UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Registrant's telephone number, including area code: (901) 753-3200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ X ] No [ ]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [ X ]
Indicate by a 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.[ ]
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 [ ]
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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 aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently
completed second fiscal quarter was $1,172,426,719.
The number of shares of the Registrant's common stock outstanding as of
February 23, 2007 was 37,032,912 excluding 3,058,590 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into this
Report: Registrant's Definitive Proxy Statement for the 2007 Annual Meeting
of Stockholders, scheduled to be mailed on or about March 28, 2007 (Part III).
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MUELLER INDUSTRIES, INC.
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As used in this report, the terms "Company", "Mueller", and "Registrant" mean
Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole,
unless the context indicates otherwise.
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TABLE OF CONTENTS
Page
Part I
Item 1. Business 4
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 15
Item 2. Properties 16
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 22
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 22
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 26
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
Item 9A. Controls and Procedures 26
Item 9B. Other Information 31
Part III
Item 10. Directors, Executive Officers and Corporate Governance 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 31
Item 13. Certain Relationships and Related Transactions,
and Director Independence 33
Item 14. Principal Accounting Fees and Services 33
Part IV
Item 15. Exhibits, Financial Statement Schedules 34
Signatures 39
Index to Consolidated Financial Statements F-1
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PART I
ITEM 1. BUSINESS
Introduction
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. Mueller'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 Original Equipment
Manufacturers (OEM) segment. Prior to 2005, the Company disclosed its
reportable segments as Standard Products and Industrial Products.
Additional operating segments have been recognized following internal
reorganizations in 2006 and 2005. 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. 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 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. The majority of the Company's manufacturing
facilities operated at moderate levels during 2005, 2004, and the first half
of 2006. In the latter half of 2006, the Company's manufacturing facilities
operated at low levels due to reduced market demand.
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During 2002, the Company sold its wholly owned subsidiary, Utah Railway
Company. Certain expenses related primarily to retiree benefits at inactive
operations were formerly combined with the operations of Utah Railway
Company under a third industry segment, Other Businesses. Following the
sale of Utah Railway Company and its classification as discontinued
operations, these expenses of inactive operations have been combined into
the unallocated expenses classification.
Information concerning segments and geographic information appears
under "Note 15 - Industry Segments" in the Notes to Consolidated Financial
Statements for the year ended December 30, 2006 in Item 8 of this Report,
which is incorporated herein by reference.
The Company is a Delaware corporation incorporated on October 3, 1990.
Plumbing & Refrigeration Segment
Mueller's Plumbing & Refrigeration segment includes the Standard
Products Division (SPD) which manufactures a broad line of copper tube, in
sizes ranging from 1/8 inch to 8 inch diameter, and which are sold in
various straight lengths and coils. Mueller is a market leader in the air-
conditioning and refrigeration service tube markets. Additionally, Mueller
supplies a variety of water tube in straight lengths and coils used for
plumbing applications in virtually every type of construction project. SPD
also manufactures copper and plastic fittings and related components for the
plumbing and heating industry that are used in water distribution systems,
heating systems, air-conditioning, and refrigeration applications, and
drainage, waste, and vent systems. A major portion of SPD's products are
ultimately used in the domestic residential and commercial construction
markets.
The Plumbing & Refrigeration segment also fabricates steel pipe nipples
and resells imported brass and plastic plumbing valves, malleable iron
fittings, faucets, and plumbing specialty products to plumbing wholesalers,
distributors to the manufactured housing and recreational vehicle industries
and building materials retailers.
On August 15, 2005, the Company acquired 100 percent of the outstanding
stock of KX Company Limited (Brassware). Brassware, located in Witton,
Birmingham, England, is an import distributor of plumbing and residential
heating products with annual sales of approximately $48 million to plumbers'
merchants and builders' merchants in the U.K. and Ireland. Additionally, on
August 27, 2004, the Company acquired 100 percent of the outstanding stock
of Vemco Brasscapri Limited (Vemco). Vemco, located in Wellington, Somerset,
England, is an import distributor of plumbing products with annual sales of
approximately $26 million to plumbers' merchants and builders' merchants
throughout the U.K. and Ireland. At the beginning of 2007, the operations
of Brassware and Vemco were combined and assumed the Mueller Primaflow brand
name.
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On December 14, 2004, the Company acquired shares in seven companies
and the inventory of another company (collectively, Mueller Comercial S.A.).
These operations, with annual sales of approximately $60 million, include pipe
nipple manufacturing in Mexico and import distribution businesses which
product lines include malleable iron fittings and other plumbing specialties.
On September 27, 2002, the Company acquired certain assets of Colonial
Engineering, Inc.'s Fort Pierce, Florida operations. These operations
manufacture injected molded plastic pressure fittings for plumbing,
agricultural, and industrial use including a line of PVC Schedule 40 and 80
and CPVC fittings.
In December 2002, the Company initiated a plan to sell or liquidate its
French manufacturing operations, Mueller Europe S.A. On March 3, 2003,
Mueller Europe S.A. filed a petition for liquidation with the Commercial
Court of Provins, France and, on March 4, 2003, the Court declared the
entity to be in liquidation. The disposition of remaining assets and
obligations of Mueller Europe S.A. is under the jurisdiction of the Court.
In 2003, the Company recognized operating losses from discontinued
operations incurred by Mueller Europe S.A. for the period the business
operated.
The Plumbing & Refrigeration segment markets primarily through its own
sales and distribution organization, which maintains sales offices and
distribution centers throughout the United States and in Canada, Mexico, and
Europe. Additionally, products are sold and marketed through a network of
agents, which, when combined with the Company's sales organization, provide
the Company broad geographic market representation.
These businesses are highly competitive. The principal methods of
competition for Mueller's products are customer service, availability, and
price. The total amount of order backlog for the Plumbing & Refrigeration
segment as of December 30, 2006 was not significant.
The Company competes with various companies, depending on the product
line. In the U.S. copper tubing business, the domestic competition includes
Cerro Flow Products, Inc., Cambridge-Lee Industries (Reading Tube
Corporation), Wolverine Tube, Inc., and Howell Metal Company (a subsidiary
of Commercial Metals Company), as well as many actual and potential foreign
competitors. In the European copper tubing business, Mueller competes with
at least eight European-based manufacturers of copper tubing as well as
other foreign-based manufacturers. In the copper fittings market,
competitors include Elkhart Products Company, a subsidiary of Aalberts
Industries N.V., and NIBCO, Inc., as well as several foreign manufacturers.
Additionally, the Company's copper tube and fittings businesses compete with
a large number of manufacturers of substitute products made from other
metals and plastic. The plastic fittings competitors include NIBCO, Inc.,
Charlotte Pipe & Foundry, and other companies. Management believes that no
single competitor offers such a wide-ranging product line as Mueller and
that this is a competitive advantage in some markets.
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OEM Segment
Mueller's OEM segment includes the Industrial Products Division (IPD),
which manufactures brass rod, nonferrous forgings, and impact extrusions
that are sold primarily to OEMs in the plumbing, refrigeration, fluid power,
and automotive industries, as well as to other manufacturers and
distributors. The Company's Port Huron, Michigan mill extrudes brass,
bronze, and copper alloy rod in sizes ranging from 3/8 inches to 4 inches in
diameter. These alloys are used in applications that require a high degree
of machinability, wear and corrosion resistance, as well as electrical
conductivity. IPD also manufactures brass and aluminum forgings, which are
used in a wide variety of products, including automotive components, brass
fittings, industrial machinery, valve bodies, gear blanks, and computer
hardware. IPD also serves the automotive, military ordnance, aerospace, and
general manufacturing industries with cold-formed aluminum and copper impact
extrusions. Typical applications for impacts are high strength ordnance,
high-conductivity electrical components, builders' hardware, hydraulic
systems, automotive parts, and other uses where toughness must be combined
with varying complexities of design and finish. Additionally IPD
manufactures shaped and formed tube, produced to tight tolerances, for
baseboard heating, appliances, and medical instruments. The OEM segment
also includes the Engineered Products Division (EPD), which manufactures and
fabricates valves and custom OEM products for refrigeration and air-
conditioning applications. The total amount of order backlog for the OEM
segment as of December 30, 2006 was not significant.
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, which is located primarily in Jintan City,
Jiangsu Province, China, is named Jiangsu Mueller-Xingrong Copper Industries
Limited.
On August 21, 2002, the Company acquired 100 percent of the outstanding
stock of Overstreet-Hughes, Co., Inc. Overstreet-Hughes, located in
Carthage, Tennessee, manufactures precision tubular components and
assemblies primarily for the OEM air-conditioning market.
IPD and EPD primarily sell directly to OEM customers. Competitors,
primarily in the brass rod market, include Cerro Metal Products Company,
Inc., Chase Industries, Inc., a subsidiary of Olin Corporation, and others
both domestic and foreign. Outside of North America, IPD and EPD sell
products through various channels.
On February 27, 2007, the Company acquired 100 percent of the
outstanding stock of Extruded Metals, Inc. (Extruded) for $32.0 million in
cash. Extruded, located in Belding, Michigan, had annual net sales of
approximately $350 million in 2006.
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Labor Relations
At December 30, 2006, the Company employed approximately 4,700
employees, of which approximately 1,900 were represented by various unions.
Those union contracts will expire as follows:
Location Expiration Date
Port Huron, Michigan April 1, 2007
Wynne, Arkansas December 1, 2009
Fulton, Mississippi August 1, 2007
North Wales, Pennsylvania July 28, 2009
Waynesboro, Tennessee November 7, 2009
Jacksboro, Tennessee September 15, 2008
Addison, Illinois January 1, 2008
The union contracts at the Company's U.K. and Mexico operations are renewed
annually. The Company expects to renew these contacts without material
disruption of its operations.
As of December 30, 2006, approximately 29 percent of the Company's
employees were covered by collective bargaining or similar agreements that
will expire during 2007.
Raw Material and Energy Availability
The major portion of Mueller's base metal requirements (primarily
copper) is normally obtained through short-term supply contracts with
competitive pricing provisions (for cathode) and the open market (for scrap).
Other raw materials used in the production of brass, including brass scrap,
zinc, tin, and lead, are obtained from zinc and lead producers, open-market
dealers, and customers with brass process scrap. Raw materials used in the
fabrication of aluminum and plastic products are purchased in the open
market from major producers.
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.
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During recent years, an increasing demand for copper and copper alloy
primarily from China had an effect on the global distribution of such
commodities. The increased demand for copper (cathode and scrap) and copper
alloy products from the export market caused a tightening in the domestic
raw materials market. Mueller's copper tube facilities can accommodate both
refined copper and copper scrap as the primary feedstock. The Company has
commitments from refined copper producers for a portion of its metal
requirements for 2007. Adequate quantities of copper are currently
available. While the Company will continue to react to market developments,
resultant pricing volatility or supply disruptions, if any, could
nonetheless adversely affect the Company.
Environmental Matters
Compliance with environmental laws and regulations is a matter of high
priority for the Company. Mueller's provision for environmental compliance
related to non-operating properties was $0.6 million in 2006 and 2005, and
$1.0 million in 2004. Environmental costs related to operating properties
is classified as cost of goods sold and is not significant. Other than as
discussed below, the Company is not involved in any Superfund sites other
than as one of numerous potentially responsible parties (PRPs) in which
cases management believes that any obligation would be insignificant.
Except as discussed below, the Company does not anticipate that it will need
to make material expenditures for such compliance activities during the
remainder of the 2007 fiscal year, or for the next two fiscal years.
Mining Remedial Recovery Company
Mining Remedial Recovery Company (MRRC), a wholly owned subsidiary, was
formed for the purpose of managing the remediation of certain properties and
the appropriate disposition thereof. These properties and related
obligations were transferred to MRRC as part of a court-ordered bankruptcy
reorganization in 1990. MRRC was the owner of property at a Superfund site
in Midvale, Utah, but the Company's obligation to contribute to remediation
was resolved by a settlement with the Government in 1990. This property was
sold during 2004.
Mammoth Mine Site
MRRC owns certain inactive mines in Shasta County, California. MRRC has
continued a program, begun in the late 1980s, of sealing mine portals with
concrete plugs in mine adits which were discharging water. The sealing
program has achieved a reduction in the metal load in discharges from these
adits; however, additional reductions are required pursuant to an order
issued by the California Regional Water Quality Control Board (QCB). In
response to a 1996 Order issued by the QCB, MRRC completed a feasibility
study in 1997 describing measures designed to mitigate the effects of acid
rock drainage. In December 1998, the QCB modified the 1996 order extending
MRRC's time to comply with water quality standards. In September 2002, the
QCB adopted a new order requiring MRRC to adopt Best Management Practices
(BMP) to control discharges of acid mine drainage. The new order extends
the time to comply with water quality standards until September 2007. MRRC
has agreed to implement BMP to reduce or prevent the discharge of acid mine
drainage until such point as compliance with the order is achieved or,
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through the Use Attainability Analysis process, the designated beneficial
uses of the respective watercourses are modified, allowing for the adoption
of alternative receiving water limits. At this site, MRRC spent
approximately $0.3 million in 2006, and estimates it will spend between
approximately $0.3 and $0.8 million annually over the next ten years.
Future expenditures beyond a ten-year horizon are not reasonably estimable
or foreseeable.
U.S.S. Lead
In 1991, U.S.S. Lead Refinery, Inc., a wholly owned subsidiary (Lead
Refinery), responded to an information request from the EPA under Superfund
for information on whether Lead Refinery arranged for the disposal of
hazardous substances in the vicinity of the Grand Calumet River/Indiana
Harbor Ship Canal. By letter dated February 4, 1997, the Indiana Department
of Environmental Management notified Lead Refinery that a pre-assessment
screening of the Grand Calumet River and the Indiana Harbor Canal conducted
pursuant to Superfund had identified releases of hazardous substances from
Lead Refinery and other PRPs that had adversely impacted natural resources.
Lead Refinery is in settlement negotiations in an effort to settle its
natural resources damages.
In 1991, Lead Refinery also responded to an information request under
Superfund regarding a site in East Chicago, Indiana. In 1992, the EPA
advised Lead Refinery of its intent to list the property as a Superfund
site; however, to date, the EPA had deferred such listing. In 1993, Lead
Refinery entered into a Consent Order with the EPA pursuant to Section
3008(h) of the Resource Conservation and Recovery Act. The Consent Order
covers remediation activities at the East Chicago, Indiana site and provides
for Lead Refinery to complete certain on-site interim remedial activities
and studies that extend off-site. In November 1996, the EPA approved, with
modifications, the Interim Stabilization Measures Work plan and designated a
Corrective Action Management Unit at the Lead Refinery site. Site
activities, which began in December 1996, have been substantially concluded.
Additionally, Lead Refinery is aware that the EPA is evaluating whether
further action in the area near Lead Refinery's facility should be
undertaken. Lead Refinery, without additional assistance from MRRC, lacks
the financial resources needed to complete any additional remediation that
may be required.
Lead Refinery has been informed by the former owner and operator of a
Superfund site located in Pedricktown, New Jersey that it intends to seek
CERCLA response costs for alleged shipments of hazardous substances to the site.
Lead Refinery has executed an agreement regarding that site, which
indefinitely extends the statute of limitations. By letter dated January 26,
1996, Lead Refinery and other PRPs received from the EPA a proposed
Administrative Order on Consent to perform the remedial design for operable
Unit 1 of the Pedricktown Superfund Site. Lead Refinery determined not to
execute the Administrative Order on Consent based on its lack of ability to
finance the clean up or pay response costs incurred by the EPA. Several
other PRPs, however, executed the agreement and are conducting the remedial
design.
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In October 2003, Lead Refinery received a settlement offer from
private settlers of $0.9 million for CERCLA contribution to past and
future response costs incurred at the NL/Taracorp Superfund site located
in Granite City, Illinois. Lead Refinery declined that offer. In
February of 2004, NL Industries, Inc. filed a contribution action against
all non-settling PRPs on the EPA's allocation list, including Lead
Refinery, seeking payments of an equitable share of clean-up costs
incurred by that corporation. Lead Refinery was not served with the
complaint prior to the execution of the deadline set by the court.
Other
In connection with acquisitions, the Company established environmental
reserves to fund the cost of remediation at sites currently or formerly
owned by various acquired entities. The Company, through its acquired
subsidiaries, is engaged in ongoing remediation and site characterization
studies.
Mueller Copper Tube Products, Inc.
In 1999, Mueller Copper Tube Products, Inc. (MCTP) commenced a cleanup
and remediation of soil and groundwater at its Wynne, Arkansas plant. MCTP
is currently removing trichloroethylene, a cleaning solvent formerly used by
MCTP, from the soil and groundwater. On August 30, 2000, MCTP received
approval of its Final Comprehensive Investigation report and Storm Water
Drainage Investigation Report addressing the treatment of soils and
groundwater, from the Arkansas Department of Environmental Quality. The
Company established a reserve for this project in connection with the
acquisition of MCTP in 1998.
Altoona, Kansas site
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 has submitted a preliminary response to this request.
Other Business Factors
The Registrant's business is not materially dependent on patents,
trademarks, licenses, franchises, or concessions held. In addition,
expenditures for company-sponsored research and development activities were
not material during 2006, 2005, or 2004. No material portion of the
Registrant's business involves governmental contracts. Seasonality of the
Company's sales is not significant.
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SEC Filings
We make available through our internet website our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission (SEC). To retrieve any of this information, you may
access our internet home page at www.muellerindustries.com, select Mueller
Financials, and then select SEC Filings.
Reports filed with the SEC may also be viewed or obtained at the SEC
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
Information on the operation of the SEC Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website
that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC; the
website address is www.sec.gov.
ITEM 1A. RISK FACTORS
The Company is exposed to risk as it operates its businesses. To
provide a framework to understand the operating environment of the Company,
we are providing a brief explanation of the more significant risks
associated with our businesses. Although we have tried to identify and
discuss key risk factors, others could emerge in the future. These risk
factors should be considered carefully when evaluating the Company and its
businesses.
Increases in energy costs and the cost and availability of raw materials
used in our products could impact our cost of goods sold and our
distribution expenses, which could have a material adverse impact on our
operating margins.
Both the costs of raw materials used in our manufactured products
(copper, brass, zinc, aluminum, and PVC and ABS resins) and energy costs
(natural gas and fuel) have been rising during the last several years, which
has resulted in increased production and distribution costs. While we
typically attempt to pass increased costs through to our customers or to
modify or adapt our activities to mitigate the impact of these increases, we
may not be able to do so successfully. Failure to fully pass these
increases to our customers or to modify or adapt our activities to mitigate
the impact could have a material adverse impact on our operating margins.
Additionally, if we are for any reason unable to obtain raw materials or
energy, our ability to manufacture our finished goods would be impacted
which could have a material adverse impact on our operating margins.
The unplanned departure of key personnel could disrupt our business.
We depend on the continued efforts of our senior management. The
unplanned loss of key personnel, or the inability to hire and retain
qualified executives, could negatively impact our ability to manage our
business.
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Economic conditions in the housing and commercial construction industries as
well as changes in interest rates could have a material adverse impact on
our business, financial condition and results of operations.
Our businesses are sensitive to changes in general economic conditions,
including, in particular, conditions in the housing and commercial
construction industries. Prices for our products are affected by overall
supply and demand in the market for our products and for our competitors'
products. In particular, market prices of building products historically
have been volatile and cyclical, and we may be unable to control the timing
and amount of pricing changes for our products. Prolonged periods of weak
demand or excess supply in any of our businesses could negatively affect our
revenues and margins and could result in a material adverse impact on our
business, financial condition and results of operations.
The markets that we serve, including, in particular, the housing and
commercial construction industries, are significantly affected by movements
in interest rates. Significantly higher interest rates could have a
material adverse effect on our business, financial condition and results of
operations. Our businesses are also affected by a variety of other factors
beyond our control, including, but not limited to, employment levels,
foreign currency rates, unforeseen inflationary pressures and consumer
confidence. Since we operate in a variety of geographic areas, our
businesses are subject to the economic conditions in each such area.
General economic downturns or localized downturns in the regions where we
have operations could have a material adverse effect on our business,
financial condition and results of operations.
Competitive conditions including the impact of imports and substitute
products could have a material adverse effect on our margins and
profitability.
The markets we serve are competitive across all product lines. Some
consolidation of customers has occurred and may continue, which could shift
buying power to customers. In some cases, customers have moved production
to low-cost countries such as China, or sourced components from there, which
has reduced demand in North America for some of the products we produce.
These conditions could have a material adverse impact on our ability to
maintain margins and profitability. The potential threat of imports and
substitute products is based upon many factors including raw material prices,
distribution costs, foreign exchange rates and production costs. The end
use of alternative import and/or substitute products could have a material
adverse effect on our business, financial condition, and results of
operations.
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Our exposure to exchange rate fluctuations on cross border transactions and
the translation of local currency results into U.S. dollars could have an
adverse impact on our results of operations or financial position.
We conduct our business through subsidiaries in several different
countries, and fluctuations in currency exchange rates could have a
significant impact on the reported results of our operations, which are
presented in U.S. dollars. A significant and growing portion of our
products are manufactured in, or acquired from suppliers located in, lower
cost regions. Cross border transactions, both with external parties and
intercompany relationships, result in increased exposure to foreign exchange
fluctuations. The strengthening of certain currencies such as the Euro and
U.S. dollar could expose our U.S. based businesses to competitive threats
from lower cost producers in other countries such as China. Lastly, our
sales are translated into U.S. dollars for reporting purposes. The
strengthening of the U.S. dollar could result in unfavorable translation
effects when the results of foreign operations are translated into U.S.
dollars. Accordingly, significant changes in exchange rates, particularly
the Euro, Pound Sterling, Mexican Peso and the Chinese Renminbi, could have
an adverse impact on our results of operations or financial position.
We are subject to claims, litigation and regulatory proceedings that could
have a material adverse effect on us.
We are, from to time, involved in various claims, litigation matters
and regulatory proceedings. These matters may include, among other things,
contract disputes, personal injury claims, environmental claims or
proceedings, other tort claims, employment and tax matters and other
litigation including class actions that arise in the ordinary course of our
business. Although we intend to defend these matters vigorously, we cannot
predict with certainty the outcome or effect of any claim or other
litigation matter, and there can be no assurance as to the ultimate outcome
of any litigation or regulatory proceeding. Litigation and regulatory
proceedings may have a material adverse effect on us because of potential
adverse outcomes, defense costs, the diversion of our management's resources,
availability of insurance coverage and other factors.
A strike or other work stoppage, or our inability to renew collective
bargaining agreements on favorable terms, could impact our cost structure
and our ability to operate our facilities and produce our products, which
could have an adverse effect on our results of operations.
As of December 30, 2006, approximately 29% of our 4,700 employees were
covered by collective bargaining or similar agreements. If we are unable to
negotiate acceptable new agreements with the unions representing our
employees upon expiration of existing contracts, we could experience strikes
or other work stoppages. Strikes or other work stoppages could cause a
significant disruption of operations at our facilities which could have an
adverse impact on us. New or renewal agreements with unions representing
our employees could call for higher wages or benefits paid to union members,
which would increase our operating costs and could adversely affect our
profitability. Higher costs and/or limitations on our ability to operate
our facilities and produce our products resulting from increased labor costs,
strikes or other work stoppages could have an adverse effect on our results
of operations.
-14-
We are subject to environmental laws and regulations and future compliance
may have a material adverse effect on our results of operations or
financial position.
The nature of our operations exposes us to the risk of liabilities and
claims with respect to environmental matters. While we have established
accruals intended to cover the cost of environmental remediation at
contaminated sites, the actual cost is difficult to determine and may
exceed our estimated reserves. Further, changes to, or more rigorous
enforcement or stringent interpretation of environmental laws could require
significant incremental costs to maintain compliance. In addition, future
claims may be asserted against us for, among other things, past acts or
omissions at locations operated by predecessor entities, or alleging damage
or injury or seeking other relief in connection with environmental matters
associated with our operations. Future liabilities, claims and compliance
costs may have a material adverse effect on us because of potential adverse
outcomes, defense costs, the diversion of our management's resources,
availability of insurance coverage and other factors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
-15-
ITEM 2. PROPERTIES
Information pertaining to the Registrant's major operating facilities
is included below. Except as noted, the Registrant owns all of its
principal properties. The Registrant's plants are in satisfactory condition
and are suitable for the purpose for which they were designed and are now
being used.
Approximate
Location Property Size Description
Plumbing & Refrigeration Segment
Fulton, MS 418,000 sq. ft. Copper tube mill. Facility includes
52.37 acres casting, extruding, and finishing
equipment to produce copper tubing,
including tube feedstock for the
Company's copper fittings plants
and Precision Tube factory.
Fulton, MS 103,000 sq. ft. Casting facility. Facility includes
11.9 acres casting equipment to produce copper
billets used in the adjoining copper
tube mill.
Wynne, AR 682,000 sq. ft.(1) Copper tube mill. Facility includes
39.2 acres extrusion and finishing equipment to
produce copper tubing and copper tube
line sets.
Fulton, MS 58,500 sq. ft. Packaging and bar coding facility for
15.53 acres retail channel sales.
Fulton, MS 70,000 sq. ft.(2) Copper fittings plant. High-volume
7.68 acres facility that produces copper fittings
using tube feedstock from the
Company's adjacent copper tube mill.
Covington, TN 159,500 sq. ft. Copper fittings plant. Facility
40.88 acres produces copper fittings using tube
feedstock from the Company's copper
tube mills.
Portage, MI 205,000 sq. ft. Plastic fittings plant. Produces DWV
18 acres fittings using injection molding
equipment.
Ontario, CA 211,000 sq. ft.(3) Plastic fittings plant. Produces DWV
10 acres fittings using injection molding
equipment.
Upper 82,000 sq. ft. Plastic fittings plant. Produces DWV
Sandusky, OH 7.52 acres fittings using injection molding
equipment.
-16-
Approximate
Location Property Size Description
Fort Pierce, FL 69,875 sq. ft. Plastic fittings plant. Produces
5.60 acres pressure fittings using injection
molding equipment.
Monterrey, 120,000 sq. ft. (3) Pipe nipples plant. Produces pipe nipples,
Mexico 3.4 acres cut pipe and merchant couplings.
Bilston, 402,500 sq. ft. Copper tube mill. Facility includes
England 14.95 acres casting, extruding, and finishing
United Kingdom equipment to produce copper tubing.
OEM Segment
Port Huron, MI 322,500 sq. ft. Brass rod mill. Facility includes
71.5 acres casting, extruding, and finishing
equipment to produce brass rods and
bars, in various shapes and sizes.
Port Huron, MI 127,500 sq. ft. Forgings plant. Produces brass and
aluminum forgings.
Marysville, MI 81,500 sq. ft. Aluminum and copper impacts plant.
6.72 acres Produces made-to-order parts using cold
impact processes.
Hartsville, TN 78,000 sq. ft. Refrigeration products plant.
4.51 acres Produces products used in
refrigeration applications such as
ball valves, line valves, and
compressor valves.
Carthage, TN 67,520 sq. ft. Fabrication facility. Produces precision
10.98 acres tubular components and assemblies.
Jacksboro, TN 65,066 sq. ft. Bending and fabricating facility.
11.78 acres Produces gas burners, supply tubes,
and manifolds for the gas appliance
industry.
Waynesboro, TN 57,000 sq. ft.(4) Gas valve plant. Facility produces
5.0 acres brass valves and assemblies for the
gas appliance industry.
North Wales, PA 174,000 sq. ft. Precision Tube factory. Facility
18.9 acres fabricates copper tubing, copper
alloy tubing, aluminum tubing, and
fabricated tubular products.
Brighton, MI 65,000 sq. ft.(3) Machining operation. Facility
machines component parts for supply
to automotive industry.
-17-
Approximate
Location Property Size Description
Middletown, OH 55,000 sq. ft. Fabricating facility. Produces burner
2.0 acres systems and manifolds for the gas
appliance industry.
Jintan City, 322,580 sq. ft.(5) Copper tube mill. Facility includes
Jiangsu Province 33.0 acres casting, and finishing equipment
China to produce engineered copper tube
primarily for OEMs.
In addition, the Company owns and/or leases other properties used as
distribution centers and corporate offices.
(1) Facility, or some portion thereof, is located on land leased from a local
municipality, with an option to purchase at nominal cost.
(2) Facility is leased under a long-term lease agreement, with an option
to purchase at nominal cost.
(3) Facility is leased under an operating lease.
(4) Facility is leased from a local municipality for a nominal amount.
(5) Facility is located on land that is under a long-term land use rights
agreement.
-18-
ITEM 3. LEGAL PROCEEDINGS
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 Consolidated Financial Statements.
Environmental Proceedings
Reference is made to "Environmental Matters" in Item 1 of this Report,
which is incorporated herein by reference, for a description of
environmental proceedings.
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 have filed a motion to alter or amend the
judgment dismissing the complaint for lack of subject matter jurisdiction,
which remains pending.
-19-
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.
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.
The Company and Mueller Europe have been served, but have not yet been required
to respond, in the Direct ACR Class Actions and 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.
-20-
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 is now
pending before 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 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, a final anti-dumping duty order issued February 19, 2007,
and exports of subject goods to Canada by the Company after this date will
be subject to such duties, at various rates, during the five-year term of
the order. If future exports are above normal values, however, no anti-
dumping duties will be levied.
The Company is assessing the terms of the order. 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 CITT findings. However, its ability to compete in the
Canadian market may be impaired.
-21-
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of February 23, 2007, the number of holders of record of
Mueller's Common Stock was approximately 1,600. On February 23, 2007,
the closing price for Mueller's Common Stock on the New York Stock
Exchange was $30.93.
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 December 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 period ended
December 30, 2006.
-22-
(a) (b) (c) (d)
Total Maximum
Number of Number of
Shares Shares
Purchased as That May
Part of 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)
October 1 -
October 28, 2006 - $ -
October 29 -
November 25, 2006 15,069 (2) 34.680
November 26 -
December 30, 2006 - -
(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.
The Company's Board of Directors declared a regular quarterly dividend
of 10 cents per share on its common stock for each fiscal quarter 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.
The high, low, and closing prices of Mueller's Common Stock on the
New York Stock Exchange for each fiscal quarter of 2006 and 2005 were as
follows:
High Low Close
2006
Fourth quarter $ 38.25 $ 30.35 $ 31.70
Third quarter 40.35 30.34 35.17
Second quarter 41.80 28.84 33.03
First quarter 35.86 26.81 35.69
2005
Fourth quarter $ 28.42 $ 24.41 $ 27.42
Third quarter 29.99 25.35 27.77
Second quarter 28.39 24.75 27.24
First quarter 32.74 27.13 27.97
-23-
PERFORMANCE GRAPH
The following table compares total stockholder return since
December 29, 2001 to the Dow Jones U.S. Total Market Index (Total Market Index)
and the Dow Jones U.S. Building Materials Index (Building Materials Index).
Total return values for the Total Market Index, the Building Materials Index
and the Company were calculated based on cumulative total return values
assuming reinvestment of dividends. The Common Stock is traded on the
New York Stock Exchange under the symbol MLI.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Among Mueller Industries, Inc., Dow Jones U.S. Total Market
Index and Dow Jones U.S. Building Materials Index
Fiscal Year Ending Last Saturday in December(1)
[GRAPH]
(1) $100 invested on 12/29/01 in stock or index-including
reinvestment of dividends. Reflects reinvestment in shares of Common Stock
of (i) regular quarterly dividends paid by the Company, (ii) the cash paid by
the Company in connection with the Special Dividend and (iii) the proceeds of
an assumed sale at par of the Debentures paid by the Company in connection
with the Special Dividend.
Mueller Dow Jones U.S. Dow Jones U.S.
Industries, Total Market Building Materials
Inc. Index Index
2001 100 100 100
2002 82 77 85
2003 104 99 119
2004 153 113 159
2005 132 120 169
2006 155 139 194
-24-
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
2006 2005 2004 2003 2002
For the fiscal year:(3)
Net sales $ 2,510,912 $ 1,729,923 $ 1,379,056 $ 999,078 $ 952,983
Operating income 218,885 131,758 112,490 49,384 85,756
Net income from continuing operations 148,869 (2) 89,218 (2) 79,416 (2) 44,221 71,177
(4) (4)
Diluted earnings per share
from continuing operations 4.00 2.40 2.15 1.19 1.92
Cash dividends per share 0.40 0.40 6.90 (1) - -
At year-end:(3)
Total assets 1,268,907 1,116,928 971,328 1,060,420 990,471
Long-term debt 308,154 312,070 310,650 (1) 11,437 14,005
(1) During 2004 the Company paid 40 cents per share in regular ten cent
quarterly cash dividends; additionally the Company paid a Special
Dividend composed of $6.50 in cash per share and $8.50 per share in the
form of 6% Subordinated Debentures due 2014
(2) Includes interest expense on 6% Subordinated Debentures following
distribution in the fourth quarter of 2004
(3) Includes activity of acquired businesses from the following purchase
dates: (i) Mueller Xingrong, December 2005 (ii) Brassware, August 15,
2005, (iii) Mueller Comercial S.A., December 14, 2004, (iv) Vemco,
August 27, 2004, (v) Overstreet-Hughes, August 21, 2002, and
(vi) certain assets of Colonial Engineering, September 27, 2002
(4) Includes $4.1 million income tax benefit for change in estimate for state
deferred income taxes and $3.3 million income tax benefit for change in estimate
for transfer pricing in 2006; includes $1.1 million income tax benefit for
change in estimate for state deferred taxes and $2.9 million income tax benefit
for correction of prior year provision in 2005.
-25-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is contained under the caption "Financial Review" submitted as a
separate section of this Annual Report on Form 10-K commencing on page F-2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are contained
under the caption "Financial Review" submitted as a separate section of this
Annual Report on Form 10-K commencing on page F-2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements required by this item are contained in a separate
section of this Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 30, 2006. Based on
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and
procedures are effective as of December 30, 2006.
-26-
Remediation of Material Weakness
During 2006, the Company implemented a remediation plan to address the
previously identified material weakness related to the accounting for
income taxes discussed in detail in our Form 10-K for the year ended
December 31, 2005. The following actions were taken pursuant to our
remediation plan during 2006:
* All tax and certain accounting and finance professionals attended
training seminars related to accounting for income taxes;
* The Company engaged a third-party firm which conducted an
independent review of the Company's processes of accounting and
reporting for income taxes, resulting in recommendations that led
to several enhanced preventive controls being implemented;
* The Company made staffing changes within its tax department to
enhance the review process over the income tax provision and
improve coordination between the tax and corporate accounting
departments;
* The Company enhanced the review processes over tax-sensitive
accounts and the tax effects of intercompany transactions;
* The Company has engaged third-party accounting firms to assist
with the tax provision calculations in foreign jurisdictions; and
* The Company has enhanced the functionality of its tax provision
software to enable it to provide more accurate estimates of state
income tax expense.
The actions described above were completed during the fourth quarter of
2006. We believe these actions have strengthened our internal control over
financial reporting and successfully remediated the material weakness
identified in our 2005 assessment.
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) under the Securities Exchange Act of 1934. Pursuant to
the rules and regulations of the Securities and Exchange Commission,
internal control over financial reporting is a process designed by, or
under the supervision of, the Company's principal executive and principal
financial officers, and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States. Due to inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal control over financial reporting may vary over time.
-27-
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 internal control over financial reporting as
of December 30, 2006 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 has concluded that our internal control over
financial reporting is effective as of December 30, 2006.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 30, 2006, has been audited
by Ernst & Young LLP, an independent registered public accounting firm, as
stated in their report which is included below.
Changes in Internal Control over Financial Reporting
Other than the actions taken to remediate the material weakness over
the accounting for income taxes as described above, there were no changes
in the Company's internal control over financial reporting during the
Company's fiscal quarter ending December 30, 2006, that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
-28-
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mueller Industries, Inc.
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting,
that Mueller Industries, Inc. (the Company) maintained effective internal
control over financial reporting as of December 30, 2006, based on criteria
established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
-29-
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 30, 2006,
is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 30, 2006,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of Mueller Industries, Inc. as of December 30, 2006 and
December 31, 2005, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years ended in
the period ended December 30, 2006 and our report dated February 26, 2007
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Memphis, Tennessee
February 26, 2007
-30-
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by Item 10 is contained under the captions
"Ownership of Common Stock by Directors and Executive Officers and
Information about Director Nominees," "Corporate Governance," "Report of
the Audit Committee of the Board of Directors," and "Section 16(a)
Beneficial Ownership Compliance Reporting" in the Company's Proxy Statement
for its 2007 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission on or about March 28, 2007, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained under the caption
"Executive Compensation" in the Company's Proxy Statement for its 2007
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 28, 2007, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table discloses information as adjusted for the
Company's Special Dividend regarding the securities to be issued and the
securities remaining available for issuance under the Registrant's stock-
based incentive plans as of December 30, 2006 (shares in thousands):
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(a) (b) (c)
Number of securities
remaining available for future
Number of securities Weighted average issuance under equity
to be issued upon exercise exercise price of compensation plans (excluding
of outstanding options, outstanding options securities reflected in column
Plan category warrants, and rights warrants, and rights (a))
Equity compensation plans
approved by security
holders 1,401 $ 25.95 818
Equity compensation
plans not approved by
security holders 311 18.29 -
-------------- --------------
Total 1,712 24.56 818
============== ==============
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On February 13, 2002 Mr. O'Hagan was granted an option to acquire
100,000 shares of Common Stock at an exercise price of $31.75 per share
(subsequent to the grant, on October 26, 2004 the option grant was modified
to equitably adjust for the Company's Special Dividend to 155,610 shares of
Common Stock at an exercise price of $20.40 per share) and on February 13,
2003 Mr. O'Hagan was granted an option to acquire 100,000 shares of Common
Stock at an exercise price of $25.10 per share (subsequent to the grant, on
October 26, 2004 the option grant was modified to equitably adjust for the
Company's Special Dividend to 155,610 shares of Common Stock at an exercise
price of $16.13 per share) (collectively, the O'Hagan Treasury Options).
Each of the O'Hagan Treasury Options has a term of ten years, subject to
earlier expiration upon termination of employment, and vests ratably over a
five-year period from the date of the grant, except that if there is a Change
in Control as defined in Mr. O'Hagan's employment agreement with the Company
(the O'Hagan Employment Agreement), all of the O'Hagan Treasury Options will
become immediately exercisable on the later to occur of (i) the day Mr.
O'Hagan notifies the Company he is terminating his employment with the
Company as a result of said change, and (ii) ten days prior to the date Mr.
O'Hagan's employment with the Company is terminated by the Company. In
addition, all outstanding unvested O'Hagan Treasury Options will immediately
vest and become exercisable if Mr. O'Hagan's employment is terminated by the
Company without Cause (as defined in the O'Hagan Employment Agreement) or by
Mr. O'Hagan for Good Reason (as defined in the O'Hagan Employment Agreement).
The O'Hagan Treasury Options may only be exercised for shares of Common Stock
held in treasury by the Company.
Other information required by Item 12 is contained under the captions
"Principal Stockholders" and "Ownership of Common Stock by Directors and
Executive Officers and Information about Director Nominees" in the Company's
Proxy Statement for its 2007 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission on or about March 28, 2007, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is contained under the caption
"Corporate Governance" in the Company's Proxy Statement for its 2007 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 28, 2007, which is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is contained under the caption
"Appointment of Independent Registered Public Accounting Firm" in the
Company's Proxy Statement for its 2007 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or about March 28, 2007,
which is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements: the financial statements, notes, and report of
independent registered public accounting firm described in Item 8 of
this Annual Report on Form 10-K are contained in a separate section of
this Annual Report on Form 10-K commencing on page F-1.
2. Financial Statement Schedule: the financial statement schedule
described in Item 8 of this report is contained in a separate section
of this Annual Report on Form 10-K commencing on page F-1.
Exhibits:
3.1 Restated Certificate of Incorporation of the Registrant dated
February 8, 2007.
3.2 By-laws of the Registrant, as amended and restated, effective
November 10, 1994 (Incorporated herein by reference to
Exhibit 3.2 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended
December 28, 2002).
4.1 Indenture, dated as of October 26, 2004, by and between Mueller
Industries, Inc, and SunTrust Bank, as trustee (Incorporated
herein by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K, dated October 26, 2004).
4.2 Form of 6% Subordinated Debenture due 2014 (Incorporated herein
by reference to Exhibit 4.2 of the Registrant's Current Report
on Form 8-K, dated October 26, 2004).
4.3 Certain instruments with respect to long-term debt of the
Registrant have not been filed as Exhibits to this Report since
the total amount of securities authorized under any such
instruments does not exceed 10 percent of the total assets of
the Registrant and its subsidiaries on a consolidated basis.
The Registrant agrees to furnish a copy of each such instrument
upon request of the Securities and Exchange Commission.
10.1 Stock Option Agreement, dated December 4, 1991, by and between
the Registrant and Harvey L. Karp (Incorporated herein by
reference to Exhibit 10.4 of the Registrant's Annual Report on
Form 10-K, dated March 24, 2003, for the fiscal year ended
December 28, 2002).
10.2 Stock Option Agreement, dated March 3, 1992, by and between
the Registrant and Harvey L. Karp (Incorporated herein by
reference to Exhibit 10.5 of the Registrant's Annual Report on
Form 10-K, dated March 24, 2003, for the fiscal year ended
December 28, 2002).
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10.3 Amended and Restated Employment Agreement, effective as of
September 17, 1997, by and between the Registrant and
Harvey L. Karp (Incorporated herein by reference to Exhibit 10.8
of the Registrant's Annual Report on Form 10-K, dated
March 24, 2003, for the fiscal year ended December 28, 2002).
10.4 Amendment, dated June 21, 2004, to the Amended and Restated
Employment Agreement dated as of September 17, 1997, by and
between the Registrant and Harvey Karp (Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Quarterly Report on
Form 10-Q, dated July 16, 2004, for the quarter ended
June 26, 2004).
10.5 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and Harvey Karp (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q,
dated July 16, 2004, for the quarter ended June 26, 2004).
10.6 Stock Option Agreement, dated May 7, 1997, by and between the
Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.12 of the Registrant's Annual Report on
Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.7 Amended and Restated Employment Agreement, effective as of
September 17, 1997, by and between the Registrant and
William D. O'Hagan (Incorporated herein by reference to
Exhibit 10.9 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended
December 28, 2002).
10.8 Amendment to Amended and Restated Employment Agreement,
effective May 12, 2000, by and between the Registrant and
William D. O'Hagan (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q,
dated July 24, 2000, for the quarter ended June 24, 2000).
10.9 Second Amendment to the Amended and Restated Employment
Agreement dated as of September 17, 1997, by and between the
Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Current Report on
Form 8-K, dated May 5, 2005).
10.10 Stock Option Agreement, dated October 9, 1998, by and between
the Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.13 of the Registrant's Annual Report on
Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.11 Stock Option Agreement, dated February 13, 2002, by and between
the Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.17 of the Registrant's Annual Report on
Form 10-K, dated March 24, 2003, for the fiscal year ended
December 28, 2002).
-35-
10.12 Stock Option Agreement, dated February 13, 2003, by and between
the Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.16 of the Registrant's Annual Report on
Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.13 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and William D. O' Hagan (Incorporated herein by
reference to Exhibit 10.2 of the Registrant's Quarterly Report
on Form 10-Q, dated July 16, 2004, for the quarter ended
June 26, 2004).
10.14 Employment Agreement, effective October 17, 2002, by and between
the Registrant and Kent A. McKee (Incorporated herein by
reference to Exhibit 10.18 of the Registrant's Annual Report on
Form 10-K, dated March 24, 2003, for the fiscal year ended
December 28, 2002).
10.15 Employment Agreement, effective November 9, 2006, by and between
the Registrant and Gregory L. Christopher.
10.16 Mueller Industries, Inc. 1991 Incentive Stock Option Plan, as
amended (Incorporated herein by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K, dated March 24, 2003,
for the fiscal year ended December 28, 2002 and Exhibit 99.2 of
the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.17 Mueller Industries, Inc. 1994 Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 10.11 of the
Registrant's Annual Report on Form 10-K, dated March 24, 2003,
for the fiscal year ended December 28, 2002 and Exhibit 99.3 of
the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.18 Mueller Industries, Inc. 1994 Non-Employee Director Stock Option
Plan, as amended (Incorporated herein by reference to
Exhibit 10.12 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended
December 28, 2002 and Exhibit 99.6 of the Registrant's Current
Report on Form 8-K, dated August 31, 2004).
10.19 Mueller Industries, Inc. 1998 Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K, dated March 24, 2003,
for the fiscal year ended December 28, 2002 and Exhibit 99.4
of the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.20 Mueller Industries, Inc. 2002 Stock Option Plan Amended and
Restated as of February 16, 2006.
10.21 Mueller Industries, Inc. Annual Bonus Plan (Incorporated herein by
reference to Exhibit 10.1 of the Registrant's Current Report on
Form 8-K, dated May 5, 2005).
-36-
10.22 Summary description of the Registrant's 2007 incentive plan for
certain key employees.
10.23 Mueller Industries, Inc. Deferred Compensation Plan, effective
December 1, 2000 (Incorporated herein by reference to
Exhibit 10.13 of the Registrant's Annual Report on Form 10-K,
dated March 26, 2001, for the fiscal year ended
December 30, 2000).
10.24 Amendment to the Mueller Industries, Inc. Deferred Compensation
Plan, dated December 15, 2005.
10.25 Securities Purchase Agreement, dated December 14, 2004, among
Mueller Comercial de Mexico, S. de R.L. de C.V.,
WTC HOLDCO I, LLC, MIYAR LLC, NICNA, GmbH, and The Seller
Parties (Incorporated herein by reference to Exhibit 10.21
of the Registrant's Annual Report on Form 10-K, dated
March 4, 2005, for the fiscal year ended December 25, 2004).
10.26 Inventory Purchase Agreement, dated December 14, 2004, by and
between Niples del Norte S.A. de C.V. and Mueller de Mexico S.A.
de C.V (Incorporated herein by reference to Exhibit 10.22 of the
Registrant's Annual Report on Form 10-K, dated March 4, 2005,
for the fiscal year ended December 25, 2004).
10.27 Credit Agreement, dated as of December 1, 2006, among the
Registrant (as Borrower) and Lasalle Bank Midwest National
Association (as agent), and certain lenders named therein
(Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K, dated December 1, 2006).
10.28 Equity Joint Venture Agreement, among Mueller Streamline China,
LLC, Mueller Streamline Holding, S.L., Jiangsu Xingrong Hi-Tech
Co., Ltd. and Jiangsu Baiyang Industries Ltd. (Incorporated
herein by reference to Exhibit 10.1 of the Registrant's Current
Report on Form 8-K, dated December 5, 2005).
14.0 Code of Business Conduct and Ethics (Incorporated herein by
reference to Exhibit 14.0 of the Registrant's Annual Report on
Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
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32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
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.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
-38-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on
February 28, 2007.
MUELLER INDUSTRIES, INC.
/s/ HARVEY L. KARP
Harvey L. Karp, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
/s/HARVEY L KARP Chairman of the Board,
Harvey L. Karp and Director February 28, 2007
/s/ALEXANDER P. FEDERBUSH Director February 28, 2007
Alexander P. Federbush
/s/GENNARO J. FULVIO Director February 28, 2007
Gennaro J. Fulvio
/s/GARY S. GLADSTEIN Director February 28, 2007
Gary S. Gladstein
/s/TERRY HERMANSON Director February 28, 2007
Terry Hermanson
/s/ROBERT B. HODES Director February 28, 2007
Robert B. Hodes
/s/WILLIAM D. O'HAGAN President, Chief Executive February 28, 2007
William D. O'Hagan Officer (Principal Executive
Officer), Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the date indicated.
Signature and Title Date
/s/ KENT A. MCKEE February 28, 2007
Kent A. McKee
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ RICHARD W. CORMAN February 28, 2007
Richard W. Corman
Vice President - Controller
-39-
MUELLER INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Review F-2
Consolidated Statements of Income for the years
ended December 30, 2006, December 31, 2005, and December 25, 2004 F-15
Consolidated Balance Sheets
as of December 30, 2006 and December 31, 2005 F-17
Consolidated Statements of Cash Flows for the years
ended December 30, 2006, December 31, 2005, and December 25, 2004 F-19
Consolidated Statements of Stockholders' Equity for the years
ended December 30, 2006, December 31, 2005, and December 25, 2004 F-21
Notes to Consolidated Financial Statements F-23
Report of Independent Registered Public Accounting Firm F-61
FINANCIAL STATEMENT SCHEDULE
Schedule for the years ended December 30, 2006, December 31, 2005,
and December 25, 2004
Valuation and Qualifying Accounts (Schedule II) F-62
F-1
FINANCIAL REVIEW
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. Mueller'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 Original Equipment
Manufacturers (OEM) segment. Prior to 2005, the Company disclosed its
reportable segments as Standard Products and Industrial Products.
Additional operating segments have been recognized following internal
reorganizations in 2006 and 2005. 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. 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. The majority of the
Company's manufacturing facilities operated at moderate levels during 2005,
2004, and the first half of 2006.
F-2
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. The following
are important economic indicators that impact the Company's businesses.
Per the U.S. Census Bureau, new housing starts in the U.S. were 1.6 million,
1.9 million, and 2.0 million in 2006, 2005, and 2004, respectively. The
seasonally adjusted annual rate of the Value of Private Non-Residential
Construction put in place was $314.5 billion in 2006, $255.4 billion in
2005, and $229.2 billion in 2004. The average 30 year fixed mortgage rate
was 6.14 percent in December 2006, 6.27 percent in December 2005, and 5.75
percent in December 2004.
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. Brass rod consumption in the U.S. has steadily declined
over the past five years, due to the outsourcing of many manufactured
products.
The year ended December 30, 2006, contained 52 weeks while the years
ended December 31, 2005 contained 53 weeks and December 25, 2004 contained
52 weeks.
Recapitalization through Special Dividend
In September 2004, the Company authorized a special dividend
consisting of $6.50 in cash and $8.50 in principal amount of the Company's
6% Subordinated Debentures due 2014 (the Debentures) for each share of
Common Stock (the Special Dividend). The Special Dividend, distributed in
the fourth quarter of 2004, substantially reduced the Company's cash
position by $245.6 million and its stockholders' equity by $545.1 million,
and increased its long-term debt by $299.5 million.
F-3
Results of Operations
2006 Performance Compared with 2005
Consolidated net sales in 2006 were $2.5 billion, a 45 percent
increase over net sales of $1.7 billion in 2005. The increase is primarily
attributable to higher raw material costs (which are passed through in the
form of higher selling prices as discussed above), and contribution from
businesses acquired late in 2005 (which includes our consolidated Chinese
joint venture) which accounted for approximately $175.2 million. Net
selling prices generally fluctuate with changes in raw material prices.
The COMEX average copper price in 2006 was approximately $3.09 per pound,
or approximately 84 percent higher than the 2005 average of $1.68. This
change increased the Company's net sales and cost of goods sold. These
increases were partially offset by a decrease in sales unit volumes during
the period.
Cost of goods sold increased $679 million, to $2.1 billion in 2006.
This increase was attributable primarily to higher raw material costs and
acquired businesses, as discussed above. Gross profit was $401.5 million
or 16.0 percent of net sales in 2006 compared with $300 million or 17.3
percent of net sales in 2005. 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
resulting in a decrease in gross profit of $14.2 million. The year over
year increase in gross profit was due to higher spreads in core product
lines, primarily copper tube and fittings, and acquired businesses.
Depreciation and amortization increased 2.2 percent to $41.6 million
in 2006 from $40.7 million in 2005 primarily due to acquisitions in late
2005 and increased capital expenditures. Selling, general, and
administrative expenses increased to $141.0 million in 2006; this $13.6
million increase was due to (i) incremental costs of approximately $8.2
million attributed to acquired businesses, (ii) increased incentive
compensation of approximately $6.2 million which includes stock-based
compensation, and (iii) net decrease of other costs of approximately $0.8
million.
Interest expense increased to $20.5 million in 2006 from $19.6 million
in 2005. The increase is primarily due to the increased borrowings from
the Company's Chinese joint venture to fund operations during 2006.
Other income includes (i) losses on the sale of property and equipment
for approximately $2.6 million, (ii) interest income on invested cash
balances of $6.1 million, (iii) rents, royalties and other, net of $2.1
million, (iv) minority interest expense related to our Chinese joint
venture of $2.6 million, (v) gain on sale of an equity investment, Conbraco
Industries, Inc., of $1.9 million, and (vi) equity in earnings of Conbraco
Industries, Inc. prior to its sale of $1.0 million. Other income decreased
approximately $6.8 million in 2006 compared to 2005. This decrease is
attributable primarily to minority interest related to the Company's
Chinese joint venture and a net loss on disposals of properties compared to
a net gain in 2005, partially offset by higher interest income in 2006
resulting from higher average cash balances.
F-4
The expense related to environmental remediation at certain non-
operating properties of the Company, included in other income, net, totaled
$0.6 million in 2006 and in 2005. The environmental expense related to
operating properties is included as a component of cost of goods sold and
was not significant for the periods presented.
Income tax expense was $54.7 million, for an effective rate of 26.9
percent, for 2006. This rate is lower than what would be computed using
the U.S. statutory federal rate primarily due to (i) changes in estimate
regarding the estimated future benefits related to state income tax credit
and net operating loss (NOL) carryforwards of $4.1 million; (ii) reductions
in tax contingency reserves related to changes in estimates for transfer
pricing of $3.3 million, and other reductions for various statute closings
during 2006; (iii) release of the remaining valuation allowance related to
a NOL carryforward in the U.K. of $2.9 million; (iv) recognition of
benefits from the U.S. Manufacturer's deduction of $2.4 million and (v)
benefits resulting from a tax holiday in certain of the Company's foreign
subsidiaries of $0.9 million.
The Company's employment was approximately 4,700 at the end of 2006
compared with 4,800 at the end of 2005.
Plumbing & Refrigeration Segment
Net sales by Plumbing & Refrigeration were $1.7 billion in 2006
compared with $1.3 billion in 2005 for a 33.9 percent increase. Operating
income was $197.4 million in 2006 compared with $125.5 million in 2005.
The increase in net sales is due primarily to higher raw material costs,
which are reflected in higher selling prices. The $71.9 million increase
in operating profit was due to higher spreads in certain product lines and
operating income from businesses acquired late in 2005. These increases
were partially offset by lower unit sales volumes resulting from weak
demand in the latter part of 2006.
OEM Segment
OEM's net sales were $835.3 million in 2006 compared with $460.3
million in 2005. Operating income increased by $17.8 million to $44.8
million in 2006 compared with $27.0 million in 2005. Much of the increase
relates to our Chinese joint venture, which commenced operations during the
first quarter of 2006, and contributed $6.4 million of operating income on
$142.8 million of net sales.
2005 Performance Compared with 2004
Consolidated net sales in 2005 were $1.7 billion, a 25 percent
increase over net sales of $1.4 billion in 2004. The increase is primarily
attributable to higher raw material costs (which are passed through in the
form of higher selling prices as discussed above), and acquired businesses,
which accounted for approximately $106.3 million. The COMEX average copper
price in 2005 was approximately $1.68 per pound, or approximately 30
percent higher than the 2004 average of $1.29. This change increased the
Company's net sales and cost of goods sold.
F-5
Cost of goods sold increased $314 million, to $1.4 billion in 2005.
This increase was attributable primarily to higher raw material costs (as
discussed above) and acquired businesses. Gross profit was $300 million or
17.3 percent of net sales in 2005 compared with $263 million or 19.1
percent of net sales in 2004. The increase in gross profit was due to (i)
higher spreads in core product lines, primarily copper tube and fittings,
(ii) acquired businesses and (iii) $1.3 million, or 2 cents per diluted
share, resulting from the liquidation of LIFO inventory layers.
Depreciation and amortization of $40.7 million in 2005 compares with
$40.6 million in 2004. Selling, general, and administrative expenses
increased to $127.4 million in 2005; this $21.0 million increase was due to
(i) incremental costs of approximately $14.3 million attributed to acquired
businesses, (ii) increased professional fees of approximately $3.3 million,
(iii) increased distribution costs of approximately $1.3 million, and (iv)
net increase of other costs of approximately $2.1 million.
Interest expense increased to $19.6 million in 2005 from $4.0 million
in 2004. This increase was primarily due to the issuance of the Debentures
on October 26, 2004.
Other income includes (i) gains on the sale of land and buildings for
approximately $3.7 million, (ii) interest income on invested cash balances
of $2.3 million, (iii) rents, royalties and other, net of $1.5 million, and
(iv) equity in earnings of an unconsolidated subsidiary (Conbraco
Industries, Inc.) of $4.5 million.
The expense related to environmental remediation at certain non-
operating properties of the Company, included in other income, net, totaled
$0.6 million in 2005 compared with $1.0 million in 2004. The environmental
expense related to operating properties is included as a component of cost
of goods sold and was not significant for the periods presented.
Income tax expense was $35.0 million, for an effective rate of 28.2
percent, for 2005; this rate is lower than the expected rate due to (i) tax
planning strategy and structure related to a business acquired in Mexico in
2004, (ii) an adjustment that reduced 2005 income tax expense by
approximately $2.9 million, or 8 cents per diluted share, to correct
estimated taxes provided for in prior years, and (iii) recognition of the
tax benefit of a foreign net operating loss carryforward in the U.K. that
was previously reserved. Management has concluded that the $2.9 million
adjustment is immaterial to the consolidated results of operations and
financial condition for the current year as well as the prior affected
years.
Income from discontinued operations consists of business interruption
insurance proceeds, net of tax, related to operations sold in 2002.
The Company's employment was approximately 4,800 at the end of 2005
compared with 4,500 at the end of 2004.
F-6
Plumbing & Refrigeration Segment
Net sales by Plumbing & Refrigeration were $1.3 billion in 2005
compared with $1.0 billion in 2004 for a 30 percent increase. Operating
income was $125.5 million in 2005 compared with $108.3 million in 2004.
The increase in net sales is due primarily to higher raw material costs,
which are reflected in higher selling prices. This $17.2 million increase
in operating profit was due to (i) higher spreads and volume in certain
product lines, (ii) $1.3 million, or 2 cents per diluted share, resulting
from the liquidation of LIFO inventory layers, and (iii) operating income
from acquired businesses in Mexico and the U.K.
OEM Segment
OEM's net sales were $460 million in 2005 compared with $392 million
in 2004. Operating income increased by $6.4 million to $27.0 million in
2005 compared with $20.6 million in 2004. During 2005, the OEM Segment
posted improved results in all product areas with the exception of Brass
Rod.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance increased to $200.5
million at December 30, 2006, from $129.7 million at December 31, 2005.
Major components of the 2006 change included $64.5 million of cash provided
by operating activities, $14.0 million of cash used in investing activities
and $19.6 million of cash provided by financing activities.
Net income from continuing operations of $148.9 million in 2006 was
the primary component of cash provided by operating activities.
Depreciation and amortization of $41.9 million was the primary non-cash
adjustment. Major changes in working capital included a $15.5 million
increase in trade accounts receivable and $56.8 million increase in
inventories due to increased metal prices in 2006 compared with 2005 and
contributions from acquired businesses, and $41.4 million decrease in
current liabilities due to (i) a $28.1 million decrease in trade accounts
payable due to lower purchasing volumes at the end of 2006, (ii) a $9.9
million decrease in income taxes payable and income tax contingences, and
(iii) a net reduction of other liabilities of $8.6 million. These
decreases were partially offset by a $5.2 million increase in accrued
compensation due primarily to increased incentive accruals.
The major components of net cash used for investing activities during
2006 included $41.2 million used for capital expenditures including $17.9
million of capital expenditures by our Chinese joint venture, which was
partially offset by the proceeds from the sale of our equity investment in
Conbraco Industries, Inc. of $23 million.
F-7
Net cash provided by financing activities totaled $19.6 million in 2006.
The increases primarily relate to $28.8 million of proceeds from the
issuance of long-term debt, primarily resulting from funds borrowed by our
Chinese joint venture to fund operations, $1.1 million for the tax benefit
of stock options exercised, and proceeds from the sale of treasury stock of
$7.7 million. These increases were partially offset by decreases of $14.8
million for cash dividends paid to our shareholders, $2.0 million for debt
repayments, and $1.1 million for the acquisition of treasury stock. The
treasury stock transactions discussed above relate to stock option exercises.
The Company has a $200 million unsecured line-of-credit (Credit
Facility) which expires in December 2011. At year-end, the Company had no
borrowings against the Credit Facility. Approximately $10.8 million in
letters of credit were backed by the Credit Facility at the end of 2006.
As of December 30, 2006, the Company's total debt was $344.1 million or 38
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 December
30, 2006, the Company was in compliance with all of its debt covenants.
The Company expects to invest between $30 and $40 million for capital
expenditures during 2007.
Contractual cash obligations of the Company as of December 30, 2006
included the following:
(In millions)
Payments Due by Year
2008- 2010-
Total 2007 2009 2011 Thereafter
Long-term debt,
including capital
lease obligations $344.2 $ 36.0 $ 0.2 $ 0.9 $307.1
Interest on fixed-
rate debt 143.7 18.5 35.9 35.7 53.6
Consulting Agreements (1) 13.3 1.3 2.7 2.0 7.3
Operating leases 20.5 7.1 7.7 3.9 1.8
Purchase commitments (2) 321.8 321.8 - - -
----- ----- ----- ----- -----
Total contractual
cash obligations $843.5 $384.7 $ 46.5 $ 42.5 $369.8
===== ===== ===== ===== =====
(1) See Note 10 to Consolidated Financial Statements.
(2) Purchase commitments include $27.8 million of open fixed price purchases
of raw materials. Additionally, the Company has contractual supply
commitments, totaling $294.0 million at year-end prices, for raw
materials consumed in the ordinary course of business; these contracts
contain variable pricing based on COMEX.
F-8
The above obligations will be satisfied with existing cash, the Credit
Facility, and cash generated by operations. Additionally, the cash flow to
fund pension and OPEB obligations was $3.3 million in 2006 and $2.6 million
in 2005. During 2005 and 2004, funded pension assets recovered a
significant portion of market value declines experienced in 2002. The
Company expects to contribute approximately $2.5 million to its pension
plans and $0.9 million to its other postretirement benefit plans in 2007.
The Company has no off-balance sheet financing arrangements except for the
operating leases identified above.
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. In June
2005 the price of copper averaged approximately $1.62 per pound. Since
then the price of copper has fluctuated significantly and averaged
approximately $3.09 per pound in December 2006. During 2006 copper reached
a historic high of $4.08 per pound.
The Company's Board of Directors declared a regular quarterly dividend
of 10 cents per share on its Common Stock during each quarter of 2006, 2005
and 2004. Additionally, during 2004 the Company distributed a Special
Dividend composed of $6.50 in cash and $8.50 in principal amount of the
Company's 6% Subordinated Debentures due 2014 per share of Common Stock.
Payment of dividends in the future is dependent upon the Company's financial
condition, cash flows, capital requirements, earnings, and other factors.
Management believes that cash provided by operations, the Credit
Facility, and currently available cash of $200.5 million will be adequate
to meet the Company's normal future capital expenditure and operational
needs. The Company's current ratio (current assets divided by current
liabilities) was 3.0 to 1 as of December 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. 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 December 30, 2006,
the Company had repurchased approximately 2.4 million shares under this
authorization.
Environmental Matters
The Company ended 2006 with total environmental reserves of
approximately $8.9 million. 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.
F-9
Market Risks
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. A discussion of the Company's accounting
for derivative instruments and hedging activities is included in the
Summary of Significant Accounting Policies in the Notes to Consolidated
Financial Statements.
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.
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
year-end, the Company held open forward contracts to purchase approximately
$5.9 million of copper over the next seven months related to fixed-price
sales orders. The Company also held open forward contracts to sell
approximately $14.3 million of copper in March 2007 related to the price
risk of inventory on hand.
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 year-end, the Company held open forward contracts to purchase
approximately $0.6 million of natural gas over the next three months.
F-10
Interest Rates
At December 30, 2006 and December 31, 2005, the fair value of the
Company's debt was estimated at $320.7 million and $298.1 million,
respectively, primarily using market yields and taking into consideration
the underlying terms of the debt. Such fair value was less than the
carrying value of debt at December 30, 2006 and December 31, 2005 by $23.4
million and $18.1 million, respectively. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 10 percent
decrease in interest rates and amounted to $10.6 million at December 30,
2006 and $4.1 million at December 31, 2005.
The Company had variable-rate debt outstanding of $36.1 million at
December 30, 2006 and $5.5 million at December 31, 2005. 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.
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 year-end, the Company held open forward contracts to
purchase approximately $2.9 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. The net investment in foreign subsidiaries translated into
U.S. dollars using the year-end exchange rates was $191.5 million at
December 30, 2006 and $143.3 million at December 31, 2005. The primary
reason for the increase in 2006 is from additional, planned investments in
the Company's Chinese joint venture and cash advances to its European
operations. The potential loss in value of the Company's net investment in
foreign subsidiaries resulting from a hypothetical 10 percent adverse
change in quoted foreign currency exchange rates at December 30, 2006 and
December 31, 2005 amounted to $19.2 million and $14.3 million, respectively.
This change would be reflected in the foreign currency translation component
of accumulated other comprehensive income in the equity section of the
Company's Consolidated Balance Sheets, unless the foreign subsidiaries are
sold or otherwise disposed.
F-11
Critical Accounting Policies and Estimates
The Company's Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the United
States. Application of these principles requires the Company to make
estimates, assumptions, and judgments that affect the amounts reported in
the Consolidated Financial Statements. Management believes the most
complex and sensitive judgments, because of their significance to the
Consolidated Financial Statements, result primarily from the need to make
estimates about the effects of matters, which are inherently uncertain.
The accounting policies and estimates that are most critical to aid in
understanding and evaluating the results of operations and financial
position of the Company include the following:
Inventory Valuation
Inventories are valued at the lower of cost or market. A significant
component of the Company's inventory is copper; the domestic copper
inventories are valued under the LIFO method, which represent approximately
12.6 percent of total inventories. The market price of copper cathode and
scrap are subject to volatility. During periods when open market prices
decline below net book value, the Company may need to provide an allowance
to reduce the carrying value of its inventory. In addition, certain items
in inventory may be considered obsolete and, as such, the Company may
establish an allowance to reduce the carrying value of those items to their
net realizable value. Changes in these estimates related to the value of
inventory, if any, may result in a materially adverse or positive impact on
the Company's reported financial position or results of operations. The
Company recognizes the impact of any changes in estimates, assumptions, and
judgments in income in the period in which it is determined.
Deferred Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon
the occurrence of future events. The Company records valuation allowances
to reduce its deferred tax assets to the amount it believes is more likely
than not to be realized. These valuation allowances can be impacted by
changes in tax laws, changes to statutory tax rates, and future taxable
income levels and are based on the Company's judgment, estimates, and
assumptions regarding those future events. In the event the Company were
to determine that it would not be able to realize all or a portion of the
net deferred tax assets in the future, the Company would increase the
valuation allowance through a charge to income in the period that such
determination is made. Conversely, if the Company were to determine that
it would be able to realize its deferred tax assets in the future, in
excess of the net carrying amounts, the Company would decrease the recorded
valuation allowance through an increase to income in the period that such
determination is made.
F-12
Environmental Reserves
The Company recognizes an environmental liability when it is probable
the liability exists and the amount is reasonably estimable. The Company
estimates the duration and extent of its remediation obligations based upon
reports of outside consultants; internal analyses of clean-up costs,
ongoing monitoring costs, and estimated legal fees; communications with
regulatory agencies; and changes in environmental law. If the Company were
to determine that its estimates of the duration or extent of its
environmental obligations were no longer accurate, the Company would adjust
its environmental liabilities accordingly in the period that such
determination is made. Estimated future expenditures for environmental
remediation are not discounted to their present value. Accrued
environmental liabilities are not reduced by potential insurance
reimbursements.
Environmental expenses that relate to ongoing operations are included
as a component of cost of goods sold. Environmental expenses related to
certain non-operating properties are included in other income, net on the
Consolidated Statements of Income.
Allowance for Doubtful Accounts
The Company provides an allowance for receivables that may not be
fully collected. In circumstances where the Company is aware of a
customer's inability to meet its financial obligations (e.g., bankruptcy
filings or substantial down-grading of credit ratings), it records a
reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount it believes most likely will be collected. For
all other customers, the Company recognizes reserves for bad debts based on
its historical collection experience. If circumstances change (e.g.,
greater than expected defaults or an unexpected material change in a major
customer's ability to meet its financial obligations), the Company's
estimate of the recoverability of amounts due could be changed by a
material amount.
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 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 will adopt FIN 48 as of December 31,
2006 (the first day of fiscal 2007), as required. The cumulative effect of
adopting FIN 48 will be recorded as a change to opening retained earnings
in the first quarter of 2007. The Company has not completed the process of
evaluating the impact that the adoption of FIN 48 will have on its
Consolidated Financial Statements.
F-13
The FASB has issued Statement of Financial Accounting Standards (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 Consolidated Financial
Statements.
In September 2006, the FASB issued SFAS 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 No. 158 requires plan
sponsors of defined benefit pension and other postretirement benefit plans
to recognize the funded status of those plans in the statement of financial
position, measure the fair value of plan assets and benefit obligations as
of the date of the fiscal year-end statement of financial position, and
provide additional disclosures. On December 30, 2006, the Company adopted
the recognition and disclosure provisions of SFAS No. 158. The effect of
adopting SFAS No. 158 on the Company's financial condition at December 30,
2006 has been included in the accompanying consolidated financial
statements. SFAS No. 158 did not have an effect on the Company's
Consolidated Balance Sheet in any prior period. The requirement to measure
plan assets and benefit obligations as of the date of the employer's fiscal
year-end statement of financial position has not yet been adopted as it is
required for fiscal years ending after December 15, 2008. See Note 9 to
the financial statements for further discussion of the effect of the
adoption of SFAS No. 158 on the Company's Consolidated Financial Statements.
Cautionary Statement Regarding Forward-Looking Information
This Annual Report contains various forward-looking statements and
includes assumptions concerning the Company's operations, future results,
and prospects. These forward-looking statements are based on current
expectations and are subject to risk and uncertainties. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, the Company provides the following cautionary statement
identifying important economic, political, and technological factors, among
others, the absence of which could cause actual results or events to differ
materially from those set forth in or implied by the forward-looking
statements and related assumptions.
Such factors include: (i) the current and projected future business
environment, including interest rates and capital and consumer spending;
(ii) the domestic housing and commercial construction industry environment;
(iii) availability and price fluctuations in commodities (including copper,
natural gas, and other raw materials, including crude oil that indirectly
effects plastic resins); (iv) competitive factors and competitor responses
to the Company's initiatives; (v) stability of government laws and
regulations, including taxes; (vi) availability of financing; and (vii)
continuation of the environment to make acquisitions, domestic and foreign,
including regulatory requirements and market values of candidates.
F-14
Mueller Industries, Inc.
Consolidated Statements of Income
Years Ended December 30, 2006, December 31, 2005, and December 25, 2004
(In thousands, except per share data)
2006 2005 2004
Net sales $2,510,912 $1,729,923 $1,379,056
Cost of goods sold 2,109,436 1,430,075 1,115,612
--------- --------- ---------
Gross profit 401,476 299,848 263,444
Depreciation and amortization 41,619 40,696 40,613
Selling, general, and
administrative expense 140,972 127,394 106,400
Impairment charge - - 3,941
--------- --------- ---------
Operating income 218,885 131,758 112,490
Interest expense (20,477) (19,550) (3,974)
Other income, net 5,171 11,997 6,842
--------- --------- ---------
Income from continuing operations
before income taxes 203,579 124,205 115,358
Income tax expense (54,710) (34,987) (35,942)
--------- --------- ---------
Income from continuing operations 148,869 89,218 79,416
Income from discontinued operations,
net of income taxes - 3,324 -
--------- --------- ---------
Net income $ 148,869 $ 92,542 $ 79,416
========= ========= =========
See accompanying notes to consolidated financial statements.
F-15
Mueller Industries, Inc.
Consolidated Statements of Income (continued)
Years Ended December 30, 2006, December 31, 2005, and December 25, 2004
(In thousands, except per share data)
2006 2005 2004
Weighted average shares for basic
earnings per share 36,893 36,590 35,321
Effect of dilutive stock options 353 513 1,590
--------- --------- ---------
Adjusted weighted average shares for
diluted earnings per share 37,246 37,103 36,911
========= ========= =========
Basic earnings per share:
From continuing operations $ 4.04 $ 2.44 $ 2.25
From discontinued operations - 0.09 -
--------- --------- ---------
Basic earnings per share $ 4.04 $ 2.53 $ 2.25
========= ========= =========
Diluted earnings per share:
From continuing operations $ 4.00 $ 2.40 $ 2.15
From discontinued operations - 0.09 -
--------- --------- ---------
Diluted earnings per share $ 4.00 $ 2.49 $ 2.15
========= ========= =========
Dividends per share $ 0.40 $ 0.40 $ 15.40
========= ========= =========
See accompanying notes to consolidated financial statements.
F-16
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 30, 2006 and December 31, 2005
(In thousands)
2006 2005
Assets
Current assets
Cash and cash equivalents $ 200,471 $ 129,685
Accounts receivable, less allowance for
doubtful accounts of $6,806 in 2006
and $5,778 in 2005 281,679 260,685
Inventories 258,647 196,987
Current deferred income taxes 21,421 19,900
Other current assets 13,976 17,019
---------- ----------
Total current assets 776,194 624,276
Property, plant, and equipment, net 315,064 307,046
Goodwill 155,653 152,171
Other assets 21,996 33,435
---------- ----------
Total Assets $ 1,268,907 $ 1,116,928
========== ==========
See accompanying notes to consolidated financial statements.
F-17
Mueller Industries, Inc.
Consolidated Balance Sheets (continued)
As of December 30, 2006 and December 31, 2005
(In thousands, except share data)
2006 2005
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 35,998 $ 4,120
Accounts payable 96,095 124,216
Accrued wages and other employee costs 43,281 38,095
Other current liabilities 80,145 97,251
---------- ----------
Total current liabilities 255,519 263,682
Long-term debt, less current portion 308,154 312,070
Pension liabilities 19,900 21,721
Postretirement benefits other than pensions 16,699 13,515
Environmental reserves 8,907 9,073
Deferred income taxes 46,408 63,944
Other noncurrent liabilities 2,206 3,078
---------- ----------
Total liabilities 657,793 687,083
---------- ----------
Minority interest in subsidiaries 22,300 6,937
Stockholders' equity
Preferred stock - $1.00 par value;
shares authorized 5,000,000;
none outstanding - -
Common stock - $.01 par value; shares
authorized 100,000,000; issued 40,091,502;
outstanding 37,025,285 in 2006
and 36,643,590 in 2005 401 401
Additional paid-in capital, common 256,906 252,889
Retained earnings 386,038 253,433
Accumulated other comprehensive income (loss) 12,503 (8,848)
Treasury common stock, at cost (67,034) (74,967)
---------- ----------
Total stockholders' equity 588,814 422,908
---------- ----------
Commitments and contingencies - -
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,268,907 $ 1,116,928
========== ==========
See accompanying notes to consolidated financial statements.
F-18
Mueller Industries, Inc.
Consolidated Statements of Cash Flows
Years Ended December 30, 2006, December 31, 2005, and December 25, 2004
(In thousands)
2006 2005 2004
Operating activities:
Income from continuing operations $ 148,869 $ 89,218 $ 79,416
Reconciliation of income from
continuing operations to net cash
provided by operating activities:
Depreciation 41,179 40,398 40,316
Amortization of intangibles 440 298 297
Amortization of Subordinated
Debenture costs 236 162 26
Stock-based compensation expense 2,789 - -
Income tax benefit from exercise
of stock options (1,065) 991 31,778
Impairment charge - - 3,941
Deferred income taxes (19,339) (9,556) 2,711
Provision for doubtful
accounts receivable 1,109 1,911 1,404
Minority interest in subsidiaries,
net of dividend paid 2,610 9 (141)
Gain on sale of equity investment (1,876) - -
Gain on early retirement of debt (97) - -
Loss (gain) on disposal of properties 2,620 (3,665) (5,729)
Equity in (earnings) loss of
unconsolidated subsidiary (964) (4,480) 2,026
Changes in assets and liabilities,
net of businesses acquired:
Receivables (15,459) (64,905) (15,722)
Inventories (56,786) (5,979) (26,208)
Other assets 1,449 1,764 (6,689)
Current liabilities (41,357) 66,435 45,274
Other liabilities (2,578) (5,894) 296
Other, net 2,759 (590) 1,765
--------- --------- ---------
Net cash provided by
operating activities 64,539 106,117 154,761
--------- --------- ---------
Investing activities:
Capital expenditures (41,206) (18,449) (19,980)
Acquisition of businesses, net
of cash received 3,632 (6,937) (56,946)
Proceeds from sales of properties
and equity investment 23,528 10,112 6,334
--------- --------- ---------
Net cash used in
investing activities (14,046) (15,274) (70,592)
--------- --------- ---------
See accompanying notes to consolidated financial statements.
F-19
Mueller Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Years ended December 30, 2006, December 31, 2005, and December 25, 2004
(In thousands)
2006 2005 2004
Financing activities:
Repayments of long-term debt $ (2,058) $ (1,091) $ (6,608)
Dividends paid (14,776) (14,646) (259,882)
Proceeds from issuance of
long-term debt 28,759 - -
Acquisition of treasury stock (1,092) (551) (42,641)
Issuance of shares under incentive
stock option plans from treasury 7,701 4,819 18,978
Income tax benefit from exercise of
stock options 1,065 - -
Subordinated Debenture issuance costs - - (2,187)
--------- --------- ---------
Net cash provided by
(used in)financing activities 19,599 (11,469) (292,340)
--------- --------- ---------
Effect of exchange rate changes on cash 694 (462) 532
Net cash provided by operating
activities of discontinued operations - 3,324 -
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents 70,786 82,236 (207,639)
Cash and cash equivalents at the
beginning of the year 129,685 47,449 255,088
--------- --------- ---------
Cash and cash equivalents at the
end of the year $ 200,471 $ 129,685 $ 47,449
========= ========= =========
For supplemental disclosures of cash flow information, see
Notes 1, 5, 6, 7, and 13.
See accompanying notes to consolidated financial statements.
F-20
Mueller Industries, Inc.
Consolidated Statements Stockholders' Equity
Years Ended December 30, 2006, December 31, 2005, and December 25, 2004
(In thousands)
2006 2005 2004
Shares Amount Shares Amount Shares Amount
Common stock:
Balance at beginning of year 40,092 $ 401 40,092 $ 401 40,092 $ 401
------- --------- ------- --------- ------ ---------
Balance at end of year 40,092 $ 401 40,092 $ 401 40,092 $ 401
======= ========= ======= ========= ====== =========
Additional paid-in capital:
Balance at beginning of year $ 252,889 $ 252,931 $ 259,110
Issuance of shares under
incentive stock option plans (1,324) (1,033) (37,957)
Stock option related compensation 4,276 - -
Income tax benefit from exercise of
stock options 1,065 991 31,778
--------- --------- ---------
Balance at end of year $ 256,906 $ 252,889 $ 252,931
========= ========= =========
Retained earnings:
Balance at beginning of year $ 253,433 $ 175,537 $ 655,495
Net income 148,869 92,542 79,416
Dividends and other (16,264) (14,646) (559,374)
--------- --------- ---------
Balance at end of year $ 386,038 $ 253,433 $ 175,537
========= ========= =========
Accumulated other comprehensive
income (loss):
Foreign currency translation $ 17,778 $ (10,122) $ 8,560
Minimum pension liability adjustment,
net of applicable income tax (expense)
benefit of $(1,165), $339, $(2) 7,108 (2,141) (2)
Change in fair value of derivatives,
net of applicable income tax (expense)
benefit of $199, $(201), $(134) (355) 330 219
Losses reclassified into earnings
from other comprehensive income,
net of applicable income tax (expense)
benefit of $0, $0, $65 - - (106)
--------- --------- ---------
Total other comprehensive income (loss) 24,531 (11,933) 8,671
Balance at beginning of year (8,848) 3,085 (5,586)
Adjustment to initially apply SFAS No. 158,
net of income tax benefit of $1,526 (3,180) - -
--------- --------- ---------
Balance at end of year $ 12,503 $ (8,848) $ 3,085
========= ========= =========
See accompanying notes to consolidated financial statements.
F-21
Mueller Industries, Inc.
Consolidated Statements Stockholders' Equity (continued)
Years Ended December 30, 2006, December 31, 2005, and December 25, 2004
(In thousands)
2006 2005 2004
Shares Amount Shares Amount Shares Amount
Treasury stock:
Balance at beginning of year 3,448 $ (74,967) 3,702 $ (80,268) 5,815 $ (94,562)
Issuance of shares under
incentive stock option plans (414) 9,025 (283) 5,852 (3,242) 56,935
Repurchase of common stock 33 (1,092) 29 (551) 1,129 (42,641)
------- --------- ------- --------- ------ ---------
Balance at end of year 3,067 $ (67,034) 3,448 $ (74,967) 3,702 $ (80,268)
======= ========= ======= ========= ====== =========
Total comprehensive income:
Net income $ 148,869 $ 92,542 $ 79,416
Other comprehensive income (loss) 24,531 (11,933) 8,671
--------- --------- ---------
Total comprehensive income $ 173,400 $ 80,609 $ 88,087
========= ========= =========
See accompanying notes to consolidated financial statements.
F-22
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The principal business of Mueller Industries, Inc. is the manufacture
and sale of 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; fabricated
tubular products; and gas valves and assemblies. The Company also resells
imported brass and plastic plumbing valves, malleable iron fittings, steel
nipples, faucets, and plumbing specialty products. The Company markets its
products to the HVAC, plumbing, refrigeration, hardware, and other
industries. Mueller's operations are located throughout the United States
and in Canada, Mexico, Great Britain, and China.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Mueller
Industries, Inc. and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The minority interest represents a separate private
ownership of 49.5 percent of Jiangsu Mueller-Xingrong Copper Industries
Limited (Mueller-Xingrong), 25 percent of Ruby Hill Mining Company, and 19
percent of Richmond-Eureka Mining Company. Prior to its sale in 2006 the
Company accounted for its minority investment in Conbraco Industries, Inc.
(Conbraco) on the equity method.
Revenue Recognition
Revenue is recognized when title passes to the customer either when
products are shipped, provided collection is determined to be probable and
no significant obligations remain for the Company, or upon the terms of the
sale. Estimates for future rebates on certain product lines, product
returns, and bad debts are recognized in the period which the revenue is
recorded. The cost of shipping product to customers is expensed as
incurred as a component of cost of goods sold.
Cash Equivalents
Temporary investments with original maturities of three months or less
are considered to be cash equivalents. These investments are stated at
cost. At December 30, 2006 and December 31, 2005, temporary investments
consisted of money market mutual funds, commercial paper, bank repurchase
agreements, and U.S. and foreign government securities totaling $182.8
million and $123.7 million, respectively.
F-23
Allowance for Doubtful Accounts
The Company provides an allowance for receivables that may not be
fully collected. In circumstances where the Company is aware of a
customer's inability to meet its financial obligations (e.g., bankruptcy
filings or substantial down-grading of credit ratings), it records a
reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount it believes most likely will be collected. For
all other customers, the Company recognizes reserves for bad debts based on
its historical collection experience. If circumstances change (e.g.,
greater than expected defaults or an unexpected material change in a major
customer's ability to meet its financial obligations), the Company's
estimate of the recoverability of amounts due could be changed by a
material amount.
Inventories
The Company's inventories are valued at the lower of cost or market.
The material component of its U.S. copper tube and copper fittings
inventories is valued on a last-in, first-out (LIFO) basis. Other
inventories, including the non-material components of U.S. copper tube and
copper fittings, are valued on a first-in, first-out (FIFO) basis.
Inventory costs include material, labor costs, and manufacturing overhead.
Elements of cost in finished goods inventory in addition to the cost
of material include depreciation, amortization, utilities, consumable
production supplies, maintenance, production, wages and transportation
costs. In November 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 151,
"Inventory Costs", which specifies that certain abnormal costs must be
recognized as current period charges. This Statement, which was effective
for inventory costs incurred after September 1, 2005, did not materially
affect the Company's results of operations or financial position.
The market price of copper cathode and scrap are subject to volatility.
During periods when open market prices decline below net book value, the
Company may need to provide an allowance to reduce the carrying value of
its inventory. In addition, certain items in inventory may be considered
obsolete and, as such, the Company may establish an allowance to reduce the
carrying value of those items to their net realizable value. Changes in
these estimates related to the value of inventory, if any, may result in a
materially adverse impact on the Company's reported financial position or
results of operations. The Company recognizes the impact of any changes in
estimates, assumptions, and judgments in income in the period in which it
is determined.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation of
buildings, machinery, and equipment is provided on the straight-line method
over the estimated useful lives ranging from 20 to 40 years for buildings
and five to 20 years for machinery and equipment. Leasehold improvements
are amortized over the lesser of their useful life or the remaining lease
term. Repairs and maintenance are expensed as incurred.
F-24
The Company evaluates the carrying value of property, plant and
equipment whenever a change in circumstances indicates that the carrying
value may not be recoverable from the undiscounted future cash flows from
operations. If an impairment exists, the net book values are reduced to
fair values as warranted.
Goodwill
Goodwill represents cost in excess of fair values assigned to the
underlying net assets of acquired businesses. Under SFAS No. 142, "Goodwill
and Other Intangible Assets", goodwill is subject to impairment testing
which compares carrying values to fair values and, when appropriate, the
carrying value of these assets is required to be reduced to fair value.
The Company performs its annual impairment assessment as of the first day
of the fourth quarter of each fiscal year, unless circumstances dictate
more frequent assessments. For testing purposes, the Company uses
components of its reporting segments; components of a segment having
similar economic characteristics are combined. No impairment loss resulted
from the 2006, 2005 or 2004 annual tests performed under SFAS No. 142;
however, as discussed in Note 4, an impairment charge was recognized in the
first quarter of 2004. There can be no assurance that additional goodwill
impairment will not occur in the future.
Self Insurance Accruals
The Company is primarily self insured for workers' compensation claims
and benefits paid under employee health care programs. Accruals are
primarily based on estimated undiscounted cost of claims, which includes
incurred-but-not-reported claims and are classified as accrued wages and
other employee costs.
Environmental Reserves and Environmental Expenses
The Company recognizes an environmental liability when it is probable
the liability exists and the amount is reasonably estimable. The Company
estimates the duration and extent of its remediation obligations based upon
reports of outside consultants; internal analyses of clean-up costs,
ongoing monitoring costs, and estimated legal fees; communications with
regulatory agencies; and changes in environmental law. If the Company were
to determine that its estimates of the duration or extent of its
environmental obligations were no longer accurate, the Company would adjust
its environmental liabilities accordingly in the period that such
determination is made. Estimated future expenditures for environmental
remediation are not discounted to their present value. Accrued
environmental liabilities are not reduced by potential insurance
reimbursements.
Environmental expenses that relate to ongoing operations are included
as a component of cost of goods sold. Environmental expenses related to
certain non-operating properties are included in other income, net on the
Consolidated Statements of Income.
F-25
Earnings Per Share
Basic earnings per share is computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the
increase in average common shares outstanding that would result from the
assumed exercise of outstanding stock options calculated using the treasury
stock method. Approximately 330,000 stock options were excluded from the
computation of diluted earnings per share at December 30, 2006 as the
options' exercise price was higher than the average market price of the
Company's stock.
Income Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon
the occurrence of future events. The Company records valuation allowances
to reduce its deferred tax assets to the amount it believes is more likely
than not to be realized. These valuation allowances can be impacted by
changes in tax laws, changes to statutory tax rates, and future taxable
income levels and are based on the Company's judgment, estimates, and
assumptions regarding those future events. In the event the Company were
to determine that it would not be able to realize all or a portion of the
net deferred tax assets in the future, the Company would increase the
valuation allowance through a charge to income tax expense in the period
that such determination is made. Conversely, if the Company were to
determine that it would be able to realize its deferred tax assets in the
future, in excess of the net carrying amounts, the Company would decrease
the recorded valuation allowance through a decrease to income tax expense
in the period that such determination is made.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (R), "Share-
Based Payment", and began recognizing compensation expense in its
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
No. 123, "Accounting for Stock-Based Compensation". No stock-based
compensation expense was reflected in net income prior to adopting SFAS No.
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.
Concentrations of Credit and Market Risk
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different geographic areas and
different industries, including HVAC, plumbing, refrigeration, hardware,
automotive, OEMs, and others.
F-26
The Company minimizes its exposure to base metal price fluctuations
through various strategies. Generally, it prices an equivalent amount of
copper raw material, under flexible pricing arrangements it maintains with
its suppliers, at the time it determines the selling price of finished
products to its customers.
The Company's historical experience in collection of accounts receivable
falls within the recorded allowances. Due to these factors, no
additional credit risk, beyond amounts provided for collection losses, is
believed inherent in the Company's accounts receivable.
Derivative Instruments and Hedging Activities
The Company has utilized forward contracts to manage the volatility
related to purchases of copper and natural gas, and certain transactions
denominated in foreign currencies. In addition, the Company has reduced its
exposure to increases in interest rates by entering into an interest rate
swap contract. These contracts have been designated as cash flow hedges.
The Company also utilized forward contracts to protect the value of a
portion of its copper inventory on hand at December 30, 2006. This
contract has been designated as a fair value hedge. The Company accounts
for derivative financial instruments in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires that an entity recognize all derivatives, as defined, as either
assets or liabilities measured at fair value. If the derivative is
designated as a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in
fair value of the hedged assets, liabilities or firm commitments through
earnings or recognized as a component of comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in
earnings. Gains and losses recognized by the Company related to the
ineffective portion of its hedging instruments, as well as gains and losses
related to the portion of the hedging instruments excluded from the
assessment of hedge effectiveness, were not material to the Company's
Consolidated Financial Statements. Should these contracts no longer meet
hedge criteria in accordance with SFAS No. 133, either through lack of
effectiveness or because the hedged transaction is not probable of
occurring, all deferred gains and losses related to the hedge will be
immediately reclassified from accumulated other comprehensive income into
earnings.
At December 30, 2006, the Company held open forward contracts to
purchase approximately $5.9 million of copper over the next seven months
related to fixed-price sales orders. The Company also held open forward
contracts to sell approximately $14.3 million of copper in March 2007
related to the price risk of inventory on hand. Also, the Company held
open forward commitments to purchase approximately $0.6 million of natural
gas in the next three months.
F-27
The Company primarily executes derivative contracts with major
financial institutions. These counterparties expose the Company to credit
risk in the event of non-performance. The amount of such exposure is
limited to the fair value of the contract plus the unpaid portion of
amounts due to the Company pursuant to terms of the derivative instruments,
if any. Although there are no collateral requirements, if a downgrade in
the credit rating of these counterparties occurs, management believes that
this exposure is mitigated by provisions in the derivative arrangements
which allow for the legal right of offset of any amounts due to the Company
from the counterparties with any amounts payable to the counterparties by
the Company. As a result, management considers the risk of counterparty
default to be minimal.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value due to the short-
term maturity of these instruments. Primarily using market yields, the
fair value of the Company's debt instruments were estimated to be $320.7
million and $298.0 million at December 30, 2006 and December 31, 2005,
respectively. The fair value of the Company's interest rate swap contract
was approximately $0.1 million at December 30, 2006 and approximately $0.2
million at December 31, 2005. This value represents the estimated amount
the Company would need to pay if the contract was terminated before
maturity, principally resulting from market interest rate decreases. The
fair value of committed forward contracts to purchase copper and natural
gas was $(0.6) million and $(0.3) million, respectively at December 30,
2006. The fair value of the forward contract to sell copper was $2.5
million at December 30, 2006. The Company estimates the fair value of
contracts by obtaining quoted market prices.
Fair value estimates are made at a specific point in time based on
relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Foreign Currency Translation
For foreign subsidiaries, the functional currency is the local
currency. Balance sheet accounts are translated at exchange rates in
effect at the end of the year and income statement accounts are translated
at average exchange rates for the year. Translation gains and losses are
included in stockholders' equity as a component of comprehensive income.
Transaction gains and losses included in the Consolidated Statements of
Income were not significant.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates, assumptions, and judgments that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
F-28
Recently Issued Accounting Standards
In June 2006, the 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 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 will adopt FIN 48 as of
December 31, 2006 (the first day of fiscal 2007), as required. The
cumulative effect of adopting FIN 48 will be recorded as a change to opening
retained earnings in the first quarter of 2007. The Company has not
completed the process of evaluating the impact that the adoption of FIN 48
will have on its Consolidated Financial Statements.
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 Consolidated Financial Statements.
In September 2006, the FASB issued SFAS 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 No. 158 requires plan
sponsors of defined benefit pension and other postretirement benefit plans
to recognize the funded status of those plans in the statement of financial
position, measure the fair value of plan assets and benefit obligations as
of the date of the fiscal year-end statement of financial position, and
provide additional disclosures. On December 30, 2006, the Company adopted
the recognition and disclosure provisions of SFAS No. 158. The effect of
adopting SFAS No. 158 on the Company's financial condition at December 30,
2006 has been included in the accompanying consolidated financial
statements. SFAS No. 158 did not have an effect on the Company's
Consolidated Balance Sheet in any prior period. The requirement to measure
plan assets and benefit obligations as of the date of the employer's fiscal
year-end statement of financial position has not yet been adopted as it is
required for fiscal years ending after December 15, 2008. See Note 9 for
further discussion of the effect of the adoption of SFAS No. 158 on the
Company's consolidated financial statements.
Reclassifications
Certain amounts in the prior years' Consolidated Financial Statements
have been reclassified to conform to the current year presentation.
General
The years ended December 30, 2006, December 31, 2005, and December 25,
2004 contained 52, 53, and 52 weeks, respectively.
F-29
Note 2 - Inventories
(In thousands)
2006 2005
Raw material and supplies $ 48,265 $ 42,333
Work-in-process 40,209 24,610
Finished goods 188,457 133,874
Valuation reserves (18,284) (3,830)
---------- ----------
Inventories $ 258,647 $ 196,987
========== ==========
Inventories valued using the LIFO method totaled $32.6 million at
December 30, 2006 and $33.5 million at December 31, 2005. At
December 30, 2006 and December 31, 2005, the approximate FIFO cost of such
inventories was $143.1 million and $87.8 million respectively. 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,
or 26 cents per diluted share after tax, resulted from the open market price
of copper falling below the inventories' net book value.
Note 3 - Property, Plant, and Equipment, Net
(In thousands)
2006 2005
Land and land improvements $ 12,481 $ 11,881
Buildings 101,046 93,013
Machinery and equipment 535,373 504,075
Construction in progress 15,430 7,098
---------- ----------
664,330 616,067
Less accumulated depreciation (349,266) (309,021)
---------- ----------
Property, plant, and equipment, net $ 315,064 $ 307,046
========== ==========
F-30
Note 4 - Goodwill
The changes in the carrying amount of goodwill were as follows:
(In thousands)
Plumbing &
Refrigeration OEM
Segment Segment Total
Balance at December 25, 2004 $ 128,115 $ 8,500 $ 136,615
Goodwill resulting from
acquisitions during the year 11,174 - 11,174
Adjustments to the fair value of
businesses acquired during 2004 1,589 - 1,589
Contingent earn-out payments 3,000 353 3,353
Foreign currency translation adjustment (560) - (560)
--------- --------- ---------
Balance at December 31, 2005 143,318 8,853 152,171
Goodwill resulting from
acquisitions during the year - 1,118 1,118
Foreign currency translation adjustment 2,364 - 2,364
--------- --------- ---------
Balance at December 30, 2006 $ 145,682 $ 9,971 $ 155,653
========= ========= =========
During 2004, the Company recognized a $3.9 million non-cash impairment
charge related to Overstreet-Hughes, Co., Inc. and reduced its goodwill by
$2.3 million and its carrying cost in long-lived assets by $1.6 million, its
best estimate of fair value. This estimate was determined based on a
discounted cash flow method.
Note 5 - Long-Term Debt
(In thousands)
2006 2005
6% Subordinated Debentures, due 2014 $ 297,688 $ 299,492
2001 Series IRBs with interest at
6.63%, due 2021 10,000 10,000
Mueller-Xingrong line of credit with
interest at 5.47%, due 2007 27,737 -
Other, including capitalized lease obligations 8,727 6,698
---------- ----------
344,152 316,190
Less current portion of long-term debt (35,998) (4,120)
---------- ----------
Long-term debt $ 308,154 $ 312,070
========== ==========
F-31
On October 26, 2004, as part of a Special Dividend, the Company issued
$299.5 million in principal amount of its 6% Subordinated Debentures (the
Debentures) due November 1, 2014. Interest on the Debentures is payable
semi-annually on May 1 and November 1. The Company may repurchase the
Debentures through open market transactions or through privately negotiated
transactions. During 2006 the Company repurchased through open market
transactions and extinguished $1.8 million in principal amount of its
Debentures. The Debentures may be redeemed in whole at any time or in part
from time to time at the option of the Company at the following redemption
price (expressed as a percentage of principal amount) plus any accrued but
unpaid interest to, but excluding, the redemption date:
If redeemed during the 12-month period beginning October 26,
Year Redemption Price
2006 103%
2007 102
2008 101
2009 and thereafter 100
On December 1, 2006, the Company executed a Credit Agreement (the
Agreement) with a syndicate of banks establishing an unsecured $200 million
revolving credit facility (the Credit Facility) which matures December 1,
2011. Borrowings under the Credit Facility bear interest, at the Company's
option, at LIBOR plus a variable premium or the greater of Prime or the
Federal Funds rate plus 0.5 percent. LIBOR advances may be based upon the
one, two, three, or six-month LIBOR. The variable premium over LIBOR is
based on certain financial ratios, and can range from 27.5 to 67.5 basis
points. At December 30, 2006, the premium was 50.0 basis points.
Additionally, a facility fee is payable quarterly on the total commitment
and varies from 10.0 to 20.0 basis points based upon the Company's
capitalization ratio. Availability of funds under the Credit Facility is
reduced by the amount of certain outstanding letters of credit, which are
used to secure the Company's payment of insurance deductibles and certain
retiree health benefits, totaling approximately $10.8 million at December
30, 2006. Terms of the letters of credit are generally one year but are
renewable annually as required. There were no borrowings outstanding as of
December 30, 2006.
Borrowings under the Agreement require the Company, among other things,
to meet certain minimum financial ratios. At December 30, 2006, the
Company was in compliance with all debt covenants.
On April 4, 2006, Mueller-Xingrong, the Company's majority owned
subsidiary, 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 an existing 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 5.47
percent).
F-32
Aggregate annual maturities of the Company's debt are $36.0 million,
$0.1 million, $0.1 million, $0.1 million, and $0.8 million for the
years 2007 through 2011 respectively. Interest paid in 2006, 2005, and
2004 was $20.4 million, $19.0 million, and $1.1 million respectively. No
interest was capitalized in 2006, 2005, or 2004.
Note 6 - Stockholders' Equity
On October 26, 2004, the Company distributed a Special Dividend
consisting of $6.50 in cash and $8.50 in principal amount of the Company's
6% Subordinated Debentures due 2014 for each share of Common Stock.
Additionally, the Company paid regular quarterly cash dividends of 10 cents
per share per quarter in 2006, 2005 and 2004.
The Company's Board of Directors has authorized the repurchase, until
October 2007, of up to 10 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 December 30, 2006,
the Company had repurchased approximately 2.4 million shares under this
authorization.
Components of accumulated other comprehensive income (loss) are as
follows:
(In thousands)
2006 2005
Cumulative foreign currency translation adjustment $ 25,314 $ 6,154
Minimum pension liability, net of income tax - (14,984)
Unrecognized prior service cost, net of income tax (856) -
Unrecognized actuarial net loss, net of income tax (11,582) -
Unrealized derivative losses, net of income tax (373) (18)
---------- ----------
Accumulated other comprehensive income (loss) $ 12,503 $ (8,848)
========== ==========
The Company adopted the recognition and disclosure provisions of SFAS
No. 158 on December 30, 2006. Pursuant to the adoption of SFAS No. 158,
unrecognized prior service costs and actuarial gains and losses are
recognized in accumulated other comprehensive income, net of tax.
Additionally, subsequent to the adoption of SFAS No. 158, minimum pension
liabilities are no longer recognized. See Note 9 for addition information
regarding the effect of the adoption of SFAS No. 158.
F-33
During 2006, the increase in cumulative foreign currency translation
adjustment relates to (i) Mueller-Xingrong, the Company's Chinese joint
venture formed in December 2005, (ii) the increase in value of British
pound sterling of approximately 14 percent, and (iii) the tax effect of
certain intercompany transactions of approximately $1.5 million, partially
offset by the decrease in value of the Mexican peso of approximately 1.5
percent.
During 2005, the reduction in cumulative foreign currency translation
adjustment relates to the decrease in value of British pound sterling of
approximately 10.4 percent plus the tax effect of certain intercompany
transactions of approximately $1.7 million, partially offset by the
increase in value of the Mexican peso of approximately 3.7 percent.
Note 7 - Income Taxes
The components of income from continuing operations before income taxes,
after consideration of minority interest, were taxed under the following
jurisdictions:
(In thousands)
2006 2005 2004
Domestic $ 188,919 $ 114,735 $ 110,913
Foreign 14,660 9,470 4,445
--------- --------- ---------
Income from continuing operations
before income taxes $ 203,579 $ 124,205 $ 115,358
========= ========= =========
F-34
Income tax expense attributable to continuing operations consists of the
following:
(In thousands)
2006 2005 2004
Current tax (benefit) expense:
Federal $ 69,119 $ 42,811 $ 30,920
Foreign 5,460 499 642
State and local (530) 1,233 1,669
--------- --------- ---------
Current tax expense 74,049 44,543 33,231
--------- --------- ---------
Deferred tax (benefit) expense:
Federal (10,544) (7,570) 3,020
Foreign (4,504) (280) (182)
State and local (4,291) (1,706) (127)
--------- --------- ---------
Deferred tax (benefit)expense (19,339) (9,556) 2,711
--------- --------- ---------
Income tax expense $ 54,710 $ 34,987 $ 35,942
========= ========= =========
No provision is made for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely
reinvested in foreign operations. It is not practicable to compute the
potential deferred tax liability associated with these undistributed
foreign earnings.
F-35
The difference between the reported income tax expense and a tax
determined by applying the applicable U.S. federal statutory income tax
rate to income from continuing operations before income taxes, after
consideration of minority interest, is reconciled as follows:
(In thousands)
2006 2005 2004
Expected income tax expense $ 71,253 $ 43,471 $ 40,375
State and local income tax,
net of federal benefit 1,947 316 1,160
Change in estimate for state
deferred taxes (4,137) (1,129) -
Foreign income taxes (2,297) (975) (652)
Valuation allowance (3,526) (1,962) (2,605)
Adjustment for correction of prior
year tax provision - (2,862) -
U.S. manufacturers deduction (2,355) (1,015) -
Tax contingency changes related to
transfer pricing (3,321) - -
Other, net (2,854) (857) (2,336)
--------- --------- ---------
Income tax expense $ 54,710 $ 34,987 $ 35,942
========= ========= =========
A foreign income tax holiday is in effect for 2006 and 2007,
resulting in a $0.9 million tax benefit in 2006, or 2 cents per diluted
share. For 2008 through 2010, the foreign jurisdiction will impose a
reduced tax rate.
The Company has recorded tax contingency reserves of $6.1 million as
of December 30, 2006 and $11.9 million as of December 31, 2005 related to
transfer pricing and other miscellaneous risks. During 2006, the Company
recorded a $3.3 million state benefit net of federal effects, or 9 cents
per diluted share, to reduce the tax contingency reserves related to a
change in estimate regarding certain transfer pricing risks.
During 2006, due to a court ruling and other factors, the Company
revised estimates of the future realization of certain state income tax
credits and net operating loss (NOL) carryforwards. Prior to 2006, the
gross deferred tax asset and related valuation allowance for these credit
and NOL carryforwards were not recognized in the Consolidated Balance
Sheets. As a result of the factors mentioned above, the Company recognized
$29.0 million in gross deferred tax assets, related to state income tax
credit and NOL carryforwards during 2006. The gross deferred tax asset was
reduced by a valuation allowance of $24.9 million, for a net benefit of
$4.1 million net of federal effects, or 11 cents per diluted share. The
estimates related to the future realization of the state tax credit and
NOL 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.
F-36
Tax expense in 2006 was reduced by $2.9 million due to the release
of the remaining valuation allowance associated with the NOL carryforward
in the U.K. Tax expense in 2005 was reduced by $2.5 million due to
reductions in valuation allowance related primarily to the NOL
carryforward in the U.K.
The 2005 adjustment of $2.9 million, or 8 cents per diluted share,
to correct the prior year income tax provision is immaterial to the
results of operations and financial condition for 2005 as well as the
prior affected years.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
(In thousands)
2006 2005
Deferred tax assets:
Accounts receivable $ 2,560 $ 1,864
Inventories 8,184 7,267
Pension, OPEB, and accrued items 19,619 11,769
Other reserves 7,139 5,762
Foreign NOL carryforwards 2,589 4,212
Interest 3,560 2,664
Foreign tax credit carryforwards 4,566 -
State tax credit and NOL carryforwards 29,037 -
Other 1,992 653
---------- ----------
Total deferred tax assets 79,246 34,191
Less valuation allowance (24,900) (3,612)
---------- ----------
Deferred tax assets, net of
valuation allowance 54,346 30,579
---------- ----------
Deferred tax liabilities:
Property, plant, and equipment 66,792 70,724
Foreign withholding tax 1,658 1,460
Other 3,919 2,439
---------- ----------
Total deferred tax liabilities 72,369 74,623
---------- ----------
Net deferred tax liability $ (18,023) $ (44,044)
========== ==========
As of December 30, 2006, the Company had state income tax credit
carryforwards of $6.0 million expiring from 2008 to 2017 and $33.4 million
with unlimited lives. Also as of December 30, 2006, the Company had state
NOL carryforwards available to offset income of $51.2 million, with
various expirations ranging from 2007 to 2025; foreign tax credit
carryforwards of $4.6 million expiring from 2013 to 2015; and foreign NOL
carryforwards available to offset income of $8.6 million with unlimited
lives.
F-37
Income taxes paid were approximately $73.2 million in 2006, $34.5
million in 2005, and $5.0 million in 2004.
During 2006, the Internal Revenue Service concluded an examination
of the Company's federal income tax returns for years 2004, 2003, and 2002.
The results of the examination did not have a material effect on the
Consolidated Financial Statements. The Company is also being examined by
various state taxing authorities for tax periods from 2002 through 2005.
While the Company believes that it is adequately reserved for possible
audit adjustments, the final resolution of these examinations cannot be
determined at this time and could result in final settlements that differ
from current estimates.
Note 8 - Other Current Liabilities
Included in other current liabilities were accrued discounts and
allowances of $51.1 million at December 30, 2006 and $51.8 million at
December 31, 2005, and taxes payable of $14.8 million at December 30, 2006
and $23.6 million at December 31, 2005.
Note 9 - Employee Benefits
The Company sponsors several qualified and nonqualified pension
plans and other postretirement benefit plans for certain of its employees.
In August 2006, the Pension Protection Act of 2006 was passed. The effect
of this legislation on the Company's pension plans was not material.
On December 30, 2006, the Company adopted the recognition and
disclosure provisions of SFAS No. 158. SFAS No. 158 required the Company
to recognize the funded status of its pension and postretirement plans in
the December 30, 2006 Consolidated Balance Sheet, with a corresponding
adjustment to accumulated other comprehensive income, net of tax. The
adjustment to accumulated other comprehensive income at adoption
represents the net unrecognized actuarial gains and losses and
unrecognized prior service costs remaining from the application of SFAS No.
87, all of which were previously netted against the plans' funded status
in the Company's statement of financial position pursuant to the
provisions of SFAS No. 87. These amounts will be subsequently recognized
as net periodic benefit cost pursuant to the Company's historical
accounting policy for amortizing such amounts. Further actuarial gains
and losses that arise in subsequent periods and are not recognized as net
periodic benefit cost in the same periods will be recognized as a
component of other comprehensive income. Those amounts will be
subsequently recognized as a component of net periodic benefit cost on the
same basis as the amounts recognized in accumulated other comprehensive
income at adoption of SFAS No. 158.
F-38
The adoption of the provisions of SFAS No. 158 resulted in a
decrease in other assets of $1.2 million, an increase in pension
liabilities of $0.2 million, an increase in postretirement benefits other
than pensions of $3.3 million, an increase in deferred tax assets of $1.5
million, and a decrease to accumulated other comprehensive income of $3.2
million. The adoption of SFAS No. 158 had no effect on the Company's
Consolidated Statement of Income for the year ended December 30, 2006, or
for any prior period presented, and it will not effect the Company's
operating results in future periods. Had the Company not been required to
adopt SFAS No. 158 at December 30, 2006, it would have recognized an
additional minimum liability pursuant to the provisions of SFAS No. 87.
The effect of recognizing the additional liability before the adoption of
SFAS No. 158 is presented in the Consolidated Statement of Stockholders'
Equity for the year ended December 30, 2006.
Included in accumulated other comprehensive income at December 30,
2006 are the following amounts that have not yet been recognized in net
periodic benefit cost: unrecognized prior service costs of $1.4 million,
or $0.9 million net of tax and unrecognized actuarial net losses of $16.7
million, or $11.6 million net of tax. The unrecognized prior service cost
and unrecognized actuarial net loss included in accumulated other
comprehensive income and expected to be recognized in net periodic benefit
cost during the year ending December 29, 2007 is $0.5 million, or $0.3
million net of tax, and $0.7 million, or $0.5 million net of tax,
respectively.
F-39
The following tables provide a reconciliation of the changes in the
plans' benefit obligations and the fair value of the plans' assets over
the two-year period ending December 30, 2006, and a statement of the
plans' funded status as of December 30, 2006 and December 31, 2005:
(In thousands)
Pension Benefits Other Benefits
2006 2005 2006 2005
Change in benefit
obligation:
Obligation at
beginning of year $ 149,773 $ 144,216 $ 11,599 $ 10,800
Service cost 2,104 2,150 7 7
Interest cost 8,419 8,095 641 632
Participant contributions 549 493 - -
Plan amendments - - - 200
Actuarial loss 3,351 8,589 108 658
Benefit payments (7,191) (7,141) (923) (698)
Settlement (373) (68) - -
Foreign currency
translation adjustment 8,806 (6,561) - -
-------- -------- -------- --------
Obligation at end of year $ 165,438 $ 149,773 $ 11,432 $ 11,599
======== ======== ======== ========
Change in fair value
of plan assets:
Fair value of plan
assets at beginning
of year $ 134,294 $ 125,824 $ - $ -
Actual return on
plan assets 17,169 17,704 - -
Employer contributions 2,343 1,924 923 698
Participant contributions 549 493 - -
Benefit payments (7,191) (7,141) (923) (698)
Settlement (379) (68) - -
Foreign currency
translation adjustment 6,257 (4,442) - -
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 153,042 $ 134,294 $ - $ -
======== ======== ======== ========
Funded status:
Funded (underfunded)
status at end of year $ (12,396) $ (15,479) $ (11,432) $ (11,599)
Unrecognized prior
service cost 1,247 2,198 111 120
Unrecognized actuarial
net loss 13,426 15,756 3,231 3,302
-------- -------- -------- --------
Net amount recognized $ 2,277 $ 2,475 $ (8,090) $ (8,177)
======== ======== ======== ========
F-40
Subsequent to the adoption of SFAS No. 158, the unrecognized prior
service cost and the unrecognized actuarial net loss are recognized in
accumulated other comprehensive income, net of income tax. Additionally,
SFAS No. 158 requires that the aggregate statuses of all overfunded plans
be recognized as an asset and the aggregate statuses of all underfunded
plans be recognized as a liability in the Consolidated Balance Sheets.
The amounts recognized as a liability are classified as current or long-
term on a plan-by-plan basis. Liabilities are classified as current to
the extent the actuarial present value of benefits payable within the next
12 months exceed the fair value of plan assets, with all remaining amounts
being classified as long-term. The unrecognized service costs and
unrecognized actuarial net loss are recognized in accumulated other
comprehensive income. Subsequent to the adoption of SFAS No. 158, the net
funded status of the plans was recognized in the Consolidated Balance
Sheet as follows as of December 30, 2006:
(In thousands)
Pension Other
Benefits Benefits
Long-term asset $ 7,279 $ -
Current liability - (924)
Long-term liability (19,675) (10,508)
---------- ----------
Net funded status $ (12,396) $ (11,432)
========== ==========
The following table provides the amounts recognized in the
Consolidated Balance Sheet as of December 31, 2005 under the provisions of
SFAS No. 87 prior to the adoption of SFAS No. 158:
(In thousands)
Pension Other
Benefits Benefits
Prepaid benefit cost $ 8,555 $ -
Accrued benefit liability (21,414) (8,177)
Accumulated other
comprehensive income 15,334 -
---------- ----------
Net amount recognized $ 2,475 $ (8,177)
========== ==========
F-41
The projected benefit obligation, accumulated benefit obligation,
and fair value of plan assets for the pension plans with benefit
obligations in excess of plan assets were $78.1 million, $75.2 million,
and $58.3 million, respectively, as of December 30, 2006, and $65.7
million, $64.3 million, and $45.3 million, respectively, as of December 31,
2005. The Company sponsors one pension plan in the U.K. which comprises
45 percent of the above benefit obligation and 37 percent of the plan
assets as of December 30, 2006.
The components of net periodic benefit cost are as follows:
(In thousands)
2006 2005 2004
Pension benefits:
Service cost $ 2,104 $ 2,150 $ 1,972
Interest cost 8,419 8,095 7,972
Expected return on
plan assets (10,619) (9,711) (9,125)
Amortization of prior
service cost 373 372 373
Amortization of net loss 1,112 919 963
Effect of curtailment and settlements 704 25 -
--------- --------- ---------
Net periodic benefit cost $ 2,093 $ 1,850 $ 2,155
========= ========= =========
Other benefits:
Service cost $ 7 $ 7 $ 5
Interest cost 641 632 649
Amortization of prior
service cost 8 8 (8)
Amortization of net loss 179 130 142
--------- --------- ---------
Net periodic benefit cost $ 835 $ 777 $ 788
========= ========= =========
During 2006, the Company amended a collective bargaining agreement
which froze the accrual of future benefits related to one of its pension
plans. This resulted in a curtailment loss of $0.6 million during the
period.
Prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses
in excess of 10 percent of the greater of the benefit obligation and the
market-related value of assets are amortized over the average remaining
service period of active participants.
F-42
The weighted average assumptions used in the measurement of the
Company's benefit obligations are as follows:
Pension Benefits Other Benefits
2006 2005 2006 2005
Discount rate 5.40% 5.59% 5.75% 6.00%
Expected return
on plan assets 7.83% 7.94% N/A N/A
Rate of compensation
increases 4.00% 4.00% N/A N/A
The weighted average assumptions used in the measurement of the
Company's net periodic benefit cost are as follows:
Pension Benefits Other Benefits
2006 2005 2004 2006 2005 2004
Discount rate 5.59% 5.91% 6.08% 6.00% 6.00% 6.25%
Expected return
on plan assets 7.94% 8.06% 8.07% N/A N/A N/A
Rate of compensation
increases 4.00% 4.50% 4.25% N/A N/A N/A
Only one pension plan uses the rate of compensation increase in its
benefit formula. All other pension plans are based on length of service.
The measurement date for the majority of the plans is November 30.
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is assumed to range
from 6.6 to 8.4 percent for 2006, gradually decrease to 4.5 percent for
2011, and remain at that level thereafter. The health care cost trend
rate assumption could have a significant effect on the amounts reported.
For example, increasing the assumed health care cost trend rates by one
percentage point would increase the accumulated postretirement benefit
obligation by $0.9 million and the service and interest cost components
of net periodic postretirement benefit costs by $0.1 million for 2006.
Decreasing the assumed health care cost trend rates by one percentage
point in each year would decrease the accumulated postretirement benefit
obligation and the service and interest cost components of net periodic
postretirement benefit costs for 2006 by $0.9 million and $0.1 million,
respectively.
F-43
The weighted average asset allocation of the Company's pension fund
assets are as follows:
Asset Category Pension Plan Assets
2006 2005
Equity securities (includes equity index funds) 78% 80%
Fixed income securities 7 6
Cash and equivalents 5 3
Alternative investments 10 11
------- -------
100% 100%
======= =======
At December 30, 2006, the Company's target allocation, by asset
category, of assets of its defined benefit pension plans is: (i) equity
securities, including equity index funds - at least 60%; (ii) fixed income
securities - not more than 25%; and (iii) alternative investments - not
more than 20%.
The Company's pension plan obligations are long-term in nature and,
accordingly, the plan assets are invested for the long-term. The Company
believes that a diversified portfolio of equity securities (both actively
managed and index funds) and private equity funds have an acceptable risk-
return profile that, over the long-term, is better than fixed income
securities. Consequently, the pension plan assets are heavily weighted to
equity investments. Plan assets are monitored periodically. Based upon
results, investment managers and/or asset classes are redeployed when
considered necessary. Expected rates of return on plan assets were
determined based on historical market returns giving consideration to the
composition of each plan's portfolio. None of the plans' assets are
expected to be returned to the Company during the next fiscal year.
F-44
The plans' assets do not include investment in securities issued by
the Company. The Company expects to contribute approximately $2.5 million
to its pension plans and $0.9 million to its other postretirement benefit
plans in 2007. The Company expects future benefits to be paid from the
plans as follows:
(In thousands)
Pension Other
Benefits Benefits
2007 $ 8,049 $ 924
2008 7,824 939
2009 8,020 954
2010 7,967 966
2011 8,155 973
2012-2016 44,649 4,068
---------- ----------
Total $ 84,664 $ 8,824
========== ==========
The Company sponsors voluntary employee savings plans that qualify
under Section 401(k) of the Internal Revenue Code of 1986. Compensation
expense for the Company's matching contribution to the 401(k) plans was
$2.4 million in 2006, $2.2 million in 2005, and $2.0 million in 2004. The
Company's match is a cash contribution. Participants direct the
investment of their account balances by allocating among a range of asset
classes including mutual funds (equity, fixed income, and balanced funds),
and money market funds. The plans do not offer direct investment in
securities issued by the Company.
In October 1992, the Coal Industry Retiree Health Benefit Act of
1992 (the Act) was enacted. The Act mandates a method of providing for
postretirement benefits to UMWA current and retired employees, including
some retirees who were never employed by the Company. In October 1993,
beneficiaries were assigned to the Company and the Company began its
mandated contributions to the UMWA Combined Benefit Fund, a multiemployer
trust. Beginning in 1994, the Company was required to make contributions
for assigned beneficiaries under an additional multiemployer trust created
by the Act, the UMWA 1992 Benefit Plan. The ultimate amount of the
Company's liability under the Act will vary due to factors which include,
among other things, the validity, interpretation, and regulation of the
Act, its joint and several obligation, the number of valid beneficiaries
assigned, and the extent to which funding for this obligation will be
satisfied by transfers of excess assets from the 1950 UMWA pension plan
and transfers from the Abandoned Mine Reclamation Fund. Nonetheless, the
Company believes it has an adequate reserve for this liability, which
totaled $6.1 million in 2006 and in 2005.
F-45
The Company makes contributions to certain multiemployer defined
benefit pension plan trusts that cover union employees based on collective
bargaining agreements. Contributions by employees are not required nor
are they permitted. Pension expense under the multiemployer defined
benefit pension plans was $0.9 million for 2006, $0.7 million for 2005,
and $0.4 million for 2004.
Note 10 - Commitments and Contingencies
The Company is subject to environmental standards imposed by federal,
state, local, and foreign environmental laws and regulations. For non-
operating properties, the Company has provided and charged to income $0.6
million in 2006, $0.6 million in 2005, and $1.0 million in 2004 for
pending environmental matters. The basis for the provision is updated
information and results of ongoing remediation and monitoring programs.
Environmental reserves total $8.9 million in 2006 and $9.1 million in 2005.
These estimated future costs, which will be funded in future years as
remediation programs progress, are not discounted to their present value,
and are not reduced by potential insurance reimbursements. Management
believes that the outcome of pending environmental matters will not
materially affect the financial position or 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 certain legal claims and litigation in the future; these
gain contingencies are not recognized in the 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 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.
F-46
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 have filed a motion to alter or
amend the judgment dismissing the complaint for lack of subject matter
jurisdiction, which remains pending.
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.
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.
F-47
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. The Company and Mueller Europe have been served, but have
not yet been required to respond, in the Direct ACR Class Actions and 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 is now pending before 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 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.
F-48
As a result, a final anti-dumping duty order issued February 19,
2007, and exports of subject goods to Canada by the Company after this
date will be subject to such duties, at various rates, during the five-
year term of the order. If future exports are above normal values, however,
no anti-dumping duties will be levied.
The Company is assessing the terms of the order. 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 CITT findings. However, its ability to compete in the
Canadian market may be impaired.
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.
The Company leases certain facilities and equipment under operating
leases expiring on various dates through 2015. The lease payments under
these agreements aggregate to approximately $7.1 million in 2007, $4.9
million in 2008, $2.8 million in 2009, $2.3 million in 2010, and $1.6
million in 2011, and $1.8 million thereafter. Total lease expense
amounted to $9.4 million in 2006, $9.4 million in 2005, and $7.9 million
in 2004.
During 2004, the Company (1) entered into consulting and non-compete
agreements (the Consulting Agreements) with Harvey L. Karp, Chairman of the
Board, and William D. O'Hagan, Chief Executive Officer, and (2) amended Mr.
Karp's employment agreement with the Company. The amendment to Mr. Karp's
employment agreement eliminates the three-year rolling term of the
agreement and imposes a fixed term ending on December 31, 2007. The
Consulting Agreements provide for post-employment services to be provided
by Messrs. Karp and O'Hagan for a six-year period. During the first four
years of the Consulting Agreements, an annual fee equal to two-thirds of
each executive's Final Base Compensation (as defined in the Consulting
Agreements) will be payable. During the final two years, the annual fee is
set at one-third of each Executive's Final Base Compensation. During the
term of the Consulting Agreements, each executive agrees not to engage in
Competitive Activity (as defined in the Consulting Agreements) and will be
entitled to receive certain other benefits from the Company. The term of
Mr. O'Hagan's Consulting Agreement will commence upon the earliest of Mr.
O'Hagan's termination of employment by the Company without Cause (as
defined in his current employment agreement) upon termination of his
F-49
employment in connection with a change in control as defined in his current
employment agreement or upon his voluntary resignation from employment with
the Company for Good Reason (as defined in his current employment
agreement). The term of Mr. Karp's Consulting Agreement will commence on
the earliest of January 1, 2008 (the day following the end of his fixed
employment term); his termination of employment by the Company without
Cause (as defined in his employment agreement); or his voluntary
resignation for Good Reason (as defined in his employment agreement); or
upon termination of his employment in connection with a change in control
as defined in his current employment. Based upon the value of the non-
compete provisions of the Consulting Agreements, the Company will expense
the value of the Consulting Agreements over their term.
Note 11 - Other Income, Net
(In thousands)
2006 2005 2004
Rent and royalties $ 2,068 $ 2,111 $ 1,773
Interest income 6,073 2,306 2,385
(Loss)gain on disposal of
properties, net (2,620) 3,665 5,729
Minority interest in income
of subsidiaries (2,610) (9) (43)
Environmental expense (580) (556) (976)
Gain on sale of equity investment 1,876 - -
Equity in earnings (loss) of
unconsolidated subsidiary 964 4,480 (2,026)
--------- --------- ---------
Other income, net $ 5,171 $ 11,997 $ 6,842
========= ========= =========
Note 12 - Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (R),
"Share-Based Payment", and began recognizing compensation expense for
its stock option grants based on the fair value of the awards, classified
as a selling, general and administrative expense. 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 No. 123,
"Accounting for Stock-Based Compensation". No stock-based compensation
expense was reflected in net income prior to adopting SFAS No. 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 No. 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 No. 123, and (ii) compensation cost for all share-based payments
F-50
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123 (R). Results
from prior periods have not been restated. As a result of adopting SFAS
No. 123 (R), the Company's income from continuing operations before income
taxes and income from continuing operations decreased by $2.8 million and
$1.8 million, respectively, for the year ended December 30, 2006.
Additionally basic and diluted earnings per share decreased by $0.05.
Prior to the adoption of SFAS No. 123 (R), the Company presented all
tax benefits of deductions resulting from the exercise of stock options as
operating cash flows in the Consolidated Statements of Cash Flows, as
required under existing pronouncements. SFAS No. 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 $1.1 million tax benefit
classified as cash provided by financing activities in 2006 would have
been classified as cash provided by operations 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 No. 123 to options granted under
the Company's stock option plans. For purposes of this pro forma
disclosure, the value of the options is estimated using a Black-Scholes-
Merton option pricing model and is amortized to expense over the options'
vesting period.
(In thousands, except per share data)
2005 2004
Net income as reported $ 92,542 $ 79,416
Deduct: Total stock-based compensation
expense determined under a fair value
based method, net of related tax effects (2,360) (2,114)
--------- ---------
SFAS No. 123 pro forma net income $ 90,182 $ 77,302
========= =========
Pro forma earning per share:
Basic $ 2.46 $ 2.19
Diluted $ 2.41 $ 2.09
Earnings per share, as reported:
Basic $ 2.53 $ 2.25
Diluted $ 2.49 $ 2.15
F-51
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.
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 certain assumptions that
are judgmental and highly sensitive in the determination of compensation
expense including the expected life of the option, stock price volatility,
risk-free interest rate, dividend yield, and exercise price. Additionally
under SFAS No. 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 December 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 No. 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:
2006 2005 2004
Expected term 6.4 years 6.0 years 6.0 years
Expected price volatility 0.269 0.249 0.274
Risk-free interest rate 4.9% 4.5% 3.0%
Dividend yield 1.2% 1.3% 1.3%
Expected term - 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 term 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 term 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 term of the
options. An increase in the risk-free rate will increase compensation
expense.
F-52
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.
The Company generally issues treasury shares when options are
exercised. A summary of the stock option activity and related information
follows:
(Shares in thousands)
Weighted Average
Options Exercise Price
Outstanding at December 27, 2003 4,125 $ 10.82
Granted 479 20.77
Exercised (3,247) 5.90
Cancelled (68) 26.40
Equitable adjustment to outstanding options 493
--------
Outstanding at December 25, 2004 1,782 18.78
Granted 460 30.02
Exercised (283) 18.04
Cancelled (47) 24.45
--------
Outstanding at December 31, 2005 1,912 21.49
Granted 355 35.11
Exercised (414) 18.60
Cancelled (141) 26.96
--------
Outstanding at December 30, 2006 1,712 24.56
========
At December 30, 2006, the aggregate intrinsic value of all
outstanding options was $12.3 million with a weighted average remaining
contractual term of 6.9 years, of which 678,433 of the outstanding options
are currently exercisable with an aggregate intrinsic value of $7.6
million, a weighted average exercise price of $20.56, and a weighted
average remaining contractual term of 5.4 years. The total intrinsic
value of options exercised during 2006 was $5.7 million. The total
compensation expense at December 30, 2006 related to non-vested awards not
yet recognized was $7.2 million with an average expense recognition period
of 3.5 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 December 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.
F-53
During 2006, the Board and shareholders 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. Shares available for future employee grants were approximately
0.8 million at December 30, 2006.
Mr. Harvey L. Karp, Chairman of the Company's Board of Directors,
exercised options to purchase 2.4 million shares of Company stock during
2004. As provided in Mr. Karp's option agreement, the Company withheld
the number of shares, at fair market value, sufficient to cover the
minimum withholding taxes incurred by the exercise. These shares withheld
have been classified as acquisition of treasury stock in the Company's
Consolidated Financial Statements.
Note 13 - 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.
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 Consolidated Financial
Statements from January 1, 2006.
On August 15, 2005, the Company acquired 100 percent of the
outstanding stock of KX Company Limited (Brassware). Brassware, located in
Witton, Birmingham, England is an import distributor of plumbing and
residential heating products with annual sales of approximately $48
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
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 as this acquisition will broaden the
Company's product line in the U.K.
F-54
On December 14, 2004, the Company acquired shares in seven companies
and the inventory of another company (collectively Mueller Comercial S.A.)
for an aggregate of $42.3 million, subject to closing adjustments, including
$3.0 million for a contingent earn-out payment, which was paid during 2006.
These operations consist of pipe nipple manufacturing in Mexico and import
distribution businesses including product lines of malleable iron fittings
and other plumbing specialties. The combined sales of Mueller Comercial
S.A. are approximately $60 million annually.
On August 27, 2004, the Company acquired 100 percent of the
outstanding stock of Vemco Brasscapri Limited (Vemco). Vemco, located in
Wellington, Somerset, England, is an import distributor of plumbing
products with annual sales of approximately $26 million to plumbers'
merchants and builders' merchants throughout the U. K. Total
consideration paid at closing was approximately $14.6 million.
These acquisitions were accounted for using the purchase method of
accounting. Therefore, the results of operations of the acquired
businesses were included in the Company's Consolidated Financial
Statements from their respective acquisition dates. The purchase price
for these acquisitions, which was financed by available cash balances, has
been allocated to the assets and liabilities of the acquired businesses
based on their respective fair market values.
The total fair value of assets acquired in 2004 was $80.9 million,
consisting primarily of receivables of $20.7 million, inventories of $18.9
million, and properties of $8.4 million. The fair value of liabilities
assumed in 2004 was $22.3 million, consisting primarily of $8.3 million of
notes payable and $14.0 million of accounts payable and other current
liabilities. The excess of the purchase price over the estimated fair
value of assets acquired and liabilities assumed of $33.0 million was
allocated to goodwill of the Plumbing & Refrigeration Segment as these
acquisitions will broaden the Company's product line in the U.K. and
Mexico and should provide opportunities to leverage our manufacturing
operations. The Mueller Comercial purchase price allocation was finalized
in 2005. The impact of the final allocation was a reduction in the fair
value of the net assets acquired of $1.3 million, primarily from a
reduction in the fair value of property, plant and equipment based on an
appraisal of the long-lived assets as well as certain purchase price
adjustments refunded by the Seller. The net result of these adjustments
to the preliminary purchase price allocation was to increase goodwill
related to Mueller Comercial by approximately $4.3 million. Goodwill is
not deductible for tax purposes.
During 2002, the Company acquired an equity interest in Conbraco
for $7.3 million in cash; early in 2003, the Company acquired an additional
interest for $10.8 million. Conbraco is a manufacturer of flow control
products including ball valves, backflow preventers, and plumbing and heating
products for commercial and industrial applications. The Company's interest
totaled approximately 38 percent of Conbraco's equity at December 31, 2005.
This investment was accounted for by the equity method of accounting, and is
included in the other assets classification in the Consolidated Balance Sheets.
F-55
provision of $2.3 million was recognized in 2004 for certain federal
income tax audit exposures of Conbraco. Conbraco settled these tax
matters during 2005; consequently, the Company reversed the loss accrual
that resulted in a $2.3 million gain in 2005. In 2006 the Company sold
its interest in Conbraco for approximately $23.0 million, realizing a pre-
tax gain of $1.9 million on the sale.
Note 14 - Discontinued Operations
During 2002, the Company completed the sale of its wholly owned
subsidiary, Utah Railway Company. During 2005, the Company recognized a
gain of $5.2 million less income tax of $1.9 million upon the settlement
of a business interruption claim related to this operation.
Note 15 - Industry Segments
The Company's reportable segments are Plumbing & Refrigeration and
OEM. Prior to 2005, the Company disclosed its reportable segments as
Standard Products and Industrial Products. Additional operating segments
have been recognized following internal reorganizations in 2006 and 2005.
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 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. Outside the U.S.,
the Company's European Operations manufacture copper tube, which is sold
in Europe and the Middle East. SPD also imports and resells brass and
plastic plumbing valves, malleable iron fittings, faucets, and plumbing
specialty products. Mexican Operations consist of pipe nipple
manufacturing and import distribution businesses including product lines
of malleable iron fittings and other plumbing specialties. The European
Operations consist of copper tube manufacturing and the import
distribution of fittings, valves, and plumbing specialties primarily in
the U.K. and Ireland. 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.
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. These products are sold primarily to OEM customers.
F-56
Summarized product line, geographic, and segment information is
shown in the following tables. Geographic sales data indicates the
location from which products are shipped. Unallocated expenses include
general corporate expenses, plus certain charges or credits not included
in segment activity.
Worldwide sales to one customer in the Plumbing & Refrigeration
segment totaled $370.8 million in 2006, $264.2 million in 2005, and $170.1
million in 2004 which represented 15 percent in 2006, 15 percent in 2005
and 12 percent in 2004 of the Company's consolidated net sales. No other
customer accounted for more than 10 percent of consolidated net sales.
NET SALES BY MAJOR PRODUCT LINE:
(In thousands)
2006 2005 2004
Tube & fittings $1,428,979 $1,060,348 $ 887,132
Valves & plumbing specialties 261,844 211,765 100,307
Brass rod & forgings 499,878 288,559 222,002
OEM components, tube & assemblies 267,452 117,232 119,659
Other 52,759 52,019 49,956
--------- --------- ---------
$2,510,912 $1,729,923 $1,379,056
========= ========= =========
GEOGRAPHIC INFORMATION:
(In thousands)
2006 2005 2004
Net sales:
United States $1,963,666 $1,477,942 $1,211,178
United Kingdom 326,047 204,020 144,784
Other 221,199 47,961 23,094
--------- --------- ---------
$2,510,912 $1,729,923 $1,379,056
========= ========= =========
Long-lived assets:
United States $ 356,854 $ 392,097 $ 416,206
United Kingdom 72,978 63,221 61,463
Other 62,881 37,334 30,731
--------- --------- ---------
$ 492,713 492,652 $ 508,400
========= ========= =========
F-57
SEGMENT INFORMATION:
(In thousands)
2006 2005 2004
Net sales:
Plumbing & Refrigeration $1,716,613 $1,281,688 $1,002,086
OEM 835,339 460,301 392,645
Elimination of intersegment sales (41,040) (12,066) (15,675)
--------- --------- ---------
$2,510,912 $1,729,923 $1,379,056
========= ========= =========
Depreciation and amortization:
Plumbing & Refrigeration $ 28,722 $ 29,393 $ 28,309
OEM 11,754 10,225 11,158
General corporate 1,379 1,240 1,172
--------- --------- ---------
$ 41,855 $ 40,858 $ 40,639
========= ========= =========
Operating income:
Plumbing & Refrigeration $ 197,402 $ 125,502 $ 108,265
OEM 44,764 26,985 20,562
Unallocated expenses (23,281) (20,729) (16,337)
--------- --------- ---------
Total operating income 218,885 131,758 112,490
Interest expense (20,477) (19,550) (3,974)
Other income, net 5,171 11,997 6,842
--------- --------- ---------
Income from continuing operations
before income taxes: $ 203,579 $ 124,205 $ 115,358
========= ========= =========
Expenditures for long-lived assets:
Plumbing & Refrigeration $ 15,847 $ 20,727 $ 74,536
OEM 24,852 4,915 2,338
--------- --------- ---------
$ 40,699 $ 25,642 $ 76,874
========= ========= =========
Segment assets:
Plumbing & Refrigeration $ 760,147 $ 730,774 $ 699,001
OEM 280,692 197,697 179,926
General corporate 228,068 188,457 92,401
--------- --------- ---------
$1,268,907 $1,116,928 $ 971,328
========= ========= =========
F-58
Note 16 - Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2006
Net sales $ 551,039 $ 779,663 $ 635,998 $ 544,212
Gross profit (1) 93,970 142,625 107,052 57,829(2)
Net income 33,365 58,750 51,579 5,175
Basic earnings per share 0.91 1.59 1.39 0.14
Diluted earnings per share: 0.90 1.57 1.38 0.14
Dividends per share 0.10 0.10 0.10 0.10
2005
Net sales $ 401,663 $ 410,506 $ 434,130 $ 483,624
Gross profit (1) 67,639 64,843 73,616 93,750(3)
Income from
continuing operations 15,208 17,183 21,016 35,811(4)
Income from discontinued
operations net of tax - - 3,324 -
Net income 15,208 17,183 24,340 35,811
Basic earnings per share:
From continuing operations 0.42 0.47 0.57 0.98
From discontinued operations - - 0.09 -
Basic earnings per share: 0.42 0.47 0.66 0.98
Diluted earnings per share:
From continuing operations 0.41 0.46 0.57 0.97
From discontinued operations - - 0.09 -
Diluted earnings per share 0.41 0.46 0.66 0.97
Dividends per share 0.10 0.10 0.10 0.10
(1) Gross profit is net sales less cost of goods sold, which excludes
depreciation and amortization.
(2) Fourth quarter of 2006 includes an adjustment to write-down inventories
to the lower of cost or market of $14.2 million.
(3) Fourth quarter of 2005 includes liquidation of LIFO inventories of
$1.3 million.
(4) Fourth quarter of 2005 includes a benefit of $2.9 million to correct
prior year income tax provisions, a benefit of $1.1 million resulting
from a change in estimate on deferred state taxes, and a $1.4 million
benefit from utilization of foreign NOL's previously reserved.
F-59
Note 17 - Subsequent Event (Unaudited)
On February 27, 2007, the Company acquired 100 percent of the
outstanding stock of Extruded Metals, Inc. (Extruded) for $32.0 million in
cash. Extruded, located in Belding, Michigan, had annual net sales of
approximately $350 million in 2006.
F-60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mueller Industries, Inc.
We have audited the accompanying consolidated balance sheets of Mueller
Industries, Inc. as of December 30, 2006 and December 31, 2005, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 30, 2006.
Our audits also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mueller
Industries, Inc. at December 30, 2006 and December 31, 2005, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 30, 2006, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Mueller Industries, Inc.'s internal control over financial reporting as of
December 30, 2006, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organization of
the Treadway Commission and our report dated February 26, 2007 expressed
an unqualified opinion thereon.
/s/ Ernst & Young LLP
Memphis, Tennessee
February 26, 2007
F-61
MUELLER INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 30, 2006, December 31, 2005, and December 25, 2004
(In thousands)
Additions
-------------------------------
Balance at Charged to Balance
beginning costs and Other at end
of year expenses additions Deductions of year
------------ ------------ ----------- ----------- -----------
2006
Allowance for doubtful accounts $ 5,778 $ 1,109 $ 519 (1) $ 600 $ 6,806
Environmental reserves $ 9,073 $ 580 $ - $ 746 $ 8,907
Valuation allowance for deferred
tax assets $ 3,612 $ - $ 24,814 (2) $ 3,526 $ 24,900
2005
Allowance for doubtful accounts $ 3,925 $ 1,911 $ 165 $ 223 $ 5,778
Environmental reserves $ 9,503 $ 556 $ (215) (3) $ 771 $ 9,073
Valuation allowance for deferred
tax assets $ 12,880 $ 602 $ - $ 9,870 $ 3,612
2004
Allowance for doubtful accounts $ 4,734 $ 1,404 $ 200 $ 2,413 $ 3,925
Environmental reserves $ 9,560 $ 976 $ 659 (3) $ 1,692 $ 9,503
Valuation allowance for deferred
tax assets $ 15,485 $ 1,479 $ - $ 4,084 $ 12,880
(1) Other consists primarily of bad debt recoveries.
(2) Other includes the additions to valuation allowances during 2006 in which previously unrecorded
gross deferred tax assets and valuation allowances were recognized.
(3) Includes currency translation changes in 2005 and 2004 and insurance proceeds in 2004.
F-62
EXHIBIT INDEX
Exhibits Description
-------- -----------
3.1 Restated Certificate of Incorporation of the Registrant
dated February 8, 2007.
10.15 Employment Agreement, effective November 9, 2006, by and between
the Registrant and Gregory L. Christopher.
10.20 Mueller Industries, Inc. 2002 Stock Option Plan Amended and
Restated as of February 16, 2006.
10.22 Summary description of the Registrant's 2007 incentive plan for
certain key employees.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
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.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.