 33 36
---------- ----------
Net periodic benefit cost $ 195 $ 197
========== ==========
-19-
For the Nine Months Ended
September 30, October 1,
2006 2005
(In thousands)
Pension benefits:
Service cost $ 1,541 $ 1,663
Interest cost 6,204 6,186
Expected return on plan assets (7,902) (7,405)
Amortization of prior service cost 280 280
Amortization of net (gain) loss 763 (418)
---------- ----------
Net periodic benefit cost $ 886 $ 306
========== ==========
Other benefits:
Service cost $ 5 $ 3
Interest cost 477 486
Amortization of prior service cost 6 (6)
Amortization of net loss 98 108
---------- ----------
Net periodic benefit cost $ 586 $ 591
========== ==========
The Company anticipates contributions to its pension plans for 2006 to
be approximately $2.4 million. During the first nine months of 2006,
approximately $1.7 million of contributions have been made to certain
pension plans.
-20-
Note 5 - Other income, net
For the Quarter Ended
September 30, October 1,
2006 2005
(In thousands)
Interest income $ 1,898 $ 636
Gain on sale of equity investment - -
Equity in earnings of
unconsolidated subsidiary - 534
Gain on early retirement of debt - -
Environmental expense (153) (124)
Minority interest in income
of subsidiaries (721) -
Gain (loss) on disposal
of properties, net (5) 4,170
Rent, royalties, and other 433 205
---------- ----------
$ 1,452 $ 5,421
========== ==========
For the Nine Months Ended
September 30, October 1,
2006 2005
(In thousands)
Interest income $ 3,861 $ 1,340
Gain on sale of equity investment 1,876 -
Equity in earnings of
unconsolidated subsidiary 964 4,005
Gain on early retirement of debt 97 -
Environmental expense (418) (414)
Minority interest in income
of subsidiaries (2,526) (7)
Gain (loss) on disposal
of properties, net (1,913) 3,713
Rent, royalties, and other 1,457 1,551
---------- ----------
$ 3,398 $ 10,188
========== ==========
-21-
Note 6 - Income Taxes
Year-to-date and quarterly income tax expense includes an adjustment
of $10.4 million, or $0.28 per diluted share, to reduce income tax expense
for changes in estimate related to exposures for existing transfer pricing
methodologies and previously unrecognized state income tax credit
carryforwards. During the third quarter, the Company received the results
of certain transfer pricing studies. After evaluating those studies, an
adjustment of $4.7 million, net of federal effects, was recorded to reduce
the tax contingency reserves related to transfer pricing risks.
Additionally, in connection with the results of the aforementioned transfer
pricing studies and a certain court ruling, estimates of the future
realization of certain state tax credits were revised. Other factors used
in revising the estimate were the remaining lives of the credit
carryforwards, projected income levels to utilize the credits given the
current business climate, and feasibility of tax planning strategies.
After considering all these factors, the Company recorded an adjustment of
$5.7 million to recognize estimated future benefits from state tax credit
carryforwards, net of federal effects, which were previously unrecognized.
As of September 30, 2006, the Company has a total of $32.0 million, net of
federal effects, in state tax credit carryforwards with an offsetting
valuation allowance of $26.3 million. Of the total credits, $1.9 million,
net of federal effects, expire in 2006, $7.7 million, net of federal
effects, expire through 2021 and the remaining credits have an unlimited
life. The estimates related to the future realization of these state tax
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.
The Company's effective tax rate for the third quarter of 2006 was
11.3 percent compared with 31.9 percent for the same period last year. The
effect of the adjustment described above was a reduction in the Company's
effective tax rate of 17.9 percent. Other factors that explain the
difference between the current period rate and the expected federal rate
for the third quarter of 2006 were (i) reductions to tax contingency
reserves related to statute closings and other settlements of approximately
$1.8 million, or $0.05 per diluted share, (ii) recognition of a benefit
from U.S. manufacturer's deduction of $1.3 million, (iii) differences in
foreign statutory income tax rates as compared to U.S. federal rate of
approximately $0.4 million, and (iv) recognition of a benefit of a foreign
tax holiday of approximately $1.1 million (without consideration of
minority interest). These reductions were partially offset by the
provision for state income taxes, net of federal benefit, of $0.4 million.
The Company's effective tax rate for the first nine months of 2006 was
24.9 percent compared with 31.7 percent for the same period last year. The
effect of the adjustment described above was a reduction in the Company's
effective tax rate of 5.5 percent. Other factors that explain the
difference between the current period rate and the expected federal rate
for the first nine months of 2006 were (i) reductions to valuation
allowances related to the U.K. net operating loss carryforwards of
approximately $2.9 million, or $0.08 per diluted share, (ii) reductions to
-22-
tax contingency reserves related to statute closings and other settlements
of approximately $1.8 million, or $0.05 per diluted share, (iii)
differences in foreign statutory income tax rates as compared to U.S.
federal rate of approximately $1.2 million, (iv) recognition of a benefit
from U.S. manufacturer's deduction of $1.9 million, (v) recognition of a
benefit of a foreign tax holiday of approximately $2.1 million (without
consideration of minority interest), and (vi) recognition of approximately
$0.9 million benefit from the favorable resolution of an Internal Revenue
Service audit of tax returns filed for 2002 and 2003. These reductions
were partially offset by the provision for state income taxes, net of
federal benefit, of $1.3 million.
Note 7 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
September 30, October 1,
2006 2005
(In thousands)
Comprehensive income:
Net income $ 51,579 $ 24,340
Other comprehensive income (loss):
Foreign currency translation 2,012 153
Minimum pension liability - -
Change in the fair value
of derivatives (306) 120
---------- ----------
$ 53,285 $ 24,613
========== ==========
For the Nine Months Ended
September 30, October 1,
2006 2005
(In thousands)
Comprehensive income:
Net income $ 143,694 $ 56,731
Other comprehensive income (loss):
Foreign currency translation 7,913 (5,581)
Minimum pension liability 4,315 -
Change in the fair value
of derivatives (203) 212
---------- ----------
$ 155,719 $ 51,362
========== ==========
-23-
The change in cumulative foreign currency translation adjustment
primarily relates to the Company's investment in its U.K. and Mexican
subsidiaries and fluctuations in exchange rates between their local
currencies and the U.S. dollar. During the first nine months of 2006, the
value of the British pound sterling increased 8.7 percent compared to the
U.S. dollar and the value of the Mexican peso decreased 2.5 percent
compared to the U.S. dollar.
Note 8 - Acquisitions and Investments
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 OEM 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). In December
2005, the Company contributed $7.0 million cash investment to the venture.
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 $5.3 million in December 2005 and $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.
During the first quarter of 2006, Mueller-Xingrong had a temporary
Bridge Loan Facility with two banks providing for secured borrowings of up
to RMB 110 million, or $13.7 million USD, to fund working capital. On
April 4, 2006, Mueller-Xingrong entered into a Credit Agreement with a
syndicate of four banks establishing a secured RMB 320 million, or $39.9
million USD, revolving working capital credit facility (the JV Credit
Facility) which matures in April 2007. Proceeds from the JV Credit
Facility were used to pay-off amounts outstanding under the Bridge Loan
Facility. Borrowings under the JV Credit Facility are secured by the real
property and equipment of Mueller-Xingrong and bear interest at 98 percent
of the latest base-lending rate published by the Peoples Bank of China
(currently 5.42 percent).
On August 15, 2005, the Company acquired 100 percent of the
outstanding stock of KX Group LTD (Brassware). Brassware, located in
Witton, Birmingham, England, is an import distributor of plumbing and
residential heating products with historical annual sales of approximately
$48.0 million to plumbers' merchants and builders' merchants in the U.K.
and Ireland. The cost of the acquired business, including cash of $10.6
million plus $1.8 million of notes issued, totaled $12.4 million. The
total estimated fair value of assets acquired was approximately $17.6
million, consisting primarily of receivables of $8.4 million, inventory of
$6.4 million and property and equipment of $1.5 million. The total
estimated fair value of liabilities assumed was approximately $16.4
million, consisting primarily of notes payable of $8.3 million and trade
-24-
payables and other current liabilities of $8.1 million. The excess of the
purchase price over the estimated fair value of assets acquired and
liabilities assumed of $11.2 million was allocated to goodwill of the
Plumbing & Refrigeration segment. This acquisition will broaden the
Company's product line in the U.K. The acquisition was accounted for using
the purchase method of accounting. Therefore, the results of operations of
the acquired business were included in the Company's Condensed Consolidated
Financial Statements from its acquisition date. The purchase price, which
was financed by available cash balances, has been allocated to the assets
of the acquired business based on their respective fair market values.
In April 2006, the Company sold its approximately 38 percent interest
in Conbraco Industries, Inc. which had a net book value of approximately
$21.1 million. Aggregate cash proceeds from the sale were approximately
$23.0 million. This transaction resulted in a pre-tax gain of
approximately $1.9 million.
Note 9 - Industry Segments
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the OEM segment. Prior to the
fourth quarter of 2005, the Company disclosed its reportable segments as
Standard Products and Industrial Products. Additional operating segments
have been recognized following an internal reorganization in 2005. For
disclosure purposes, as permitted under SFAS 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), the Trading Group, and
European Operations. The OEM segment is composed of the Industrial
Products Division (IPD) and the 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. European Operations manufactures copper tube in Europe, which is
sold in Europe and the Middle East; activities also include import
distribution. The Trading Group sources products for import distribution
in North America. 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, through IPD, manufactures and sells brass and
copper alloy rod, bar, and shapes; aluminum and brass forgings; and
aluminum and copper impact extrusions; and through EPD, manufactures and
sells refrigeration valves and fittings; fabricated tubular products; gas
valves and assemblies; and commercial copper tube. The OEM segment sells
its products primarily to original equipment manufacturers (OEMs), many of
which are in the HVAC, plumbing, and refrigeration markets in the U.S.,
Mexico, and China.
-25-
Summarized segment information is as follows:
For the Quarter Ended
September 30, October 1,
2006 2005
(In thousands)
Net sales:
Plumbing & Refrigeration $ 426,261 $ 322,507
OEM 218,372 114,325
Elimination of intersegment sales (8,635) (2,702)
---------- ----------
$ 635,998 $ 434,130
========== ==========
Operating income:
Plumbing & Refrigeration $ 56,863 $ 30,955
OEM 9,862 5,700
Unallocated expenses (4,922) (6,418)
---------- ----------
$ 61,803 $ 30,237
========== ==========
Income before income taxes:
Plumbing & Refrigeration $ 57,181 $ 35,073
OEM 8,841 5,881
Unallocated expenses (7,852) (10,090)
---------- ----------
$ 58,170 $ 30,864
========== ==========
-26-
For the Nine Months Ended
September 30, October 1,
2006 2005
(In thousands)
Net sales:
Plumbing & Refrigeration $ 1,364,360 $ 918,839
OEM 628,472 336,608
Elimination of intersegment sales (26,132) (9,148)
---------- ----------
$ 1,966,700 $ 1,246,299
========== ==========
Operating income:
Plumbing & Refrigeration $ 179,384 $ 78,732
OEM 42,326 19,540
Unallocated expenses (18,531) (15,533)
---------- ----------
$ 203,179 $ 82,739
========== ==========
Income before income taxes:
Plumbing & Refrigeration $ 179,128 $ 83,216
OEM 38,424 19,768
Unallocated expenses (26,136) (24,787)
---------- ----------
$ 191,416 $ 78,197
========== ==========
September 30, 2006 December 31, 2005
(In thousands)
Segment assets:
Plumbing & Refrigeration $ 801,649 $ 718,484
OEM 286,117 197,697
General corporate 219,632 188,457
---------- ----------
$ 1,307,398 $ 1,104,638
========== ==========
The quarter and nine month periods ended September 30, 2006 include
the acquired operations of Brassware in the Plumbing & Refrigeration
segment and Mueller-Xingrong in the OEM segment.
-27-
Note 10 - Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements. It prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company has not yet completed the process of evaluating what effect, if
any, the adoption of FIN 48 will have on its consolidated statements of
income or financial position.
In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R)" (SFAS 158).
SFAS 158 requires an employer to:
* recognize the funded status of a benefit plan in its statement of
financial position and to recognize changes in that funded status in
comprehensive income;
* recognize as a component of other comprehensive income, net of tax, the
gains or losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic benefit cost
pursuant to FASB Statement No. 87;
* measure defined benefit plan assets and obligations as of the date of the
employer's fiscal year-end statement of financial position (with limited
exceptions); and
* disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that
arise from delayed recognition of the gains or losses, prior service costs
or credits, and transition asset or obligation.
A publicly traded entity is required to initially recognize the funded
status of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after December 15,
2006. The requirement to measure plan assets and benefit obligations as of
the date of the employer's fiscal year-end statement of financial position
is effective for fiscal years ending after December 15, 2008. The Company
has not yet completed the process of evaluating what effect, if any, the
adoption of SFAS 158 will have on its consolidated statements of income or
financial position.
-28-
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. Prior to the
fourth quarter of 2005, the Company disclosed its reportable segments as
Standard Products and Industrial Products. Additional operating segments
have been recognized following an internal reorganization in 2005. For
disclosure purposes, as permitted under SFAS 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), the Trading Group, and
European Operations. The OEM segment is composed of the Industrial
Products Division (IPD) and the 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. European Operations manufactures copper tube in Europe, which is
sold in Europe and the Middle East; activities also include import
distribution. The Trading Group sources products for import distribution
in North America. 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, through IPD, manufactures and sells brass and
copper alloy rod, bar, and shapes; aluminum and brass forgings; and
aluminum and copper impact extrusions; and through EPD, manufactures and
sells refrigeration valves and fittings; fabricated tubular products; gas
valves and assemblies; and commercial copper tube. The OEM segment sells
its products primarily to original equipment manufacturers (OEMs), many of
which are in the HVAC, plumbing, and refrigeration markets in the U.S.,
Mexico, and China.
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 drivers of underlying demand for these products.
-29-
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. The nine-month period ended September 30, 2006 contained 39
weeks while the nine-month period ended October 1, 2005 contained 40 weeks.
Results of Operations
During the third quarter of 2006, the Company's net sales were $636.0
million, which compares with net sales of $434.1 million over the same
period of 2005. Net sales were $1.97 billion in the first nine months of
2006 compared with $1.25 billion in the same period of 2005. The increase
in net sales is attributable to higher selling prices and acquired
businesses partially offset by reduced volumes. The average price of
copper was approximately 95 percent higher in the first nine months of 2006
compared with the same period of 2005. Businesses acquired in late 2005
contributed $139.2 million of sales in the first nine months of 2006.
Cost of goods sold increased from $360.5 million in the third quarter
of 2005 to $528.9 million in the same period of 2006. Cost of goods sold
for the nine months ended September 30, 2006 was $1.62 billion compared
with $1.04 billion for the first nine months of 2005. The increase in the
current year was attributable to higher material costs offset by reduced
volume. Gross profit increased to $107.1 million from $73.6 million in the
third quarter and increased to $343.6 million from $206.1 million for the
nine-month period due primarily to higher margins on copper tube and brass
rod and from businesses acquired late in 2005. The impact of rising raw
material costs also significantly contributed to the gross profit
improvement. Inventories valued using the LIFO method totaled $40.0
million at September 30, 2006 and $33.5 million at December 31, 2005. At
September 30, 2006 and December 31, 2005, the approximate FIFO cost of such
inventories was $164.3 million and $87.8 million, respectively.
Selling, general, and administrative expense was $34.8 million for the
third quarter of 2006 compared with $33.3 million for the same period of
2005. Year-to-date selling, general, and administrative expense was $109.4
million for 2006 compared with $92.8 million for the same period of 2005.
The increase for the quarter and nine months was primarily due to
businesses acquired in second half of 2005 and increased incentive
compensation including stock-based compensation.
-30-
For the third quarter of 2006, operating income at the Plumbing &
Refrigeration segment was $56.9 million, which compares with $31.0 million
in the same period of 2005. Year-to-date, 2006 operating income at the
Plumbing & Refrigeration segment was $179.4 million, which compares with
$78.7 million in the same period of 2005. The third quarter increase was
primarily attributable to better margins from copper tube and European
operations including contributions from acquired businesses partially
offset by reduced margins in the Trading Group. The year-to-date increase
was primarily attributable to better margins from copper tube, plastic
fittings, and European operations including contributions from acquired
businesses. Volumes in the segment's core product lines, particularly
copper tube, were down substantially from the second quarter of 2006 and
the third quarter of 2005; this unit volume reduction was comparable to the
reduction in the U.S. industry as a whole.
Operating income at the OEM segment was $9.9 million in the third
quarter of 2006 compared with $5.7 million in the third quarter of 2005.
Year-to-date, 2006 operating income at the OEM segment was $42.3 million,
which compares with $19.5 million in the same period of 2005. Improved
profitability in the third quarter was due to improved spreads in the brass
rod business and contributions from Mueller-Xingrong, which reported total
operating income of $1.8 million for the quarter. Lower unit volumes also
impacted the OEM segment. Improved profitability in the first nine months
of 2006 was due to (i) improved spreads in the brass rod business, (ii)
contributions from Mueller-Xingrong, which reported total operating income
of $5.8 million for the first nine months of 2006, and (iii) improvements
in other product lines.
Interest expense for the third quarter of 2006 totaled $5.1 million,
compared with $4.8 million for the same period of 2005. For the first nine
months of 2006, interest expense was $15.2 million compared with $14.7
million for the same period of 2005. The increase in the third quarter and
first nine months of 2006 is primarily attributable to increased borrowings
at Mueller-Xingrong.
Other income, net was $3.4 million for the first nine months of 2006
compared with $10.2 million for the same period of 2005. The current year
decrease is primarily due to: (i) a decrease in earnings from an
unconsolidated subsidiary, Conbraco Industries, Inc. (Conbraco), (ii)
elimination of minority interest in Mueller-Xingrong, and (iii) current
year loss on disposal of properties. In April 2006, the Company sold its
approximately 38 percent interest in Conbraco, which had a net book value
of approximately $21.1 million. This transaction resulted in a pre-tax
gain of approximately $1.9 million. Aggregate cash proceeds from the sale
were approximately $23.0 million.
The Company's effective tax rate for the third quarter of 2006 was
11.3 percent compared with 31.9 percent for the same period last year. The
effective tax rate for the third quarter includes an adjustment of $10.4
million, or $0.28 per diluted share, to reduce income tax expense for
changes in estimate related to exposures for existing transfer pricing
methodologies and previously unrecognized state income tax credit
carryforwards. The effect of the adjustment was a reduction in the
Company's effective tax rate of 17.9 percent. See Note 6 to the financial
-31-
statements for more information regarding the adjustment. Other factors
that explain the difference between the current period rate and the
expected federal rate for the third quarter of 2006 were (i) reductions to
tax contingency reserves related to statute closings and other settlements
of approximately $1.8 million, or $0.05 per diluted share, (ii) recognition
of a benefit from U.S. manufacturer's deduction of $1.3 million, (iii)
differences in foreign statutory income tax rates as compared to U.S.
federal rate of approximately $0.4 million, and (iv) recognition of a
benefit of a foreign tax holiday of approximately $1.1 million (without
consideration of minority interest). These reductions were partially
offset by the provision for state income taxes, net of federal benefit, of
$0.4 million.
The Company's effective tax rate for the first nine months of 2006 was
24.9 percent compared with 31.7 percent for the same period last year. The
effect of the adjustment described above was a reduction in the Company's
effective tax rate of 5.5 percent. Other factors that explain the
difference between the current period rate and the expected federal rate
for the first nine months of 2006 were (i) reductions to valuation
allowances related to the U.K. net operating loss carryforwards of
approximately $2.9 million, or $0.08 per diluted share, (ii) reductions to
tax contingency reserves related to statute closings and other settlements
of approximately $1.8 million, or $0.05 per diluted share, (iii)
differences in foreign statutory income tax rates as compared to U.S.
federal rate of approximately $1.2 million, (iv) recognition of a benefit
from U.S. manufacturer's deduction of $1.9 million, (v) recognition of a
benefit of a foreign tax holiday of approximately $2.1 million (without
consideration of minority interest), and (vi) recognition of approximately
$0.9 million benefit from the favorable resolution of an Internal Revenue
Service audit of tax returns filed for 2002 and 2003. These reductions
were partially offset by the provision for state income taxes, net of
federal benefit, of $1.3 million.
Liquidity and Capital Resources
Cash provided by operating activities during the first nine months of
2006 totaled $25.0 million, which is primarily attributable to net income
of $143.7 million, depreciation and amortization of $31.2 million, and
increased current liabilities of $25.3 million, offset primarily by
increased receivables of $63.8 million and increased inventories of $97.0
million. 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 nine months of 2006, the average COMEX copper
price was approximately $3.06 per pound, which represents a 95 percent
increase over the average price during the first nine months of 2005. This
rise in the price of cathode has also resulted in sharp increases in the
open market price for copper scrap and, to a lesser extent, the price of
brass scrap.
-32-
During the first nine months of 2006, cash used in investing
activities was $6.1 million, consisting primarily of capital expenditures
totaling $33.0 million partially offset by $23.2 million proceeds from the
sale of properties including the equity interest in Conbraco Industries,
Inc. Cash provided by financing activities totaled $21.5 million for the
first nine months of 2006 consisting primarily of issuance of debt to fund
working capital of Mueller-Xingrong of $24.9 million and proceeds from the
sale of treasury stock of $7.1 million, partially offset by payment of
dividends of $11.1 million. Repayments of long-term debt totaled $1.9
million for the first nine months of 2006 which included $1.8 million of
the Company's 6% Subordinated Debentures.
The Company has a $150 million unsecured line-of-credit (Credit
Facility) which expires in November 2007. At September 30, 2006, there
were no outstanding borrowings under the Credit Facility. Approximately
$11.7 million in letters of credit were backed by the Credit Facility at
the end of the quarter. At September 30, 2006, the Company's total debt
was $341.5 million or 37.2 percent of its total capitalization.
On April 4, 2006, Mueller-Xingrong entered into a Credit Agreement
with a syndicate of four banks establishing a secured RMB 320 million, or
$39.9 million USD, revolving working capital credit facility (the JV Credit
Facility) which matures in April 2007. Proceeds from the JV Credit
Facility were used to pay-off amounts outstanding under the Bridge Loan
Facility. Borrowings under the JV Credit Facility are secured by the real
property and equipment of Mueller-Xingrong and bear interest at 98 percent
of the latest base-lending rate published by the Peoples Bank of China
(currently 5.42 percent).
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of working capital,
tangible net worth, and debt service coverage ratios. At September 30,
2006, 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 each of the first three quarters of 2006 and 2005.
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, 2006, the Company made its semi-annual interest payment
of approximately $9.0 million on its 6% Subordinated Debentures.
Management believes that cash provided by operations and currently
available cash of $170.4 million will be adequate to meet the Company's
normal future capital expenditures and operational needs. The Company's
current ratio was 2.6 to 1 at September 30, 2006.
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. 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 September 30, 2006, the Company has
-33-
repurchased approximately 2.4 million shares under this authorization.
Additionally, the Company may repurchase its outstanding 6% Subordinated
Debentures through open market transactions. Purchases of those
securities, if any, will be funded primarily through existing cash and cash
from operations.
There have been no significant changes in the Company's contractual
cash obligations reported at December 31, 2005, except the following. At
December 31, 2005, the Company reported contractual supply commitments for
raw materials consumed in the ordinary course of business totaling $327.3
million or $2.05 per pound. At September 30, 2006 the price per pound for
the same raw materials was approximately $3.46. The increased price will
affect cash outflows during the fourth quarter of 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in raw material
costs, energy costs, interest rates, and foreign currency exchange. 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
Adequate supplies of raw material have historically been available to
the Company from primary producers, metal brokers, and scrap dealers.
Sufficient energy in the form of natural gas, fuel oils, and electricity is
available to operate the Company's production facilities. While temporary
shortages of raw material and fuels may occur occasionally, to date they
have not materially hampered the Company's operations.
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.
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. Gains or losses with respect to these positions are deferred in
stockholders' equity 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. As of September 30, 2006, the Company
held open forward contracts to purchase approximately $7.4 million of
copper through December 2006.
-34-
Futures contracts may also be used to manage price risk associated
with natural gas purchases. 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 September 30,
2006, the Company had open forward contracts to purchase $1.0 million of
natural gas through March 2007. The lack of availability of energy sources
and the impact of rising energy prices could materially affect the
Company's business, results of operations and financial condition.
Subsequent to quarter-end, the Company sold forward approximately five
million pounds of copper to reduce its price exposure on higher inventory
quantities.
Interest Rates
At September 30, 2006, the Company had variable rate debt outstanding
of $28.9 million, the majority of which relates to the debt issued by
Mueller-Xingrong, which is discussed above. At these borrowing levels, a
hypothetical 10 percent increase in interest rates would have had an
insignificant unfavorable impact on the Company's pre-tax 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 September 30, 2006, one of the Company's foreign
subsidiaries had $3.8 million in open forward contracts to purchase 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, and the Mexican peso.
Additionally, with the investment in Mueller-Xingrong, the Company is
exposed to the Chinese currency (RMB). 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.
-35-
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, because of the
material weakness in internal controls related to the accounting for income
taxes as described below, the Company's disclosure controls and procedures
were not effective as of September 30, 2006.
The Company's management, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company's internal control over financial reporting as
of December 31, 2005 based on the control criteria established in a report
entitled Internal Control-Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on such
evaluation management determined that a material weakness related to the
accounting for income taxes existed as of December 31, 2005. At September
30, 2006, management determined that the material weakness had not yet been
remediated.
-36-
As defined by the Public Company Accounting Oversight Board's Auditing
Standard No. 2, a material weakness in internal control is a significant
deficiency, or combination of significant deficiencies, that results in
more than a remote likelihood that a material misstatement of the financial
statements would not be prevented or detected on a timely basis by the
Company. The principal factors contributing to the material weakness in
accounting for income taxes were (1) inadequate staffing and technical
expertise within the Company's tax department, (2) ineffective review and
approval practices, (3) inadequate processes to effectively reconcile
income tax accounts, and (4) inadequate application of the provisions of
SFAS 109 to tax planning strategies. These deficiencies resulted in
adjustments to correct the Company's accounting for income taxes which were
recorded prior to the issuance of the Consolidated Financial Statements as
of and for the year ended December 31, 2005. These deficiencies, in the
aggregate, were determined to be a material weakness. As a result of the
aforementioned material weakness, management has concluded that the
Company's internal control over financial reporting was not effective as of
December 31, 2005. Management has also determined that the existence of
the material weakness did not result in a material misstatement of the
financial results reported for prior annual or interim periods.
Changes in Internal Control over Financial Reporting
Management is in the process of implementing additional procedures to
enhance the controls surrounding accounting for income taxes.
Specifically, management is undertaking the following actions intended to
address the identified control weakness:
* Evaluate current staffing resources;
* Require additional education and training in prevailing accounting
standards that govern income tax reporting for personnel involved in the
preparation and review of income tax reporting matters;
* Engage third-party experts to conduct an independent review and evaluation
of the Company's process of accounting for and reporting of income taxes;
and
* Implement a standardized reporting system related to income tax reporting
matters that will facilitate timely information gathering and analysis for
all business units.
As of September 30, 2006, selected members of the corporate accounting
and tax departments have completed training courses in prevailing
accounting standards that govern income tax reporting, a third-party expert
has completed its initial review of the Company's process of accounting for
and reporting of income taxes, although recommendations have not yet been
fully implemented, and the corporate accounting department has made certain
staffing changes.
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending September 30, 2006,
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting. However,
as described above, the Company is undertaking changes in internal control
over financial reporting to correct the material weakness related to the
accounting for income taxes.
-37-
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 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 named in
two of the Copper Tube 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. Plaintiffs have filed a motion
for reconsideration of the dismissal of Mueller Europe. In October 2006,
the Federal Actions were dismissed in their entirety for lack of subject
matter jurisdiction as to all defendants. The time to file a notice of
appeal from the dismissal for lack of subject matter jurisdiction has not
yet expired.
The Company's demurrer to the complaint and the Company's motion to
dismiss for failure to state a claim are pending 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.
-38-
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 in the United States District Court for the
Northern District of California. 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
in the Direct ACR Class Actions. No defendant has yet been served with the
consolidated complaint in the Indirect ACR Class Actions. The Company,
Mueller Europe, WTC Holding Company, Inc., and Deno Holding Company, Inc.
have been served, but not yet required to respond, in one of the ACR Class
Actions filed in the United States District Court for the Northern District
of California. The Company, but not Mueller Europe, has been served in the
second of the ACR Class Actions filed in the United States District Court
for the Northern District of California, but has not yet been required to
respond.
The Company believes that the claims for relief in the ACR Actions are
without merit and intends to defend the ACR Actions vigorously.
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
-39-
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.
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 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 possible U.S. exporters and importers of these
goods and requested to provide information to Canadian authorities.
The Company responded to the CBSA's requests for information in the
investigation and will supply additional data as may be available. The
CBSA issued its Preliminary Determination on October 20, 2006, estimating
margins of dumping for these goods. Shipments of the subject goods into
Canada on or after October 20th will bear these significant duties until a
final determination is made on or about January 18, 2007. The Company does
not anticipate any material adverse effect on its financial condition as a
result of the Preliminary Determination by the CBSA.
Environmental Matters
By letter dated October 10, 2006, the Kansas Department of Health and
Environment (KDHE) advised the Company that environmental contamination has
been identified at a former smelter in Altoona, Kansas. KDHE asserts that
the Company is a corporate successor to an entity that is alleged to have
owned and operated the smelter from 1915-1918. KDHE has requested that the
Company negotiate a consent order with KDHE to address contamination at the
site. The Company is in the process of evaluating this request.
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.
On September 22, 2005, the European Commission adopted a statement
alleging infringements in Europe of competition rules by manufacturers of
copper fittings including the Company and a business in England that it
acquired in 1997. The Company took the lead in bringing these copper-
fitting issues to the attention of the European Commission and has fully
cooperated in the resulting investigation from its inception. On September
20, 2006, the European Commission adopted its copper-fittings decision,
finding infringements in Europe of competition rules by various companies,
including the Company and certain of its subsidiaries, and imposing fines
on various companies. Neither the Company nor its subsidiaries were
assessed any fines.
-40-
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 September 30,
2006, 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 September 30, 2006.
(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)
July 2 -
July 29, 2006 80(2) $ 35.05
July 30 -
August 26, 2006 924(2) 39.68
August 27 -
September 30, 2006 3,691(2) 36.57
(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.
(2) Shares tendered to the Company by employee stock option holders in
payment of the option purchase price and/or withholding taxes upon
exercise.
-41-
Item 6. Exhibits
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended September 30, 2006. 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, 3, 4, and 5 are not applicable and have been omitted.
-42-
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.
October 30, 2006 /S/ KENT A. MCKEE
Date Kent A. McKee
Executive Vice President and
Chief Financial Officer
October 30, 2006 /S/ RICHARD W. CORMAN
Date Richard W. Corman
Vice President - Controller
-43-
EXHIBIT INDEX
Exhibits Description
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended September 30, 2006. 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.