UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Registrant's telephone number, including area code: (901) 753-3200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ X ] No [ ]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [ X ]
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.[ ]
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Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ X ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently
completed second fiscal quarter was $1,264,992,578.
The number of shares of the Registrant's common stock outstanding as of
February 22, 2008 was 37,093,873 excluding 2,997,629 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into this
Report: Registrant's Definitive Proxy Statement for the 2008 Annual Meeting
of Stockholders, scheduled to be mailed on or about March 26, 2008 (Part III).
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MUELLER INDUSTRIES, INC.
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As used in this report, the terms "Company", "Mueller", and "Registrant" mean
Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole,
unless the context indicates otherwise.
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TABLE OF CONTENTS
Page
Part I
Item 1. Business 4
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 14
Item 2. Properties 15
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 22
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 23
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
Item 9A. Controls and Procedures 27
Item 9B. Other Information 30
Part III
Item 10. Directors, Executive Officers and Corporate Governance 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 31
Item 13. Certain Relationships and Related Transactions,
and Director Independence 33
Item 14. Principal Accounting Fees and Services 33
Part IV
Item 15. Exhibits, Financial Statement Schedules 33
Signatures 39
Index to Consolidated Financial Statements F-1
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PART I
ITEM 1. BUSINESS
Introduction
The Company is a leading manufacturer of copper, brass, plastic,
aluminum, and other 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 pipe,
fittings and valves; refrigeration valves and fittings; fabricated tubular
products; and steel nipples. The Company also resells imported brass and
plastic plumbing valves, malleable iron fittings, faucets and plumbing
specialty products. Mueller's operations are located throughout the United
States, and in Canada, Mexico, Great Britain, and China.
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the Original Equipment
Manufacturers (OEM) segment. 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 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, plastic
pipe, and valves in North America and sources products for import
distribution in North America. European Operations manufactures copper tube
in Europe, which is sold in Europe and the Middle East; activities also
include import distribution. Mexican Operations consist of pipe nipple
manufacturing and import distribution businesses including product lines of
malleable iron fittings and other plumbing specialties. The Plumbing &
Refrigeration segment sells products to wholesalers in the HVAC (heating,
ventilation, and air-conditioning), plumbing, and refrigeration markets, to
distributors to the manufactured housing and recreational vehicle
industries, and to building material retailers. The OEM segment
manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum
and brass forgings; aluminum and copper impact extrusions; refrigeration
valves and fittings; fabricated tubular products; and gas valves and
assemblies. The Company's Chinese joint venture manufactures engineered
copper tube for refrigeration applications; these products are sold
primarily to OEMs located in China and its results are included in the OEM
segment. The OEM segment sells its products primarily to original equipment
manufacturers, many of which are in the HVAC, plumbing, and refrigeration
markets. Certain administrative expenses and expenses related primarily to
retiree benefits at inactive operations are combined into the unallocated
expenses classification.
Information concerning segments and geographic information appears
under "Note 15 - Industry Segments" in the Notes to Consolidated Financial
Statements for the year ended December 29, 2007 in Item 8 of this Report,
which is incorporated herein by reference.
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The majority of the Company's manufacturing facilities operated at
moderate levels during 2005 and the first half of 2006. In the latter half
of 2006, and in 2007, the Company's manufacturing facilities operated at low
levels due to reduced market demand.
The Company is a Delaware corporation incorporated on October 3, 1990.
Plumbing & Refrigeration Segment
Mueller's Plumbing & Refrigeration segment includes the Standard
Products Division (SPD) which manufactures a broad line of copper tube, in
sizes ranging from 1/8 inch to 8 inch diameter, and which are sold in
various straight lengths and coils. Mueller is a market leader in the air-
conditioning and refrigeration service tube markets. Additionally, Mueller
supplies a variety of water tube in straight lengths and coils used for
plumbing applications in virtually every type of construction project. SPD
also manufactures copper and plastic fittings and related components for the
plumbing and heating industry that are used in water distribution systems,
heating systems, air-conditioning, and refrigeration applications, and
drainage, waste, and vent systems. A major portion of SPD's products are
ultimately used in the domestic residential and commercial construction
markets.
The Plumbing & Refrigeration segment also fabricates steel pipe nipples
and resells imported brass and plastic plumbing valves, malleable iron
fittings, faucets, and plumbing specialty products to plumbing wholesalers,
distributors to the manufactured housing and recreational vehicle industries
and building materials retailers.
On August 15, 2005, the Company acquired 100 percent of the outstanding
stock of KX Company Limited (Brassware). Brassware, located in Witton,
Birmingham, England, is an import distributor of plumbing and residential
heating products to plumbers' merchants and builders' merchants in the U.K.
and Ireland. Additionally, on August 27, 2004, the Company acquired 100
percent of the outstanding stock of Vemco Brasscapri Limited (Vemco).
Vemco, located in Wellington, Somerset, England, is an import distributor of
plumbing products to plumbers' merchants and builders' merchants throughout
the U.K. and Ireland. At the beginning of 2007, the operations of Brassware
and Vemco were combined and assumed the Mueller Primaflow brand name.
On December 14, 2004, the Company acquired shares in seven companies
and the inventory of another company (collectively, Mueller Comercial S.A.).
These operations include pipe nipple manufacturing in Mexico and import
distribution businesses which product lines include malleable iron fittings
and other plumbing specialties.
The Plumbing & Refrigeration segment markets primarily through its own
sales and distribution organization, which maintains sales offices and
distribution centers throughout the United States and in Canada, Mexico, and
Europe. Additionally, products are sold and marketed through a network of
agents, which, when combined with the Company's sales organization, provide
the Company broad geographic market representation.
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These businesses are highly competitive. The principal methods of
competition for Mueller's products are customer service, availability, and
price. The total amount of order backlog for the Plumbing & Refrigeration
segment as of December 29, 2007 was not significant.
The Company competes with various companies, depending on the product
line. In the U.S. copper tubing business, the domestic competition includes
Cerro Flow Products, Inc., Cambridge-Lee Industries (Reading Tube
Corporation), Wolverine Tube, Inc., KobeWieland Copper Products LLC, and
Howell Metal Company (a subsidiary of Commercial Metals Company), as well as
many actual and potential foreign competitors. In the European copper tubing
business, Mueller competes with at least eight European-based manufacturers
of copper tubing as well as other foreign-based manufacturers. In the copper
fittings market, competitors include Elkhart Products Company, a subsidiary
of Aalberts Industries N.V., and NIBCO, Inc., as well as several foreign
manufacturers. Additionally, the Company's copper tube and fittings
businesses compete with a large number of manufacturers of substitute
products made from other metals and plastic. The plastic fittings
competitors include NIBCO, Inc., Charlotte Pipe & Foundry, and other
companies. Management believes that no single competitor offers such a wide-
ranging product line as Mueller and that this is a competitive advantage in
some markets.
OEM Segment
Mueller's OEM segment includes the Industrial Products Division (IPD),
which manufactures brass rod, nonferrous forgings, and impact extrusions
that are sold primarily to OEMs in the plumbing, refrigeration, fluid power,
and automotive industries, as well as to other manufacturers and
distributors. The Company extrudes brass, bronze, and copper alloy rod in
sizes ranging from 3/8 inches to 4 inches in diameter. These alloys are
used in applications that require a high degree of machinability, wear and
corrosion resistance, as well as electrical conductivity. IPD also
manufactures brass and aluminum forgings, which are used in a wide variety
of products, including automotive components, brass fittings, industrial
machinery, valve bodies, gear blanks, and computer hardware. IPD also
serves the automotive, military ordnance, aerospace, and general
manufacturing industries with cold-formed aluminum and copper impact
extrusions. Typical applications for impacts are high strength ordnance,
high-conductivity electrical components, builders' hardware, hydraulic
systems, automotive parts, and other uses where toughness must be combined
with varying complexities of design and finish. Additionally IPD
manufactures shaped and formed tube, produced to tight tolerances, for
baseboard heating, appliances, and medical instruments. The OEM segment
also includes the Engineered Products Division (EPD), which manufactures and
fabricates valves and custom OEM products for refrigeration and air-
conditioning, gas appliance, and barbecue grill applications. The total
amount of order backlog for the OEM segment as of December 29, 2007 was not
significant.
On February 27, 2007, the Company acquired 100 percent of the
outstanding stock of Extruded Metals, Inc. (Extruded). Extruded, located in
Belding, Michigan, manufactures brass rod products, and during 2006 had
annual net sales of approximately $360 million. The acquisition of Extruded
complements the Company's existing brass rod product line.
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In December 2005, two subsidiaries of the Company received a business
license from a Chinese industry and commerce authority, establishing a joint
venture with Jiangsu Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang
Industries Ltd. The joint venture, in which the Company holds a 50.5
percent interest, produces inner groove and smooth tube in level-wound
coils, pancake coils, and straight lengths, primarily to serve the Chinese
domestic OEM air-conditioning market as well as to complement the Company's
U.S. product line. The joint venture, which is located primarily in Jintan
City, Jiangsu Province, China, is named Jiangsu Mueller-Xingrong Copper
Industries Limited (Mueller-Xingrong).
IPD and EPD primarily sell directly to OEM customers. Competitors,
primarily in the brass rod market, include Chase Brass and Copper Company, a
subsidiary of Global Brass and Copper, Inc., and others both domestic and
foreign. Outside of North America, IPD and EPD sell products through
various channels.
Labor Relations
At December 29, 2007, the Company employed approximately 4,875
employees, of which approximately 2,150 were represented by various unions.
Those union contracts will expire as follows:
Location Expiration Date
Port Huron, Michigan (Local 218 I.A.M.) May 1, 2010
Port Huron, Michigan (Local 44 U.A.W.) June 13, 2010
Belding, Michigan August 25, 2009
Wynne, Arkansas June 28, 2010
Fulton, Mississippi August 1, 2012
North Wales, Pennsylvania July 28, 2009
Waynesboro, Tennessee November 7, 2009
Jacksboro, Tennessee September 15, 2008
The union contracts at the Company's U.K. and Mexico operations are renewed
annually. The Company expects to renew these contacts without material
disruption of its operations.
As of December 29, 2007, approximately 18 percent of the Company's
employees were covered by collective bargaining or similar agreements that will
expire during 2008.
Raw Material and Energy Availability
The major portion of Mueller's base metal requirements (primarily
copper) is normally obtained through short-term supply contracts with
competitive pricing provisions (for cathode) and the open market (for
scrap). Other raw materials used in the production of brass, including
brass scrap, zinc, tin, and lead, are obtained from zinc and lead producers,
open-market dealers, and customers with brass process scrap. Raw materials
used in the fabrication of aluminum and plastic products are purchased in
the open market from major producers.
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Adequate supplies of raw material have historically been available to
the Company from primary producers, metal brokers, and scrap dealers.
Sufficient energy in the form of natural gas, fuel oils, and electricity is
available to operate the Company's production facilities. While temporary
shortages of raw material and fuels may occur occasionally, to date they
have not materially hampered the Company's operations.
During recent years, an increasing demand for copper and copper alloy
primarily from China had an effect on the global distribution of such
commodities. The increased demand for copper (cathode and scrap) and copper
alloy products from the export market caused a tightening in the domestic
raw materials market. Mueller's copper tube facilities can accommodate both
refined copper and copper scrap as the primary feedstock. The Company has
commitments from refined copper producers for a portion of its metal
requirements for 2008. Adequate quantities of copper are currently
available. While the Company will continue to react to market developments,
resultant pricing volatility or supply disruptions, if any, could
nonetheless adversely affect the Company.
Environmental Matters
Compliance with environmental laws and regulations is a matter of high
priority for the Company. Mueller's provision for environmental compliance
related to non-operating properties was $0.7 million for 2007 and $0.6
million in 2006 and 2005. Environmental costs related to operating
properties are classified as costs of goods sold and is not significant.
Other than as discussed below, the Company is not involved in any Superfund
sites other than as one of numerous potentially responsible parties (PRPs)
in which cases management believes that any obligation would be
insignificant. Except as discussed below, the Company does not anticipate
that it will need to make material expenditures for such compliance
activities during the remainder of the 2008 fiscal year, or for the next two
fiscal years.
Mining Remedial Recovery Company
Mammoth Mine Site
Mining Remedial Recovery Company (MRRC), a wholly owned subsidiary,
owns certain inactive mines in Shasta County, California. MRRC has
continued a program, begun in the late 1980's, of sealing mine portals with
concrete plugs in mine adits which were discharging water. The sealing
program has achieved significant reductions in the metal load in discharges
from these adits; however, additional reductions are required pursuant to an
order issued by the California Regional Water Quality Control Board (QCB).
In response to a 1996 Order issued by the QCB, MRRC completed a feasibility
study in 1997 describing measures designed to mitigate the effects of acid
rock drainage. In December 1998, the QCB modified the 1996 order extending
MRRC's time to comply with water quality standards. In September 2002, the
QCB adopted a new order requiring MRRC to adopt Best Management Practices
(BMP) to control discharges of acid mine drainage That order extended the
time to comply with water quality standards until September 2007. During
that time, implementation of BMP further reduced impacts of acid rock
drainage; however full compliance has not been achieved. The QCB is
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presently renewing MRRC's discharge permit and will concurrently issue a new
order. It is expected that the new order will require continued
implementation of BMP through 2012 to address residual discharges of acid
rock drainage. At this site, MRRC spent approximately $0.3 million in 2007,
$0.3 million in 2006, and estimates it will spend between approximately $0.3
and $0.8 million annually over the next ten years. Future expenditures
beyond a ten-year horizon are not reasonably estimable or foreseeable.
U.S.S. Lead
In 1991, U.S.S. Lead Refinery, Inc., a wholly owned subsidiary (Lead
Refinery), responded to an information request from the EPA under Superfund
for information on whether Lead Refinery arranged for the disposal of
hazardous substances in the vicinity of the Grand Calumet River/Indiana
Harbor Ship Canal. By letter dated February 4, 1997, the Indiana Department
of Environmental Management (IDEM) notified Lead Refinery that a pre-
assessment screening of the Grand Calumet River and the Indiana Harbor Canal
conducted pursuant to Superfund had identified releases of hazardous
substances from Lead Refinery and other PRPs that had adversely impacted
natural resources. Lead Refinery is in settlement negotiations in an effort
to settle EPA's claim for natural resources damages. Settlement
negotiations seek to resolve the claims of both IDEM and EPA for natural
resources damages.
In 1991, Lead Refinery also responded to an information request under
Superfund regarding a site in East Chicago, Indiana. In 1992, the EPA
advised Lead Refinery of its intent to list the property as a Superfund
site; however, to date, the EPA had deferred such listing. In 1993, Lead
Refinery entered into a Consent Order with the EPA pursuant to Section
3008(h) of the Resource Conservation and Recovery Act. The Consent Order
covers remediation activities at the East Chicago, Indiana site and provides
for Lead Refinery to complete certain on-site interim remedial activities
and studies that extend off-site. In November 1996, the EPA approved, with
modifications, Lead Refinery's Interim Stabilization Measures Work plan and
its design for a Corrective Action Management Unit at the Lead Refinery
site. Site activities, which began in December 1996, have been
substantially concluded. Lead Refinery's ongoing activities at the East
Chicago, Indiana site will be handled pursuant to a post-closure permit
issued by IDEM in December 2007 and effective as of January 22, 2008. With
this permit in effect, Lead Refinery expects that the Consent Order will be
terminated. Additionally, Lead Refinery is aware that the EPA is evaluating
whether further action under Superfund in the area near Lead Refinery's
facility should be undertaken. Lead Refinery, without additional assistance
from MRRC, lacks the financial resources needed to complete any additional
remediation that may be required.
Lead Refinery has been informed by the former owner and operator of a
Superfund site located in Pedricktown, New Jersey that it intends to seek
CERCLA response costs for alleged shipments of hazardous substances to the
site. Lead Refinery has executed a standstill agreement regarding that
site, which indefinitely extends the statute of limitations. By letter
dated January 26, 1996, Lead Refinery and other PRPs received from the EPA a
proposed Administrative Order on Consent to perform the remedial design for
operable Unit 1 of the Pedricktown Superfund Site. Lead Refinery determined
not to execute the Administrative Order on Consent based on its lack of
ability to finance the clean up or pay response costs incurred by the EPA.
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Several other PRPs, however, executed the agreement and performed the
remedial design.
In October 2003, Lead Refinery received a settlement offer from the EPA
of $0.9 million for CERCLA contribution to past and future response costs
incurred at the NL/Taracorp Superfund site in Granite City, Illinois. Lead
Refinery declined that offer. In February of 2004, NL Industries, Inc.
filed a contribution action against all PRPs who had not settled with the
EPA, including Lead Refinery, seeking payments of an equitable share of
clean-up costs incurred by NL Industries. Lead Refinery was not served with
the complaint prior to the execution of the deadline set by the court.
Other
In connection with acquisitions, the Company established environmental
reserves to fund the cost of remediation at sites currently or formerly
owned by various acquired entities. The Company, through its acquired
subsidiaries, is engaged in ongoing remediation and site characterization
studies.
Mueller Copper Tube Products, Inc.
In 1999, Mueller Copper Tube Products, Inc. (MCTP) commenced a cleanup
and remediation of soil and groundwater at its Wynne, Arkansas plant. MCTP
is currently removing trichloroethylene, a cleaning solvent formerly used by
MCTP, from the soil and groundwater. On August 30, 2000, MCTP received
approval of its Final Comprehensive Investigation Report and Storm Water
Drainage Investigation Report addressing the treatment of soils and
groundwater, from the Arkansas Department of Environmental Quality. The
Company established a reserve for this project in connection with the
acquisition of MCTP in 1998.
Altoona, Kansas Site
By letter dated October 10, 2006, the Kansas Department of Health and
Environment (KDHE) advised the Company that environmental contamination has
been identified at a former smelter in Altoona, Kansas. KDHE asserts that
the Company is a corporate successor to an entity that is alleged to have
owned and operated the smelter from 1915 to 1918. KDHE has requested that
the Company negotiate a consent order with KDHE to address contamination at
the site. The Company has submitted a preliminary response to this request.
The Company and another PRP have met with KDHE and the Company has been
advised informally that the Company might be similarly connected to two,
possibly three, other former smelter sites in Kansas. The Company does not
believe it is liable for the contamination but expects that the Company may
be asked to participate in further discussions with the potentially liable
party and with KDHE.
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Recapitalization through Special Dividend
In September 2004, the Company authorized a special dividend consisting
of $6.50 in cash and $8.50 in principal amount of the Company's 6%
Subordinated Debentures due 2014 (the Debentures) for each share of Common
Stock (the Special Dividend). The Special Dividend, distributed in the
fourth quarter of 2004, substantially reduced the Company's cash position by
$245.6 million and its stockholders' equity by $545.1 million, and increased
its long-term debt by $299.5 million.
Other Business Factors
The Registrant's business is not materially dependent on patents,
trademarks, licenses, franchises, or concessions held. In addition,
expenditures for company-sponsored research and development activities were
not material during 2007, 2006, or 2005. No material portion of the
Registrant's business involves governmental contracts. Seasonality of the
Company's sales is not significant.
SEC Filings
We make available through our internet website our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission (SEC). To retrieve any of this information, you may
access our internet home page at www.muellerindustries.com, select Mueller
Financials, and then select SEC Filings.
Reports filed with the SEC may also be viewed or obtained at the SEC
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
Information on the operation of the SEC Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website
that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC; the
website address is www.sec.gov.
ITEM 1A. RISK FACTORS
The Company is exposed to risk as it operates its businesses. To
provide a framework to understand the operating environment of the Company,
we are providing a brief explanation of the more significant risks
associated with our businesses. Although we have tried to identify and
discuss key risk factors, others could emerge in the future. These risk
factors should be considered carefully when evaluating the Company and its
businesses.
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Increases in costs and the availability of energy and raw materials used in
our products could impact our cost of goods sold and our distribution
expenses, which could have a material adverse impact on our operating
margins.
Both the costs of raw materials used in our manufactured products
(copper, brass, zinc, aluminum, and PVC and ABS resins) and energy costs
(electricity, natural gas and fuel) have been rising during the last several
years, which has resulted in increased production and distribution costs.
While we typically attempt to pass increased costs through to our customers
or to modify or adapt our activities to mitigate the impact of these
increases, we may not be able to do so successfully. Failure to fully pass
these increases to our customers or to modify or adapt our activities to
mitigate the impact could have a material adverse impact on our operating
margins. Additionally, if we are for any reason unable to obtain raw
materials or energy, our ability to manufacture our finished goods would be
impacted which could have a material adverse impact on our operating
margins.
The unplanned departure of key personnel could disrupt our business.
We depend on the continued efforts of our senior management. The
unplanned loss of key personnel, or the inability to hire and retain
qualified executives, could negatively impact our ability to manage our
business.
Economic conditions in the housing and commercial construction industries as
well as changes in interest rates could have a material adverse impact on
our business, financial condition and results of operations.
Our businesses are sensitive to changes in general economic conditions,
including, in particular, conditions in the housing and commercial
construction industries. Prices for our products are affected by overall
supply and demand in the market for our products and for our competitors'
products. In particular, market prices of building products historically
have been volatile and cyclical, and we may be unable to control the timing
and amount of pricing changes for our products. Prolonged periods of weak
demand or excess supply in any of our businesses could negatively affect our
revenues and margins and could result in a material adverse impact on our
business, financial condition, and results of operations.
The markets that we serve, including, in particular, the housing and
commercial construction industries, are significantly affected by movements
in interest rates and the availability of credit. Significantly higher
interest rates could have a material adverse effect on our business,
financial condition and results of operations. Our businesses are also
affected by a variety of other factors beyond our control, including, but
not limited to, employment levels, foreign currency rates, unforeseen
inflationary pressures and consumer confidence. Since we operate in a
variety of geographic areas, our businesses are subject to the economic
conditions in each such area. General economic downturns or localized
downturns in the regions where we have operations could have a material
adverse effect on our business, financial condition, and results of
operations.
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Competitive conditions including the impact of imports and substitute
products could have a material adverse effect on our margins and
profitability.
The markets we serve are competitive across all product lines. Some
consolidation of customers has occurred and may continue, which could shift
buying power to customers. In some cases, customers have moved production
to low-cost countries such as China, or sourced components from there, which
has reduced demand in North America for some of the products we produce.
These conditions could have a material adverse impact on our ability to
maintain margins and profitability. The potential threat of imports and
substitute products is based upon many factors including raw material
prices, distribution costs, foreign exchange rates and production costs.
The end use of alternative import and/or substitute products could have a
material adverse effect on our business, financial condition, and results of
operations.
Our exposure to exchange rate fluctuations on cross border transactions and
the translation of local currency results into U.S. dollars could have an
adverse impact on our results of operations or financial position.
We conduct our business through subsidiaries in several different
countries, and fluctuations in currency exchange rates could have a
significant impact on the reported results of our operations, which are
presented in U.S. dollars. A significant and growing portion of our
products are manufactured in, or acquired from suppliers located in, lower
cost regions. Cross border transactions, both with external parties and
intercompany relationships, result in increased exposure to foreign exchange
fluctuations. The strengthening of certain currencies such as the Euro and
U.S. dollar could expose our U.S. based businesses to competitive threats
from lower cost producers in other countries such as China. Lastly, our
sales are translated into U.S. dollars for reporting purposes. The
strengthening of the U.S. dollar could result in unfavorable translation
effects when the results of foreign operations are translated into U.S.
dollars. Accordingly, significant changes in exchange rates, particularly
the Euro, Pound Sterling, Mexican Peso and the Chinese Renminbi, could have
an adverse impact on our results of operations or financial position.
We are subject to claims, litigation and regulatory proceedings that could
have a material adverse effect on us.
We are, from to time, involved in various claims, litigation matters
and regulatory proceedings. These matters may include, among other things,
contract disputes, personal injury claims, environmental claims or
proceedings, other tort claims, employment and tax matters and other
litigation including class actions that arise in the ordinary course of our
business. Although we intend to defend these matters vigorously, we cannot
predict with certainty the outcome or effect of any claim or other
litigation matter, and there can be no assurance as to the ultimate outcome
of any litigation or regulatory proceeding. Litigation and regulatory
proceedings may have a material adverse effect on us because of potential
adverse outcomes, defense costs, the diversion of our management's
resources, availability of insurance coverage and other factors.
-13-
A strike or other work stoppage, or our inability to renew collective
bargaining agreements on favorable terms, could impact our cost structure
and our ability to operate our facilities and produce our products, which
could have an adverse effect on our results of operations.
As of December 29, 2007, approximately 44 percent of our 4,875
employees were covered by collective bargaining or similar agreements. If
we are unable to negotiate acceptable new agreements with the unions
representing our employees upon expiration of existing contracts, we could
experience strikes or other work stoppages. Strikes or other work stoppages
could cause a significant disruption of operations at our facilities which
could have an adverse impact on us. New or renewal agreements with unions
representing our employees could call for higher wages or benefits paid to
union members, which would increase our operating costs and could adversely
affect our profitability. Higher costs and/or limitations on our ability to
operate our facilities and produce our products resulting from increased
labor costs, strikes or other work stoppages could have an adverse effect on
our results of operations.
We are subject to environmental laws and regulations and future compliance
may have a material adverse effect on our results of operations or financial
position.
The nature of our operations exposes us to the risk of liabilities and
claims with respect to environmental matters. While we have established
accruals intended to cover the cost of environmental remediation at
contaminated sites, the actual cost is difficult to determine and may exceed
our estimated reserves. Further, changes to, or more rigorous enforcement
or stringent interpretation of environmental laws could require significant
incremental costs to maintain compliance. In addition, future claims may be
asserted against us for, among other things, past acts or omissions at
locations operated by predecessor entities, or alleging damage or injury or
seeking other relief in connection with environmental matters associated
with our operations. Future liabilities, claims and compliance costs may
have a material adverse effect on us because of potential adverse outcomes,
defense costs, the diversion of our management's resources, availability of
insurance coverage and other factors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
-14-
ITEM 2. PROPERTIES
Information pertaining to the Registrant's major operating facilities
is included below. Except as noted, the Registrant owns all of its
principal properties. The Registrant's plants are in satisfactory condition
and are suitable for the purpose for which they were designed and are now
being used.
Approximate
Location Property Size Description
Plumbing & Refrigeration Segment
Fulton, MS 418,000 sq. ft. Copper tube mill. Facility includes
52.37 acres casting, extruding, and finishing
equipment to produce copper tubing,
including tube feedstock for the
Company's copper fittings plants
and Precision Tube factory.
Fulton, MS 103,000 sq. ft. Casting facility. Facility includes
11.9 acres casting equipment to produce copper
billets used in the adjoining copper
tube mill.
Wynne, AR 682,000 sq. ft.(1) Copper tube mill. Facility includes
39.2 acres extrusion and finishing equipment to
produce copper tubing and copper tube
line sets.
Fulton, MS 58,500 sq. ft. Packaging and bar coding facility for
15.53 acres retail channel sales.
Fulton, MS 70,000 sq. ft.(2) Copper fittings plant. High-volume
7.68 acres facility that produces copper fittings
using tube feedstock from the
Company's adjacent copper tube mill.
Covington, TN 159,500 sq. ft. Copper fittings plant. Facility
40.88 acres produces copper fittings using tube
feedstock from the Company's copper
tube mills.
Portage, MI 205,000 sq. ft. Plastic fittings plant. Produces DWV
18 acres fittings using injection molding
equipment.
Ontario, CA 211,000 sq. ft.(3) Plastic fittings plant. Produces DWV
10 acres fittings using injection molding
equipment.
Fort Pierce, FL 69,875 sq. ft. Plastic fittings plant. Produces
5.60 acres pressure fittings using injection
molding equipment.
-15-
Approximate
Location Property Size Description
Monterrey, 120,000 sq. ft.(3) Pipe nipples plant. Produces pipe nipples,
Mexico 3.4 acres cut pipe and merchant couplings.
Bilston, 402,500 sq. ft. Copper tube mill. Facility includes
England 14.95 acres casting, extruding, and finishing
United Kingdom equipment to produce copper tubing.
OEM Segment
Port Huron, MI 322,500 sq. ft. Brass rod mill. Facility includes
71.5 acres casting, extruding, and finishing
equipment to produce brass rods and
bars, in various shapes and sizes.
Belding, MI 293,068 sq. ft. Brass rod mill. Facility includes
17.64 acres casting, extruding, and finishing
equipment to produce brass rods and
bars, in various shapes and sizes.
Port Huron, MI 127,500 sq. ft. Forgings plant. Produces brass and
aluminum forgings.
Marysville, MI 81,500 sq. ft. Aluminum and copper impacts plant.
6.72 acres Produces made-to-order parts using cold
impact processes.
Hartsville, TN 78,000 sq. ft. Refrigeration products plant.
4.51 acres Produces products used in
refrigeration applications such as
ball valves, line valves, and
compressor valves.
Carthage, TN 67,520 sq. ft. Fabrication facility. Produces precision
10.98 acres tubular components and assemblies.
Jacksboro, TN 65,066 sq. ft. Bending and fabricating facility.
11.78 acres Produces gas burners, supply tubes,
and manifolds for the gas appliance
industry.
Waynesboro, TN 57,000 sq. ft.(4) Gas valve plant. Facility produces
5.0 acres brass valves and assemblies for the
gas appliance industry.
North Wales, PA 174,000 sq. ft. Precision Tube factory. Facility
18.9 acres fabricates copper tubing, copper
alloy tubing, aluminum tubing, and
fabricated tubular products.
Brighton, MI 65,000 sq. ft.(3) Machining operation. Facility
machines component parts for supply
to automotive industry.
-16-
Approximate
Location Property Size Description
Middletown, OH 55,000 sq. ft. Fabricating facility. Produces burner
2.0 acres systems and manifolds for the gas
appliance industry.
Jintan City, 322,580 sq. ft.(5) Copper tube mill. Facility includes
Jiangsu Province 33.0 acres casting, and finishing equipment
China to produce engineered copper tube
primarily for OEMs.
In addition, the Company owns and/or leases other properties used as
distribution centers and corporate offices.
(1) Facility, or some portion thereof, is located on land leased from a local
municipality, with an option to purchase at nominal cost.
(2) Facility is leased under a long-term lease agreement, with an option
to purchase at nominal cost.
(3) Facility is leased under an operating lease.
(4) Facility is leased from a local municipality for a nominal amount.
(5) Facility is located on land that is under a long-term land use rights
agreement.
-17-
ITEM 3. LEGAL PROCEEDINGS
General
The Company is involved in certain litigation as a result of claims
that arose in the ordinary course of business. Additionally, the Company
may realize the benefit of certain legal claims and litigation in the future;
these gain contingencies are not recognized in the Consolidated Financial
Statements.
Environmental Proceedings
Reference is made to "Environmental Matters" in Item 1 of this
Report, which is incorporated herein by reference, for a description of
environmental proceedings.
Copper Tube Antitrust Litigation
The Company is named as a defendant in several pending litigations
(the Copper Tube Actions) brought by direct and indirect purchasers of
various forms of copper tube. The Copper Tube Actions allege
anticompetitive activities with respect to the sale of copper plumbing
tubes (copper plumbing tubes) and/or copper tubes used in, among other
things, the manufacturing of air-conditioning and refrigeration units (ACR
copper tubes). All of the Copper Tube Actions seek monetary and other
relief.
Direct-Purchaser Plumbing Tube Action
Two Copper Tube Actions were filed in September and October of 2004
in the United States District Court for the Western District of Tennessee
and were consolidated to become the Direct-Purchaser Plumbing Tube Action.
The Direct-Purchaser Plumbing Tube Action is a purported class action
brought on behalf of direct purchasers of copper plumbing tubes in the
United States and alleges anticompetitive activities with respect to the
sale of copper plumbing tubes. Wholly owned Company subsidiaries, WTC
Holding Company, Inc. (WTC Holding Company), Deno Holding Company, Inc.
(Deno Holding Company), and Mueller Europe Ltd. (Mueller Europe), are
named in the Direct-Purchaser Plumbing Tube Action.
In September 2006, the Direct-Purchaser Plumbing Tube Action was
dismissed as to Mueller Europe for lack of personal jurisdiction. In
October 2006, the Direct-Purchaser Plumbing Tube Action was dismissed in
its entirety for lack of subject matter jurisdiction as to all defendants.
Although plaintiffs in the Direct-Purchaser Plumbing Tube Action
filed a motion for reconsideration of the dismissal of Mueller Europe, the
court 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.
-18-
In June 2007, plaintiffs filed with the United States Court of
Appeals for the Sixth Circuit a notice of appeal from the judgment and
orders dismissing the complaint in the Direct-Purchaser Plumbing Tube
Action. The Company, WTC Holding Company, Inc., Deno Holding Company,
Inc., and Mueller Europe filed notices of cross-appeal in July 2007.
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 Direct-Purchaser
Plumbing Tube Action, which the court denied in November 2007. In
November 2007, plaintiffs filed a notice of appeal from the order denying
the motion to vacate. All appeals in the Direct-Purchaser Plumbing Tube
Action remain pending.
Indirect-Purchaser Plumbing Tube Action
Four Copper Tube Actions were filed in October 2004 in state court in
California and were consolidated to become the Indirect-Purchaser
Plumbing Tube Action. The Indirect-Purchaser Plumbing Tube Action is a
purported class action brought on behalf of indirect purchasers of copper
plumbing tubes in California and alleges anticompetitive activities with
respect to the sale of copper plumbing tubes. WTC Holding Company, Deno
Holding Company, Mueller Europe, and Deno Acquisition Eurl are named in
the Indirect-Purchaser Plumbing Tube Action. Deno Acquisition Eurl has
not been served with the complaint in the Indirect-Purchaser Plumbing Tube
Action.
The claims against WTC Holding Company and Deno Holding Company have
been dismissed without prejudice in the Indirect-Purchaser Plumbing Tube
Action. Mueller Europe has not yet been required to respond in the
Indirect-Purchaser Plumbing Tube Action. The Company's demurrer to the
complaint has been filed in the Indirect-Purchaser Plumbing Tube Action.
The court overseeing the Indirect-Purchaser Plumbing Tube Action has
stayed that action conditioned upon the parties' submitting periodic
status reports on the status of the Direct-Purchaser Plumbing Tube Action.
Direct-Purchaser ACR Tube Action
Three Copper Tube Actions were filed in April 2006 in the United
States District Court for the Western District of Tennessee and were
consolidated to become the Direct-Purchaser ACR Tube Action. The Direct-
Purchaser ACR Tube Action is a purported class action brought on behalf of
direct purchasers of ACR copper tubes in the United States and alleges
anticompetitive activities with respect to the sale of ACR copper tubes.
The Company and Mueller Europe are named in the Direct-Purchaser ACR Tube
Action.
In July 2007, the Direct-Purchaser ACR Tube Action was dismissed in
its entirety for lack of subject matter jurisdiction as to all defendants.
In August 2007, plaintiffs filed with the United States Court of Appeals
for the Sixth Circuit a notice of appeal from the judgment and order
dismissing the complaint in the Direct-Purchaser ACR Tube Action. The
Company and Mueller Europe filed notices of cross-appeal in August 2007.
All appeals in the Direct-Purchaser ACR Tube Action remain pending.
-19-
In December 2007, plaintiffs filed with the United States Court of
Appeals for the Sixth Circuit a motion to dismiss the cross-appeals in the
Direct-Purchaser ACR Tube Action. That motion remains pending.
Indirect-Purchaser ACR Tube Action
Two Copper Tube Actions were filed in June and August 2006 in the
United States District Court for the Western District of Tennessee and
were consolidated to become the Indirect-Purchaser ACR Tube Action. The
Indirect-Purchaser ACR Tube Action is a purported class action brought on
behalf of indirect purchasers of ACR copper tubes in the United States and
alleges anticompetitive activities with respect to the sale of ACR copper
tubes. The Company and Mueller Europe are named in the Indirect-Purchaser
ACR Tube Action. The Company and Mueller Europe have been served, but
have not yet been required to respond, in the Indirect-Purchaser ACR Tube
Action.
Carrier ACR Tube Action
A Copper Tube Action (the Carrier ACR Tube Action) was filed in March
2006 in the United States District Court for the Western District of
Tennessee by Carrier Corporation, Carrier S.A., and Carrier Italia S.p.A.
(collectively, Carrier). The Carrier ACR Tube Action alleges
anticompetitive activities with respect to the sale to Carrier of ACR
copper tubes. The Company and Mueller Europe are named in the Carrier ACR
Tube Action.
In July 2007, the Carrier ACR Tube Action was dismissed in its
entirety for lack of subject matter jurisdiction as to all defendants. In
August 2007, plaintiffs filed with the United States Court of Appeals for
the Sixth Circuit a notice of appeal from the judgment and order
dismissing the complaint in the Carrier Action. The Company and Mueller
Europe filed notices of cross-appeal in August 2007.
In October 2007, Carrier filed with the United States Court of
Appeals for the Sixth Circuit a motion to dismiss the cross-appeals, which
the Court denied in December 2007. All appeals in the Carrier ACR Tube
Action remain pending.
Indirect-Purchaser Copper Tube Action
A Copper Tube Action (the Indirect-Purchaser Copper Tube Action) was
filed in July 2006 in the United States District Court for the Northern
District of California. The Indirect-Purchaser Copper Tube Action is a
purported class action brought on behalf of indirect purchasers of copper
plumbing tubes and ACR copper tubes in the United States and alleges
anticompetitive activities with respect to the sale of both copper
plumbing tubes and ACR copper tubes.
The Company, Mueller Europe, WTC Holding Company, Deno Holding
Company, and Deno Acquisition Eurl are named in the Indirect-Purchaser
Copper Tube Action. The Company, Mueller Europe, WTC Holding Company, and
Deno Holding Company have been served, but have not yet been required to
respond, in the Indirect-Purchaser Copper Tube Action.
-20-
Although the Company believes that the claims for relief in the Copper
Tube Actions are without merit, due to the procedural stage of the Copper
Tube Actions, the Company is unable to determine the likelihood of a
materially adverse outcome in the Copper Tube Actions or the amount or range
of a potential loss in the Copper Tube Actions.
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 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.
-21-
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 not sought authorization to have an 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. On January
3, 2008 the Court overruled that motion and the case is proceeding to
discovery of the relevant facts. The Company believes that these
counterclaims are without merit and intends to defend them vigorously.
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; however,
in February 2008, Canadian government officials announced their decision not
to proceed with the prosecution of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-22-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of February 21, 2008, the number of holders of record of Mueller's
Common Stock was approximately 1,450. On February 22, 2008, the closing
price for Mueller's Common Stock on the New York Stock Exchange was
$29.43.
Issuer Purchases of Equity Securities
The Company's Board of Directors has extended, until October 2008,
the authorization to repurchase up to ten million shares of the Company's
Common Stock through open market transactions or through privately
negotiated transactions. The Company has no obligation to purchase any
shares and may cancel, suspend, or extend the time period for the purchase
of shares at any time. Any purchases will be funded primarily through
existing cash and cash from operations. The Company may hold any shares
purchased in treasury or use a portion of the repurchased shares for
employee benefit plans, as well as for other corporate purposes. Through
December 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 period ended December 29, 2007.
(a) (b) (c) (d)
Total Maximum
Number of Number of
Shares Shares
Purchased as That May
Part of Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Purchased per Share Programs Programs
7,647,030 (1)
September 30 -
October 27, 2007 - $ -
October 28 -
November 24, 2007 - -
November 25 -
December 29, 2007 - -
(1) Shares available to be purchased under the Company's 10 million share
repurchase authorization until October 2008. The extension of the
authorization was announced on October 26, 2007.
The Company's Board of Directors declared a regular quarterly dividend
of 10 cents per share on its common stock for each fiscal quarter of 2007
and 2006. Payment of dividends in the future is dependent upon the Company's
financial condition, cash flows, capital requirements, earnings, and other
factors.
-23-
The high, low, and closing prices of Mueller's Common Stock on the New
York Stock Exchange for each fiscal quarter of 2007 and 2006 were as follows:
High Low Close
2007
Fourth quarter $ 38.59 $ 27.15 $ 29.57
Third quarter 38.94 28.76 36.14
Second quarter 35.95 29.46 34.44
First quarter 33.60 27.86 30.10
2006
Fourth quarter $ 38.25 $ 30.35 $ 31.70
Third quarter 40.35 30.34 35.17
Second quarter 41.80 28.84 33.03
First quarter 35.86 26.81 35.69
PERFORMANCE GRAPH
The following table compares total stockholder return since December
28, 2002 to the Dow Jones U.S. Total Market Index (Total Market Index) and
the Dow Jones U.S. Building Materials & Fixtures Index (Building Materials
Index). Total return values for the Total Market Index, the Building
Materials Index and the Company were calculated based on cumulative total
return values assuming reinvestment of dividends. The Common Stock is
traded on the New York Stock Exchange under the symbol MLI.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Among Mueller Industries, Inc., The Dow Jones US Index
And The Dow Jones US Building Materials & Fixtures Index
[GRAPH]
* $100 invested on 12/28/02 in stock or index-including reinvestment of
dividends.
Reflects reinvestment of shares in Common Stock of (i) regular quarterly
dividends paid by the Company, ii) the cash paid by the Company in connection
with the Special Dividend and (iii) the proceeds of an assumed sale at par of
the Debentures paid by the Company in connection with the Special Dividend.
-24-
Mueller Dow Jones U.S. Dow Jones U.S.
Industries, Total Market Building Materials &
Inc. Index Fixtures Index
2002 100 100 100
2003 127 130 139
2004 188 147 186
2005 162 157 198
2006 190 181 228
2007 179 193 219
-25-
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
2007 2006 2005 2004 2003
For the fiscal year:(2)
Net sales $ 2,697,845 $ 2,510,912 $ 1,729,923 $ 1,379,056 $ 999,078
Operating income 191,621 (5) 218,885 (3) 131,758 112,490 49,384
Net income from continuing operations 115,475 148,869 (4) 89,218 79,416 44,221
Diluted earnings per share
from continuing operations 3.10 4.00 2.40 2.15 1.19
Cash dividends per share 0.40 0.40 0.40 6.90 (1) -
At year-end:
Total assets 1,449,204 1,268,907 1,116,928 971,328 1,060,420
Long-term debt 281,738 308,154 312,070 310,650 (1) 11,437
(1) During 2004, the Company paid 40 cents per share in regular ten cent quarterly cash dividends;
additionally the Company paid a Special Dividend composed of $6.50 in cash and $8.50 per share
in the form of 6% Subordinated Debentures due 2014.
(2) Includes activity of acquired businesses from the following purchase dates: (i) Extruded, February 27, 2007,
(ii) Mueller-Xingrong, December 2005, (iii) Brassware, August 15, 2005, (iv) Mueller Comercial S.A.,
December 14, 2004, (v) Vemco, August 27, 2004.
(3) In 2006, the Company recorded a pre-tax charge of $14.2 million to write-down inventories to the lower of
cost or market.
(4) Includes $7.7 million benefit for change in estimate regarding the future utilization of various tax
incentives in 2006.
(5) Includes $10.0 million pre-tax gain from liquidation of LIFO layers plus a gain from a copper litigation
settlement of $8.9 million, less a goodwill impairment charge of $2.8 million related to its Mexican
Operations.
-26-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is contained under the caption "Financial Review" submitted as
a separate section of this Annual Report on Form 10-K commencing on page
F-2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are
contained under the caption "Financial Review" submitted as a separate
section of this Annual Report on Form 10-K commencing on page F-2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements required by this item are contained in a separate
section of this Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure information required to be disclosed in Company reports filed under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in Company reports filed
under the Exchange Act is accumulated and communicated to management,
including the Company's Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures pursuant
to Rule 13a-15(e) of the Exchange Act as of December 29, 2007. Based on
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures
are effective as of December 29, 2007 to ensure that information required to
be disclosed in Company reports filed under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods
specified in the SEC rules and forms and (ii) accumulated and communicated
to management, including the Company's principal executive officer and
principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
-27-
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) under the Securities Exchange Act of 1934. Pursuant to the
rules and regulations of the Securities and Exchange Commission, internal
control over financial reporting is a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers, and effected by the Company's board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally
accepted in the United States. Due to inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Further, because of changes in conditions, effectiveness of internal control
over financial reporting may vary over time.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's internal control over financial reporting as
of December 29, 2007 based on the control criteria established in a report
entitled "Internal Control-Integrated Framework," issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on such
evaluation management has concluded that our internal control over financial
reporting is effective as of December 29, 2007.
The Company acquired Extruded in February 2007 and has excluded
Extruded from its assessment of, and conclusion on, the effectiveness of the
Company's internal control over financial reporting. Extruded accounted for
4 percent and 5 percent of total and net assets, respectively, as of
December 29, 2007 and 12 percent and 5 percent of revenues and net income,
respectively, for the year then ended.
Ernst & Young LLP, the independent registered public accounting firm
that audited the Company's financial statements included in this Annual
Report on Form 10-K, has issued an attestation report on the Company's
internal control over financial reporting, which is included herein.
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 December 29, 2007, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
-28-
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mueller Industries, Inc.
We have audited Mueller Industries, Inc.'s internal control over financial
reporting as of December 29, 2007, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Mueller
Industries, Inc.'s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the
accompanying Management's Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal Control
over Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include
the internal controls of Extruded Metals, Inc., which is included in the
December 29, 2007 consolidated financial statements of Mueller Industries,
Inc. and constituted $62.8 million and $38.1 million of total and net
assets, respectively, as of December 29, 2007 and $310.7 million and $5.3
million of revenues and net income, respectively, for the year then ended.
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Our audit of internal control over financial reporting of Mueller
Industries, Inc. also did not include an evaluation of the internal control
over financial reporting of Extruded Metals, Inc.
In our opinion, Mueller Industries, Inc. maintained, in all material
respects, effective internal control over financial reporting as of December
29, 2007, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets
of Mueller Industries, Inc. as of December 29, 2007 and December 30, 2006,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 29, 2007
and our report dated February 26, 2008 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Memphis, Tennessee
February 26, 2008
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by Item 10 is contained under the captions
"Ownership of Common Stock by Directors and Executive Officers and
Information about Director Nominees," "Corporate Governance," "Report of the
Audit Committee of the Board of Directors," and "Section 16(a) Beneficial
Ownership Compliance Reporting" in the Company's Proxy Statement for its
2008 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or about March 26, 2008, which is incorporated herein
by reference.
The Company intends to disclose any amendments to its Code of Business
Conduct and Ethics by posting such information to the Company's website at
www.muellerindustries.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained under the caption
"Compensation Discussion and Analysis", "Summary Compensation Table for
2007", "2007 Grants of Plan Based Awards Table", "Outstanding Equity Awards
at Fiscal 2007 Year-End", "2007 Option Exercises", "Employment Agreements",
"Potential Payments Under Employment and Consulting Agreements as of the End
of 2007", "2007 Director Compensation", "Report of the Compensation
Committee of the Board of Directors on Executive Compensation" and
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"Corporate Governance" in the Company's Proxy Statement for its 2008 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 26, 2008, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table discloses information regarding the securities to
be issued and the securities remaining available for issuance under the
Registrant's stock-based incentive plans as of December 29, 2007 (shares in
thousands):
-31-
(a) (b) (c)
Number of securities
remaining available for future
Number of securities Weighted average issuance under equity
to be issued upon exercise exercise price of compensation plans (excluding
of outstanding options, outstanding options securities reflected in column
Plan category warrants, and rights warrants, and rights (a))
Equity compensation plans
approved by security
holders 1,692 $ 28.42 470
Equity compensation
plans not approved by
security holders 311 (1) 18.29 -
-------------- --------------
Total 2,003 26.84 470
============== ==============
(1) On February 13, 2002 Mr. William D. O'Hagan, President and Chief Executive Officer, was
granted an option to acquire 155,610 shares of Common Stock at an exercise price of $20.40 per share
and on February 13, 2003 Mr. O'Hagan was granted an option to acquire 155,610 shares of Common Stock
at an exercise price of $16.13 per share (collectively, the O'Hagan Treasury Options). Each of the
O'Hagan Treasury Options has a term of ten years, subject to earlier expiration upon termination of
employment, and vests ratably over a five-year period from the date of the grant, except that if there
is a Change in Control as defined in Mr. O'Hagan's employment agreement with the Company (the O'Hagan
Employment Agreement), all of the O'Hagan Treasury Options will become immediately exercisable on the
later to occur of (i) the day Mr. O'Hagan notifies the Company he is terminating his employment with
the Company as a result of said change, and (ii) ten days prior to the date Mr. O'Hagan's employment
with the Company is terminated by the Company. In addition, all outstanding unvested O'Hagan Treasury
Options will immediately vest and become exercisable if Mr. O'Hagan's employment is terminated by the
Company without Cause (as defined in the O'Hagan Employment Agreement) or by Mr. O'Hagan for Good
Reason (as defined in the O'Hagan Employment Agreement). The O'Hagan Treasury Options may only be
exercised for shares of Common Stock held in treasury by the Company.
-32-
Other information required by Item 12 is contained under the captions
"Principal Stockholders" and "Ownership of Common Stock by Directors and
Executive Officers and Information about Director Nominees" in the Company's
Proxy Statement for its 2008 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission on or about March 26, 2008, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by Item 13 is contained under the caption
"Corporate Governance" in the Company's Proxy Statement for its 2008 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 26, 2008, which is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is contained under the caption
"Appointment of Independent Registered Public Accounting Firm" in the Company's
Proxy Statement for its 2008 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission on or about March 26, 2008, which is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements: the financial statements, notes, and report of
independent registered public accounting firm described in Item 8 of
this Annual Report on Form 10-K are contained in a separate section
of this Annual Report on Form 10-K commencing on page F-1.
2. Financial Statement Schedule: the financial statement schedule
described in Item 8 of this report is contained in a separate section
of this Annual Report on Form 10-K commencing on page F-1.
3. Exhibits:
3.1 Restated Certificate of Incorporation of the Registrant dated
February 8, 2007 (Incorporated herein by reference to Exhibit
3.1 of the Registrant's Annual Report on Form 10-K, dated
February 28, 2007, for the fiscal year ended December 30,
2006).
3.2 Amended and Restated By-laws of the Registrant, adopted and
effective as of October 25, 2007 (Incorporated herein by
reference to Exhibit 3.1 of the Registrant's Quarterly Report
on Form 10-Q, dated October 26, 2007, for the quarter ended
September 29, 2007).
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4.1 Indenture, dated as of October 26, 2004, by and between
Mueller Industries, Inc, and SunTrust Bank, as trustee
(Incorporated herein by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K, dated October 26,
2004).
4.2 Form of 6% Subordinated Debenture due 2014 (Incorporated
herein by reference to Exhibit 4.2 of the Registrant's
Current Report on Form 8-K, dated October 26, 2004).
4.3 Certain instruments with respect to long-term debt of the
Registrant have not been filed as Exhibits to this Report
since the total amount of securities authorized under any
such instruments does not exceed 10 percent of the total
assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant agrees to furnish a copy
of each such instrument upon request of the Securities and
Exchange Commission.
10.1 Stock Option Agreement, dated December 4, 1991, by and
between the Registrant and Harvey L. Karp (Incorporated
herein by reference to Exhibit 10.4 of the Registrant's
Annual Report on Form 10-K, dated March 24, 2003, for the
fiscal year ended December 28, 2002).
10.2 Stock Option Agreement, dated March 3, 1992, by and between
the Registrant and Harvey L. Karp (Incorporated herein by
reference to Exhibit 10.5 of the Registrant's Annual Report
on Form 10-K, dated March 24, 2003, for the fiscal year ended
December 28, 2002).
10.3 Amended and Restated Employment Agreement, effective as of
September 17, 1997, by and between the Registrant and Harvey
L. Karp (Incorporated herein by reference to Exhibit 10.8 of
the Registrant's Annual Report on Form 10-K, dated March 24,
2003, for the fiscal year ended December 28, 2002).
10.4 Amendment, dated June 21, 2004, to the Amended and Restated
Employment Agreement dated as of September 17, 1997, by and
between the Registrant and Harvey Karp (Incorporated herein
by reference to Exhibit 10.3 of the Registrant's Quarterly
Report on Form 10-Q, dated July 16, 2004, for the quarter
ended June 26, 2004).
10.5 Second Amendment, dated February 17, 2005, to the Amended and
Restated Employment Agreement, dated as of September 17,
1997, between the Registrant and Harvey Karp (Incorporated
herein by reference to Exhibit 10.2 of the Registrant's
Current Report on Form 8-K, dated May 5, 2005).
10.6 Third Amendment, dated October 25, 2007, to the Amended and
Restated Employment Agreement, dated as of September 17,
1997, by and between the Registrant and Harvey Karp
(Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K, dated October 25,
2007).
-34-
10.7 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and Harvey Karp (Incorporated herein by reference
to Exhibit 10.1 of the Registrant's Quarterly Report on Form
10-Q, dated July 16, 2004, for the quarter ended June 26,
2004).
10.8 Amended and Restated Consulting Agreement, dated October 25,
2007, by and between the Registrant and Harvey Karp
(Incorporated herein by reference to Exhibit 10.2 of the
Registrant's Current Report on Form 8-K, dated October 25,
2007).
10.9 Stock Option Agreement, dated May 7, 1997, by and between the
Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.12 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.10 Amended and Restated Employment Agreement, effective as of
September 17, 1997, by and between the Registrant and William
D. O'Hagan (Incorporated herein by reference to Exhibit 10.9
of the Registrant's Annual Report on Form 10-K, dated March
24, 2003, for the fiscal year ended December 28, 2002).
10.11 Amendment to Amended and Restated Employment Agreement,
effective May 12, 2000, by and between the Registrant and
William D. O'Hagan (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form
10-Q, dated July 24, 2000, for the quarter ended June 24,
2000).
10.12 Second Amendment to the Amended and Restated Employment
Agreement dated as of September 17, 1997, by and between the
Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Current Report
on Form 8-K, dated May 5, 2005).
10.13 Stock Option Agreement, dated October 9, 1998, by and between
the Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.13 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.14 Stock Option Agreement, dated February 13, 2002, by and
between the Registrant and William D. O'Hagan (Incorporated
herein by reference to Exhibit 10.17 of the Registrant's
Annual Report on Form 10-K, dated March 24, 2003, for the
fiscal year ended December 28, 2002).
10.15 Stock Option Agreement, dated February 13, 2003, by and
between the Registrant and William D. O'Hagan (Incorporated
herein by reference to Exhibit 10.16 of the Registrant's
Annual Report on Form 10-K, dated March 1, 2004, for the
fiscal year ended December 27, 2003).
-35-
10.16 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and William D. O' Hagan (Incorporated herein by
reference to Exhibit 10.2 of the Registrant's Quarterly
Report on Form 10-Q, dated July 16, 2004, for the quarter
ended June 26, 2004).
10.17 Employment Agreement, effective October 17, 2002, by and
between the Registrant and Kent A. McKee (Incorporated herein
by reference to Exhibit 10.18 of the Registrant's Annual
Report on Form 10-K, dated March 24, 2003, for the fiscal
year ended December 28, 2002).
10.18 Employment Agreement, effective November 9, 2006, by and
between the Registrant and Gregory L. Christopher
(Incorporated herein by reference to Exhibit 10.15 of the
Registrant's Annual Report on Form 10-K, dated February 28,
2007, for the fiscal year ended December 30, 2006).
10.19 Mueller Industries, Inc. 1991 Incentive Stock Option Plan, as
amended (Incorporated herein by reference to Exhibit 10.6 of
the Registrant's Annual Report on Form 10-K, dated March 24,
2003, for the fiscal year ended December 28, 2002 and Exhibit
99.2 of the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.20 Mueller Industries, Inc. 1994 Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 10.11 of the
Registrant's Annual Report on Form 10-K, dated March 24,
2003, for the fiscal year ended December 28, 2002 and Exhibit
99.3 of the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.21 Mueller Industries, Inc. 1994 Non-Employee Director Stock
Option Plan, as amended (Incorporated herein by reference to
Exhibit 10.12 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended December 28,
2002 and Exhibit 99.6 of the Registrant's Current Report on
Form 8-K, dated August 31, 2004).
10.22 Mueller Industries, Inc. 1998 Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K, dated March 24,
2003, for the fiscal year ended December 28, 2002 and Exhibit
99.4 of the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.23 Mueller Industries, Inc. 2002 Stock Option Plan Amended and
Restated as of February 16, 2006 (Incorporated herein by
reference to Exhibit 10.20 of the Registrant's Annual Report
on Form 10-K, dated February 28, 2007, for the fiscal year
ended December 30, 2006).
10.24 Mueller Industries, Inc. Annual Bonus Plan (Incorporated
herein by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K, dated May 5, 2005).
-36-
10.25 Summary description of the Registrant's 2008 incentive plan
for certain key employees.
10.26 Mueller Industries, Inc. Deferred Compensation Plan,
effective December 1, 2000 (Incorporated herein by reference
to Exhibit 10.13 of the Registrant's Annual Report on Form
10-K, dated March 26, 2001, for the fiscal year ended
December 30, 2000).
10.27 Amendment to the Mueller Industries, Inc. Deferred
Compensation Plan, dated December 15, 2005.
10.28 Securities Purchase Agreement, dated December 14, 2004, among
Mueller Comercial de Mexico, S. de R.L. de C.V., WTC HOLDCO
I, LLC, MIYAR LLC, NICNA, GmbH, and The Seller Parties
(Incorporated herein by reference to Exhibit 10.21 of the
Registrant's Annual Report on Form 10-K, dated March 4, 2005,
for the fiscal year ended December 25, 2004).
10.29 Inventory Purchase Agreement, dated December 14, 2004, by and
between Niples del Norte S.A. de C.V. and Mueller de Mexico
S.A. de C.V (Incorporated herein by reference to Exhibit
10.22 of the Registrant's Annual Report on Form 10-K, dated
March 4, 2005, for the fiscal year ended December 25, 2004).
10.30 Credit Agreement, dated as of December 1, 2006, among the
Registrant (as Borrower) and Lasalle Bank Midwest National
Association (as agent), and certain lenders named therein
(Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K, dated December 1,
2006).
10.31 Equity Joint Venture Agreement, among Mueller Streamline
China, LLC, Mueller Streamline Holding, S.L., Jiangsu
Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang Industries
Ltd. (Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K, dated December 5,
2005).
10.32 Stock Purchase Agreement by and between TBG Holdings N.V. and
N.V. Hollandsch-Amerikaansche Beleggingsmaatschappij Holland-
American Investment Corporation, as Sellers, and Mueller
Industries, Inc., as Buyer, dated as of February 27, 2007
(Incorporated herein by reference to Exhibit 10.2 of the
Registrant's Current Report on Form 8-K, dated February 27,
2007).
14.0 Code of Business Conduct and Ethics (Incorporated herein by
reference to Exhibit 14.0 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Registered Public Accounting Firm.
-37-
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-38-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on
February 26, 2008.
MUELLER INDUSTRIES, INC.
/s/HARVEY L. KARP
Harvey L. Karp, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
/s/HARVEY L KARP Chairman of the Board, February 26, 2008
Harvey L. Karp and Director
/s/ALEXANDER P. FEDERBUSH Director February 26, 2008
Alexander P. Federbush
/s/PAUL J. Flaherty Director February 26, 2008
Paul J. Flaherty
/s/GENNARO J. FULVIO Director February 26, 2008
Gennaro J. Fulvio
/s/GARY S. GLADSTEIN Director February 26, 2008
Gary S. Gladstein
/s/SCOTT J. GOLDMAN Director February 26, 2008
Scott J. Goldman
/s/TERRY HERMANSON Director February 26, 2008
Terry Hermanson
/s/WILLIAM D. O'HAGAN President, Chief Executive February 26, 2008
William D. O'Hagan Officer (Principal Executive
Officer), Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the date indicated.
Signature and Title Date
/s/ KENT A. MCKEE February 26, 2008
Kent A. McKee
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ RICHARD W. CORMAN February 26, 2008
Richard W. Corman
Vice President - Controller
-39-
MUELLER INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Review F-2
Consolidated Statements of Income for the years ended
December 29, 2007, December 30, 2006, and December 31, 2005 F-15
Consolidated Balance Sheets as of December 29, 2007
and December 30, 2006 F-17
Consolidated Statements of Cash Flows for the years ended
December 29, 2007, December 30, 2006, and December 31, 2005 F-19
Consolidated Statements of Stockholders' Equity for the years
ended December 29, 2007, December 30, 2006, and December 31, 2005 F-21
Notes to Consolidated Financial Statements F-23
Report of Independent Registered Public Accounting Firm F-58
FINANCIAL STATEMENT SCHEDULE
Schedule for the years ended December 29, 2007, December 30, 2006,
and December 31, 2005
Valuation and Qualifying Accounts (Schedule II) F-59
F-1
FINANCIAL REVIEW
OVERVIEW
The Company is a leading manufacturer of copper, brass, plastic,
aluminum, and other 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 pipe,
fittings and valves; refrigeration valves and fittings; fabricated tubular
products; and steel nipples. The Company also resells imported brass and
plastic plumbing valves, malleable iron fittings, faucets and plumbing
specialty products. Mueller's operations are located throughout the United
States, and in Canada, Mexico, Great Britain, and China.
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the Original Equipment
Manufacturers (OEM) segment. 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 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, plastic
pipe, and valves in North America and sources products for import
distribution in North America. European Operations manufactures copper tube
in Europe, which is sold in Europe and the Middle East; activities also
include import distribution. Mexican Operations include pipe nipple
manufacturing and import distribution businesses including product lines of
malleable iron fittings and other plumbing specialties. The Plumbing &
Refrigeration segment sells products to wholesalers in the HVAC (heating,
ventilation, and air-conditioning), plumbing, and refrigeration markets, to
distributors to the manufactured housing and recreational vehicle
industries, and to building material retailers. The OEM segment
manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum
and brass forgings; aluminum and copper impact extrusions; refrigeration
valves and fittings; fabricated tubular products; and gas valves and
assemblies. The Company's Chinese joint venture (Mueller-Xingrong)
manufactures engineered copper tube for refrigeration applications; these
products are sold primarily to OEM's located in China and its results are
included in the OEM segment. The OEM segment sells its products primarily
to original equipment manufacturers, many of which are in the HVAC,
plumbing, and refrigeration markets.
The majority of the Company's manufacturing facilities operated at
moderate levels during 2005 and the first half of 2006. In the latter half
of 2006, and in 2007, the Company's manufacturing facilities operated at low
levels due to reduced market demand.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration, and plumbing
markets because the principal end use of a significant portion of the
Company's products is in the construction of single and multi-family housing
and commercial buildings. Repairs and remodeling projects are also
important drivers of underlying demand for these products. The following
F-2
are important economic indicators that impact the Company's businesses. Per
the U.S. Census Bureau, new housing starts in the U.S. were 1.4 million, 1.8
million, and 2.1 million in 2007, 2006, and 2005, respectively. The Value
of Private Non-Residential Construction put in place was $349.8 billion in
2007, $295.7 billion in 2006, and $246.6 billion in 2005. The average 30
year fixed mortgage rate was 6.10 percent in December 2007, 6.14 percent in
December 2006, and 6.27 percent in December 2005.
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. U.S. consumption of copper tubing is still predominantly
supplied by U.S. manufacturers, although imports from Mexico is a
significant factor. Brass rod consumption in the U.S. has steadily declined
over the past five years, due to the outsourcing of many manufactured
products.
The Company's fiscal years ended December 29, 2007 and December 30,
2006 contained 52 weeks while the year ended December 31, 2005 contained 53
weeks.
RESULTS OF OPERATIONS
2007 Performance Compared with 2006
Consolidated net sales in 2007 were $2.7 billion, a 7 percent increase
over net sales of $2.5 billion in 2006. The increase was primarily
attributable to the acquisition of Extruded Metals, Inc. (Extruded) during
the first quarter of 2007, partially offset by lower unit sales volumes in
each of the Company's primary product lines. Net selling prices generally
fluctuate with changes in raw material costs. Increases in raw material
costs are generally passed through to customers in the form of higher
selling prices. The COMEX average copper price in 2007 was approximately
$3.22 per pound, or approximately 4 percent higher than the 2006 average of
$3.09. Mueller-Xingrong also contributed to the increase in net sales.
Cost of goods sold increased $215 million, to $2.3 billion in 2007.
This increase was attributable primarily to the acquisition of Extruded and
to higher raw material costs. Gross profit was $372.9 million or 13.8
percent of net sales in 2007 compared with $401.5 million or 16.0 percent of
net sales in 2006. The year over year decrease in gross profit was due to
reduced volume in core product lines plus increased conversion costs
partially offset by increased spreads in copper tube and fittings. The
decrease in gross profit percentage is primarily due to the mix of sales
following the acquisition of Extruded resulting in an increase in lower
F-3
margin sales of brass rod. During the fourth quarter of 2007 the Company
recognized a $10.0 million pre-tax gain resulting from the liquidation of
LIFO layers. In addition, during the fourth quarter of 2007 and 2006,
certain inventories valued using the FIFO method were written down to the
lower of cost or market resulting in decreases in gross profit of $2.7
million and $14.2 million, respectively.
Depreciation and amortization increased 6.3 percent to $44.2 million in
2007 from $41.6 million in 2006 primarily due to recent acquisitions.
Selling, general, and administrative expenses increased to $143.3 million in
2007; this $2.3 million increase was due to incremental costs of
approximately $3.1 million attributed to acquired businesses, partially
offset by net decreases of other costs of approximately $0.8 million.
During 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.
During its required annual assessment of goodwill in 2007, the Company
revised the projected future cash flows as well as other estimates and
assumptions related to its Mexican Operations. Based upon the changes in
discounted future cash flows, the Company recognized an impairment charge of
$2.8 million reducing the carrying value of the business.
Interest expense increased to $22.1 million in 2007 from $20.5 million
in 2006. The increase is due to the increased borrowings by Mueller-
Xingrong to fund operations. Other income in 2007 includes interest income
on invested cash balances of $11.3 million plus the gain on sale of non-
operating natural resource property for approximately $3.1 million partially
offset by $0.8 million minority interest expense related to Mueller-
Xingrong and environmental expense related to non-operating properties of
$0.7 million. Other income increased approximately $8.6 million in 2007
compared with 2006. This increase is attributable primarily to higher
interest income in 2007 resulting from higher average cash balances and a
net gain on disposals of properties compared with a net loss in 2006.
Income tax expense was $67.8 million, for an effective rate of 37 percent.
This rate is higher than what would be computed using the U.S. statutory
federal rate primarily due to state income tax expense of $6.5 million,
foreign tax items of $1.2 million, and a correction of the income tax
provision for prior years related to the deferred tax liabilities on U.S.
pension plans of $2.2 million. These increases were partially offset by the
effect of the federal production activities deduction of $3.2 million, the
reduction to income tax contingencies of $1.4 million and the net reduction
in valuation allowances associated with certain tax attributes of $1.9 million.
The Company's employment was approximately 4,875 at the end of 2007
compared with 4,700 at the end of 2006.
F-4
Plumbing & Refrigeration Segment
Net sales by the Plumbing & Refrigeration segment were $1.6 billion in
2007 compared with $1.7 billion in 2006. The decrease in net sales is due
to lower unit sales volumes in copper tube and copper and plastic fittings,
partially offset by higher selling prices. Gross profit declined to $297.3
million in 2007 from $324.8 million in 2006 which was the result of
decreased unit sales volumes offset by increased spreads in copper tube and
fittings and a $10.0 million gain from liquidation of LIFO inventory.
Additionally, the Company wrote down its inventories to the lower of cost or
market in 2007 and 2006 by $2.7 million and $14.2 million, respectively.
Depreciation and amortization increased to $29.8 million in 2007 from $28.7
million in 2006 due to depreciation on recent capital expenditures.
Selling, general, and administrative expenses were $95.2 million in 2007
compared with $98.7 million in 2006. The decrease is primarily due to
decreased incentive compensation. Also included as components of operating
income for 2007 were a $2.8 million goodwill impairment charge related to
the Company's Mexican Operations and a $8.9 million gain from the monetary
settlement on the Morgan copper litigation.
OEM Segment
The OEM segment's net sales were $1.14 billion in 2007 compared with
$835.3 million in 2006. Included in the OEM segment's sales are Extruded's
sales totaling $311 million since its acquisition in February 2007. Sales
increases at Mueller-Xingrong were offset by net decreased sales across
the remainder of the segment's businesses. Gross profit decreased from
$77.8 million in 2006 to $74.4 million in 2007 resulting primarily from the
lower sales volumes, offset partially from contributions from Extruded and
higher profits at the aluminum impacts operation. The gross profit
percentage also decreased primarily due to a higher mix of lower margin
brass rod sales following the acquisition of Extruded. Depreciation and
amortization increased from $11.8 million in 2006 to $13.4 million in 2007
due primarily to depreciation expense at recently acquired businesses.
Selling, general, and administrative expenses were $22.8 million in 2007
compared with $21.2 million in 2006. The increase is primarily attributable
to the Extruded acquisition.
2006 Performance Compared with 2005
Consolidated net sales in 2006 were $2.5 billion, a 45 percent increase
over net sales of $1.7 billion in 2005. The increase was primarily
attributable to higher raw material costs (which are passed through in the
form of higher selling prices as discussed above), and contribution from
businesses acquired late in 2005 (which includes Mueller-Xingrong) which
accounted for approximately $175.2 million. The COMEX average copper price
in 2006 was approximately $3.09 per pound, or approximately 84 percent
higher than the 2005 average of $1.68. This change increased the Company's
net sales and cost of goods sold. These increases were partially offset by
a decrease in sales unit volumes during the period.
Cost of goods sold increased $679 million, to $2.1 billion in 2006.
This increase was attributable primarily to higher raw material costs and
acquired businesses, as discussed above. Gross profit was $401.5 million or
16.0 percent of net sales in 2006 compared with $300 million or 17.3 percent
F-5
of net sales in 2005. During the fourth quarter of 2006 certain inventories
valued using the FIFO method and certain firm commitments to purchase
inventories were written down to the lower of cost or market resulting in a
decrease in gross profit of $14.2 million. The year over year increase in
gross profit was due to higher spreads in core product lines, primarily
copper tube and fittings, and acquired businesses.
Depreciation and amortization increased 2.2 percent to $41.6 million in
2006 from $40.7 million in 2005 primarily due to acquisitions in late 2005
and increased capital expenditures. Selling, general, and administrative
expenses increased to $141.0 million in 2006; this $13.6 million increase
was due to (i) incremental costs of approximately $8.2 million attributed to
acquired businesses, (ii) increased incentive compensation of approximately
$6.2 million which includes stock-based compensation, and (iii) net decrease
of other costs of approximately $0.8 million.
Interest expense increased to $20.5 million in 2006 from $19.6 million
in 2005. The increase is primarily due to the increased borrowings from the
Company's Chinese joint venture to fund operations during 2006.
Other income includes (i) losses on the sale of property and equipment
for approximately $2.6 million, (ii) interest income on invested cash
balances of $6.1 million, (iii) rents, royalties and other, net of $2.1
million, (iv) minority interest expense related to Mueller-Xingrong of
$2.6 million, (v) gain on sale of an equity investment, Conbraco Industries,
Inc., of $1.9 million, and (vi) equity in earnings of Conbraco Industries,
Inc. prior to its sale of $1.0 million. Other income decreased approximately
$6.8 million in 2006 compared with 2005. This decrease was attributable
primarily to minority interest related to the Company's Chinese joint
venture and a net loss on disposals of properties compared with a net gain in
2005, partially offset by higher interest income in 2006 resulting from
higher average cash balances.
The expense related to environmental remediation at certain non-
operating properties of the Company, included in other income, net, totaled
$0.6 million in 2006 and in 2005. The environmental expense related to
operating properties is included as a component of cost of goods sold and
was not significant for the periods presented.
Income tax expense was $54.7 million, for an effective rate of 26.9
percent, for 2006. This rate was lower than what would be computed using the
U.S. statutory federal rate primarily due to (i) changes in estimate
regarding the estimated future utilization of state and foreign attributes of
$7.7 million; (ii) changes in estimate regarding tax contingency reserves and
other reductions for various statute closings of $5.6 million; (iii)
recognition of benefits from the federal production activities deduction of
$2.4 million and (iv) benefits resulting from a tax holiday in certain of the
Company's foreign subsidiaries and other foreign items of $2.2 million.
These items were partially offset by $1.9 million of state tax expense, net
of the federal benefit.
The Company's employment was approximately 4,700 at the end of 2006
compared with 4,800 at the end of 2005.
F-6
Plumbing & Refrigeration Segment
Net sales by Plumbing & Refrigeration were $1.7 billion in 2006 compared
with $1.3 billion in 2005 for a 33.9 percent increase. The increase in net
sales is due primarily to higher raw material costs, which are reflected in
higher selling prices, and contributions from businesses acquired late in
2005. These increases were partially offset by lower unit sales volumes
resulting from weak demand in the latter part of 2006. Gross profit was
$324.8 million in 2006 compared with $243.4 million in 2005. The increases
in gross profit were due primarily to the factors mentioned regarding the
increases in net sales, partially offset by a $14.2 million write down of
inventories to the lower of cost or market. Overall gross profit percentage
remained consistent at approximately 19 percent. Depreciation and
amortization was $28.7 million in 2006 compared with $29.4 million in 2005.
This decrease is primarily due to certain machinery and equipment at a
manufacturing facility becoming fully depreciated late in 2005. Selling,
general, and administrative expenses increased from $88.5 million in 2005 to
$98.7 million in 2006. The increase is primarily due to increased expenses
of businesses acquired late in 2005 and increased incentive compensation.
OEM Segment
Net sales in the OEM segment were $835.3 million in 2006 compared with
$460.3 million in 2005. The increase in net sales is attributable to net
sales of $142.8 million of our Chinese joint venture, which commenced
operations in the first quarter of 2006, and increased sales at our Port
Huron brass rod mill of $228.2 million. The increase in net sales at the
brass rod operation is due primarily to the increased selling prices
resulting from higher raw material costs. Gross profit increased from $57.3
million in 2005 to $77.8 million in 2006 due primarily to the factors
mentioned regarding the increase in net sales. Gross profit percentage
decreased primarily due to a higher mix of sales of brass rods, which
traditionally have lower margins. Depreciation and amortization increased to
$11.8 million in 2006 from $10.2 million in 2005 resulting primarily from
expense at our Chinese joint venture of $1.2 million. Selling, general, and
administrative expenses were $21.2 million in 2006 compared with $20.1
million in 2005. The increase is primarily due to expenses at our Chinese
joint venture during 2006 of $1.7 million partially offset by decreases in
other costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance increased to $308.6
million at December 29, 2007, from $200.5 million at December 30, 2006.
Major components of the 2007 change included $185.8 million of cash provided
by operating activities, $62.5 million of cash used in investing activities
and $15.8 million of cash used in financing activities.
Net income of $115.5 million in 2007 was the primary component of cash
provided by operating activities. Depreciation and amortization of $44.5
million was the primary non-cash adjustment. Major changes in working
capital, net of the Extruded acquisition, included a $7.9 million increase
in trade accounts receivable, $20.4 million decrease in inventories and
$12.7 million increase in current liabilities.
F-7
The major components of net cash used for investing activities during
2007 included $32.2 million used in the acquisition of Extruded and $29.9
million used for capital expenditures. Net cash used in financing
activities totaled $15.8 million in 2007 which included $14.8 million of
dividends paid and $18.8 million of repayments of long term debt in the
Company's domestic and European operations, partially offset by $16.6
million of proceeds from issuance of long-term debt by Mueller-Xingrong.
The Company has a $200 million unsecured line-of-credit (Credit
Facility) which expires in December 2011. At year-end, the Company had no
borrowings against the Credit Facility. Approximately $9.8 million in
letters of credit were backed by the Credit Facility at the end of 2007. As
of December 29, 2007, the Company's total debt was $354.5 million or 33
percent of its total capitalization. Subsequent to year-end the Company
purchased, through a privately negotiated transaction, and extinguished
approximately $25.5 million principal value of its 6% Subordinated
Debentures at approximately 90 percent of their face value.
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of tangible net worth
and the satisfaction of certain minimum financial ratios. As of December
29, 2007, the Company was in compliance with all of its debt covenants.
The Company expects to invest between $30 and $40 million for capital
expenditures during 2008.
Contractual cash obligations of the Company as of December 29, 2007
included the following:
(In millions)
Payments Due by Year
2009- 2011-
Total 2008 2010 2012 Thereafter
Long-term debt,
including capital
lease obligations $354.5 $ 72.7 $ - $ 1.8 $280.0
Interest on fixed-
rate debt 130.8 32.7 32.7 32.7 32.7
Consulting Agreements (1) 13.3 2.7 5.3 4.0 1.3
Operating leases 27.0 6.2 8.4 5.5 6.9
Purchase commitments (2) 449.0 449.0 - - -
----- ----- ----- ----- -----
Total contractual
cash obligations $974.6 $563.3 $ 46.4 $ 44.0 $320.9
===== ===== ===== ===== =====
(1) See Note 10 to Consolidated Financial Statements. For the purpose of
this disclosure, the Company assumed the Consulting Agreements are
effective immediately.
(2) Purchase commitments include $48.9 million of open fixed price purchases
of raw materials. Additionally, the Company has contractual supply
commitments, totaling $400.1 million at year-end prices, for raw
materials consumed in the ordinary course of business; these contracts
contain variable pricing based on COMEX.
F-8
The above obligations will be satisfied with existing cash, the Credit
Facility, and cash generated by operations. Additionally, the cash flow to
fund pension and OPEB obligations was $3.8 million in 2007 and $3.3 million
in 2006. In recent years, funded pension assets recovered a significant
portion of market value declines experienced in 2002. The Company expects
to contribute approximately $2.4 million to its pension plans and $1.7
million to its other postretirement benefit plans in 2008. The Company has
no off-balance sheet financing arrangements except for the operating leases
identified above.
Fluctuations in the cost of copper and other raw materials affect the
Company's liquidity. Changes in material costs directly impact components
of working capital, primarily inventories and accounts receivable. In June
2005 the price of copper averaged approximately $1.62 per pound. Since then
the price of copper has fluctuated significantly and averaged approximately
$3.09 per pound in 2006 and $3.22 in 2007. During 2006 copper reached a
historic high of $4.08 per pound.
The Company's Board of Directors declared a regular quarterly dividend
of 10 cents per share on its Common Stock during each quarter of 2007, 2006
and 2005. Payment of dividends in the future is dependent upon the Company's
financial condition, cash flows, capital requirements, earnings, and other
factors.
Management believes that cash provided by operations, the Credit
Facility, and currently available cash of $308.6 million will be adequate to
meet the Company's normal future capital expenditure and operational needs.
The Company's current ratio (current assets divided by current liabilities)
was 2.8 to 1 as of December 29, 2007.
The Company's Board of Directors has extended, until October 2008, the
authorization to repurchase up to ten million shares of the Company's
Common Stock through open market transactions or through privately
negotiated transactions. The Company has no obligation to purchase any
shares and may cancel, suspend, or extend the time period for the purchase
of shares at any time. Any purchases will be funded primarily through
existing cash and cash from operations. The Company may hold any shares
purchased in treasury or use a portion of the repurchased shares for
employee benefit plans, as well as for other corporate purposes. Through
December 29, 2007, the Company had repurchased approximately 2.4 million
shares under this authorization. In addition, the Company may repurchase
portions of its 6% Subordinated Debentures through open market transactions
or through privately negotiated transactions.
Environmental Matters
The Company ended 2007 with total environmental reserves of
approximately $8.9 million. Based upon information currently available,
management believes that the outcome of pending environmental matters will
not materially affect the overall financial position and results of
operations of the Company.
F-9
MARKET RISKS
The Company is exposed to market risk from changes in raw material and
energy costs, interest rates, and foreign currency exchange rates. To
reduce such risks, the Company may periodically use financial instruments.
All hedging transactions are authorized and executed pursuant to policies
and procedures. Further, the Company does not buy or sell financial
instruments for trading purposes. A discussion of the Company's accounting
for derivative instruments and hedging activities is included in the Summary
of Significant Accounting Policies in the Notes to Consolidated Financial
Statements.
Cost and Availability of Raw Materials and Energy
Copper and brass represent the largest component of the Company's
variable costs of production. The cost of these materials is subject to
global market fluctuations caused by factors beyond the Company's control.
Significant increases in the cost of metal, to the extent not reflected in
prices for the Company's finished products, or the lack of availability
could materially and adversely affect the Company's business, results of
operations and financial condition.
The Company occasionally enters into forward fixed-price arrangements
with certain customers. The Company may utilize forward contracts to hedge
risks associated with forward fixed-price arrangements. The Company may
also utilize forward contracts to manage price risk associated with
inventory. Depending on the nature of the hedge, changes in the fair value
of the forward contracts will either be offset against the change in fair
value of the inventory through earnings or recognized as a component of
comprehensive income and reflected in earnings upon the sale of inventory.
Periodic value fluctuations of the contracts generally offset the value
fluctuations of the underlying fixed-price transactions or inventory. At
year-end, the Company held open forward contracts to purchase approximately
$11.5 million of copper over the next twelve 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. There
were no open contracts to purchase natural gas at December 29, 2007.
Interest Rates
At December 29, 2007 and December 30, 2006, the fair value of the
Company's debt was estimated at $329.2 million and $320.7 million,
respectively, primarily using market yields and taking into consideration
the underlying terms of the debt. Such fair value was less than the
carrying value of debt at December 29, 2007 and December 30, 2006 by $25.3
million and $23.4 million, respectively. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 10 percent
decrease in interest rates and amounted to $13.5 million at December 29,
2007 and $10.6 million at December 30, 2006.
F-10
The Company had variable-rate debt outstanding of $46.7 million at
December 30, 2007 and $36.1 million at December 31, 2006. At these
borrowing levels, a hypothetical 10 percent increase in interest rates would
have had an insignificant unfavorable impact on the Company's pretax
earnings and cash flows. The primary interest rate exposure on floating-
rate debt is based on LIBOR.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other
than an entity's functional currency. The Company and its subsidiaries
generally enter into transactions denominated in their respective functional
currencies. Foreign currency exposures arising from transactions
denominated in currencies other than the functional currency are not
material; however, the Company may utilize certain forward fixed-rate
contracts to hedge such transactional exposures. Gains and losses with
respect to these positions are deferred in stockholders' equity as a
component of comprehensive income and reflected in earnings upon collection
of receivables. At year-end, the Company held open forward contracts to
purchase approximately $2.8 million U.S. dollars.
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars.
The primary currencies to which the Company is exposed include the Canadian
dollar, the British pound sterling, the Euro, the Mexican peso, and the
Chinese renminbi. The Company generally views as long-term its investments
in foreign subsidiaries with a functional currency other than the U.S.
dollar. As a result, the Company generally does not hedge these net
investments. The net investment in foreign subsidiaries translated into
U.S. dollars using the year-end exchange rates was $199.4 million at
December 29, 2007 and $191.5 million at December 30, 2006. The potential
loss in value of the Company's net investment in foreign subsidiaries
resulting from a hypothetical 10 percent adverse change in quoted foreign
currency exchange rates at December 29, 2007 and December 30, 2006 amounted
to $21.1 million and $19.2 million, respectively. This change would be
reflected in the foreign currency translation component of accumulated other
comprehensive income in the equity section of the Company's Consolidated
Balance Sheets, unless the foreign subsidiaries are sold or otherwise
disposed.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the United
States. Application of these principles requires the Company to make
estimates, assumptions, and judgments that affect the amounts reported in
the Consolidated Financial Statements. Management believes the most complex
and sensitive judgments, because of their significance to the Consolidated
Financial Statements, result primarily from the need to make estimates about
the effects of matters, which are inherently uncertain. The accounting
policies and estimates that are most critical to aid in understanding and
evaluating the results of operations and financial position of the Company
include the following:
F-11
Inventory Valuation
Inventories are valued at the lower of cost or market. A significant
component of the Company's inventory is copper; the domestic copper
inventories are valued under the LIFO method, which represent approximately
9.4 percent of total inventories. The market price of copper cathode and
scrap are subject to volatility. During periods when open market prices
decline below net book value, the Company may need to provide an allowance
to reduce the carrying value of its inventory. In addition, certain items
in inventory may be considered obsolete and, as such, the Company may
establish an allowance to reduce the carrying value of those items to their
net realizable value. Changes in these estimates related to the value of
inventory, if any, may result in a materially adverse or positive impact on
the Company's reported financial position or results of operations. The
Company recognizes the impact of any changes in estimates, assumptions, and
judgments in income in the period in which it is determined.
Income Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon
the occurrence of future events. The Company records valuation allowances
to reduce its deferred tax assets to the amount it believes is more likely
than not to be realized. These valuation allowances can be impacted by
changes in tax laws, changes to statutory tax rates, and future taxable
income levels and are based on the Company's judgment, estimates, and
assumptions regarding those future events. In the event the Company were to
determine that it would not be able to realize all or a portion of the net
deferred tax assets in the future, the Company would increase the valuation
allowance through a charge to income in the period that such determination
is made. Conversely, if the Company were to determine that it would be able
to realize its deferred tax assets in the future, in excess of the net
carrying amounts, the Company would decrease the recorded valuation
allowance through an increase to income in the period that such
determination is made.
The Company provides for uncertain tax positions and the related
interest and penalties, if any, based upon management's assessment of
whether a tax benefit is more likely than not to be sustained upon
examination by tax authorities. At December 29, 2007, the Company believes
it has appropriately accounted for any unrecognized tax benefits. To the
extent the Company prevails in matters for which a liability for an
unrecognized tax benefit is established or is required to pay amounts in
excess of the liability, the Company's effective tax rate in a given
financial statement period may be affected.
Environmental Reserves
The Company recognizes an environmental liability when it is probable
the liability exists and the amount is reasonably estimable. The Company
estimates the duration and extent of its remediation obligations based upon
reports of outside consultants; internal analyses of clean-up costs, ongoing
monitoring costs, and estimated legal fees; communications with regulatory
agencies; and changes in environmental law. If the Company were to
determine that its estimates of the duration or extent of its environmental
F-12
obligations were no longer accurate, the Company would adjust its
environmental liabilities accordingly in the period that such determination
is made. Estimated future expenditures for environmental remediation are
not discounted to their present value. Accrued environmental liabilities
are not reduced by potential insurance reimbursements.
Environmental expenses that relate to ongoing operations are included
as a component of cost of goods sold. Environmental expenses related to
certain non-operating properties are included in other income, net on the
Consolidated Statements of Income.
Allowance for Doubtful Accounts
The Company provides an allowance for receivables that may not be fully
collected. In circumstances where the Company is aware of a customer's
inability to meet its financial obligations (e.g., bankruptcy filings or
substantial down-grading of credit ratings), it records a reserve for bad
debts against amounts due to reduce the net recognized receivable to the
amount it believes most likely will be collected. For all other customers,
the Company recognizes reserves for bad debts based on its historical
collection experience. If circumstances change (e.g., greater than expected
defaults or an unexpected material change in a major customer's ability to
meet its financial obligations), the Company's estimate of the
recoverability of amounts due could be changed by a material amount.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB has issued SFAS No. 157, "Fair Value Measurements," which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosure
about fair value measurements. The Company is required to adopt the
provisions of this statement in the first quarter of fiscal 2008.
Management is reviewing the potential effects of this statement; however, it
does not expect the adoption of SFAS No. 157 to have a material impact on
the Company's Consolidated Financial Statements.
In 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 Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141 (R), "Business
Combinations." The purpose of issuing the statement is to replace current
guidance in SFAS No. 141 to better represent the economic value of a
business combination transaction. The changes to be effected with SFAS No.
141 (R) from the current guidance include, but are not limited to: (1)
acquisition costs will be recognized separately from the acquisition; (2)
known contractual contingencies at the time of the acquisition will be
considered part of the liabilities acquired measured at their fair value;
all other contingencies will be part of the liabilities acquired measured at
their fair value only if it is more likely than not that they meet the
F-13
definition of a liability; (3) contingent consideration based on the outcome
of future events will be recognized and measured at the time of the
acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and
liabilities, as well as noncontrolling interests, in the acquiree, at the
full amounts of their fair values; and (5) a bargain purchase (defined as a
business combination in which the total acquisition-date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred plus any noncontrolling interest in the acquiree) will require
that excess to be recognized as a gain attributable to the acquirer. SFAS
No. 141 (R) will be effective for fiscal years beginning after December 15,
2008.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements - an amendment of ARB No. 51."
SFAS No. 160 requires (i) that noncontrolling (minority) interests be
reported as a component of stockholders' equity, (ii) that net income
attributable to the parent and the noncontrolling interest be separately
identified in the Consolidated Statements of Income, (iii) that changes in a
parent's ownership interest while the parent retains the controlling
interest be accounted for as equity transactions, (iv) that any retained
noncontrolling equity investment upon the deconsolidation of a subsidiary be
initially measured at fair value, and (v) that sufficient disclosures are
provided that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective for annual periods beginning after December 15, 2008 and should be
applied prospectively. However, the presentation and disclosure
requirements of the statement shall be applied retrospectively for all
periods presented.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report contains various forward-looking statements and
includes assumptions concerning the Company's operations, future results,
and prospects. These forward-looking statements are based on current
expectations and are subject to risk and uncertainties. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995, the Company provides the following cautionary statement identifying
important economic, political, and technological factors, among others, the
absence of which could cause actual results or events to differ materially
from those set forth in or implied by the forward-looking statements and
related assumptions.
In addition to those factors discussed under "Risk Factors" in this
Annual Report on Form 10-K, such factors include: (i) the current and
projected future business environment, including interest rates and capital
and consumer spending; (ii) the domestic housing and commercial construction
industry environment; (iii) availability and price fluctuations in
commodities (including copper, natural gas, and other raw materials,
including crude oil that indirectly affects plastic resins); (iv)
competitive factors and competitor responses to the Company's initiatives;
(v) stability of government laws and regulations, including taxes; (vi)
availability of financing; and (vii) continuation of the environment to make
acquisitions, domestic and foreign, including regulatory requirements and
market values of candidates.
F-14
Mueller Industries, Inc.
Consolidated Statements of Income
Years Ended December 29, 2007, December 30, 2006, and December 31, 2005
(In thousands, except per share data)
2007 2006 2005
Net sales $2,697,845 $2,510,912 $1,729,923
Cost of goods sold 2,324,924 2,109,436 1,430,075
--------- --------- ---------
Gross profit 372,921 401,476 299,848
Depreciation and amortization 44,153 41,619 40,696
Selling, general, and
administrative expense 143,284 140,972 127,394
Copper litigation settlement (8,893) - -
Impairment charge 2,756 - -
--------- --------- ---------
Operating income 191,621 218,885 131,758
Interest expense (22,071) (20,477) (19,550)
Other income, net 13,731 5,171 11,997
--------- --------- ---------
Income from continuing operations
before income taxes 183,281 203,579 124,205
Income tax expense (67,806) (54,710) (34,987)
--------- --------- ---------
Income from continuing operations 115,475 148,869 89,218
Income from discontinued operations,
net of income taxes - - 3,324
--------- --------- ---------
Net income $ 115,475 $ 148,869 $ 92,542
========= ========= =========
See accompanying notes to consolidated financial statements.
F-15
Mueller Industries, Inc.
Consolidated Statements of Income (continued)
Years Ended December 29, 2007, December 30, 2006, and December 31, 2005
(In thousands, except per share data)
2007 2006 2005
Weighted average shares for basic
earnings per share 37,060 36,893 36,590
Effect of dilutive stock options 163 353 513
--------- --------- ---------
Adjusted weighted average shares for
diluted earnings per share 37,223 37,246 37,103
========= ========= =========
Basic earnings per share:
From continuing operations $ 3.12 $ 4.04 $ 2.44
From discontinued operations - - 0.09
--------- --------- ---------
Basic earnings per share $ 3.12 $ 4.04 $ 2.53
========= ========= =========
Diluted earnings per share:
From continuing operations $ 3.10 $ 4.00 $ 2.40
From discontinued operations - - 0.09
--------- --------- ---------
Diluted earnings per share $ 3.10 $ 4.00 $ 2.49
========= ========= =========
Dividends per share $ 0.40 $ 0.40 $ 0.40
========= ========= =========
See accompanying notes to consolidated financial statements.
F-16
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 29, 2007 and December 30, 2006
(In thousands)
2007 2006
Assets
Current assets
Cash and cash equivalents $ 308,618 $ 200,471
Accounts receivable, less allowance for
doubtful accounts of $5,015 in 2007
and $6,806 in 2006 323,003 281,679
Inventories 269,032 258,647
Current deferred income taxes 19,853 21,421
Other current assets 19,841 13,976
---------- ----------
Total current assets 940,347 776,194
Property, plant, and equipment, net 308,383 315,064
Goodwill 153,263 155,653
Other assets 47,211 21,996
---------- ----------
Total Assets $ 1,449,204 $ 1,268,907
========== ==========
See accompanying notes to consolidated financial statements.
F-17
Mueller Industries, Inc.
Consolidated Balance Sheets (continued)
As of December 29, 2007 and December 30, 2006
(In thousands, except share data)
2007 2006
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 72,743 $ 35,998
Accounts payable 140,497 96,095
Accrued wages and other employee costs 39,984 43,281
Other current liabilities 81,829 80,145
---------- ----------
Total current liabilities 335,053 255,519
Long-term debt, less current portion 281,738 308,154
Pension liabilities 14,805 19,900
Postretirement benefits other than pensions 21,266 16,699
Environmental reserves 8,897 8,907
Deferred income taxes 52,156 46,408
Other noncurrent liabilities 2,029 2,206
---------- ----------
Total liabilities 715,944 657,793
---------- ----------
Minority interest in subsidiaries 22,765 22,300
Stockholders' equity
Preferred stock - $1.00 par value;
shares authorized 5,000,000;
none outstanding - -
Common stock - $.01 par value; shares
authorized 100,000,000; issued 40,091,502;
outstanding 37,079,903 in 2007
and 37,025,285 in 2006 401 401
Additional paid-in capital 259,611 256,906
Retained earnings 484,534 386,038
Accumulated other comprehensive income 31,808 12,503
Treasury common stock, at cost (65,859) (67,034)
---------- ----------
Total stockholders' equity 710,495 588,814
---------- ----------
Commitments and contingencies - -
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,449,204 $ 1,268,907
========== ==========
See accompanying notes to consolidated financial statements.
F-18
Mueller Industries, Inc.
Consolidated Statements of Cash Flows
Years Ended December 29, 2007, December 30, 2006, and December 31, 2005
(In thousands)
2007 2006 2005
Operating activities:
Net income $ 115,475 $ 148,869 $ 92,542
Reconciliation of net income to net
cash provided by operating activities:
Depreciation 43,605 41,179 40,398
Amortization of intangibles 548 440 298
Amortization of Subordinated
Debenture costs 324 236 162
Stock-based compensation expense 2,737 2,789 -
Income tax benefit from exercise
of stock options (73) (1,065) 991
Impairment charge 2,756 - -
Deferred income taxes 3,094 (19,339) (9,556)
Provision for doubtful
accounts receivable (177) 1,109 1,911
Minority interest in subsidiaries,
net of dividend paid (781) 2,610 9
Gain on sale of equity investment - (1,876) -
Gain on early retirement of debt - (97) -
(Gain) loss on disposal of properties (2,468) 2,620 (3,665)
Equity in earnings unconsolidated
subsidiary - (964) (4,480)
Changes in assets and liabilities,
net of businesses acquired:
Receivables (7,937) (15,459) (64,905)
Inventories 20,411 (56,786) (5,979)
Other assets (4,120) 1,449 1,764
Current liabilities 12,704 (41,357) 66,435
Other liabilities 1,809 (2,578) (5,894)
Other, net (2,063) 2,759 (590)
--------- --------- ---------
Net cash provided by
operating activities 185,844 64,539 109,441
--------- --------- ---------
See accompanying notes to consolidated financial statements.
F-19
Mueller Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Years ended December 29, 2007, December 30, 2006, and December 31, 2005
(In thousands)
2007 2006 2005
Investing activities:
Capital expenditures $ (29,870) $ (41,206) $ (18,449)
Acquisition of businesses, net
of cash received (32,243) 3,632 (6,937)
Proceeds from sales of properties
and equity investment 3,809 23,528 10,112
Net deposits into restricted cash
balances (4,194) - -
--------- --------- ---------
Net cash used in
investing activities (62,498) (14,046) (15,274)
--------- --------- ---------
Financing activities:
Repayments of long-term debt (18,765) (2,058) (1,091)
Dividends paid (14,825) (14,776) (14,646)
Proceeds from issuance of
long-term debt 16,635 28,759 -
Acquisition of treasury stock (54) (1,092) (551)
Issuance of shares under incentive
stock option plans from treasury 1,124 7,701 4,819
Income tax benefit from exercise of
stock options 73 1,065 -
--------- --------- ---------
Net cash (used in) provided by
financing activities (15,812) 19,599 (11,469)
--------- --------- ---------
Effect of exchange rate changes on cash 613 694 (462)
--------- --------- ---------
Increase in cash and cash equivalents 108,147 70,786 82,236
Cash and cash equivalents at the
beginning of the year 200,471 129,685 47,449
--------- --------- ---------
Cash and cash equivalents at the
end of the year $ 308,618 $ 200,471 $ 129,685
========= ========= =========
For supplemental disclosures of cash flow information, see
Notes 1, 5, 6, 7, and 13.
See accompanying notes to consolidated financial statements.
F-20
Mueller Industries, Inc.
Consolidated Statements Stockholders' Equity
Years ended December 29, 2007, December 30, 2006, and December 31, 2005
(In thousands)
2007 2006 2005
Shares Amount Shares Amount Shares Amount
Common stock:
Balance at beginning of year 40,092 $ 401 40,092 $ 401 40,092 $ 401
------- --------- ------- --------- ------ ---------
Balance at end of year 40,092 $ 401 40,092 $ 401 40,092 $ 401
======= ========= ======= ========= ====== =========
Additional paid-in capital:
Balance at beginning of year $ 256,906 $ 252,889 $ 252,931
Issuance of shares under
incentive stock option plans (105) (1,324) (1,033)
Stock-based compensation 2,737 4,276 -
Income tax benefit from exercise of
stock options 73 1,065 991
--------- --------- ---------
Balance at end of year $ 259,611 $ 256,906 $ 252,889
========= ========= =========
Retained earnings:
Balance at beginning of year $ 386,038 $ 253,433 $ 175,537
Adjustment to prior year retained
earnings due to the adoption of FIN 48 (2,154) - -
Net income 115,475 148,869 92,542
Dividends and other (14,825) (16,264) (14,646)
--------- --------- ---------
Balance at end of year $ 484,534 $ 386,038 $ 253,433
========= ========= =========
Accumulated other comprehensive
income (loss):
Foreign currency translation $ 4,606 $ 17,778 $ (10,122)
Minimum pension liability adjustment,
net of tax of $(1,165) and $339 - 7,108 (2,141)
Change in fair value of derivatives,
net of tax of $(166), $199, $(201) 285 (355) 330
Net actuarial gain on pension and post-
retirement obligations, net of tax of $(7,116) 14,170 - -
Other, net 244 - -
--------- --------- ---------
Total other comprehensive income (loss) 19,305 24,531 (11,933)
Balance at beginning of year 12,503 (8,848) 3,085
Adjustment to initially apply SFAS No. 158,
net of tax of $1,526 - (3,180) -
--------- --------- ---------
Balance at end of year $ 31,808 $ 12,503 $ (8,848)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-21
Mueller Industries, Inc.
Consolidated Statements Stockholders' Equity (continued)
Years Ended December 29, 2007, December 30, 2006, and December 31, 2005
(In thousands)
2007 2006 2005
Shares Amount Shares Amount Shares Amount
Treasury stock:
Balance at beginning of year 3,067 $ (67,034) 3,448 $ (74,967) 3,702 $ (80,268)
Issuance of shares under
incentive stock option plans (57) 1,229 (414) 9,025 (283) 5,852
Repurchase of common stock 2 (54) 33 (1,092) 29 (551)
------- --------- ------- --------- ------ ---------
Balance at end of year 3,012 $ (65,859) 3,067 $ (67,034) 3,448 $ (74,967)
======= ========= ======= ========= ====== =========
Total comprehensive income:
Net income $ 115,475 $ 148,869 $ 92,542
Other comprehensive income (loss) 19,305 24,531 (11,933)
--------- --------- ---------
Total comprehensive income $ 134,780 $ 173,400 $ 80,609
========= ========= =========
See accompanying notes to consolidated financial statements.
F-22
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The principal business of Mueller Industries, Inc. is the manufacture
and sale of copper tube and fittings; brass and copper alloy rod, bar, and
shapes; aluminum and brass forgings; aluminum and copper impact extrusions;
plastic pipe, fittings and valves; steel nipples; refrigeration valves and
fittings; fabricated tubular products; and gas valves and assemblies. The
Company also resells imported brass and plastic plumbing valves, malleable
iron fittings, faucets, and plumbing specialty products. The Company
markets its products to the HVAC, plumbing, refrigeration, hardware, and
other industries. Mueller's operations are located throughout the United
States and in Canada, Mexico, Great Britain, and China.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Mueller
Industries, Inc. and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The minority interest represents a separate private
ownership of 49.5 percent of Jiangsu Mueller-Xingrong Copper Industries
Limited (Mueller-Xingrong), 25 percent of Ruby Hill Mining Company, and 19
percent of Richmond-Eureka Mining Company, which was sold in 2007. Prior to
its sale in 2006, the Company accounted for its minority investment in
Conbraco Industries, Inc. (Conbraco) on the equity method.
Revenue Recognition
Revenue is recognized when title passes to the customer either when
products are shipped, provided collection is determined to be probable and
no significant obligations remain for the Company, or upon the terms of the
sale. Estimates for future rebates on certain product lines, product
returns, and bad debts are recognized in the period which the revenue is
recorded. The cost of shipping product to customers is expensed as incurred
as a component of cost of goods sold.
Cash Equivalents
Temporary investments with original maturities of three months or less
are considered to be cash equivalents. These investments are stated at
cost. At December 29, 2007 and December 30, 2006, temporary investments
consisted of money market mutual funds, commercial paper, bank repurchase
agreements, and U.S. and foreign government securities totaling $282.5
million and $182.8 million, respectively.
Allowance for Doubtful Accounts
The Company provides an allowance for receivables that may not be fully
collected. In circumstances where the Company is aware of a customer's
inability to meet its financial obligations (e.g., bankruptcy filings or
substantial down-grading of credit ratings), it records a reserve for bad
debts against amounts due to reduce the net recognized receivable to the
amount it believes most likely will be collected. For all other customers,
F-23
the Company recognizes reserves for bad debts based on its historical
collection experience. If circumstances change (e.g., greater than expected
defaults or an unexpected material change in a major customer's ability to
meet its financial obligations), the Company's estimate of the
recoverability of amounts due could be changed by a material amount.
Inventories
The Company's inventories are valued at the lower of cost or market.
The material component of its U.S. copper tube and copper fittings
inventories is valued on a last-in, first-out (LIFO) basis. Other
manufactured inventories, including the non-material components of U.S.
copper tube and copper fittings, are valued on a first-in, first-out (FIFO)
basis. Certain inventories purchased for resale are valued on an average
cost basis. Inventory costs include material, labor costs, and
manufacturing overhead.
Elements of cost in finished goods inventory in addition to the cost of
material include depreciation, amortization, utilities, consumable
production supplies, maintenance, production, wages and transportation
costs. In November 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory
Costs," which specifies that certain abnormal costs must be recognized as
current period charges. This Statement, which was effective for inventory
costs incurred after September 1, 2005, did not materially affect the
Company's results of operations or financial position.
The market price of copper cathode and scrap are subject to volatility.
During periods when open market prices decline below net book value, the
Company may need to provide an allowance to reduce the carrying value of its
inventory. In addition, certain items in inventory may be considered
obsolete and, as such, the Company may establish an allowance to reduce the
carrying value of those items to their net realizable value. Changes in
these estimates related to the value of inventory, if any, may result in a
materially adverse impact on the Company's reported financial position or
results of operations. The Company recognizes the impact of any changes in
estimates, assumptions, and judgments in income in the period in which it is
determined.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation of
buildings, machinery, and equipment is provided on the straight-line method
over the estimated useful lives ranging from 20 to 40 years for buildings
and five to 20 years for machinery and equipment. Leasehold improvements
are amortized over the lesser of their useful life or the remaining lease
term. Repairs and maintenance are expensed as incurred.
The Company evaluates the carrying value of property, plant, and
equipment whenever a change in circumstances indicates that the carrying
value may not be recoverable from the undiscounted future cash flows from
operations. If an impairment exists, the net book values are reduced to
fair values as warranted.
F-24
Goodwill
Goodwill represents cost in excess of fair values assigned to the
underlying net assets of acquired businesses. Under SFAS No. 142, "Goodwill
and Other Intangible Assets," goodwill is subject to impairment testing which
compares carrying values to fair values and, when appropriate, the carrying
value of these assets is required to be reduced to fair value. The Company
performs its annual impairment assessment as of the first day of the fourth
quarter of each fiscal year, unless circumstances dictate more frequent
assessments. For testing purposes, the Company uses components of its
reporting segments; components of a segment having similar economic
characteristics are combined. No impairment loss resulted from the 2006 or
2005 annual tests performed under SFAS No. 142; however, as discussed in
Note 4, an impairment charge was recognized in 2007. There can be no
assurance that additional goodwill impairment will not occur in the future.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill.
Accumulated amortization totaled $13.4 million at December 29, 2007 and at
December 30, 2006.
Self-Insurance Accruals
The Company is primarily self-insured for workers' compensation claims
and benefits paid under employee health care programs. Accruals are
primarily based on estimated undiscounted cost of claims, which includes
incurred but not reported claims, and are classified as accrued wages and
other employee costs.
Environmental Reserves and Environmental Expenses
The Company recognizes an environmental liability when it is probable
the liability exists and the amount is reasonably estimable. The Company
estimates the duration and extent of its remediation obligations based upon
reports of outside consultants, internal analyses of clean-up costs, ongoing
monitoring costs, and estimated legal fees, communications with regulatory
agencies, and changes in environmental law. If the Company were to
determine that its estimates of the duration or extent of its environmental
obligations were no longer accurate, the Company would adjust its
environmental liabilities accordingly in the period that such determination
is made. Estimated future expenditures for environmental remediation are
not discounted to their present value. Accrued environmental liabilities
are not reduced by potential insurance reimbursements.
Environmental expenses that relate to ongoing operations are included
as a component of cost of goods sold. Environmental expenses related to
certain non-operating properties are included in other income, net on the
Consolidated Statements of Income.
Earnings Per Share
Basic earnings per share is computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the increase
in average common shares outstanding that would result from the assumed
exercise of outstanding stock options calculated using the treasury stock
method. Approximately 683,000 and 330,000 stock options were excluded from
the computation of diluted earnings per share at December 29, 2007 and
December 30, 2006, respectively, as the options' exercise price was higher
than the average market price of the Company's stock.
F-25
Income Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon
the occurrence of future events. The Company records valuation allowances
to reduce its deferred tax assets to the amount it believes is more likely
than not to be realized. These valuation allowances can be impacted by
changes in tax laws, changes to statutory tax rates, and future taxable
income levels and are based on the Company's judgment, estimates, and
assumptions regarding those future events. In the event the Company were to
determine that it would not be able to realize all or a portion of the net
deferred tax assets in the future, the Company would increase the valuation
allowance through a charge to income tax expense in the period that such
determination is made. Conversely, if the Company were to determine that it
would be able to realize its deferred tax assets in the future, in excess of
the net carrying amounts, the Company would decrease the recorded valuation
allowance through a decrease to income tax expense in the period that such
determination is made.
The Company provides for uncertain tax positions and the related
interest and penalties, if any, based upon management's assessment of
whether a tax benefit is more likely than not to be sustained upon
examination by tax authorities. At December 29, 2007, the Company believes
it has appropriately accounted for any unrecognized tax benefits. To the
extent the Company prevails in matters for which a liability for an
unrecognized tax benefit is established or is required to pay amounts in
excess of the liability, the Company's effective tax rate in a given
financial statement period may be affected.
Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes assessed by a governmental authority that are directly imposed on
a revenue producing transaction between the Company and its customers,
primarily value added taxes in foreign jurisdictions, are accounted for on a
net (excluded from revenues and costs) basis.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (R), "Share-
Based Payment," and began recognizing compensation expense in its
Consolidated Statements of Income as a selling, general, and administrative
expense for its stock option grants based on the fair value of the awards.
Prior to January 1, 2006, the Company accounted for stock option grants
under the recognition and measurement provisions of APB Opinion 25,
"Accounting for Stock Issued to Employees," and related Interpretations, as
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." No
stock-based compensation expense was reflected in net income prior to
adopting SFAS No. 123 (R) as all options were granted at an exercise price
equal to the market value of the underlying common stock on the date of
grant.
F-26
Concentrations of Credit and Market Risk
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different geographic areas and
different industries, including HVAC, plumbing, refrigeration, hardware,
automotive, OEMs, and others.
The Company minimizes its exposure to base metal price fluctuations
through various strategies. Generally, it prices an equivalent amount of
copper raw material, under flexible pricing arrangements it maintains with
its suppliers, at the time it determines the selling price of finished
products to its customers.
The Company's historical experience in collection of accounts
receivable falls within the recorded allowances. Due to these factors, no
additional credit risk, beyond amounts provided for collection losses, is
believed inherent in the Company's accounts receivable.
Derivative Instruments and Hedging Activities
The Company has utilized forward contracts to manage the volatility
related to purchases of copper and natural gas, and certain transactions
denominated in foreign currencies. In addition, the Company has reduced its
exposure to increases in interest rates by entering into an interest rate
swap contract. These contracts have been designated as cash flow hedges.
The Company has also utilized forward contracts to protect the value of its
copper inventory on hand through a fair value hedge. The Company accounts
for derivative financial instruments in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that an entity recognize all derivatives, as defined, as either
assets or liabilities measured at fair value. If the derivative is
designated as a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in
fair value of the hedged assets, liabilities or firm commitments through
earnings or recognized as a component of comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in
earnings. Gains and losses recognized by the Company related to the
ineffective portion of its hedging instruments, as well as gains and losses
related to the portion of the hedging instruments excluded from the
assessment of hedge effectiveness, were not material to the Company's
Consolidated Financial Statements. Should these contracts no longer meet
hedge criteria in accordance with SFAS No. 133, either through lack of
effectiveness or because the hedged transaction is not probable of
occurring, all deferred gains and losses related to the hedge will be
immediately reclassified from accumulated other comprehensive income into
earnings.
At December 29, 2007, the Company held open forward contracts to
purchase approximately $11.5 million of copper over the next twelve months
related to fixed-price sales orders.
F-27
The Company primarily executes derivative contracts with major
financial institutions. These counterparties expose the Company to credit
risk in the event of non-performance. The amount of such exposure is
limited to the fair value of the contract plus the unpaid portion of amounts
due to the Company pursuant to terms of the derivative instruments, if any.
Although there are no collateral requirements, if a downgrade in the credit
rating of these counterparties occurs, management believes that this
exposure is mitigated by provisions in the derivative arrangements which
allow for the legal right of offset of any amounts due to the Company from
the counterparties with any amounts payable to the counterparties by the
Company. As a result, management considers the risk of counterparty default
to be minimal.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value due to the short-
term maturity of these instruments. Primarily using market yields, the fair
value of the Company's debt instruments were estimated to be $329.2 million
and $320.7 million at December 29, 2007 and December 30, 2006, respectively.
The fair value of the Company's interest rate swap contract was less than
$0.1 million at December 29, 2007 and December 30, 2006. This value
represents the estimated amount the Company would need to pay if the contract
was terminated before maturity, principally resulting from market interest
rate decreases. The fair value of committed forward contracts to purchase
copper was $(0.1) million and $(0.6) million, respectively at
December 29, 2007 and December 30, 2006. The Company estimates the fair
value of contracts by obtaining quoted market prices.
Fair value estimates are made at a specific point in time based on
relevant market information about the financial instrument. These estimates
are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Foreign Currency Translation
For foreign subsidiaries, the functional currency is the local
currency. Balance sheet accounts are translated at exchange rates in effect
at the end of the year and income statement accounts are translated at
average exchange rates for the year. Translation gains and losses are
included in stockholders' equity as a component of accumulated other
comprehensive income. Included in the Consolidated Statements of Income were
transaction gains of $2.0 million for 2007 and losses of $0.4 million and
$0.5 million in 2006 and 2005, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates, assumptions, and judgments that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
F-28
Recently Issued Accounting Standards
The FASB has issued SFAS No. 157, "Fair Value Measurements," which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosure
about fair value measurements. The Company is required to adopt the
provisions of this statement in the first quarter of fiscal 2008.
Management is reviewing the potential effects of this statement; however, it
does not expect the adoption of SFAS No. 157 to have a material impact on
the Company's Consolidated Financial Statements.
In 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 Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141 (R), "Business
Combinations." The purpose of issuing the statement is to replace current
guidance in SFAS No. 141 to better represent the economic value of a
business combination transaction. The changes to be effected with SFAS No.
141 (R) from the current guidance include, but are not limited to: (1)
acquisition costs will be recognized separately from the acquisition; (2)
known contractual contingencies at the time of the acquisition will be
considered part of the liabilities acquired measured at their fair value;
all other contingencies will be part of the liabilities acquired measured at
their fair value only if it is more likely than not that they meet the
definition of a liability; (3) contingent consideration based on the outcome
of future events will be recognized and measured at the time of the
acquisition; (4) business combinations achieved in stages (step
acquisitions) will need to recognize the identifiable assets and
liabilities, as well as noncontrolling interests, in the acquiree, at the
full amounts of their fair values; and (5) a bargain purchase (defined as a
business combination in which the total acquisition-date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred plus any noncontrolling interest in the acquiree) will require
that excess to be recognized as a gain attributable to the acquirer. SFAS
No. 141 (R) will be effective for fiscal years beginning after December 15,
2008.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements - an amendment of ARB No. 51."
SFAS No. 160 requires (i) that noncontrolling (minority) interests be
reported as a component of stockholders' equity, (ii) that net income
attributable to the parent and the noncontrolling interest be separately
identified in the Consolidated Statements of Income, (iii) that changes in a
parent's ownership interest while the parent retains the controlling
interest be accounted for as equity transactions, (iv) that any retained
noncontrolling equity investment upon the deconsolidation of a subsidiary be
initially measured at fair value, and (v) that sufficient disclosures are
provided that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective for annual periods beginning after December 15, 2008 and should be
F-29
applied prospectively. However, the presentation and disclosure
requirements of the statement shall be applied retrospectively for all
periods presented.
Reclassifications
Certain amounts in the 2005 Consolidated Statement of Cash Flows have
been reclassified to conform to the current year presentation.
General
The Company's fiscal years ended December 29, 2007 and December 30, 2006
contained 52 weeks while the year ended December 31, 2005 contained 53 weeks.
Note 2 - Inventories
(In thousands)
2007 2006
Raw material and supplies $ 47,568 $ 48,265
Work-in-process 37,350 40,209
Finished goods 191,132 188,457
Valuation reserves (7,018) (18,284)
---------- ----------
Inventories $ 269,032 $ 258,647
========== ==========
Inventories valued using the LIFO method totaled $25.2 million at
December 29, 2007 and $32.6 million at December 30, 2006. At December 29,
2007 and December 30, 2006, the approximate FIFO cost of such inventories
was $116.3 million and $143.1 million, respectively. During 2007 inventory
quantities valued using the LIFO method declined which resulted in
liquidation of LIFO inventory layers. Additionally, the Company records
certain inventories purchased for resale on an average cost basis. The
values of those inventories were $59.6 million and $65.5 million at the end
of 2007 and 2006, respectively.
The effect of liquidation of LIFO layers decreased cost of sales by
approximately $10.0 million, or 17 cents per diluted share after tax.
During 2007 and 2006 certain inventories and firm commitments to purchase
inventories were written down to the lower of cost or market. The write down
of approximately $2.7 million, or 5 cents per diluted share after tax, and
$14.2 million, or 26 cents per diluted share after tax, during 2007 and 2006,
respectively, resulted from the open market price of copper falling below the
inventories' net book value.
At December 29, 2007 the FIFO value of inventory consigned to others
was $20.5 million compared with $3.9 million at the end of 2006.
F-30
Note 3 - Property, Plant, and Equipment, Net
(In thousands)
2007 2006
Land and land improvements $ 13,477 $ 12,481
Buildings 108,621 101,046
Machinery and equipment 565,371 535,373
Construction in progress 11,005 15,430
---------- ----------
698,474 664,330
Less accumulated depreciation (390,091) (349,266)
---------- ----------
Property, plant, and equipment, net $ 308,383 $ 315,064
========== ==========
Note 4 - Goodwill
The changes in the carrying amount of goodwill were as follows:
(In thousands)
Plumbing &
Refrigeration OEM
Segment Segment Total
Balance at December 31, 2005 $ 143,318 $ 8,853 $ 152,171
Goodwill resulting from
acquisitions during the year - 1,118 1,118
Foreign currency translation adjustment 2,364 - 2,364
--------- --------- ---------
Balance at December 30, 2006 145,682 9,971 155,653
Impairment charge (2,756) - (2,756)
Foreign currency translation adjustment 366 - 366
--------- --------- ---------
Balance at December 29, 2007 $ 143,292 $ 9,971 $ 153,263
========= ========= =========
During its required annual assessment of goodwill in 2007, the Company
revised the projected future cash flows as well as other estimates and
assumptions related to its Mexican Operations. Based upon the changes in
discounted future cash flows, the Company recognized an impairment charge of
$2.8 million reducing the carrying value of the business.
F-31
Note 5 - Long-Term Debt
(In thousands)
2007 2006
6% Subordinated Debentures, due 2014 $ 297,688 $ 297,688
2001 Series IRBs with interest at
6.16%, due 2011 through 2021 10,000 10,000
Mueller-Xingrong line of credit with
interest at 6.48%, due 2008 46,627 27,737
Other, including capitalized lease obligations 166 8,727
---------- ----------
354,481 344,152
Less current portion of long-term debt (72,743) (35,998)
---------- ----------
Long-term debt $ 281,738 $ 308,154
========== ==========
On October 26, 2004, as part of a Special Dividend, the Company issued
$299.5 million in principal amount of its 6% Subordinated Debentures (the
Debentures) due November 1, 2014. Interest on the Debentures is payable
semi-annually on May 1 and November 1. The Company may repurchase the
Debentures through open market transactions or through privately negotiated
transactions. During 2006 the Company repurchased, through open market
transactions, and extinguished $1.8 million in principal amount of its
Debentures. Subsequent to year-end, the Company repurchased, through a
privately negotiated transaction, and extinguished $25.5 million in
principal amount of the Debentures. As such, this amount is classified as
current at December 29, 2007. The Debentures may be redeemed in whole at
any time or in part from time to time at the option of the Company at the
following redemption price (expressed as a percentage of principal amount)
plus any accrued but unpaid interest to, but excluding, the redemption date:
If redeemed during the 12-month period beginning October 26,
Year Redemption Price
2007 102%
2008 101
2009 and thereafter 100
On December 1, 2006, the Company executed a Credit Agreement (the
Agreement) with a syndicate of banks establishing an unsecured $200 million
revolving credit facility (the Credit Facility) which matures December 1,
2011. Borrowings under the Credit Facility bear interest, at the Company's
option, at LIBOR plus a variable premium or the greater of Prime or the
Federal Funds rate plus 0.5 percent. LIBOR advances may be based upon the
one, two, three, or six-month LIBOR. The variable premium over LIBOR is
based on certain financial ratios, and can range from 27.5 to 67.5 basis
points. At December 29, 2007, the premium was 40.0 basis points.
F-32
Additionally, a facility fee is payable quarterly on the total commitment
and varies from 10.0 to 20.0 basis points based upon the Company's
capitalization ratio. Availability of funds under the Credit Facility is
reduced by the amount of certain outstanding letters of credit, which are
used to secure the Company's payment of insurance deductibles and certain
retiree health benefits, totaling approximately $9.8 million at December 29,
2007. Terms of the letters of credit are generally one year but are
renewable annually as required. There were no borrowings outstanding as of
December 29, 2007.
Borrowings under the Agreement require the Company, among other things,
to meet certain minimum financial ratios. At December 29, 2007, the Company
was in compliance with all debt covenants.
On April 4, 2006, Mueller-Xingrong entered into a Credit Agreement with
a syndicate of four banks establishing a secured RMB 320 million, or $39.9
million, revolving working capital facility with a maturity date of April
2007. On April 4, 2007, Mueller-Xingrong renewed and amended this facility
(the Amended JV Credit Facility). The Amended JV Credit Facility is a
secured RMB 450 million, or $60.76 million, revolving working capital
facility which matures in April 2008. Borrowings under the Amended JV
Credit Facility are secured by the real property and equipment of Mueller-
Xingrong and bear interest at 95 percent of the latest base-lending rate
published by the Peoples Banks of China (6.16% at year-end).
Aggregate annual maturities of the Company's debt are $72.7 million in
2008, $0.8 million in 2011, $1.0 million in 2012, and $280.0 million
thereafter. Interest paid in 2007, 2006, and 2005 was $20.0 million, $20.4
million, and $19.0 million, respectively. No interest was capitalized in
2007, 2006, or 2005.
Note 6 - Stockholders' Equity
On October 26, 2004, the Company distributed a Special Dividend
consisting of $6.50 in cash and $8.50 in principal amount of the Company's
6% Subordinated Debentures due 2014 for each share of Common Stock.
Additionally, the Company paid regular quarterly cash dividends of 10 cents
per share per quarter in 2007, 2006 and 2005.
The Company's Board of Directors has authorized the repurchase, until
October 2008, of up to 10 million shares of the Company's Common Stock
through open market transactions or through privately negotiated
transactions. The Company has no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at any
time. Any purchases will be funded primarily through existing cash and cash
from operations. The Company may hold any shares purchased in treasury or
use a portion of the repurchased shares for employee benefit plans, as well
as for other corporate purposes. Through December 29, 2007, the Company had
repurchased approximately 2.4 million shares under this authorization.
F-33
Components of accumulated other comprehensive income are as follows:
(In thousands)
2007 2006
Cumulative foreign currency translation adjustment $ 29,920 $ 25,314
Unrecognized prior service cost, net of income tax (620) (856)
Unrecognized actuarial net gain (loss),
net of income tax 2,596 (11,582)
Unrealized derivative losses, net of income tax (88) (373)
---------- ----------
Accumulated other comprehensive income $ 31,808 $ 12,503
========== ==========
The Company adopted the recognition and disclosure provisions of SFAS
No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" (SFAS No. 158) on December 30, 2006. Pursuant to the
adoption of SFAS No. 158, unrecognized prior service costs and actuarial gains
and losses are recognized in accumulated other comprehensive income, net of
tax.
During 2007, the increase in cumulative foreign currency translation
adjustment relates to (i) the increase in value of the Chinese renmimbi of
6.0 percent, (ii) the increase in value of British pound sterling of
approximately 1.9 percent, and (iii) the tax effect of certain intercompany
transactions of approximately $0.3 million.
During 2006, the increase in cumulative foreign currency translation
adjustment relates to (i) Mueller-Xingrong, the Company's Chinese joint
venture formed in December 2005, (ii) the increase in value of British pound
sterling of approximately 14 percent, and (iii) the tax effect of certain
intercompany transactions of approximately $1.5 million, partially offset by
the decrease in value of the Mexican peso of approximately 1.5 percent.
Note 7 - Income Taxes
The components of income from continuing operations before income
taxes were taxed under the following jurisdictions:
(In thousands)
2007 2006 2005
Domestic $ 168,936 $ 188,919 $ 114,735
Foreign 14,345 14,660 9,470
--------- --------- ---------
Income from continuing operations
before income taxes $ 183,281 $ 203,579 $ 124,205
========= ========= =========
F-34
Income tax expense attributable to continuing operations consists of
the following:
(In thousands)
2007 2006 2005
Current tax (benefit) expense:
Federal $ 62,215 $ 69,119 $ 42,811
Foreign 3,735 5,460 499
State and local (1,238) (530) 1,233
--------- --------- ---------
Current tax expense 64,712 74,049 44,543
--------- --------- ---------
Deferred tax (benefit) expense:
Federal 2,379 (10,544) (7,570)
Foreign 7,061 (4,504) (280)
State and local (6,346) (4,291) (1,706)
--------- --------- ---------
Deferred tax (benefit) expense 3,094 (19,339) (9,556)
--------- --------- ---------
Income tax expense $ 67,806 $ 54,710 $ 34,987
========= ========= =========
No provision is made for U.S. income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. It is not practicable to compute the potential deferred tax
liability associated with these undistributed foreign earnings.
The difference between the reported income tax expense and a tax
determined by applying the applicable U.S. federal statutory income tax rate
to income from continuing operations before income taxes is reconciled as
follows:
(In thousands)
2007 2006 2005
Expected income tax expense $ 64,148 $ 71,253 $ 43,471
State and local income tax,
net of federal benefit 6,497 1,947 (813)
Effect of foreign statutory rates
different from U.S. and other
foreign adjustments 1,171 (2,163) (975)
Valuation allowance changes (1,920) (7,663) (1,962)
Adjustment for correction of prior
year tax provision 2,239 - (2,862)
U.S. production activities deduction (3,150) (2,355) (1,015)
Tax contingency changes (1,449) (5,633) (431)
Other, net 270 (676) (426)
--------- --------- ---------
Income tax expense $ 67,806 $ 54,710 $ 34,987
========= ========= =========
F-35
A foreign income tax holiday for Mueller-Xingrong is in effect for
2006 and 2007, resulting in an immaterial tax benefit for 2007 and a $0.9
million tax benefit in 2006, or 2 cents per diluted share. For 2008 through
2010, the foreign jurisdiction will impose a reduced tax rate.
During 2007, the Company reduced its total valuation allowance by $1.9
million, or 5 cents per diluted share. This net reduction included a
reduction of $10.7 million primarily from a change in the estimate of the
utilization of various state income tax attributes in future years, offset
by increases in the valuation allowance related to the reduction in
anticipated utilization in future years of various other tax attributes.
These estimates are highly subjective and could be affected by changes in
business conditions and other factors. Changes in any of these factors
could have a material impact on future income tax expense.
During 2006, the Company recorded a benefit of $7.7 million, or 21
cents per diluted share, related to the reduction in the valuation
allowance. The Company recognized $29.0 million in gross deferred tax
assets, related to state income tax credits and NOL carryforwards. The
gross deferred tax asset was reduced by a valuation allowance of $24.9
million, for a net benefit of $4.1 million. The remaining amount pertains
primarily to a reduction of the valuation allowance associated with various
foreign tax attributes. During 2005, the Company recorded a benefit of $2.0
million, or 5 cents per diluted share, primarily related to the reduction in
the valuation allowance related to foreign NOL carryforwards.
Included in income tax expense for 2007 is an adjustment of $2.2
million, or 6 cents per diluted share, resulting from a correction of the
prior years' deferred income tax provision related to U.S. pension plans.
The effect of this correction is not material to the current period or any
prior period presented. The 2005 adjustment of $2.9 million, or 8 cents per
diluted share, to correct the prior years' income tax provision is
immaterial to the results of operations and financial condition for 2005 as
well as the prior affected years.
At the beginning of fiscal 2007, the Company adopted the provisions of
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (FIN 48), which clarifies accounting
for income taxes under SFAS No. 109 by prescribing a minimum recognition
threshold that a tax position must meet in order for a benefit for the
position to be recognized in the financial statements. As a result of the
adoption, the Company recorded an adjustment of approximately $2.2 million
to reduce the opening balance of retained earnings, and $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 Consolidated Balance
Sheet. At adoption, the Company's unrecognized tax benefits totaled $11.8
million.
F-36
The following table summarizes the activity related to our unrecognized
tax benefits:
(In thousands)
Balance at December 31, 2006 $ 11,792
Increases related to prior year tax positions 5,800
Increases related to current year tax positions 316
Decreases related to prior year tax positions (4,500)
Decreases due to lapses in statutes of limitations (2,076)
----------
Balance at December 29, 2007 $ 11,332
==========
Federal income tax benefits associated with state tax uncertainties
and interest on federal tax uncertainties are recorded as a
deferred asset. At the date of adoption, this asset totaled $3.5 million
and decreased to $2.5 million during 2007. Of the $11.3 million of
unrecognized tax benefits, approximately $9.3 million, net of any applicable
federal benefit, would affect the effective tax rate, if recognized. Due to
ongoing federal and state income tax audits and potential lapses of the
statutes of limitations in various taxing jurisdictions, it is reasonably
possible that this reserve may change in the next twelve months by up to
$5.4 million.
The Company includes interest and penalties related to income tax matters
as a component of income tax expense. Cumulative potential interest
and penalties accrued related to unrecognized tax benefits at the date of
adoption totaled $3.2 million. During 2007, the reduction to tax expense
related to penalties and interest, without consideration of any applicable
federal benefit, was $1.3 million, or 4 cents per diluted share, bringing
the cumulative potential interest and penalty accrual related to
unrecognized tax benefits to $1.9 million.
During 2006, the Internal Revenue Service concluded an examination of
the Company's federal income tax returns for years 2002 and 2003. The
Company's 2005 federal income tax return will be examined by the Internal
Revenue Service during 2008. The Company is also under current examination
by various state taxing authorities for tax periods from 2002 through 2005.
While the Company believes that it is adequately reserved for possible
audit adjustments, the final resolution of these examinations cannot be
determined with certainty and could result in final settlements that differ
from current estimates. The statute of limitations is still open for the
Company's federal tax return and most state income tax returns for the 2004
return and all subsequent years. The statutes of limitations for some
state and foreign returns are also open for some earlier tax years due to
ongoing audits and differing statute periods.
F-37
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
(In thousands)
2007 2006
Deferred tax assets:
Accounts receivable $ 1,692 $ 2,560
Inventories 6,348 8,184
OPEB and accrued items 14,393 12,692
Pension - 6,820
Other reserves 9,098 7,358
Interest 3,741 3,560
Federal and foreign tax attributes 8,137 7,155
State tax attributes, net of federal benefit 25,240 29,037
Other 1,341 1,880
---------- ----------
Total deferred tax assets 69,990 79,246
Less valuation allowance (22,980) (24,900)
---------- ----------
Deferred tax assets, net of
valuation allowance 47,010 54,346
---------- ----------
Deferred tax liabilities:
Property, plant, and equipment 61,969 66,792
Foreign withholding tax 1,958 1,658
Pension 6,888 -
Other 754 3,919
---------- ----------
Total deferred tax liabilities 71,569 72,369
---------- ----------
Net deferred tax liability $ (24,559) $ (18,023)
========== ==========
As a result of the Company's acquisition of Extruded Metals, Inc. during
the first quarter of 2007, deferred tax assets were increased by a net purchase
accounting adjustment of $1.2 million. Significant items included a $2.4
million deferred tax liability for a prepaid pension asset and a $2.6
million deferred tax asset related to postretirement obligations.
As of December 29, 2007, after consideration of the federal benefit,
the Company had state income tax credit carryforwards of $1.3 million with
various expirations through 2017, and other state income tax credit
carryforwards of $21.8 million with unlimited lives. The Company has
recorded a tax benefit of $2.1 million with respect to state NOL
carryforwards, expiring between 2008 and 2025. The state tax credit and NOL
carryforwards are offset by valuation allowances totaling $14.2 million.
Additionally, the Company had federal and foreign tax attributes of $8.1
million, most of which expire from 2013 to 2015, which were offset by
valuation allowances of $5.0 million. Other foreign deferred tax assets
were offset by valuation allowances of $3.8 million.
F-38
Income taxes paid were approximately $62.3 million in 2007, $73.2
million in 2006, and $34.5 million in 2005.
Note 8 - Other Current Liabilities
Included in other current liabilities were accrued discounts and
allowances of $49.2 million at December 29, 2007 and $51.1 million at
December 30, 2006, and taxes payable of $11.2 million at December 29, 2007
and $14.8 million at December 30, 2006.
Note 9 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. In
August 2006, the Pension Protection Act of 2006 was passed. The effect of
this legislation on the Company's pension plans was not material.
During 2007, the Company assumed certain pension and postretirement
obligations totaling $25.3 million and $7.5 million, respectively, and
pension trust assets of $32.2 million in the acquisition of Extruded Metals,
Inc. Net periodic benefit income with respect to the acquired pension plan
was $0.6 million and the net periodic benefit cost with respect to the
acquired postretirement plan was $0.6 million in 2007.
On December 30, 2006, the Company adopted the recognition and
disclosure provisions of SFAS No. 158. SFAS No. 158 required the Company to
recognize the funded status of its pension and postretirement plans in the
Consolidated Balance Sheet, with a corresponding adjustment to accumulated
other comprehensive income, net of tax. The adjustment to accumulated other
comprehensive income at adoption represents the net unrecognized actuarial
gains and losses and unrecognized prior service costs remaining from the
application of SFAS No. 87, "Employers' Accounting for Pensions" (SFAS No. 87)
all of which were previously netted against the plans' funded status in the
Company's Consolidated Balance Sheet pursuant to the provisions of
SFAS No. 87. These amounts are recognized as net periodic benefit cost
pursuant to the Company's historical accounting policy for amortizing such
amounts. Actuarial gains and losses that are not recognized as net periodic
benefit cost in the same periods are recognized as a component of other
comprehensive income. Those amounts are recognized as a component of net
periodic benefit cost on the same basis as the amounts recognized in
accumulated other comprehensive income at adoption of SFAS No. 158.
The adoption of the provisions of SFAS No. 158 resulted in a decrease
in other assets of $1.2 million, an increase in pension liabilities of $0.2
million, an increase in postretirement benefits other than pensions of $3.3
million, an increase in deferred tax assets of $1.5 million, and a decrease
to accumulated other comprehensive income of $3.2 million. The adoption of
SFAS No. 158 had no effect on the Company's Consolidated Statement of Income
for the year ended December 30, 2006, or for any prior period presented, and
it will not affect the Company's operating results in future periods. Had
the Company not been required to adopt SFAS No. 158 at December 30, 2006, it
would have recognized an additional minimum liability pursuant to the
provisions of SFAS No. 87. The effect of recognizing the additional
liability in 2006 before the adoption of SFAS No. 158 is presented in the
Consolidated Statement of Stockholders' Equity.
F-39
The following tables provide a reconciliation of the changes in the
plans' benefit obligations and the fair value of the plans' assets for 2007
and 2006, and a statement of the plans' aggregate funded status as of
December 29, 2007 and December 30, 2006:
(In thousands)
Pension Benefits Other Benefits
2007 2006 2007 2006
Change in benefit
obligation:
Obligation at
beginning of year $ 165,438 $ 149,773 $ 11,432 $ 11,599
Service cost 2,410 2,104 1,897 7
Interest cost 9,775 8,419 1,129 641
Participant contributions 533 549 - -
Business acquisitions 25,237 - 7,477 -
Actuarial (gain) loss (14,986) 3,351 (1,046) 108
Benefit payments (9,464) (7,191) (1,197) (923)
Curtailment - - (256) -
Settlement (165) (373) - -
Foreign currency
translation adjustment 1,453 8,806 2 -
-------- -------- -------- --------
Obligation at end of year $ 180,231 $ 165,438 $ 19,438 $ 11,432
======== ======== ======== ========
Change in fair value
of plan assets:
Fair value of plan
assets at beginning
of year $ 153,042 $ 134,294 $ - $ -
Actual return on
plan assets 19,270 17,169 - -
Employer contributions 2,610 2,343 1,197 923
Participant contributions 533 549 - -
Business acquisitions 32,173 - - -
Benefit payments (9,464) (7,191) (1,197) (923)
Settlement (165) (379) - -
Foreign currency
translation adjustment 1,063 6,257 - -
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 199,062 $ 153,042 $ - $ -
======== ======== ======== ========
F-40
(In thousands)
Pension Benefits Other Benefits
2007 2006 2007 2006
Funded status:
Funded (underfunded)
status at end of year $ 18,831 $ (12,396) $ (19,438) $ (11,432)
Amounts recognized in
accumulated other
comprehensive income:
Unrecognized net
actuarial (gain) loss (7,523) 13,426 2,011 3,231
Unrecognized prior
service cost 936 1,247 47 111
-------- -------- -------- --------
Total recognized in
accumulated other
comprehensive income (6,587) 14,673 2,058 3,342
-------- -------- -------- --------
Net amount recognized $ 12,244 $ 2,277 $ (17,380) $ (8,090)
======== ======== ======== ========
The Company sponsors one pension plan in the U.K. which comprises 41
percent of the above benefit obligation and 31 percent of the above plan
assets as of December 29, 2007.
As of December 29, 2007, $(0.3) million of the actuarial net gain and
$0.3 million of the prior service cost will, through amortization, be
recognized as components of net periodic benefit cost in 2008.
Pursuant to the provisions of SFAS No. 158, the aggregate statuses of
all overfunded plans are recognized as an asset and the aggregate statuses
of all underfunded plans are recognized as a liability in the Consolidated
Balance Sheets. The amounts recognized as a liability are classified as
current or long-term on a plan-by-plan basis. Liabilities are classified as
current to the extent the actuarial present value of benefits payable within
the next 12 months exceed the fair value of plan assets, with all remaining
amounts being classified as long-term. The total funded status of the plans
was recognized in the Consolidated Balance Sheet as follows as of December
29, 2007 and December 30, 2006:
F-41
(In thousands)
Pension Benefits Other Benefits
2007 2006 2007 2006
Long-term asset $ 32,547 $ 7,279 $ - $ -
Current liability - - (1,729) (924)
Long-term liability (13,716) (19,675) (17,709) (10,508)
-------- -------- -------- --------
Total funded (underfunded)
status $ 18,831 $ (12,396) $ (19,438) $ (11,432)
======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with benefit obligations in
excess of plan assets were $77.5 million, $74.6 million, and $63.8 million,
respectively, as of December 29, 2007, and $78.1 million, $75.2 million, and
$58.3 million, respectively, as of December 30, 2006.
The components of net periodic benefit cost (income) are as follows:
(In thousands)
2007 2006 2005
Pension benefits:
Service cost $ 2,410 $ 2,104 $ 2,150
Interest cost 9,775 8,419 8,095
Expected return on
plan assets (13,672) (10,619) (9,711)
Amortization of prior
service cost 311 373 372
Amortization of net loss 622 1,112 919
Effect of curtailment and
settlements 59 704 25
--------- --------- ---------
Net periodic benefit (income) cost $ (495) $ 2,093 $ 1,850
========= ========= =========
Other benefits:
Service cost $ 1,897 $ 7 $ 7
Interest cost 1,129 641 632
Amortization of prior
service cost 2 8 8
Amortization of net loss 175 179 130
Effect of curtailment (194) - -
--------- --------- ---------
Net periodic benefit cost $ 3,009 $ 835 $ 777
========= ========= =========
F-42
During 2007, the Company ceased postretirement life insurance benefits
for employees of certain locations, resulting in a curtailment gain of $0.2
million. During 2006, the Company amended a collective bargaining agreement
which froze the accrual of future benefits related to one of its pension
plans. This resulted in a curtailment loss of $0.6 million during the
period.
Prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses
in excess of 10 percent of the greater of the benefit obligation and the
market-related value of assets are amortized over the average remaining
service period of active participants.
The weighted average assumptions used in the measurement of the
Company's benefit obligations are as follows:
Pension Benefits Other Benefits
2007 2006 2007 2005
Discount rate 6.18% 5.40% 6.21% 5.75%
Expected return
on plan assets 8.01% 7.83% N/A N/A
Rate of compensation
increases 4.43% 4.00% 5.04% N/A
The weighted average assumptions used in the measurement of the
Company's net periodic benefit cost are as follows:
Pension Benefits Other Benefits
2007 2006 2005 2007 2006 2005
Discount rate 5.40% 5.59% 5.91% 5.75% 6.00% 6.00%
Expected return
on plan assets 7.83% 7.94% 8.06% N/A N/A N/A
Rate of compensation
increases 4.00% 4.00% 4.50% N/A N/A N/A
Two pension plans and all Mexican postemployment plans use the rate of
compensation increase in its benefit formula. All other pension plans are
based on length of service. The measurement date for the majority of the
plans is November 30.
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is assumed to range from 6.2 to
11 percent for 2007, gradually decrease to 5 percent for 2013, and remain at
that level thereafter. The health care cost trend rate assumption could
have a significant effect on the amounts reported. For example, increasing
the assumed health care cost trend rates by one percentage point would
increase the accumulated postretirement benefit obligation by $1.8 million
and the service and interest cost components of net periodic postretirement
F-43
benefit costs by $0.1 million for 2007. Decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation and the service and interest
cost components of net periodic postretirement benefit costs for 2007 by
$1.6 million and $0.1 million, respectively.
The weighted average asset allocation of the Company's pension fund
assets are as follows:
Asset Category Pension Plan Assets
2007 2006
Equity securities (includes equity index funds) 62% 78%
Fixed income securities 6 7
Cash and equivalents 24 5
Alternative investments 8 10
------- -------
100% 100%
======= =======
At December 29, 2007, the Company's target allocation, by asset
category, of assets of its defined benefit pension plans is: (i) equity
securities, including equity index funds - at least 60 percent; (ii) fixed
income securities - not more than 25 percent; and (iii) alternative
investments - not more than 20 percent.
The Company's pension plan obligations are long-term and, accordingly,
the plan assets are invested for the long-term. The Company believes that a
diversified portfolio of equity securities (both actively managed and index
funds) and private equity funds have an acceptable risk-return profile that,
over the long-term, is better than fixed income securities. Consequently,
the pension plan assets are heavily weighted to equity investments. Plan
assets are monitored periodically. Based upon results, investment managers
and/or asset classes are redeployed when considered necessary. Expected
rates of return on plan assets were determined based on historical market
returns giving consideration to the composition of each plan's portfolio.
None of the plans' assets are expected to be returned to the Company during
the next fiscal year.
F-44
The plans' assets do not include investment in securities issued by the
Company. The Company expects to contribute approximately $2.4 million to
its pension plans and $1.7 million to its other postretirement benefit plans
in 2008. The Company expects future benefits to be paid from the plans as
follows:
(In thousands)
Pension Other
Benefits Benefits
2008 $ 10,442 $ 1,730
2009 10,452 1,783
2010 10,440 1,841
2011 10,786 1,893
2012 11,550 1,937
2013-2017 60,726 7,608
---------- ----------
Total $ 114,396 $ 16,792
========== ==========
Subsequent to year-end, effective January 1, 2008, the Company merged
several of its U.S. pension plans into one plan, the Mueller Pension Plan.
As part of the merger, the Company also consolidated all the pension assets
into one master trust. None of the benefits historically provided by the
plans were changed as a result of the merger.
The Company sponsors voluntary employee savings plans that qualify
under Section 401(k) of the Internal Revenue Code of 1986. Compensation
expense for the Company's matching contribution to the 401(k) plans was $2.5
million in 2007, $2.4 million in 2006, and $2.2 million in 2005. The
Company's match is a cash contribution. Participants direct the investment
of their account balances by allocating among a range of asset classes
including mutual funds (equity, fixed income, and balanced funds), and money
market funds. The plans do not offer direct investment in securities issued
by the Company.
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992
(the Act) was enacted. The Act mandates a method of providing for
postretirement benefits to UMWA current and retired employees, including
some retirees who were never employed by the Company. In October 1993,
beneficiaries were assigned to the Company and the Company began its
mandated contributions to the UMWA Combined Benefit Fund, a multiemployer
trust. Beginning in 1994, the Company was required to make contributions
for assigned beneficiaries under an additional multiemployer trust created
by the Act, the UMWA 1992 Benefit Plan. The ultimate amount of the
Company's liability under the Act will vary due to factors which include,
among other things, the validity, interpretation, and regulation of the Act,
its joint and several obligation, the number of valid beneficiaries
assigned, and the extent to which funding for this obligation will be
satisfied by transfers of excess assets from the 1950 UMWA pension plan and
transfers from the Abandoned Mine Reclamation Fund. Nonetheless, the
Company believes it has an adequate reserve for this liability, which
totaled $4.4 million in 2007 and $6.1 million in 2006.
F-45
The Company makes contributions to certain multiemployer defined
benefit pension plan trusts that cover union employees based on collective
bargaining agreements. Contributions by employees are not required nor are
they permitted. Pension expense under the multiemployer defined benefit
pension plans was $1.0 million in 2007, $0.9 million for 2006, and $0.7
million for 2005.
Note 10 - Commitments and Contingencies
Environmental
The Company is subject to environmental standards imposed by federal,
state, local, and foreign environmental laws and regulations. For non-
operating properties, the Company has provided and charged to income $0.7
million in 2007, $0.6 million in 2006, and $0.6 million in 2005 for pending
environmental matters. The basis for the provision is updated information
and results of ongoing remediation and monitoring programs. Environmental
reserves total $8.9 million in 2007 and in 2006. These estimated future
costs, which will be funded in future years as remediation programs
progress, are not discounted to their present value, and are not reduced by
potential insurance reimbursements. Management believes that the outcome of
pending environmental matters will not materially affect the financial
position or results of operations of the Company.
Copper Tube Antitrust Litigation
The Company is named as a defendant in several pending litigations (the
Copper Tube Actions) brought by direct and indirect purchasers of various
forms of copper tube. The Copper Tube Actions allege anticompetitive
activities with respect to the sale of copper plumbing tubes and/or copper
tubes used in, among other things, the manufacturing of air-conditioning and
refrigeration units. All of the Copper Tube Actions seek monetary and other
relief. Although the Company believes that the claims for relief in the
Copper Tube Actions are without merit, due to the procedural stage of the
Copper Tube Actions, the Company is unable to determine the likelihood of a
materially adverse outcome in the Copper Tube Actions or the amount or range
of a potential loss in the Copper Tube Actions.
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 not sought authorization to have an 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,
F-46
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. On January 3,
2008 the Court overruled that motion and the case is proceeding to discovery
of the relevant facts. The Company believes that these counterclaims are
without merit and intends to defend them vigorously. The Company does not
anticipate any material adverse effect on its business or financial
condition as a result of this litigation.
Other
Additionally, 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. The Company may also realize the benefit
of certain legal claims and litigation in the future; these gain
contingencies are not recognized in the Consolidated Financial Statements.
Leases
The Company leases certain facilities and equipment under operating
leases expiring on various dates through 2021. The lease payments under
these agreements aggregate to approximately $6.2 million in 2008, $4.5
million in 2009, $4.0 million in 2010, $3.2 million in 2011, $2.3 million in
2012, and $6.9 million thereafter. Total lease expense amounted to $10.4
million in 2007, $9.4 million in 2006, and $9.4 million in 2005.
Consulting Agreements
During 2004, the Company entered into consulting and non-compete
agreements (the Consulting Agreements) with Harvey L. Karp, Chairman of the
Board, and William D. O'Hagan, Chief Executive Officer. The Consulting
Agreements provide for post-employment services to be provided by Messrs.
Karp and O'Hagan for a six-year period. During the first four years of the
Consulting Agreements, an annual fee equal to two-thirds of each executive's
Final Base Compensation (as defined in the Consulting Agreements) will be
payable. During the final two years, the annual fee is set at one-third of
each executive's Final Base Compensation. During the term of the Consulting
Agreements, each executive agrees not to engage in Competitive Activity (as
defined in the Consulting Agreements) and will be entitled to receive
certain other benefits from the Company. The term of the Consulting
Agreements will commence upon the earliest of termination of employment by
the Company without Cause, upon termination of employment in connection with
a change in control, or upon voluntary resignation from employment with the
Company for Good Reason, as defined in the executives' current employment
agreements. In October 2007 Mr. Karp's Consulting Agreement was amended to
change the effective date from December 31, 2007 to the date of termination
of employment without cause. Based upon the value of the non-compete
provisions of the Consulting Agreements, the Company will expense the value
of the Consulting Agreements over their term.
F-47
Purchase Commitments
Purchase commitments include $48.9 million of open fixed price purchases
of raw materials. Additionally, the Company has contractual supply
commitments, totaling $400.1 million at year-end prices, for raw materials
consumed in the ordinary course of business; these contracts contain variable
pricing based on COMEX.
Note 11 - Other Income, Net
(In thousands)
2007 2006 2005
Interest income $ 11,281 $ 6,073 $ 2,306
Gain (loss) on disposal of
properties, net 2,468 (2,620) 3,665
Rent and royalties 1,262 2,068 2,111
Environmental expense,
non-operating properties (698) (580) (556)
Minority interest in income
of subsidiaries (582) (2,610) (9)
Gain on sale of equity investment - 1,876 -
Equity in earnings of
unconsolidated subsidiary - 964 4,480
--------- --------- ---------
Other income, net $ 13,731 $ 5,171 $ 11,997
========= ========= =========
Note 12 - Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (R), "Share-
Based Payment," and began recognizing compensation expense for its stock
option grants based on the fair value of the awards, classified as a
selling, general, and administrative expense. Prior to January 1, 2006, the
Company accounted for stock option grants under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation." No stock-based compensation expense was reflected in net
income prior to adopting SFAS No. 123 (R) as all options were granted at an
exercise price equal to the market value of the underlying common stock on
the date of grant. SFAS No. 123 (R) was adopted using the modified
prospective transition method. Under this transition method, compensation
cost recognized in the periods after adoption includes: (i) compensation
cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant-date fair value estimated in accordance
with the original provisions of SFAS No. 123, and (ii) compensation cost for
all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
No. 123 (R). Results from prior periods have not been restated. As a
result of adopting SFAS No. 123 (R), the Company's income from continuing
F-48
operations before income taxes and income from continuing operations
decreased by $2.8 million and $1.8 million, respectively, for the year ended
December 30, 2006. Additionally, basic and diluted earnings per share
decreased by $0.05.
Prior to the adoption of SFAS No. 123 (R), the Company presented all
tax benefits of deductions resulting from the exercise of stock options as
operating cash flows in the Consolidated Statement of Cash Flows, as
required under existing pronouncements. SFAS No. 123 (R) requires the cash
flows from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options to be classified as financing
cash flows. The tax benefits classified as cash provided by financing
activities in 2007 and 2006 would have been classified as cash provided by
operations under previous guidance.
The following table illustrates the pro forma effect on the prior
year's net income and earnings per share as if the Company had applied the
fair value recognition provisions of SFAS No. 123 to options granted under
the Company's stock option plans. For purposes of this pro forma
disclosure, the value of the options is estimated using a Black-Scholes-
Merton option pricing model and is amortized to expense over the options'
vesting period.
(In thousands, except per share data)
2005
Net income as reported $ 92,542
Deduct: Total stock-based compensation
expense determined under a fair value
based method, net of related tax effects (2,360)
----------
SFAS No. 123 pro forma net income $ 90,182
==========
Pro forma earning per share:
Basic $ 2.46
Diluted $ 2.41
Earnings per share, as reported:
Basic $ 2.53
Diluted $ 2.49
Under existing plans, the Company may grant options to purchase shares
of common stock at prices not less than the fair market value of the stock
on the date of grant. Generally, the options vest annually in equal
increments over a five-year period beginning one year from the date of
grant. Any unexercised options expire after not more than ten years. The
fair value of each grant is estimated as a single award and amortized into
compensation expense on a straight-line basis over its vesting period. The
weighted average, grant-date fair value of options granted during 2007 and
2006 were $11.25 and $11.59, respectively.
F-49
The Company estimates the fair value of all stock option awards as of
the grant date by applying the Black-Scholes-Merton option pricing model.
The use of this valuation model involves certain assumptions that are
judgmental and highly sensitive in the determination of compensation expense
including the expected life of the option, stock price volatility, risk-free
interest rate, and dividend yield. Additionally under SFAS No. 123 (R),
forfeitures are estimated at the time of valuation and reduce expense
ratably over the vesting period. The forfeiture rate, which is estimated at
a weighted average of 3.5 percent of unvested options outstanding as of
December 29, 2007, is adjusted periodically based on the extent to which
actual forfeitures differ, or are expected to differ, from the previous
estimate. Under SFAS No. 123 and APB 25, the Company elected to account for
forfeitures when awards were actually forfeited and reflected the
forfeitures as a cumulative adjustment to the pro forma expense. The
weighted average for key assumptions used in determining the fair value of
options granted and a discussion of the methodology used to develop each
assumption are as follows:
2007 2006 2005
Expected term 6.4 years 6.4 years 6.0 years
Expected price volatility 0.241 0.269 0.249
Risk-free interest rate 4.7% 4.9% 4.5%
Dividend yield 1.1% 1.2% 1.3%
Expected term - This is the period of time over which the options granted
are expected to remain outstanding. The Company uses the "simplified"
method found in the Securities and Exchange Commission's Staff Accounting
Bulletin No. 107 to estimate the expected term of stock option grants. An
increase in the expected term will increase compensation expense.
Expected price volatility - This is a measure of the amount by which a price
has fluctuated or is expected to fluctuate. The Company uses actual
historical changes in the market value of its stock to calculate the
volatility assumption. Daily market value changes from the date of grant
over a past period representative of the expected term of the options are
used. An increase in the expected price volatility rate will increase
compensation expense.
Risk-free interest rate - This is the U.S. Treasury rate for the week of the
grant, having a term representative of the expected term of the options. An
increase in the risk-free rate will increase compensation expense.
Dividend yield - This rate is the annual dividends per share as a percentage
of the Company's stock price. An increase in the dividend yield will
decrease compensation expense.
F-50
The Company generally issues treasury shares when options are
exercised. A summary of the stock option activity and related information
follows:
(Shares in thousands)
Weighted Average
Options Exercise Price
Outstanding at December 25, 2004 1,782 $ 18.78
Granted 460 30.02
Exercised (283) 18.04
Cancelled (47) 24.45
--------
Outstanding at December 31, 2005 1,912 21.49
Granted 355 35.11
Exercised (414) 18.60
Cancelled (141) 26.96
--------
Outstanding at December 30, 2006 1,712 24.56
Granted 364 36.77
Exercised (56) 19.95
Cancelled (17) 31.89
--------
Outstanding at December 29, 2007 2,003 26.85
========
At December 29, 2007, the aggregate intrinsic value of all outstanding
options, for which the market value of the Company's common stock at
December 29, 2007 exceeded the exercise price, was $10.2 million with a
weighted average exercise price of $20.06 and a weighted average remaining
contractual term of 5.0 years, of which 796 thousand of the outstanding
options are currently exercisable with an aggregate intrinsic value of $7.9
million, a weighted average exercise price of $19.62, and a weighted average
remaining contractual term of 4.6 years. The total intrinsic value of
options exercised during 2007 was $0.7 million. The total compensation
expense at December 29, 2007 related to non-vested awards not yet recognized
was $8.1 million with an average expense recognition period of 3.6 years.
Under the Company's 1994 Non-Employee Director Stock Option Plan, each
member of the Company's Board of Directors who is neither an employee nor an
officer of the Company is automatically granted each year on the date of the
Company's Annual Meeting of Stockholders, without further action by the
Board, an option to purchase 2,000 shares of Common Stock at the fair market
value of the Common Stock on the date the option is granted. As of December
29, 2007, options to purchase 42,672 shares of Common Stock were outstanding
under this Plan and 15,588 options are available under the Plan for future
issuance.
During 2006, the Board and shareholders approved an amendment and
restatement of the 2002 Stock Option Plan, which, among other things,
increased the number of shares available for issuance by 1.0 million shares.
Shares available for future employee grants were approximately 0.5 million
at December 29, 2007.
F-51
Note 13 - Acquisitions and Investments
On February 27, 2007, the Company acquired 100 percent of the
outstanding stock of Extruded Metals, Inc. (Extruded) for $32.8 million in
cash, including transaction costs of $0.8 million. Extruded, located in
Belding, Michigan, manufactures brass rod products, and during 2006 had
annual net sales of approximately $360 million. The acquisition of Extruded
complements the Company's existing brass rod product line. The total
estimated fair values of the assets acquired totaled $74.5 million,
consisting primarily of receivables of $29.5 million, inventories of $29.1
million, property, plant, and equipment of $5.8 million, and prepaid pension
asset of $6.9 million. The total estimated fair values of liabilities
assumed totaled $41.7 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. As of December 29, 2007, management does not expect any
further purchase price allocation adjustments.
The results of operations for Extruded are reported in the Company's
OEM segment and have been included in the accompanying 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 purchase accounting adjustments.
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.
(In thousands, except per share data)
2007 2006
Pro forma:
Net sales $ 2,755,273 $ 2,873,056
Net income 115,707 161,418
Earnings per share:
Basic $ 3.12 $ 4.38
Diluted $ 3.11 $ 4.33
In December 2005, two subsidiaries of the Company received a business
license from a Chinese industry and commerce authority, establishing a joint
venture with Jiangsu Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang
Industries Ltd. The joint venture, in which the Company holds a 50.5
percent interest, produces inner groove and smooth tube in level-wound
coils, pancake coils, and straight lengths, primarily to serve the Chinese
domestic OEM air-conditioning market as well as to complement the Company's
U.S. product line. The joint venture is located primarily in Jintan City,
Jiangsu Province, China. The joint venture entity is named Jiangsu Mueller-
Xingrong Copper Industries Limited. In December 2005, the Company
contributed $7.0 million cash investment to the venture. During the first
quarter of 2006 the Company contributed an additional $12.4 million, which
F-52
completed its initial planned cash investment. Non-cash contributions from
the other joint venture parties included long-lived assets of approximately
$5.3 million in December 2005 and $8.5 million during the first quarter of
2006. The results of operations of this joint venture are reported in the
OEM segment and are included in the Company's Consolidated Financial
Statements from January 1, 2006.
On August 15, 2005, the Company acquired 100 percent of the outstanding
stock of KX Company Limited (Brassware). Brassware, located in Witton,
Birmingham, England is an import distributor of plumbing and residential
heating products to plumbers' merchants and builders' merchants in the U.K.
and Ireland. The cost of the acquired business, including cash of $10.6
million plus $1.8 million of notes issued, totaled $12.4 million. The total
estimated fair value of assets acquired was approximately $17.6 million,
consisting primarily of receivables of $8.4 million, inventory of $6.4
million, and property and equipment of $1.5 million. The total estimated
fair value of liabilities assumed was approximately $16.4 million,
consisting primarily of notes payable of $8.3 million and trade payables and
other current liabilities of $8.1 million. The excess of the purchase price
over the estimated fair value of assets acquired and liabilities assumed of
$11.2 million was allocated to goodwill of the Plumbing & Refrigeration
Segment as this acquisition will broaden the Company's product line in the
U.K.
These acquisitions were accounted for using the purchase method of
accounting. Therefore, the results of operations of the acquired businesses
were included in the Company's Consolidated Financial Statements from their
respective acquisition dates. The purchase price for these acquisitions,
which was financed by available cash balances, has been allocated to the
assets and liabilities of the acquired businesses based on their respective
fair market values.
During 2006, the Company sold its 38 percent interest in Conbraco for
approximately $23.0 million, realizing a pre-tax gain of $1.9 million on the
sale.
Note 14 - Discontinued Operations
During 2002, the Company completed the sale of its wholly owned
subsidiary, Utah Railway Company. During 2005, the Company recognized a
gain of $5.2 million less income tax of $1.9 million upon the settlement of
a business interruption claim related to this operation.
Note 15 - Industry Segments
The Company's reportable segments are Plumbing & Refrigeration and OEM.
For disclosure purposes, as permitted under SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," certain operating
segments are aggregated into reportable segments. The Plumbing &
Refrigeration segment is composed of Standard Products (SPD), European
Operations, and Mexican Operations. The OEM segment is composed of
Industrial Products (IPD) and Engineered Products (EPD). These segments are
classified primarily by the markets for their products. Performance of
segments is generally evaluated by their operating income.
F-53
SPD manufactures copper tube and fittings, plastic fittings, plastic
pipe, and line sets. These products are manufactured in the U.S. Outside
the U.S., the Company's European Operations manufacture copper tube, which
is sold in Europe and the Middle East. SPD also imports and resells brass
and plastic plumbing valves, malleable iron fittings, faucets, and plumbing
specialty products. Mexican Operations consist of pipe nipple manufacturing
and import distribution businesses including product lines of malleable iron
fittings and other plumbing specialties. The European Operations consist of
copper tube manufacturing and the import distribution of fittings, valves,
and plumbing specialties primarily in the U.K. and Ireland. The Plumbing &
Refrigeration segment's products are sold primarily to plumbing,
refrigeration, and air-conditioning wholesalers, hardware wholesalers and
co-ops, and building product retailers.
IPD manufactures brass rod, impact extrusions, and forgings as well as
a variety of end products including plumbing brass; automotive components;
valves and fittings; and specialty copper, copper-alloy, and aluminum
tubing. EPD manufactures and fabricates valves and assemblies for the
refrigeration, air-conditioning, gas appliance, and barbecue grill markets.
These products are sold primarily to OEM customers.
Summarized product line, geographic, and segment information is shown
in the following tables. Geographic sales data indicates the location from
which products are shipped. Unallocated expenses include general corporate
expenses, plus certain charges or credits not included in segment activity.
Worldwide sales to one customer in the Plumbing & Refrigeration segment
totaled $322.1 million in 2007, $370.8 million in 2006, and $264.2 million
in 2005 which represented 12 percent in 2007, 15 percent in 2006, and 15
percent in 2005 of the Company's consolidated net sales. No other customer
accounted for more than 10 percent of consolidated net sales.
NET SALES BY MAJOR PRODUCT LINE:
(In thousands)
2007 2006 2005
Tube & fittings $1,288,968 $1,428,979 $1,060,348
Brass rod & forgings 733,325 499,878 288,559
OEM components, tube & assemblies 339,227 267,452 117,232
Valves & plumbing specialties 266,649 261,844 211,765
Other 69,676 52,759 52,019
--------- --------- ---------
$2,697,845 $2,510,912 $1,729,923
========= ========= =========
F-54
GEOGRAPHIC INFORMATION:
(In thousands)
2007 2006 2005
Net sales:
United States $2,105,801 $1,963,666 $1,477,942
United Kingdom 336,133 326,047 204,020
Other 255,911 221,199 47,961
--------- --------- ---------
$2,697,845 $2,510,912 $1,729,923
========= ========= =========
Long-lived assets:
United States $ 375,061 $ 356,854 $ 392,097
United Kingdom 67,705 72,978 63,221
Other 66,091 62,881 37,334
--------- --------- ---------
$ 508,857 492,713 $ 492,652
========= ========= =========
SEGMENT INFORMATION:
(In thousands)
2007 2006 2005
Net sales:
Plumbing & Refrigeration $1,572,565 $1,716,613 $1,281,688
OEM 1,144,302 835,339 460,301
Elimination of intersegment sales (19,022) (41,040) (12,066)
--------- --------- ---------
$2,697,845 $2,510,912 $1,729,923
========= ========= =========
Depreciation and amortization:
Plumbing & Refrigeration $ 29,777 $ 28,722 $ 29,393
OEM 13,413 11,754 10,225
General corporate 1,287 1,379 1,240
--------- --------- ---------
$ 44,477 $ 41,855 $ 40,858
========= ========= =========
F-55
SEGMENT INFORMATION (continued):
(In thousands)
2007 2006 2005
Operating income:
Plumbing & Refrigeration $ 178,367 $ 197,402 $ 125,502
OEM 38,215 44,764 26,985
Unallocated expenses (24,961) (23,281) (20,729)
--------- --------- ---------
Total operating income 191,621 218,885 131,758
Interest expense (22,071) (20,477) (19,550)
Other income, net 13,731 5,171 11,997
--------- --------- ---------
Income from continuing operations
before income taxes $ 183,281 $ 203,579 $ 124,205
========= ========= =========
Expenditures for long-lived assets:
Plumbing & Refrigeration $ 22,229 $ 15,847 $ 20,727
OEM 39,884 24,852 4,915
--------- --------- ---------
$ 62,113 $ 40,699 $ 25,642
========= ========= =========
Segment assets:
Plumbing & Refrigeration $ 771,206 $ 760,147 $ 730,774
OEM 364,154 280,692 197,697
General corporate 313,844 228,068 188,457
--------- --------- ---------
$1,449,204 $1,268,907 $1,116,928
========= ========= =========
During 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). The settlement proceeds are reflected in the table
above as a component of operating income for the Plumbing & Refrigeration
segment.
F-56
Note 16 - Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2007
Net sales $ 609,782 $ 772,647 $ 693,682 $ 621,734
Gross profit (1) 73,204 110,901 90,463 98,353(2)
Net income 18,913 36,398 31,324 28,840(3)
Basic earnings per share 0.51 0.98 0.84 0.78
Diluted earnings per share 0.51 0.98 0.84 0.78
Dividends per share 0.10 0.10 0.10 0.10
2006
Net sales $ 551,039 $ 779,663 $ 635,998 $ 544,212
Gross profit (1) 93,970 142,625 107,052 57,829(4)
Net income 33,365 58,750 51,579 5,175
Basic earnings per share 0.91 1.59 1.39 0.14
Diluted earnings per share 0.90 1.57 1.38 0.14
Dividends per share 0.10 0.10 0.10 0.10
(1) Gross profit is net sales less cost of goods sold, which excludes
depreciation and amortization.
(2) Fourth quarter of 2007 includes an adjustment to write-down inventories
to the lower of cost or market of $2.7 million and a gain of $10.0
million resulting from the liquidation of LIFO layers.
(3) Fourth quarter of 2007 includes a goodwill impairment charge of $2.8
million related to the Company's Mexican Operations.
(4) Fourth quarter of 2006 includes an adjustment to write-down inventories
to the lower of cost or market of $14.2 million.
F-57
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mueller Industries, Inc.
We have audited the accompanying consolidated balance sheets of Mueller
Industries, Inc. as of December 29, 2007 and December 30, 2006, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 29, 2007. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mueller
Industries, Inc. at December 29, 2007 and December 30, 2006, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 29, 2007, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 7 to the consolidated financial statements, the company
adopted FASB Interpretation No. 48 "Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109," effective December 31,
2006.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Mueller Industries, Inc.'s
internal control over financial reporting as of December 29, 2007, based on
criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 26, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Memphis, Tennessee
February 26, 2008
F-58
MUELLER INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 29, 2007, December 30 2006, and December 31, 2005
(In thousands)
Additions
-------------------------------
Balance at Charged to Balance
beginning costs and Other at end
of year expenses additions Deductions of year
------------ ------------ ----------- ----------- -----------
2007
Allowance for doubtful accounts $ 6,806 $ (177) $ 1,117 (1) $ 2,731 $ 5,015
Environmental reserves $ 8,907 $ 698 $ 100 (3) $ 808 $ 8,897
Valuation allowance for deferred
tax assets $ 24,900 $ (1,920) $ - $ - $ 22,980
2006
Allowance for doubtful accounts $ 5,778 $ 1,109 $ 519 (1) $ 600 $ 6,806
Environmental reserves $ 9,073 $ 580 $ - $ 746 $ 8,907
Valuation allowance for deferred
tax assets $ 3,612 $ (7,663) $ 28,951 (2) $ - $ 24,900
2005
Allowance for doubtful accounts $ 3,925 $ 1,911 $ 165 $ 223 $ 5,778
Environmental reserves $ 9,503 $ 556 $ (215) (3) $ 771 $ 9,073
Valuation allowance for deferred
tax assets $ 12,880 $ (1,962) $ - $ 7,306 (4)$ 3,612
(1) Other consists primarily of the opening balance related to the acquisition of Extruded Metals, Inc.
and bad debt recoveries in 2007 and consists primarily of bad debt recoveries in 2006.
(2) Other includes the additions to valuation allowances during 2006 in which previously unrecorded gross
deferred tax assets and valuation allowances were recognized.
(3) Other includes the opening balance related to the acquisition of Extruded Metals, Inc. in 2007 and
currency translation changes in 2005.
(4) Deductions consist primarily of reclassification adjustments and currency translation changes in 2005.
F-59
EXHIBIT INDEX
Exhibits Description
-------- -----------
10.25 Summary description of the Registrant's 2008 incentive plan for
certain key employees.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.