UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 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
October 25, 2007, was 37,077,960.
-1-
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Period Ended September 29, 2007
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Condensed Consolidated Statements of Income
for the quarters and nine months ended September 29, 2007
and September 30, 2006 3
b.) Condensed Consolidated Balance Sheets
as of September 29, 2007 and December 30, 2006 7
c.) Condensed Consolidated Statements of Cash Flows
for the nine months September 29, 2007
and September 30, 2006 9
d.) Notes to Condensed Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4. Controls and Procedures 30
Part II. Other Information
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 35
Item 5. Other Information 35
Item 6. Exhibits 36
Signatures 37
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
September 29, September 30,
2007 2006
(In thousands, except per share data)
Net sales $ 693,682 $ 635,998
Cost of goods sold 603,219 528,946
---------- ----------
Gross profit 90,463 107,052
Depreciation and amortization 11,582 10,462
Selling, general, and
administrative expense 36,246 34,787
Copper antitrust litigation
settlement (8,865) -
---------- ----------
Operating income 51,500 61,803
Interest expense (5,384) (5,085)
Other income, net 4,060 1,452
---------- ----------
Income before income taxes 50,176 58,170
Income tax expense (18,852) (6,591)
---------- ----------
Net income $ 31,324 $ 51,579
========== ==========
See accompanying notes to condensed consolidated financial statements.
-3-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
September 29, September 30,
2007 2006
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 37,075 36,976
Effect of dilutive stock options 234 379
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,309 37,355
---------- ----------
Basic earnings per share $ 0.84 $ 1.39
========== ==========
Diluted earnings per share $ 0.84 $ 1.38
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to condensed consolidated financial statements.
-4-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands, except per share data)
Net sales $ 2,076,111 $ 1,966,700
Cost of goods sold 1,801,543 1,623,053
---------- ----------
Gross profit 274,568 343,647
Depreciation and amortization 33,854 31,033
Selling, general, and
administrative expense 110,144 109,435
Copper antitrust litigation
settlement (8,865) -
---------- ----------
Operating income 139,435 203,179
Interest expense (16,567) (15,161)
Other income, net 10,938 3,398
---------- ----------
Income before income taxes 133,806 191,416
Income tax expense (47,171) (47,722)
---------- ----------
Net income $ 86,635 $ 143,694
========== ==========
See accompanying notes to condensed consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 37,054 36,853
Effect of dilutive stock options 185 396
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,239 37,249
---------- ----------
Basic earnings per share $ 2.34 $ 3.90
========== ==========
Diluted earnings per share $ 2.33 $ 3.86
========== ==========
Dividends per share $ 0.30 $ 0.30
========== ==========
See accompanying notes to condensed consolidated financial statements.
-6-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 29, December 30,
2007 2006
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 273,211 $ 200,471
Accounts receivable, less allowance
for doubtful accounts of $8,317 in
2007 and $6,806 in 2006 351,707 281,679
Inventories 231,228 258,647
Other current assets 35,669 35,397
---------- ----------
Total current assets 891,815 776,194
Property, plant, and equipment, net 320,082 315,064
Goodwill 156,545 155,653
Other assets 33,430 21,996
---------- ----------
$ 1,401,872 $ 1,268,907
========== ==========
See accompanying notes to condensed consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 29, December 30,
2007 2006
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 33,669 $ 35,998
Accounts payable 134,569 96,095
Accrued wages and other employee costs 38,522 43,281
Other current liabilities 90,772 80,145
---------- ----------
Total current liabilities 297,532 255,519
Long-term debt 307,988 308,154
Pension liabilities 20,774 19,900
Postretirement liabilities other
than pensions 24,446 16,699
Environmental reserves 9,159 8,907
Deferred income taxes 42,030 46,408
Other noncurrent liabilities 1,995 2,206
---------- ----------
Total liabilities 703,924 657,793
---------- ----------
Minority interest in subsidiaries 22,419 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 37,077,960
in 2007 and 37,025,285 in 2006 401 401
Additional paid-in capital, common 258,917 256,906
Retained earnings 459,403 386,038
Accumulated other comprehensive income 22,711 12,503
Treasury common stock, at cost (65,903) (67,034)
---------- ----------
Total stockholders' equity 675,529 588,814
Commitments and contingencies - -
---------- ----------
$ 1,401,872 $ 1,268,907
========== ==========
See accompanying notes to condensed consolidated financial statements.
-8-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands)
Cash flows from operating activities
Net income $ 86,635 $ 143,694
Reconciliation of net income to net
cash provided by operating
activities:
Depreciation and amortization 34,107 31,225
Deferred income taxes (3,026) (11,193)
Minority interest in subsidiaries,
net of dividend paid (644) 2,526
Share-based compensation expense 1,975 2,041
(Gain) loss on disposal of
properties (3,114) 1,913
Gain on sale of equity investment - (1,876)
Income tax benefit from exercise
of stock options (130) (1,217)
Equity in earning of unconsolidated
subsidiary - (964)
Gain on early retirement of debt - (97)
Changes in assets and liabilities,
net of businesses acquired:
Receivables (36,370) (59,227)
Inventories 57,656 (96,979)
Other assets (6,103) (5,340)
Current liabilities 13,669 20,755
Other liabilities 3,754 2,770
Other, net (1,003) (2,987)
---------- ----------
Net cash provided by
operating activities 147,406 25,044
---------- ----------
Cash flows from investing activities
Capital expenditures (22,776) (32,975)
Acquisition of businesses, net
of cash received (31,970) 3,632
Proceeds from sale of properties and
equity investment 3,033 23,227
---------- ----------
Net cash used in
investing activities (51,713) (6,116)
---------- ----------
See accompanying notes to condensed consolidated financial statements.
-9-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands)
Cash flows from financing activities
Issuance of debt by joint venture $ 4,506 $ 24,918
Dividends paid (11,117) (11,073)
Proceeds from sale of treasury stock 1,093 7,116
Repayments of long-term debt (18,273) (1,922)
Proceeds from issuance of debt - 1,902
Income tax benefit from exercise
of stock options 130 1,217
Acquisition of treasury stock (54) (570)
---------- ----------
Net cash (used in) provided by
financing activities (23,715) 21,588
---------- ----------
Effect of exchange rate changes on cash 762 262
---------- ----------
Increase in cash and cash equivalents 72,740 40,778
Cash and cash equivalents at the
beginning of the period 200,471 129,685
---------- ----------
Cash and cash equivalents at the
end of the period $ 273,211 $ 170,463
========== ==========
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.
Guarantees, in the form of letters of credit, are issued by the
Company generally to guarantee the payment of insurance deductibles,
retiree health benefits, and certain operating costs of a foreign
subsidiary. The terms of the Company's guarantees are generally one year
but are renewable annually as required. The maximum potential amount of
future payments the Company could have been required to make under its
guarantees at September 29, 2007 was $10.3 million.
-11-
Note 3 - Copper Antitrust Litigation
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 received a
monetary settlement of approximately $8.9 million pursuant to the agreement
in the third quarter of 2007.
Note 4 - Inventories
September 29, December 30,
2007 2006
(In thousands)
Raw materials and supplies $ 17,495 $ 48,265
Work-in-process 38,365 40,209
Finished goods 180,734 188,457
Valuation reserves (5,366) (18,284)
---------- ----------
Inventories $ 231,228 $ 258,647
========== ==========
The Company has deferred recognizing potential gains resulting from
liquidation of LIFO inventories during the first nine 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. In the
event the Company is unable to replenish these inventories due to lack of
availability or operational reasons, a non-cash gain of up to approximately
$30.0 million from the liquidation of LIFO quantities would be recognized.
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.
-12-
Note 5 - Industry Segments
The Company's reportable segments are Plumbing & Refrigeration and OEM.
For disclosure purposes, as permitted under Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," certain operating segments are
aggregated into reportable segments. The Plumbing & Refrigeration segment
is composed of Standard Products (SPD), European Operations, and Mexican
Operations. The OEM segment is composed of Industrial Products (IPD) and
Engineered Products (EPD). These segments are classified primarily by the
markets for their products. Performance of segments is generally evaluated
by their operating income.
SPD manufactures copper tube and fittings, plastic fittings, and line
sets. These products are manufactured in the U.S. SPD also imports and
resells in North America brass and plastic plumbing valves, malleable iron
fittings, faucets, and plumbing specialty products. European Operations
consist of copper tube manufacturing, with such products being sold in
Europe and the Middle East, and import distribution of fittings, valves,
and plumbing specialties primarily in the U.K. and Ireland. Mexican
Operations consist of pipe nipple manufacturing and import distribution
businesses including product lines of malleable iron fittings and other
plumbing specialties. The Plumbing & Refrigeration segment's products are
sold primarily to plumbing, refrigeration, and air-conditioning wholesalers,
hardware wholesalers and co-ops, and building product retailers.
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.
-13-
Summarized segment information is as follows:
For the Quarter Ended
September 29, September 30,
2007 2006
(In thousands)
Net sales:
Plumbing & Refrigeration $ 397,855 $ 426,261
OEM 302,122 218,372
Elimination of intersegment sales (6,295) (8,635)
---------- ----------
$ 693,682 $ 635,998
========== ==========
Operating income:
Plumbing & Refrigeration $ 52,260 $ 56,863
OEM 5,609 9,862
Unallocated expenses (6,369) (4,922)
---------- ----------
Total operating income 51,500 61,803
Interest expense (5,384) (5,085)
Other income, net 4,060 1,452
---------- ----------
Income before income taxes $ 50,176 $ 58,170
========== ==========
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands)
Net sales:
Plumbing & Refrigeration $ 1,223,337 $ 1,364,360
OEM 868,053 628,472
Elimination of intersegment sales (15,279) (26,132)
---------- ----------
$ 2,076,111 $ 1,966,700
========== ==========
Operating income:
Plumbing & Refrigeration $ 130,860 $ 179,384
OEM 29,102 42,326
Unallocated expenses (20,527) (18,531)
---------- ----------
Total operating income 139,435 203,179
Interest expense (16,567) (15,161)
Other income, net 10,938 3,398
---------- ----------
Income before income taxes $ 133,806 $ 191,416
========== ==========
-14-
September 29, December 30,
2007 2006
(In thousands)
Segment assets:
Plumbing & Refrigeration $ 730,193 $ 760,147
OEM 374,229 280,692
General corporate 297,450 228,068
---------- ----------
$ 1,401,872 $ 1,268,907
========== ==========
Note 6 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
September 29, September 30,
2007 2006
(In thousands)
Net income $ 31,324 $ 51,579
Other comprehensive income (loss),
net of tax:
Foreign currency translation 2,883 2,012
Amortization of prior service
cost included in pension expense 47 -
Amortization of actuarial gains
and losses included in pension
expense (10) -
Change in the fair value of
derivatives 228 (306)
---------- ----------
Other comprehensive income 3,148 1,706
---------- ----------
Comprehensive income $ 34,472 $ 53,285
========== ==========
-15-
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands)
Net income $ 86,635 $ 143,694
Other comprehensive income (loss),
net of tax:
Foreign currency translation 9,360 7,913
Minimum pension liability - 4,315
Amortization of prior service
cost included in pension expense 148 -
Amortization of actuarial gains
and losses included in pension
expense 100 -
Change in the fair value of
derivatives 600 (203)
---------- ----------
Other comprehensive income 10,208 12,025
---------- ----------
Comprehensive income $ 96,843 $ 155,719
========== ==========
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 nine months of 2007, the value of the British pound
sterling and the Chinese renmimbi increased 4.5 percent and 4.0 percent,
respectively, compared to the U.S. dollar.
Note 7 - 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 $7.5
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
$0.6 million annually.
-16-
Net periodic benefit (income) cost is based on estimated values
provided by independent actuaries. The components of net periodic benefit
(income) cost are as follows:
For the Quarter Ended
September 29, September 30,
2007 2006
(In thousands)
Pension benefits:
Service cost $ 506 $ 592
Interest cost 2,078 2,320
Expected return on plan assets (2,952) (3,053)
Amortization of prior service cost 78 94
Amortization of net loss 219 345
---------- ----------
Net periodic benefit (income) cost $ (71) $ 298
========== ==========
Other benefits:
Service cost $ (284) $ 1
Interest cost 437 159
Amortization of prior service cost (2) 2
Amortization of net loss 45 33
Curtailment gain (194) -
---------- ----------
Net periodic benefit cost $ 2 $ 195
========== ==========
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands)
Pension benefits:
Service cost $ 1,518 $ 1,541
Interest cost 6,234 6,204
Expected return on plan assets (8,748) (7,902)
Amortization of prior service cost 233 280
Amortization of net loss 658 763
---------- ----------
Net periodic benefit (income) cost $ (105) $ 886
========== ==========
Other benefits:
Service cost $ 849 $ 5
Interest cost 772 477
Amortization of prior service cost 2 6
Amortization of net loss 137 98
Curtailment gain (194) -
---------- ----------
Net periodic benefit cost $ 1,566 $ 586
========== ==========
-17-
The Company anticipates contributions to its pension plans for 2007 to
be approximately $2.5 million. During the first nine months of 2007,
approximately $1.9 million of contributions have been made to certain
pension plans.
Note 8 - 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 net 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 $76.2
million, consisting primarily of receivables of $29.5 million, inventories
of $26.8 million, property, plant, and equipment of $12.7 million, and
prepaid pension asset of $6.1 million. The total estimated fair values of
liabilities assumed totaled $43.6 million, consisting primarily of a
working capital debt facility of $10.0 million, accounts payable and
accrued expenses of $24.0 million, and postretirement benefit obligations
of $7.5 million. The debt assumed was extinguished by the Company
immediately following the acquisition. During the third quarter of 2007,
adjustments were recorded to the estimated fair value of assets acquired
and liabilities assumed, resulting in a decrease in the postretirement
benefit obligation of $4.1 million, a decrease in property, plant, and
equipment of $2.6 million, and an increase in long term deferred tax
liability of $1.5 million. Management will continue the process of
refining the purchase price accounting estimates and expects to finalize
these estimates in the fourth quarter of 2007. As a result, this purchase
price allocation is subject to change.
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.
-18-
For the Quarter Ended
September 29, September 30,
2007 2006
(In thousands, except per share data)
Pro forma:
Net sales $ 693,682 $ 735,669
Net income 31,324 53,265
Earnings per share:
Basic $ 0.84 $ 1.44
Diluted $ 0.84 $ 1.43
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands, except per share data)
Pro forma:
Net sales $ 2,133,539 $ 2,242,092
Net income 86,600 152,440
Earnings per share:
Basic $ 2.34 $ 4.14
Diluted $ 2.33 $ 4.09
In December 2005, two subsidiaries of the Company received a business
license from a Chinese industry and commerce authority, establishing a
joint venture with Jiangsu Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang
Industries Ltd. The joint venture, in which the Company holds a 50.5
percent interest, produces inner groove and smooth tube in level-wound
coils, pancake coils, and straight lengths, primarily to serve the Chinese
domestic OEM air-conditioning market as well as to complement the Company's
U.S. product line. The joint venture is located primarily in Jintan City,
Jiangsu Province, China. The joint venture entity is named Jiangsu
Mueller-Xingrong Copper Industries Limited (Mueller-Xingrong). 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.
-19-
Note 9 - Income Taxes
FIN 48 Adoption and 2007 Activity:
At the beginning of fiscal 2007, the Company adopted the provisions of
Financial Accounting Standards Board (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 accrued related to unrecognized tax benefits
at the date of adoption totaled $3.2 million. The Company includes
interest 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 nine months ended September 29, 2007, total unrecognized
tax benefits increased to $26.3 million. The increase is primarily due to
$1.2 million of derecognized tax benefits resulting from audit activity
during the period and $2.3 million of derecognized tax benefits resulting
from uncertainties arising or identified subsequent to the adoption date.
Offsetting these items is the recognition of tax benefits of approximately
$2.4 million due to a lapse in the statute of limitations. Cumulative
potential interest accrued related to unrecognized tax benefits at
September 29, 2007 totaled $3.2 million. At September 29, 2007, all
unrecognized tax benefits would affect the effective tax rate, if
recognized.
The Company files a consolidated U.S. Federal return and numerous
combined, unitary, and separate income tax returns in various state, local,
and foreign jurisdictions. The Company is no longer subject to U.S.
Federal income tax examinations for years before 2004 and with few
exceptions is no longer subject to state, local, or foreign income tax
examinations by tax authorities for years before 2001. 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 third quarter of 2007 was
37.6 percent compared with 11.3 percent for the same period last year. The
Company's effective tax rate for the first nine months of 2007 was 35.3
percent compared with 24.9 percent for the same period last year. The
reduction in the rate in the prior year was primarily related to
adjustments to reduce tax contingency reserves and changes in estimate
regarding the future realization of certain state tax credit carryforwards.
-20-
In the current quarter, the difference between the effective tax rate
and the U.S. Federal statutory tax rate is primarily related to (i) the
provision for state taxes of $1.1 million, net of federal benefit, (ii)
reconciliation of 2006 tax provision to final tax returns totaling $1.7
million, and (iii) additional expense of $1.2 million, net of federal
benefit, resulting from unrecognized tax benefits. These items were
partially offset by the recognition of a benefit from federal tax
incentives of $0.7 million and the recognition of tax benefits and
previously accrued interest of $2.2 million, net of federal benefit, due to
a lapse in the statute of limitations.
Income tax expense for the nine months ended September 29, 2007
includes a benefit of $7.8 million, or $0.21 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 $2.8 million, or $0.08 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 net effect of these
adjustments was a benefit of $2.7 million, or a reduction in the Company's
effective tax rate of 2.0 percent for the period.
Other factors that explain the difference between the effective tax
rate and the U.S. Federal statutory tax rate for the first nine 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
$3.6 million, net of federal benefit, (ii) a provision for repatriation of
certain foreign earnings of $0.4 million, (iii) reconciliation of 2006 tax
provision to final tax returns totaling $0.9 million, and (iv) additional
expense of $3.0 million, net of federal benefit, resulting from
unrecognized tax benefits. These items were partially offset by (i) the
recognition of a benefit from federal tax incentives of $2.2 million, (ii)
recognition of tax benefits of $2.2 million, net of federal benefit, due to
a lapse of the statute of limitations, and (iii) the recognition of a
benefit of a foreign tax holiday of approximately $1.0 million (without
consideration of minority interest).
-21-
Note 10 - Other Income, Net
For the Quarter Ended
September 29, September 30,
2007 2006
(In thousands)
Interest income $ 3,168 $ 1,898
Environmental expense (119) (153)
Minority interest in (income) loss of
subsidiaries 626 (721)
Gain (loss) on disposal of
properties, net (23) (5)
Rent, royalties, and other, net 408 433
---------- ----------
Other income, net $ 4,060 $ 1,452
========== ==========
For the Nine Months Ended
September 29, September 30,
2007 2006
(In thousands)
Interest income $ 8,100 $ 3,861
Gain on sale of equity investment - 1,876
Equity in earnings of unconsolidated
subsidiary - 964
Gain on early retirement of debt - 97
Environmental expense (487) (418)
Minority interest in (income) loss of
subsidiaries (720) (2,526)
Gain (loss) on disposal of
properties, net 3,114 (1,913)
Rent, royalties, and other, net 931 1,457
---------- ----------
Other income, net $ 10,938 $ 3,398
========== ==========
-22-
Note 11 - 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 air-conditioning), plumbing, and refrigeration markets, to distributors
-23-
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 conditions and
trends including substitute products and imports. For plumbing
applications, plastic 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 third quarter of 2007, the Company's net sales were $693.7
million, which compares with net sales of $636.0 million for the same
period of 2006. Net sales were $2.08 billion in the first nine months of
2007 compared with $1.97 billion in the same period of 2006. The change in
net sales for the quarter and nine-month period was primarily attributable
to contributions from acquired businesses partially offset by reduced
volumes in the Company's core product lines. The average price of copper
was approximately 5 percent higher in the first nine months of 2007
compared with the same period of 2006. Extruded Metals, Inc. (Extruded)
contributed $93.4 million of net sales in the third quarter and $222.9
million of net sales since its acquisition in February 2007.
Cost of goods sold increased from $528.9 million in the third quarter
of 2006 to $603.2 million in the same period of 2007. Cost of goods sold
for the nine months ended September 29, 2007 was $1.80 billion compared
with $1.62 billion for the first nine 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 $90.5 million from $107.1 million in the third quarter
-24-
and decreased to $274.6 million from $343.6 million for the nine-month
period due primarily to lower margins on copper tube and brass rod. During
the first nine months of 2007, inventory quantities valued using the LIFO
method declined. The Company expects to replenish these inventories by the
end of 2007 and, as such, has not recognized the effects of liquidating
LIFO layers. In the event the Company is unable to replenish these
inventories due to lack of availability or operational reasons, a non-cash
gain of up to approximately $30.0 million from the liquidation of LIFO
quantities would be recognized.
Selling, general, and administrative expense was $36.2 million for the
third quarter of 2007 compared with $34.8 million for the same period of
2006. Year-to-date selling, general, and administrative expense was $110.1
million for 2007 compared with $109.4 million for the same period of 2006.
The increase for the quarter and nine months was primarily due to expenses
of Extruded since its acquisition date.
During the third quarter of 2007, the Company received a monetary
settlement of approximately $8.9 million pursuant to a settlement agreement
terminating 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.
For the third quarter of 2007, operating income at the Plumbing &
Refrigeration segment was $52.3 million, which compares with $56.9 million
in the same period of 2006. Operating income for the first nine months at
the Plumbing & Refrigeration segment was $130.9 million, which compares
with $179.4 million in the same period of 2006. The third quarter
decreases were primarily attributable to lower selling prices and spreads
in copper tube, partially offset by proceeds from the copper antitrust
litigation settlement. The year-to-date decreases were primarily
attributable to reduced volumes.
Operating income at the OEM segment was $5.6 million in the third
quarter of 2007 compared with $9.9 million in the third quarter of 2006.
Operating income for the first nine months of 2007 at the OEM segment was
$29.1 million, which compares with $42.3 million in the same period of 2006.
Reduced operating income in the third quarter and first nine months of 2007
was due primarily to reduced volumes at the Port Huron brass rod mill
partially offset by contributions from Extruded.
Interest expense for the third quarter of 2007 totaled $5.4 million,
compared with $5.1 million for the same period of 2006. For the first nine
months of 2007, interest expense was $16.6 million compared with $15.2
million for the same period of 2006. The increase in interest expense for
the third quarter and first nine months of 2007 is attributable to
increased borrowings by Mueller-Xingrong to fund working capital.
-25-
Other income, net was $4.1 million for the third quarter of 2007
compared with $1.5 million for the same period of 2006. The current year
increase was primarily due to increased interest income on higher invested
cash balances and reduction of the elimination of minority interest in
Mueller-Xingrong. Year-to-date, other income, net was $10.9 million in
2007 compared with $3.4 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.
The Company's effective tax rate for the third quarter of 2007 was
37.6 percent compared with 11.3 percent for the same period last year. The
Company's effective tax rate for the first nine months of 2007 was 35.3
percent compared with 24.9 percent for the same period last year. The
reduction in the rate in the prior year was primarily related to
adjustments to reduce tax contingency reserves and changes in estimate
regarding the future realization of certain state tax credit carryforwards.
In the current quarter, the difference between the effective tax rate
and the U.S. Federal statutory tax rate is primarily related to (i) the
provision for state taxes of $1.1 million, net of federal benefit, (ii)
reconciliation of 2006 tax provision to final tax returns totaling $1.7
million, and (iii) additional expense of $1.2 million, net of federal
benefit, resulting from unrecognized tax benefits. These items were
partially offset by the recognition of a benefit from federal tax
incentives of $0.7 million and the recognition of tax benefits and
previously accrued interest of $2.2 million, net of federal benefit, due to
a lapse in the statute of limitations.
Income tax expense for the nine months ended September 29, 2007
includes a benefit of $7.8 million, or $0.21 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 $2.8 million, or $0.08 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 net effect of these
adjustments was a benefit of $2.7 million, or a reduction in the Company's
effective tax rate of 2.0 percent for the period.
-26-
Other factors that explain the difference between the effective tax
rate and the U.S. Federal statutory tax rate for the first nine 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
$3.6 million, net of federal benefit, (ii) a provision for repatriation of
certain foreign earnings of $0.4 million, (iii) reconciliation of 2006 tax
provision to final tax returns totaling $0.9 million, and (iv) additional
expense of $3.0 million, net of federal benefit, resulting from
unrecognized tax benefits. These items were partially offset by (i) the
recognition of a benefit from federal tax incentives of $2.2 million, (ii)
recognition of tax benefits of $2.2 million, net of federal benefit, due to
a lapse of the statute of limitations, and (iii) the recognition of a
benefit of a foreign tax holiday of approximately $1.0 million (without
consideration of minority interest).
Liquidity and Capital Resources
Cash provided by operating activities during the first nine months of
2007 totaled $147.4 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
the first nine months of 2007, the average COMEX copper price was
approximately $3.21 per pound, which represents a 5 percent increase over
the average price during the first nine months 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 nine months of 2007, cash used in investing
activities was $51.7 million, consisting of capital expenditures totaling
$22.8 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 $23.7 million for the first nine
months of 2007 consisting primarily of repayment of long-term debt of $18.3
million and payment of dividends of $11.1 million, partially offset by
issuance of debt of $4.5 million by the Company's Chinese joint venture.
The Company has a $200 million unsecured line-of-credit (Credit
Facility) which expires in December 2011. At September 29, 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 third quarter of 2007. As of September 29, 2007, the Company's
total debt was $341.7 million or 34 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 September
29, 2007, the Company was in compliance with all of its debt covenants.
-27-
The Company declared and paid a regular quarterly cash dividend of ten
cents per common share in each of the first three 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. The Company makes semi-annual interest payments of approximately
$8.9 million each May 1 and November 1 on its 6% Subordinated Debentures.
The Company may repurchase the Debentures through open market transactions
or through privately negotiated transactions.
Management believes that cash provided by operations and currently
available cash of $273.2 million will be adequate to meet the Company's
normal future capital expenditures and operational needs. The Company's
current ratio was 3 to 1 at September 29, 2007.
The Company's Board of Directors has authorized the repurchase until
October 2008 of up to ten million shares of the Company's common stock
through open market transactions or through privately negotiated
transactions. The Company has no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at
any time. Any purchases will be funded primarily through existing cash and
cash from operations. The Company may hold any shares purchased in
treasury or use a portion of the repurchased shares for employee benefit
plans, as well as for other corporate purposes. Through September 29, 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.
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
-28-
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
September 29, 2007, the Company held open forward contracts to purchase
approximately $6.1 million of copper over the next ten 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 September 29, 2007, the Company held no open forward contracts
to purchase natural gas.
Interest Rates
At September 29, 2007, the Company had variable-rate debt outstanding
of $33.7 million, the majority of which related to the debt issued by
Mueller-Xingrong. At these borrowing levels, a hypothetical 10 percent
increase in interest rates would have had an insignificant unfavorable
impact on the Company's pretax earnings and cash flows. The primary
interest rate exposure on floating-rate debt is based on LIBOR and on the
base-lending rate published by the People's Bank of China.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other
than an entity's functional currency. The Company and its subsidiaries
generally enter into transactions denominated in their respective
functional currencies. Foreign currency exposures arising from
transactions denominated in currencies other than the functional currency
are not material; however, the Company may utilize certain forward fixed-
rate contracts to hedge such transactional exposures. Gains and losses
with respect to these positions are deferred in stockholders' equity as a
component of comprehensive income and reflected in earnings upon collection
of receivables. At September 29, 2007, the Company held open forward
contracts to purchase approximately 4.0 million U.S. dollars.
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars.
The primary currencies to which the Company is exposed include the Canadian
dollar, the British pound sterling, the Euro, the Mexican peso, and the
Chinese renminbi. The Company generally views as long-term its investments
in foreign subsidiaries with a functional currency other than the U.S.
dollar. As a result, the Company generally does not hedge these net
investments.
-29-
Cautionary Statement Regarding Forward Looking Information
Statements in this Quarterly Report on Form 10-Q that are not strictly
historical may be "forward-looking" statements, which involve risks and
uncertainties. These include economic and currency conditions, continued
availability of raw materials and energy, market demand, pricing,
competitive and technological factors, and the availability of financing,
among others, as set forth in the Company's filings with the Securities and
Exchange Commission. The words "outlook," "estimate," "project," "intend,"
"expect," "believe," "target," and similar expressions are intended to
identify forward-looking statements. The reader should not place undue
reliance on forward-looking statements, which speak only as of the date of
this report. The Company has no obligation to publicly update or revise
any forward-looking statements to reflect events after the date of this
report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure information required to be disclosed in Company reports filed under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in Company reports
filed under the Exchange Act is accumulated and communicated to management,
including the Company's Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
The Company's management, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures pursuant
to Rule 13a-15(b) of the Exchange Act as of the end of the period covered
by this report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of September 29, 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 September 29, 2007,
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
-30-
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.
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.
-31-
In September 2007, plaintiffs filed with the United States District
Court for the Western District of Tennessee a motion to vacate the judgment
and orders dismissing the complaint in the Federal Actions and filed with
the United States Court of Appeals for the Sixth Circuit a motion to stay
or extend the briefing schedule in the appeal of the Federal Actions.
Those motions remain pending.
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.
In September 2007, the court overseeing the Tennessee state court
action dismissed that action without prejudice based on plaintiffs' lack of
prosecution.
The Company's demurrer to the complaint has been filed in the state
court action in California. Mueller Europe has not yet been required to
respond to the complaint in the state court action pending in 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. In July 2007, the
Carrier Action was dismissed in its entirety for lack of subject matter
jurisdiction as to all defendants. In August 2007, plaintiffs filed a
notice of appeal in the Carrier Action with the United States Court of
Appeals for the Sixth Circuit. The Company and Mueller Europe filed
notices of cross-appeal in August 2007.
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.
In July 2007, the Direct ACR Class Actions were dismissed in their entirety
for lack of subject matter jurisdiction as to all defendants. In August
2007, plaintiffs filed a notice of appeal in the Direct ACR Class Actions
with the United States Court of Appeals for the Sixth Circuit. The Company
and Mueller Europe filed notices of cross-appeal in August 2007.
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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 United
States Court of Appeals for the Sixth Circuit issues a mandate resolving
the last of the pending appeals in 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 Antitrust Litigation
In connection with the previously disclosed In re Copper Antitrust
Litigation, the Company finalized a settlement agreement terminating the
lawsuit in July 2007. The Company recognized 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.
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
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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.
Employment Litigation
On June 1, 2007, the Company filed a lawsuit in the Circuit Court of
Dupage County, Illinois against Peter D. Berkman and Jeffrey A. Berkman,
former executives of the Company and B&K Industries, Inc. (B&K), a wholly-
owned subsidiary of the Company, relating to their alleged breach of
fiduciary duties and contractual obligations to the Company through, among
other things, their involvement with a supplier of B&K during their
employment with B&K. The lawsuit alleges appropriation of corporate
opportunities for personal benefit, failure to disclose competitive
interests or other conflicts of interest, and unfair competition, as well
as breach of employment agreements in connection with the foregoing. The
lawsuit seeks compensatory and punitive damages, and other appropriate
relief. In August, the defendants filed an answer to the complaint
admitting Peter Berkman had an undisclosed ownership interest in a
supplier, and a counterclaim against the Company, B&K and certain of the
Company's officers and directors alleging defamation, tortious interference
with prospective economic relations, and conspiracy, and seeking damages in
unspecified amounts. In September, Homewerks Worldwide LLC, an entity
formed by Peter Berkman, filed a complaint as an intervenor based on
substantially the same allegations included in the Berkmans' counterclaim.
In October, the Company filed a motion seeking to have the Berkmans'
counterclaim dismissed as a matter of law. That motion is pending. The
Company does not anticipate any material adverse effect on its business or
financial condition as a result of this litigation.
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.
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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 2008, of up to ten million shares of the Company's Common Stock
through open market transactions or through privately negotiated
transactions. The Company has no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at
any time. Any purchases will be funded primarily through existing cash and
cash from operations. The Company may hold any shares purchased in
treasury or use a portion of the repurchased shares for employee benefit
plans, as well as for other corporate purposes. Through September 29, 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 September 29, 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)
July 1-
July 28,2007 - $ -
July 29 -
August 25, 2007 - -
August 26 -
September 29, 2007 - -
(1) Shares available to be purchased under the Company's 10 million share
repurchase authorization until October 2008. This repurchase plan was
announced on October 26, 2007.
Item 5. Other Information
On October 25, 2007, the Company's Board of Directors approved and
adopted Amended and Restated By-Laws, effective as of October 25, 2007, to
provide for (i) the position of Chief Operating Officer and (ii) the
issuance and transfer of both certificated and uncertificated shares of
capital stock of the Company. The amendments relating to uncertificated
shares were adopted by the Company to comply with a recent amendment to the
New York Stock Exchange ("NYSE") Listed Company Manual that requires NYSE
listed companies to have their listed securities eligible to participate in
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the Direct Registration System ("DRS"). DRS allows an investor's ownership
to be recorded and maintained on the books of the issuer or the registrar
of such stock without the issuance of a physical stock certificate. The
summary of the Amended and Restated Bylaws is qualified in its entirety by
reference to the full text of Amended and Restated Bylaws attached hereto
as Exhibit 3.1.
Item 6. Exhibits
3.1 Amended and Restated By-laws of the Registrant, adopted and
effective as of October 25, 2007.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUELLER INDUSTRIES, INC.
October 26, 2007 /s/ Kent A. McKee
Date Kent A. McKee
Executive Vice President and
Chief Financial Officer
October 26, 2007 /s/ Richard W. Corman
Date Richard W. Corman
Vice President - Controller
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EXHIBIT INDEX
Exhibits Description
3.1 Amended and Restated By-laws of the Registrant, adopted and
effective as of October 25, 2007.
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.