UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007 Commission file number 1-6770
MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-0790410
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8285 Tournament Drive, Suite 150
Memphis, Tennessee 38125
(Address of principal executive offices) (Zip Code)
(901) 753-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock outstanding as of
July 23, 2007, was 37,072,759.
-1-
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2007
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Condensed Consolidated Statements of Income
for the quarters and six months ended June 30, 2007
and July 1, 2006 3
b.) Condensed Consolidated Balance Sheets
as of June 30, 2007 and December 30, 2006 7
c.) Condensed Consolidated Statements of Cash Flows
for the six months June 30, 2007
and July 1, 2006 9
d.) Notes to Condensed Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 28
Part II. Other Information
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 33
Item 5. Other Information 34
Item 6. Exhibits 34
Signatures 35
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
June 30, July 1,
2007 2006
(In thousands, except per share data)
Net sales $ 772,647 $ 779,663
Cost of goods sold 661,746 637,038
---------- ----------
Gross profit 110,901 142,625
Depreciation and amortization 11,306 10,376
Selling, general, and
administrative expense 38,971 39,689
---------- ----------
Operating income 60,624 92,560
Interest expense (5,689) (5,214)
Other income (expense), net 1,925 (67)
---------- ----------
Income before income taxes 56,860 87,279
Current income tax expense (25,446) (29,584)
Deferred income tax benefit 4,984 1,055
---------- ----------
Total income tax expense (20,462) (28,529)
---------- ----------
Net income $ 36,398 $ 58,750
========== ==========
See accompanying notes to condensed consolidated financial statements.
-3-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
June 30, July 1,
2007 2006
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 37,060 36,891
Effect of dilutive stock options 204 421
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,264 37,312
---------- ----------
Basic earnings per share $ 0.98 $ 1.59
========== ==========
Diluted earnings per share $ 0.98 $ 1.57
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to condensed consolidated financial statements.
-4-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands, except per share data)
Net sales $ 1,382,429 $ 1,330,702
Cost of goods sold 1,198,324 1,094,107
---------- ----------
Gross profit 184,105 236,595
Depreciation and amortization 22,272 20,571
Selling, general, and
administrative expense 73,898 74,648
---------- ----------
Operating income 87,935 141,376
Interest expense (11,183) (10,076)
Other income (expense), net 6,878 1,946
---------- ----------
Income before income taxes 83,630 133,246
Current income tax expense (34,459) (46,077)
Deferred income tax benefit 6,140 4,946
---------- ----------
Total income tax expense (28,319) (41,131)
---------- ----------
Net income $ 55,311 $ 92,115
========== ==========
See accompanying notes to condensed consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 37,044 36,791
Effect of dilutive stock options 160 405
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,204 37,196
---------- ----------
Basic earnings per share $ 1.49 $ 2.50
========== ==========
Diluted earnings per share $ 1.49 $ 2.48
========== ==========
Dividends per share $ 0.20 $ 0.20
========== ==========
See accompanying notes to condensed consolidated financial statements.
-6-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2007 December 30, 2006
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 247,916 $ 200,471
Accounts receivable, less allowance
for doubtful accounts of $7,603 in
2007 and $6,806 in 2006 392,326 281,679
Inventories 251,544 258,647
Other current assets 41,497 35,397
---------- ----------
Total current assets 933,283 776,194
Property, plant, and equipment, net 325,822 315,064
Goodwill 156,400 155,653
Other assets 37,799 21,996
---------- ----------
$ 1,453,304 $ 1,268,907
========== ==========
See accompanying notes to condensed consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
June 30, 2007 December 30, 2006
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 48,037 $ 35,998
Accounts payable 181,136 96,095
Accrued wages and other employee costs 36,535 43,281
Other current liabilities 110,269 80,145
---------- ----------
Total current liabilities 375,977 255,519
Long-term debt 308,084 308,154
Pension liabilities 20,006 19,900
Postretirement liabilities other
than pensions 28,913 16,699
Environmental reserves 9,186 8,907
Deferred income taxes 42,398 46,408
Other noncurrent liabilities 2,015 2,206
---------- ----------
Total liabilities 786,579 657,793
---------- ----------
Minority interest in subsidiaries 22,783 22,300
Stockholders' equity:
Preferred stock - shares authorized
5,000,000; none outstanding - -
Common stock - $.01 par value; shares
authorized 100,000,000; issued
40,091,502; outstanding 37,072,759
in 2007 and 37,025,285 in 2006 401 401
Additional paid-in capital, common 258,207 256,906
Retained earnings 431,786 386,038
Accumulated other comprehensive
income 19,563 12,503
Treasury common stock, at cost (66,015) (67,034)
---------- ----------
Total stockholders' equity 643,942 588,814
---------- ----------
Commitments and contingencies - -
---------- ----------
$ 1,453,304 $ 1,268,907
========== ==========
See accompanying notes to condensed consolidated financial statements.
-8-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands)
Cash flows from operating activities
Net income $ 55,311 $ 92,115
Reconciliation of net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 22,465 20,719
Deferred income taxes (6,140) (4,946)
(Gain) loss on disposal
of properties (3,137) 1,905
Stock-based compensation expense 1,273 1,308
Income tax benefit from exercise of
stock options (124) (1,042)
Minority interest in subsidiaries,
net of dividend paid (18) 1,805
Gain on sale of equity investment - (1,876)
Equity in earnings of
unconsolidated subsidiary - (964)
Gain on early retirement of debt - (97)
Changes in assets and liabilities,
net of businesses acquired:
Receivables (78,521) (161,990)
Inventories 35,467 (51,127)
Other assets (10,948) (4,642)
Current liabilities 78,376 93,142
Other liabilities 773 4,439
Other, net 2,144 (3,657)
---------- ----------
Net cash provided by (used in)
operating activities 96,921 (14,908)
---------- ----------
Cash flows from investing activities
Capital expenditures (15,638) (20,918)
Acquisition of businesses, net of
cash received (31,970) 3,632
Proceeds from sales of
properties and equity investment 3,032 23,218
---------- ----------
Net cash (used in) provided by
investing activities (44,576) 5,932
---------- ----------
See accompanying notes to condensed consolidated financial statements.
-9-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands)
Cash flows from financing activities
Proceeds from issuance of
long-term debt $ 19,054 $ 22,425
Repayments of long-term debt (18,116) (3,413)
Dividends paid (7,410) (7,373)
Issuance of shares under incentive
stock option plans from treasury 977 5,823
Income tax benefit from exercise
of stock options 124 1,042
Acquisition of treasury stock (54) (396)
---------- ----------
Net cash (used in) provided by
financing activities (5,425) 18,108
---------- ----------
Effect of exchange rate changes on cash 525 70
---------- ----------
Increase in cash and cash equivalents 47,445 9,202
Cash and cash equivalents at the
beginning of the period 200,471 129,685
---------- ----------
Cash and cash equivalents at the
end of the period $ 247,916 $ 138,887
========== ==========
See accompanying notes to condensed consolidated financial statements.
-10-
MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted.
Results of operations for the interim periods presented are not necessarily
indicative of results which may be expected for any other interim period or
for the year as a whole. This Quarterly Report on Form 10-Q should be read
in conjunction with the Company's Annual Report on Form 10-K, including the
annual financial statements incorporated therein.
The accompanying unaudited interim financial statements include all
normal recurring adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods
presented.
Note 1 - Earnings per Common Share
Basic per share amounts have been computed based on the average number
of common shares outstanding. Diluted per share amounts reflect the increase
in average common shares outstanding that would result from the assumed
exercise of outstanding stock options, computed using the treasury stock
method.
Note 2 - Commitments and Contingencies
The Company is involved in certain litigation as a result of claims
that arose in the ordinary course of business, which management believes
will not have a material adverse effect on the Company's financial position
or results of operations. Additionally, the Company may realize the benefit
of certain legal claims and litigation in the future; these gain
contingencies are not recognized in the Condensed Consolidated Financial
Statements.
On June 12, 2003, two of the Company's subsidiaries, Mueller Copper
Tube Products Inc. and Mueller Copper Tube Company Inc., brought a lawsuit
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 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. In July 2007, the parties finalized a settlement
agreement terminating the lawsuit. The Company will recognize a monetary
settlement of approximately $8.9 million pursuant to the agreement in the
third quarter of 2007.
-11-
Guarantees, in the form of letters of credit, are issued by the Company
generally to guarantee the payment of insurance deductibles, retiree health
benefits, and certain operating costs of a foreign subsidiary. The terms of
the Company's guarantees are generally one year but are renewable annually
as required. The maximum potential amount of future payments the Company
could have been required to make under its guarantees at June 30, 2007 was
$10.3 million.
Note 3 - Inventories
June 30, 2007 December 30, 2006
(In thousands)
Raw materials and supplies $ 22,575 $ 48,265
Work-in-process 50,718 40,209
Finished goods 183,618 188,457
Valuation reserves (5,367) (18,284)
---------- ----------
Inventories $ 251,544 $ 258,647
========== ==========
The Company has deferred recognizing potential gains resulting from
liquidation of LIFO inventories during the first six months of 2007. The
Company expects to replenish these inventories by the end of 2007 and, as
such, has not recognized the effects of liquidating LIFO layers.
Inventories valued using the LIFO method totaled $19.3 million at
June 30, 2007, assuming recognition of liquidation of LIFO layers, and
$32.6 million at December 30, 2006. At June 30, 2007 and December 30, 2006,
the approximate FIFO cost of such inventories was $104.3 million and $143.1
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 resulted from the open market
price of copper falling below the inventories' net book value.
Note 4 - Industry Segments
The Company's reportable segments are Plumbing & Refrigeration and OEM.
For disclosure purposes, as permitted under Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information," certain operating segments are aggregated into
reportable segments. The Plumbing & Refrigeration segment is composed of
Standard Products (SPD), European Operations, and Mexican Operations. The
OEM segment is composed of Industrial Products (IPD) and Engineered Products
(EPD). These segments are classified primarily by the markets for their
products. Performance of segments is generally evaluated by their operating
income.
-12-
SPD manufactures copper tube and fittings, plastic fittings, and line
sets. These products are manufactured in the U.S. SPD also imports and
resells in North America brass and plastic plumbing valves, malleable iron
fittings, faucets, and plumbing specialty products. European Operations
consist of copper tube manufacturing, with such products being sold in Europe
and the Middle East, and import distribution of fittings, valves, and
plumbing specialties primarily in the U.K. and Ireland. Mexican Operations
consist of pipe nipple manufacturing and import distribution businesses
including product lines of malleable iron fittings and other plumbing
specialties. The Plumbing & Refrigeration segment's products are sold
primarily to plumbing, refrigeration, and air-conditioning wholesalers,
hardware wholesalers and co-ops, and building product retailers.
IPD manufactures brass rod, impact extrusions, and forgings as well as
a variety of end products including plumbing brass; automotive components;
valves and fittings; and specialty copper, copper-alloy, and aluminum
tubing. EPD manufactures and fabricates valves and assemblies for the
refrigeration, air-conditioning, gas appliance, and barbecue grill markets.
The OEM segment sells its products primarily to original equipment
manufacturers, many of which are in the HVAC, plumbing, and refrigeration
markets. Included in the OEM segment are the results of operations, from
its acquisition date of February 27, 2007, and assets of Extruded Metals,
Inc.
Summarized segment information is as follows:
For the Quarter Ended
June 30, July 1,
2007 2006
(In thousands)
Net sales:
Plumbing & Refrigeration $ 455,486 $ 551,158
OEM 322,201 242,128
Elimination of intersegment sales (5,040) (13,623)
---------- ----------
$ 772,647 $ 779,663
========== ==========
Operating income:
Plumbing & Refrigeration $ 51,746 $ 78,328
OEM 17,999 21,511
Unallocated expenses (9,121) (7,279)
---------- ----------
Total operating income 60,624 92,560
Interest expense (5,689) (5,214)
Other income (expense), net 1,925 (67)
---------- ----------
Income before income taxes $ 56,860 $ 87,279
========== ==========
-13-
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands)
Net sales:
Plumbing & Refrigeration $ 825,482 $ 938,099
OEM 565,931 410,100
Elimination of intersegment sales (8,984) (17,497)
---------- ----------
$ 1,382,429 $ 1,330,702
========== ==========
Operating income:
Plumbing & Refrigeration $ 78,600 $ 122,521
OEM 23,493 32,464
Unallocated expenses (14,158) (13,609)
---------- ----------
Total operating income 87,935 141,376
Interest expense (11,183) (10,076)
Other income (expense), net 6,878 1,946
---------- ----------
Income before income taxes $ 83,630 $ 133,246
========== ==========
June 30, 2007 December 30, 2006
(In thousands)
Segment assets:
Plumbing & Refrigeration $ 764,928 $ 760,147
OEM 398,378 280,692
General corporate 289,998 228,068
---------- ----------
$ 1,453,304 $ 1,268,907
========== ==========
-14-
Note 5 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
June 30, July 1,
2007 2006
(In thousands)
Net income $ 36,398 $ 58,750
Other comprehensive income (loss),
net of tax
Foreign currency translation 5,084 5,645
Minimum pension liability - 4,315
Amortization of prior service
cost included in pension expense 101 -
Amortization of actuarial gains
and losses included in pension
expense 110 -
Change in the fair value of
derivatives (146) (53)
---------- ----------
Other comprehensive income 5,149 9,907
---------- ----------
Comprehensive income $ 41,547 $ 68,657
========== ==========
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands)
Net income $ 55,311 $ 92,115
Other comprehensive income (loss),
net of tax
Foreign currency translation 6,477 5,901
Minimum pension liability - 4,315
Amortization of prior service
cost included in pension expense 101 -
Amortization of actuarial gains
and losses included in pension
expense 110 -
Change in the fair value of
derivatives 372 103
---------- ----------
Other comprehensive income 7,060 10,319
---------- ----------
Comprehensive income $ 62,371 $ 102,434
========== ==========
-15-
The change in cumulative foreign currency translation adjustment
primarily relates to the Company's investment in its foreign subsidiaries and
fluctuations in exchange rates between their local currencies and the U.S.
dollar, plus the tax effect of certain intercompany transactions. During the
first six months of 2007, the value of the British pound sterling, the Chinese
renmimbi, and the Mexican peso increased 2.5 percent, 2.6 percent, and 1.0
percent, respectively, compared to the U.S. dollar.
Note 6 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. During
the first quarter of 2007, the Company assumed certain pension and
postretirement obligations totaling approximately $25.8 million and $11.6
million, respectively, and pension trust assets of $31.9 million in the
acquisition of Extruded Metals, Inc. Net periodic pension benefit related
to the pension plan is expected to be $0.7 million annually and net periodic
benefit cost related to the postretirement plan is expected to be $0.9
million annually.
The net periodic benefit cost is based on estimated values provided by
independent actuaries. The components of net periodic benefit cost are as
follows:
For the Quarter Ended
June 30, July 1,
2007 2006
(In thousands)
Pension benefits:
Service cost $ 473 $ 422
Interest cost 2,025 1,861
Expected return on plan assets (3,000) (2,241)
Amortization of prior service cost 62 93
Amortization of net loss 206 106
---------- ----------
Net periodic benefit (income) cost $ (234) $ 241
========== ==========
Other benefits:
Service cost $ 1,057 $ 2
Interest cost 177 160
Amortization of prior service cost 2 2
Amortization of net loss 46 32
---------- ----------
Net periodic benefit cost $ 1,282 $ 196
========== ==========
-16-
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands)
Pension benefits:
Service cost $ 1,012 $ 949
Interest cost 4,156 3,884
Expected return on plan assets (5,796) (4,849)
Amortization of prior service cost 155 186
Amortization of net loss 439 418
---------- ----------
Net periodic benefit (income) cost $ (34) $ 588
========== ==========
Other benefits:
Service cost $ 1,133 $ 4
Interest cost 335 318
Amortization of prior service cost 4 4
Amortization of net loss 92 65
---------- ----------
Net periodic benefit cost $ 1,564 $ 391
========== ==========
The Company anticipates contributions to its pension plans for 2007 to
be approximately $2.5 million. During the first six months of 2007,
approximately $1.2 million of contributions have been made to certain pension
plans.
Note 7 - Acquisitions
On February 27, 2007, the Company acquired 100 percent of the
outstanding stock of Extruded Metals, Inc. (Extruded) for $32.6 million in
cash, including transaction costs of $0.6 million. Extruded, located in
Belding, Michigan, manufactures brass rod products, and during 2006 had
annual sales of approximately $350 million. The acquisition of Extruded will
complement the Company's existing brass rod product line. The total
estimated fair values of the assets acquired totaled $78.8 million,
consisting primarily of receivables of $29.5 million, inventories of $26.8
million, property, plant, and equipment of $15.3 million, and prepaid pension
asset of $6.1 million. The total estimated fair values of liabilities
assumed totaled $46.2 million, consisting primarily of a working capital debt
facility of $10.0 million, accounts payable and accrued expenses of $24.0
million, and postretirement obligations of $11.6 million. The debt assumed
was extinguished by the Company immediately following the acquisition. The
purchase price allocation of Extruded is considered preliminary. The Company
expects to finalize the purchase price accounting estimates during 2007 and,
as a result, this purchase price allocation is subject to change.
-17-
The results of operations for Extruded are reported in the Company's OEM
segment and have been included in the accompanying Condensed Consolidated
Financial Statements from the acquisition date. The following table presents
condensed pro forma consolidated results of operations as if the Extruded
acquisition had occurred at the beginning of the periods presented. This
information combines the historical results of operations of the Company and
Extruded after the effects of estimated preliminary purchase accounting
adjustments. Actual adjustments may differ from those reflected below. The
pro forma information does not purport to be indicative of the results that
would have been obtained if the operations had actually been combined during
the periods presented and is not necessarily indicative of operating results
to be expected in future periods.
For the Quarter Ended
June 30, July 1,
2007 2006
(In thousands, except per share data)
Net sales $ 772,647 $ 874,432
Net income 36,398 65,228
Pro forma earnings per share:
Basic earning per share $ 0.98 $ 1.77
Diluted earning per share $ 0.98 $ 1.75
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands, except per share data)
Net sales $ 1,439,857 $ 1,506,423
Net income 55,242 99,175
Pro forma earnings per share:
Basic earning per share $ 1.49 $ 2.70
Diluted earning per share $ 1.48 $ 2.67
In December 2005, two subsidiaries of the Company received a business
license from a Chinese industry and commerce authority, establishing a joint
venture with Jiangsu Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang
Industries Ltd. The joint venture, in which the Company holds a 50.5 percent
interest, produces inner groove and smooth tube in level-wound coils, pancake
coils, and straight lengths, primarily to serve the Chinese domestic original
equipment manufactures' air-conditioning market as well as to complement the
Company's U.S. product line. The joint venture is located primarily in
Jintan City, Jiangsu Province, China. The joint venture entity is named
Jiangsu Mueller-Xingrong Copper Industries Limited (Mueller-Xingrong).
During the first quarter of 2006, the Company contributed an additional $12.4
million, which completed its initial planned cash investment. Non-cash
contributions from the other joint venture parties included long-lived assets
of approximately $8.5 million during the first quarter of 2006. The results
of operations of this joint venture are reported in the OEM segment and are
included in the Company's Condensed Consolidated Financial Statements from
January 1, 2006.
-18-
Note 8 - Income Taxes
FIN 48 Adoption and 2007 Activity:
At the beginning of fiscal 2007, the Company adopted the provisions of
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN
48). As a result of the adoption, the Company recorded an adjustment of
approximately $2.2 million to reduce the opening balance of retained earnings.
Additionally, as a result of the adoption of FIN 48, $3.5 million of federal
income tax benefits associated with state tax uncertainties, which had been
used to reduce the tax contingency liability in prior periods, were
reclassified to deferred income taxes on the Company's Condensed Consolidated
Balance Sheet. At adoption, the Company's unrecognized tax benefits totaled
$25.6 million. Cumulative potential interest and penalties accrued related
to unrecognized tax benefits at the date of adoption totaled $3.2 million.
The Company includes interest and penalties related to income tax matters as
a component of income tax expense. All unrecognized tax benefits at adoption
would affect the effective tax rate, if recognized.
During the six months ended June 30, 2007, total unrecognized tax
benefits increased to $31.6 million. The increase is primarily the result of
$1.2 million of state income tax credit carryforwards that were derecognized
($0.8 million net of federal benefit) as a result of audit activity during
the period, and $4.4 million related to additional uncertainties identified
subsequent to the adoption date. Cumulative potential interest and penalties
accrued related to unrecognized tax benefits at June 30, 2007 totaled $4.6
million. At June 30, 2007, approximately $27.2 million of unrecognized tax
benefits would affect the effective tax rate, if recognized.
The Company files numerous consolidated and separate income tax returns
in the U.S. Federal jurisdiction and in many state, local, and foreign
jurisdictions. The Company is no longer subject to U.S. Federal income tax
examinations for years before 2003 and with few exceptions is no longer
subject to state, local, or foreign income tax examinations by tax
authorities for years before 2000. The Internal Revenue Service is currently
examining Extruded's 2005 U.S. Federal income tax return. Additionally, the
Mississippi State Tax Commission and the California Franchise Tax Board are
currently examining state income tax returns for certain of the Company's
subsidiaries for years 2002 through 2005. The results of these examinations
are not expected to have a material impact on the Company's financial
position or results of operations.
Discussion of Effective Tax Rate:
The Company's effective tax rate for the second quarter of 2007 was 36.0
percent compared with 32.7 percent for the same period last year. The
difference between the effective tax rate and what would be computed using
the U.S. Federal statutory tax rate for the second quarter of 2007 is
primarily related to the provision for state taxes of $1.6 million, net of
federal benefit, and additional expense of $1.1 million, net of federal
benefit, resulting from unrecognized tax benefits. These items were
partially offset by the recognition of a benefit from the U.S. manufacturer's
deduction of $1.0 million and the recognition of a benefit of a foreign tax
holiday of approximately $0.7 million (without consideration of minority
interest).
-19-
Income tax expense for the six months ended June 30, 2007 includes a
benefit of $8.1 million, or $0.22 per diluted share, for a reduction in the
valuation allowance for state income tax credit carryforwards. During the
first quarter, the Company changed its estimates regarding the future
realization of these credit carryforwards as a result of tax plans initiated
in the period which management determined were feasible and would be
implemented. The estimates related to the future realization of these credit
carryforwards are highly subjective and could be affected by changes in
business conditions and the feasibility of tax planning strategies. Changes
in any of these factors could have a material impact on future income tax
expense. Also included in income tax expense are adjustments of $2.2 million,
or $0.06 per diluted share, during the first quarter to correct the prior
year income tax provision for deferred tax liabilities on U.S. pension plans,
and $2.6 million, or $0.07 per diluted share, for a change in estimate during
the first quarter which reduced deferred tax assets related to the
determination that a certain tax plan was no longer economically beneficial
to the Company and thus would not be executed. The effect of the correction
is not material to the current period or the prior period presented.
The Company's effective tax rate for the first six months of 2007 was
33.9 percent compared with 30.9 percent for the same period last year. The
net effect of the adjustments described above was a benefit of $3.2 million,
or a reduction in the Company's effective tax rate of 3.8 percent for the
period. Other factors that explain the difference between the effective tax
rate and what would be computed using the U.S. Federal statutory tax rate for
the first six months of 2007 were (i) the provision for state taxes
(excluding the effects of the change in estimate related to the state income
tax credit carryforwards) of $2.5 million, net of federal benefit, (ii) a
provision for repatriation of certain foreign earnings of $0.4 million, and
(iii) additional expense of $1.8 million, net of federal benefit, resulting
from unrecognized tax benefits. These items were partially offset by the
recognition of a benefit from the U.S. manufacturer's deduction of $1.5
million and the recognition of a benefit of a foreign tax holiday
of approximately $1.1 million (without consideration of minority interest).
-20-
Note 9 - Other Income (Expense), Net
For the Quarter Ended
June 30, July 1,
2007 2006
(In thousands)
Interest income $ 2,660 $ 1,003
Gain on sale of equity investment - 1,876
Equity in earning of unconsolidated
subsidiary - -
Gain on early retirement of debt - 97
Environmental expense (257) (140)
Minority interest in income of
subsidiaries (944) (1,412)
Gain (loss) on disposal of
properties, net 5 (2,026)
Rent, royalties, and other, net 461 535
---------- ----------
$ 1,925 $ (67)
========== ==========
For the Six Months Ended
June 30, July 1,
2007 2006
(In thousands)
Interest income $ 4,932 $ 1,963
Gain on sale of equity investment - 1,876
Equity in earning of unconsolidated
subsidiary - 964
Gain on early retirement of debt - 97
Environmental expense (368) (265)
Minority interest in income of
subsidiaries (1,346) (1,805)
Gain (loss) on disposal of
properties, net 3,137 (1,905)
Rent, royalties, and other, net 523 1,021
---------- ----------
$ 6,878 $ 1,946
========== ==========
-21-
Note 10 - Recently Issued Accounting Standards
The FASB has issued SFAS No. 157, "Fair Value Measurements," which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosure
about fair value measurements. The Company is required to adopt the
provisions of this statement in the first quarter of fiscal 2008.
Management is reviewing the potential effects of this statement; however, it
does not expect the adoption of SFAS No. 157 to have a material impact on
the Company's Condensed Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities." SFAS No. 159 permits
entities to choose to measure eligible items at fair value at specified
election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the effect that
adoption of this statement will have on the Company's Condensed Consolidated
Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Overview
The Company is a leading manufacturer of copper, brass, plastic, and
aluminum products. The range of these products is broad: copper tube and
fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and
valves; refrigeration valves and fittings; and fabricated tubular products.
The Company also resells imported brass and plastic plumbing valves,
malleable iron fittings, steel nipples, faucets and plumbing specialty
products. The Company's operations are located throughout the United States,
and in Canada, Mexico, Great Britain, and China.
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the OEM segment. For disclosure
purposes, as permitted under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," certain operating segments are
aggregated into reportable segments. The Plumbing & Refrigeration segment
is composed of the Standard Products Division (SPD), European Operations,
and Mexican Operations. The OEM segment is composed of the Industrial
Products Division (IPD) and Engineered Products Division (EPD). These
reportable segments are described in more detail below. SPD manufactures
and sells copper tube, copper and plastic fittings, and valves in North
America and sources products for import distribution in North America.
European Operations manufactures copper tube in Europe, which is sold in
Europe and the Middle East; activities also include import distribution in
the U.K. and Ireland. Mexican Operations include pipe nipple manufacturing
and import distribution businesses including product lines of malleable iron
fittings and other plumbing specialties. The Plumbing & Refrigeration
segment sells products to wholesalers in the HVAC (heating, ventilation, and
-22-
air-conditioning), plumbing, and refrigeration markets, to distributors to
the manufactured housing and recreational vehicle industries, and to
building material retailers. The OEM segment manufactures and sells brass
and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum
and copper impact extrusions; refrigeration valves and fittings; fabricated
tubular products; and gas valves and assemblies. The OEM segment sells its
products primarily to original equipment manufacturers, many of which are in
the HVAC, plumbing, and refrigeration markets.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration, and plumbing
markets because the principal end use of a significant portion of the
Company's products is in the construction of single and multi-family housing
and commercial buildings. Repairs and remodeling projects are also
important factors affecting the underlying demand for these products.
Profitability of certain of the Company's product lines depends upon
the "spreads" between the cost of raw material and the selling prices of its
completed products. The open market prices for copper cathode and scrap,
for example, influence the selling price of copper tubing, a principal
product manufactured by the Company. The Company attempts to minimize the
effects on profitability from fluctuations in material costs by passing
through these costs to its customers. The Company's earnings and cash flow
are dependent upon these spreads that fluctuate based upon market conditions.
Earnings and profitability are also subject to market trends such as
substitute products and imports. Plastic plumbing systems are the primary
substitute product; these products represent an increasing share of
consumption. Imports of copper tubing from Mexico have increased in recent
years, although U.S. consumption is still predominantly supplied by U.S.
manufacturers.
Results of Operations
During the second quarter of 2007, the Company's net sales were $772.6
million, which compares with net sales of $779.7 million over the same
period of 2006. Net sales were $1.38 billion in the first half of 2007
compared with $1.33 billion in the same period of 2006. The change in net
sales for the quarter and six-month period was primarily attributable to
reduced volumes in the Company's core product lines, offset by contributions
from acquired businesses. The average price of copper was approximately 9
percent higher in the first half of 2007 compared with the same period of
2006. Extruded Metals, Inc. (Extruded), which the Company acquired in
February 2007, contributed $97.5 million of net sales in the second quarter
and $129.5 million of net sales in the first half of 2007.
Cost of goods sold increased from $637.0 million in the second quarter
of 2006 to $661.7 million in the same period of 2007. Cost of goods sold for
the six months ended June 30, 2007 was $1.20 billion compared with $1.09
billion for the first six months of 2006. The current year increase was
attributable to higher material costs and acquired businesses, partially
offset by volume declines and lower conversion costs. Gross profit decreased
to $110.9 million from $142.6 million in the second quarter and decreased to
$184.1 million from $236.6 million for the six-month period due primarily to
-23-
lower margins on copper tube and brass rod. During the first six months of
2007, inventory quantities valued using the LIFO method declined. The
Company expects to replenish these LIFO inventories by the end of 2007 and as
such, has not recognized the effect of liquidating LIFO layers. Inventories
valued using the LIFO method totaled $19.3 million at June 30, 2007, assuming
recognition of liquidation of LIFO layers, and $32.6 million at
December 30, 2006. At June 30, 2007 and December 30, 2006, the approximate
FIFO cost of such inventories was $104.3 million and $143.1 million,
respectively.
Selling, general, and administrative expense was $39.0 million for the
second quarter of 2007 compared with $39.7 million for the same period of
2006. Year-to-date selling, general, and administrative expense was $73.9
million for 2007 compared with $74.6 million for the same period of 2006.
The decrease for the quarter and six months was primarily due to reductions
in incentive compensation partially offset by expenses of Extruded since its
acquisition date.
For the second quarter of 2007, operating income at the Plumbing &
Refrigeration segment was $51.7 million, which compares with $78.3 million
in the same period of 2006. Operating income for the first six months at
the Plumbing & Refrigeration segment was $78.6 million, which compares with
$122.5 million in the same period of 2006. The second quarter and six month
decreases were primarily attributable to reduced volumes.
Operating income at the OEM segment was $18.0 million in the second
quarter of 2007 compared with $21.5 million in the second quarter of 2006.
Operating income for the first six months at the OEM segment was $23.5
million, which compares with $32.5 million in the same period of 2006.
Reduced operating income in the second quarter and first half of 2007 was
due primarily to reduced volumes in the brass rod business partially offset
by contributions from Extruded.
Interest expense for the second quarter of 2007 totaled $5.7 million,
compared with $5.2 million for the same period of 2006. For the first half of
2007, interest expense was $11.2 million compared with $10.1 million for
the same period of 2006. The increase in interest expense for the second
quarter and first half of 2007 is attributable to increased borrowings at
Mueller-Xingrong to fund operations.
Other income (expense), net was $1.9 million for the second quarter of
2007 compared with $(0.1) million for the same period of 2006. The current
year increase was due to increased interest income on higher invested cash
balances and the reduction of the loss on property disposals. Year-to-date,
other income (expense), net was $6.9 million in 2007 compared with $1.9
million for the same period of 2006. The current year increase is due
primarily to the recognition of a $3.1 million gain in the first quarter of
2007 from the sale of non-operating royalty producing properties plus
increased interest income on higher invested cash balances. In April 2006,
the Company sold its approximately 38 percent interest in Conbraco
Industries, Inc., which had a net book value of approximately $21.1 million.
This transaction resulted in a pre-tax gain of approximately $1.9 million.
Aggregate cash proceeds from the sale were approximately $23.0 million.
-24-
The Company's effective tax rate for the second quarter of 2007 was
36.0 percent compared with 32.7 percent for the same period last year. The
difference between the effective tax rate and what would be computed using
the U.S. Federal statutory tax rate for the second quarter of 2007 is
primarily related to the provision for state taxes of $1.6 million, net of
federal benefit, and additional expense of $1.1 million, net of federal
benefit, resulting from unrecognized tax benefits. These items were
partially offset by the recognition of a benefit from the U.S.
manufacturer's deduction of $1.0 million and the recognition of a benefit of
a foreign tax holiday of approximately $0.7 million (without consideration
of minority interest).
Income tax expense for the six months ended June 30, 2007 includes a
benefit of $8.1 million, or $0.22 per diluted share, for a reduction in the
valuation allowance for state income tax credit carryforwards. During the
first quarter, the Company changed its estimates regarding the future
realization of these credit carryforwards as a result of tax plans initiated
in the period which management determined were feasible and would be
implemented. The estimates related to the future realization of these
credit carryforwards are highly subjective and could be affected by changes
in business conditions and the feasibility of tax planning strategies.
Changes in any of these factors could have a material impact on future
income tax expense. Also included in income tax expense are adjustments of
$2.2 million, or $0.06 per diluted share, during the first quarter to
correct the prior year income tax provision for deferred tax liabilities on
U.S. pension plans, and $2.6 million, or $0.07 per diluted share, for a change
in estimate during the first quarter which reduced deferred tax
assets related to the determination that a certain tax plan was no longer
economically beneficial to the Company and thus would not be executed.
The Company's effective tax rate for the first six months of 2007 was
33.9 percent compared with 30.9 percent for the same period last year. The
net effect of the adjustments described above was a benefit of $3.2 million,
or a reduction in the Company's effective tax rate of 3.8 percent for the
period. Other factors that explain the difference between the effective tax
rate and what would be computed using the U.S. Federal statutory tax rate
for the first six months of 2007 were (i) the provision for state taxes
(excluding the effects of the change in estimate related to the state income
tax credit carryforwards) of $2.5 million, net of federal benefit, (ii) a
provision for repatriation of certain foreign earnings of $0.4 million, and
(iii) additional expense of $1.8 million, net of federal benefit, resulting
from unrecognized tax benefits. These items were partially offset by the
recognition of a benefit from the U.S. manufacturer's deduction of $1.5
million and the recognition of a benefit of a foreign tax holiday of
approximately $1.1 million (without consideration of minority interest).
Liquidity and Capital Resources
Cash provided by operating activities during the first half of 2007
totaled $96.9 million, which is primarily attributable to net income,
depreciation and amortization, decreased inventories, and increased current
liabilities, partially offset by increased receivables and other assets.
Fluctuations in the cost of copper and other raw materials affect the
Company's liquidity. Changes in material costs directly impact components
of working capital, primarily inventories and accounts receivable. During
-25-
the first half of 2007, the average COMEX copper price was approximately
$3.08 per pound, which represents a 9 percent increase over the average
price during the first half of 2006. This rise in the price of cathode has
also resulted in sharp increases in the open market price for copper scrap
and, to a lesser extent, the price of brass scrap.
During the first half of 2007, cash used in investing activities was
$44.6 million, consisting of capital expenditures totaling $15.6 million,
plus the acquisition of Extruded for $32.0 million, partially offset by
proceeds from the sale of properties of $3.0 million. Cash used in
financing activities totaled $5.4 million for the first half of 2007
consisting primarily of issuance of debt of $19.1 million by the Company's
Chinese joint venture, partially offset by repayment of long-term debt of $18.1
million and payment of dividends of $7.4 million.
The Company has a $200 million unsecured line-of-credit (Credit
Facility) which expires in December 2011. At June 30, 2007, the Company had
no borrowings against the Credit Facility. Approximately $9.8 million in
letters of credit were backed by the Credit Facility at the end of the
second quarter of 2007. As of June 30, 2007, the Company's total debt was
$356.1 million or 36 percent of its total capitalization.
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of tangible net worth
and the satisfaction of certain minimum financial ratios. As of June 30,
2007, the Company was in compliance with all of its debt covenants.
The Company declared and paid a regular quarterly cash dividend of ten
cents per common share in the first and second quarters of 2007. Payment of
dividends in the future is dependent upon the Company's financial condition,
cash flows, capital requirements, earnings, and other factors. On May 1,
2007, the Company paid approximately $8.9 million in interest on its 6%
Subordinated Debentures.
Management believes that cash provided by operations and currently
available cash of $247.9 million will be adequate to meet the Company's
normal future capital expenditures and operational needs. The Company's
current ratio was 2.5 to 1 at June 30, 2007.
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 June 30, 2007, the Company has
repurchased approximately 2.4 million shares under this authorization.
There have been no significant changes in the Company's contractual
cash obligations reported at December 30, 2006.
-26-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in raw material and
energy costs, interest rates, and foreign currency exchange rates. To
reduce such risks, the Company may periodically use financial instruments.
All hedging transactions are authorized and executed pursuant to policies
and procedures. Further, the Company does not buy or sell financial
instruments for trading purposes.
Cost and Availability of Raw Materials and Energy
Copper and brass represent the largest component of the Company's
variable costs of production. The cost of these materials is subject to
global market fluctuations caused by factors beyond the Company's control.
Significant increases in the cost of metal, to the extent not reflected in
prices for the Company's finished products, or the lack of availability
could materially and adversely affect the Company's business, results of
operations and financial condition.
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
June 30, 2007, the Company held open forward contracts to purchase
approximately $1.4 million of copper over the next four months related to
fixed-price sales orders.
Futures contracts may also be used to manage price risk associated with
natural gas purchases. The effective portion of gains and losses with
respect to these positions are deferred in stockholders' equity as a
component of comprehensive income and reflected in earnings upon consumption
of natural gas. Periodic value fluctuations of the contracts generally
offset the value fluctuations of the underlying natural gas prices. At June
30, 2007, the Company held no open forward contracts to purchase natural gas.
Interest Rates
At June 30, 2007, the Company had variable-rate debt outstanding of
$48.1 million, the majority of which related to the debt issued by Mueller-
Xingrong. At these borrowing levels, a hypothetical 10 percent increase in
interest rates would have had an insignificant unfavorable impact on the
Company's pretax earnings and cash flows. The primary interest rate
exposure on floating-rate debt is based on LIBOR and on the base-lending
rate published by the People's Bank of China.
-27-
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 June 30, 2007, the Company held open forward contracts
to purchase approximately $4.4 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.
Cautionary Statement Regarding Forward Looking Information
Statements in this Quarterly Report on Form 10-Q that are not strictly
historical may be "forward-looking" statements, which involve risks and
uncertainties. These include economic and currency conditions, continued
availability of raw materials and energy, market demand, pricing,
competitive and technological factors, and the availability of financing,
among others, as set forth in the Company's filings with the Securities and
Exchange Commission. The words "outlook," "estimate," "project," "intend,"
"expect," "believe," "target," and similar expressions are intended to
identify forward-looking statements. The reader should not place undue
reliance on forward-looking statements, which speak only as of the date of
this report. The Company has no obligation to publicly update or revise any
forward-looking statements to reflect events after the date of this report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure information required to be disclosed in Company reports filed under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in Company reports filed
under the Exchange Act is accumulated and communicated to management,
including the Company's Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
-28-
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures pursuant
to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by
this report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2007.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending June 30, 2007, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
General
The Company is involved in certain litigation as a result of claims that
arose in the ordinary course of business, which management believes will not
have a material adverse effect on the Company's financial position or results
of operations. Additionally, the Company may realize the benefit of certain
legal claims and litigation in the future; these gain contingencies are not
recognized in the Condensed Consolidated Financial Statements.
Copper Tube Antitrust Litigation
Beginning in September 2004, the Company has been named as a defendant
in several purported class action complaints brought by direct and indirect
purchasers alleging anticompetitive activities with respect to the sale of
copper tubes in the United States (the Copper Tube Actions). Two such
purported class actions were filed in the United States District Court for
the Western District of Tennessee (the Federal Actions). The remaining
Copper Tube Actions were filed in state courts in Tennessee, California and
Massachusetts.
Certain of the Copper Tube Actions purport to address the sale of copper
plumbing tube in particular. Plaintiffs' motions to consolidate the Federal
Actions and the actions pending in California state court, respectively, have
been granted. All of the Copper Tube Actions, which are similar, seek
monetary and other relief.
Wholly owned Company subsidiaries, WTC Holding Company, Inc., Deno
Holding Company, Inc., and Mueller Europe Ltd. (Mueller Europe), are named in
all of the Copper Tube Actions, and Deno Acquisition Eurl is or was named in
two of the Copper Tube Actions but has not been, or was not, 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.
-29-
In September 2006, the Federal Actions were dismissed as to Mueller
Europe for lack of personal jurisdiction. In October 2006, the Federal
Actions were dismissed in their entirety for lack of subject matter
jurisdiction as to all defendants. Although plaintiffs filed a motion for
reconsideration of the dismissal of Mueller Europe, the court has held that
such motion was mooted by its dismissal of the case for lack of subject
matter jurisdiction. Plaintiffs filed a motion to alter or amend the
judgment dismissing the complaint for lack of subject matter jurisdiction,
which the court denied in May 2007. In June 2007, plaintiffs filed a notice
of appeal in the Federal Actions with the United States Court of Appeals for
the Sixth Circuit. The Company, WTC Holding Company, Inc., Deno Holding
Company, Inc., and Mueller Europe filed notices of cross-appeal in July 2007.
In May 2007, before either the Company or Mueller Europe had been
required to respond to the complaint in the Massachusetts state court action,
the court overseeing the Massachusetts state court action granted plaintiffs'
voluntary motion to dismiss that action without prejudice.
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. Mueller Europe has
not yet been required to respond to the complaints in any of the state court
actions pending in Tennessee or California. The court overseeing the
California state court action has stayed that action conditioned upon the
parties' submitting periodic status reports on the status of 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. Motions to dismiss by the Company and by Mueller
Europe are pending in the Carrier Action.
In addition, beginning in April 2006, the Company and Mueller Europe
have been named as defendants 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).
The Company and Mueller Europe are named in five ACR Class Actions filed
in the United States District Court for the Western District of Tennessee.
Three of the ACR Class Actions filed in the Western District of Tennessee
have been consolidated to become the Direct ACR Class Actions. Motions to
dismiss by the Company and by Mueller Europe are pending in the Direct ACR
Class Actions.
-30-
Two of the ACR Class Actions filed in the Western District of Tennessee
have been consolidated to become the Indirect ACR Class Actions. The Company
and Mueller Europe have been served, but have not yet been required to
respond, in the Indirect ACR Class Actions. Pursuant to an order granting an
agreed motion of the parties to the Indirect ACR Class Actions, neither the
Company nor Mueller Europe will be required to respond to the complaint in
the Indirect ACR Class Actions until after the court in the Western District
of Tennessee has ruled on the currently pending motions to dismiss the Direct
ACR Class Actions and the Carrier Action.
The Company, Mueller Europe, WTC Holding Company, Inc., Deno Holding
Company, Inc., and Deno Acquisition Eurl are named in an ACR Class Action
filed by indirect purchasers in the United States District Court for the
Northern District of California (the California Indirect ACR Class Action).
The California Indirect ACR Class Action alleges anticompetitive activities
with respect to plumbing tubes as well as ACR copper tubes. 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 the
California Indirect ACR Class Action.
The Company believes that the claims for relief in the ACR Actions are
without merit and intends to defend the ACR Actions vigorously.
Copper Price Manipulation Litigation
Two of the Company's subsidiaries, Mueller Copper Tube Products Inc. and
Mueller Copper Tube Company Inc., brought a lawsuit (the Price Manipulation
Action) against J.P. Morgan Chase & Co. and Morgan Guaranty Trust Company of
New York (collectively Morgan) to recover damages the Company believes it
suffered on first purchases of copper cathode resulting from an alleged
conspiracy to manipulate the price of copper cathode by Morgan (and certain
of its predecessors and affiliates) and others in violation of the federal
antitrust laws. The lawsuit was filed on June 12, 2003, in the U.S. District
Court for the Western District of Wisconsin. The Company's lawsuit was
consolidated with those of certain other first purchasers of copper cathode
and rod under the name In re Copper Antitrust Litigation. Although the Price
Manipulation Action was dismissed by the district court on March 2, 2004, as
barred by the statute of limitations, the U.S. Court of Appeals for the
Seventh Circuit, on February 6, 2006, reversed the district court's decision
in part and remanded the Price Manipulation Action for further proceedings in
the district court. On January 16, 2007, Morgan filed a Motion for Summary
Judgment which the District Court denied on April 24, 2007. In July 2007,
the parties finalized a settlement agreement terminating the lawsuit. The
Company will recognize a monetary settlement of approximately $8.9 million
pursuant to the agreement in the third quarter of 2007.
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.
-31-
On January 18, 2007, the CBSA issued a final determination in its
investigation. The Company was found to have dumped subject goods during the
CBSA's investigation period. On February 19, 2007, the Canadian
International Trade Tribunal (CITT) concluded that the dumping of the subject
goods from the United States had caused injury to the Canadian industry.
As a result of these findings, exports of subject goods to Canada by
the Company made on or after October 20, 2006 will be subject to antidumping
measures. Under Canada's system of prospective antidumping enforcement, the
CBSA has issued normal values to the Company. Antidumping duties will be
imposed on the Company's Canadian customers only to the extent that the
Company's future exports of copper pipe fittings are made at net export
prices which are below these normal values. If net export prices for subject
goods exceed normal values, no antidumping duties will be payable. These
measures will remain in place for five years, at which time an expiry review
will be conducted by Canadian authorities to determine whether these measures
should be maintained for another five years or allowed to expire.
On July 16, 2007, the CBSA completed a review process pursuant to which
revised normal values were issued to exporters of subject goods, including
the Company. The Company does not anticipate any substantial impairment of
its ability to compete in Canada compared to the situation that existed prior
to July 16, 2007. The Company anticipates that future normal value reviews
will be conducted on a periodic basis by the CBSA, which could affect the
Company's ability to compete in Canada, depending on the level of normal
values resulting from these future normal value reviews. However, given the
small percentage of its products that are sold for export to Canada, the
Company does not anticipate any material adverse effect on its financial
condition as a result of the antidumping case in Canada.
Other Matters
The Company is aware of an investigation of competition in markets in
which it participates, or has participated in the past, in Canada. The
Company does not anticipate any material adverse effect on its business or
financial condition as a result of that investigation.
-32-
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The Company's Board of Directors has authorized the repurchase, until
October 2007, of up to ten million shares of the Company's Common Stock
through open market transactions or through privately negotiated
transactions. The Company has no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at any
time. Any purchases will be funded primarily through existing cash and cash
from operations. The Company may hold any shares purchased in treasury or
use a portion of the repurchased shares for employee benefit plans, as well
as for other corporate purposes. Through June 30, 2007, the Company had
repurchased approximately 2.4 million shares under this authorization.
Below is a summary of the Company's stock repurchases for the quarterly
period ended June 30, 2007.
(a) (b) (c) (d)
Total
Number of Maximum
Shares Number of
Purchased Shares that
as Part of May Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Purchased per Share Programs Programs
7,647,030(1)
April 1-
April 28,2007 - $ -
April 29 -
May 26, 2007 1,323 (2) 33.57
May 27 -
June 30, 2007 264 (2) 35.28
(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.
-33-
Item 5. Other Information
Labor Relations Update
On June 1, 2007 the union representing certain employees at the
Company's Port Huron and Marysville, Michigan facilities elected to strike.
The manufacturing plants continued to operate during the strike with minimal
disruption to customer service. The union accepted terms of an amended
contract and returned to work on June 14.
Subsequent to quarter-end, the union representing certain employees at
the Company's Wynne, Arkansas copper tube mill approved an amended contract,
which included an extension through December 2011.
The union contract which covers certain employees at the Company's
Fulton, Mississippi copper tube mill expires August 1, 2007. A revised union
contract is currently being negotiated.
Item 6. Exhibits
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended June 30, 2007.
Such report is being furnished for the information of
the Securities and Exchange Commission only and is not
to be deemed filed as part of this Quarterly Report on
Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Items 1A, 3, and 4 are not applicable and have been omitted.
-34-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUELLER INDUSTRIES, INC.
July 25, 2007 /s/ Kent A. McKee
Date Kent A. McKee
Executive Vice President and
Chief Financial Officer
July 25, 2007 /s/ Richard W. Corman
Date Richard W. Corman
Vice President - Controller
-35-
EXHIBIT INDEX
Exhibits Description
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders
for the quarter ended June 30, 2007. Such report is being
furnished for the information of the Securities and
Exchange Commission only and is not to be deemed filed as
part of this Quarterly Report on Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.