UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2008 Commission file number 1-6770
MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-0790410
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8285 Tournament Drive, Suite 150
Memphis, Tennessee 38125
(Address of principal executive offices) (Zip Code)
(901) 753-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, 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.
Large accelerated filer [ X ] Accelerated filer [ ]
Non-accelerated filer [ ] 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 number of shares of the Registrant's common stock outstanding as of
July 21, 2008, was 37,135,905.
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MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Period Ended June 28, 2008
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Condensed Consolidated Statements of Income
for the quarters and six months ended June 28, 2008
and June 30, 2007 3
b.) Condensed Consolidated Balance Sheets
as of June 28, 2008 and December 29, 2007 5
c.) Condensed Consolidated Statements of Cash Flows
for the six months June 28, 2008
and June 30, 2007 7
d.) Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
Part II. Other Information
Item 1. Legal Proceedings 27
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits 32
Signatures 33
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
June 28, June 30,
2008 2007
(In thousands, except per share data)
Net sales $ 753,471 $ 772,647
Cost of goods sold 661,209 661,746
Depreciation and amortization 11,004 11,306
Selling, general, and
administrative expense 34,618 38,971
---------- ----------
Operating income 46,640 60,624
Interest expense (5,238) (5,689)
Other income (expense), net 951 1,925
---------- ----------
Income before income taxes 42,353 56,860
Income tax expense (15,339) (20,462)
---------- ----------
Net income $ 27,014 $ 36,398
========== ==========
Weighted average shares
for basic earnings per share 37,119 37,060
Effect of dilutive stock options 340 204
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,459 37,264
---------- ----------
Basic earnings per share $ 0.73 $ 0.98
========== ==========
Diluted earnings per share $ 0.72 $ 0.98
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to condensed consolidated financial statements.
-3-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Six Months Ended
June 28, June 30,
2008 2007
(In thousands, except per share data)
Net sales $ 1,457,579 $ 1,382,429
Cost of goods sold 1,273,006 1,198,324
Depreciation and amortization 21,988 22,272
Selling, general, and
administrative expense 72,909 73,898
---------- ----------
Operating income 89,676 87,935
Interest expense (10,705) (11,183)
Other income (expense), net 4,968 6,878
---------- ----------
Income before income taxes 83,939 83,630
Income tax expense (29,570) (28,319)
---------- ----------
Net income $ 54,369 $ 55,311
========== ==========
Weighted average shares
for basic earnings per share 37,108 37,044
Effect of dilutive stock options 269 160
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,377 37,204
---------- ----------
Basic earnings per share $ 1.47 $ 1.49
========== ==========
Diluted earnings per share $ 1.45 $ 1.49
========== ==========
Dividends per share $ 0.20 $ 0.20
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 28, 2008 December 29, 2007
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 273,620 $ 308,618
Accounts receivable, less allowance
for doubtful accounts of $6,785 in
2008 and $5,015 in 2007 392,826 323,003
Inventories 263,752 269,032
Other current assets 36,789 39,694
---------- ----------
Total current assets 966,987 940,347
Property, plant, and equipment, net 303,453 308,383
Goodwill 154,224 153,263
Other assets 47,137 47,211
---------- ----------
$ 1,471,801 $ 1,449,204
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
June 28, 2008 December 29, 2007
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 55,365 $ 72,743
Accounts payable 130,182 140,497
Accrued wages and other employee costs 31,628 39,984
Other current liabilities 88,850 81,829
---------- ----------
Total current liabilities 306,025 335,053
Long-term debt 281,586 281,738
Pension liabilities 14,345 14,805
Postretirement liabilities other
than pensions 21,656 21,266
Environmental reserves 8,873 8,897
Deferred income taxes 46,197 52,156
Other noncurrent liabilities 2,197 2,029
---------- ----------
Total liabilities 680,879 715,944
---------- ----------
Minority interest in subsidiary 25,895 22,765
Stockholders' equity:
Preferred stock - shares authorized
5,000,000; none outstanding - -
Common stock - $.01 par value; shares
authorized 100,000,000; issued
40,091,502; outstanding 37,135,905
in 2008 and 37,079,903 in 2007 401 401
Additional paid-in capital 260,980 259,611
Retained earnings 531,483 484,534
Accumulated other comprehensive
income 36,802 31,808
Treasury common stock, at cost (64,639) (65,859)
---------- ----------
Total stockholders' equity 765,027 710,495
---------- ----------
Commitments and contingencies - -
---------- ----------
$ 1,471,801 $ 1,449,204
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 28, June 30,
2008 2007
(In thousands)
Cash flows from operating activities
Net income $ 54,369 $ 55,311
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization 22,323 22,465
Gain on early retirement of debt (2,482) -
Minority interest in subsidiary,
net of dividend paid 1,562 (18)
Stock-based compensation expense 1,479 1,273
Loss (gain) on disposal of properties 341 (3,137)
Deferred income taxes 130 (6,140)
Income tax benefit from exercise of
stock options (69) (124)
Changes in assets and liabilities,
net of business acquired:
Receivables (66,599) (78,521)
Inventories 7,489 35,467
Other assets (2,321) (10,948)
Current liabilities (12,757) 78,376
Other liabilities 1,342 773
Other, net (1,167) 2,144
---------- ----------
Net cash provided by
operating activities 3,640 96,921
---------- ----------
Cash flows from investing activities
Capital expenditures (14,833) (15,638)
Net deposits into
restricted cash balances (632) -
Acquisition of business, net of
cash received - (31,970)
Proceeds from sales of properties - 3,032
---------- ----------
Net cash used in
investing activities (15,465) (44,576)
---------- ----------
See accompanying notes to condensed consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Six Months Ended
June 28, June 30,
2008 2007
(In thousands)
Cash flows from financing activities
Repayments of long-term debt $ (23,605) $ (18,116)
Dividends paid (7,421) (7,410)
Issuance of debt by joint venture, net 5,411 19,054
Issuance of shares under incentive
stock option plans from treasury 1,055 977
Income tax benefit from exercise
of stock options 69 124
Acquisition of treasury stock (13) (54)
---------- ----------
Net cash used in
financing activities (24,504) (5,425)
---------- ----------
Effect of exchange rate changes on cash 1,331 525
---------- ----------
(Decrease) increase in cash and
cash equivalents (34,998) 47,445
Cash and cash equivalents at the
beginning of the period 308,618 200,471
---------- ----------
Cash and cash equivalents at the
end of the period $ 273,620 $ 247,916
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. Results of operations for the interim periods presented are not
necessarily indicative of results which may be expected for any other
interim period or for the year as a whole. This Quarterly Report on Form
10-Q should be read in conjunction with the Company's Annual Report on Form
10-K, including the annual financial statements incorporated therein.
The accompanying unaudited interim financial statements include all
normal recurring adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods
presented.
Note 1 - Earnings per Common Share
Basic per share amounts have been computed based on the average number
of common shares outstanding. Diluted per share amounts reflect the
increase in average common shares outstanding that would result from the
assumed exercise of outstanding stock options, computed using the treasury
stock method.
Note 2 - Commitments and Contingencies
The Company is involved in certain litigation as a result of claims
that arose in the ordinary course of business, which management believes
will not have a material adverse effect on the Company's financial position
or results of operations. Additionally, the Company may realize the benefit
of certain legal claims and litigation in the future; these gain
contingencies are not recognized in the Condensed Consolidated Financial
Statements.
Environmental Matters
By letter dated October 10, 2006, the Kansas Department of Health and
Environment (KDHE) advised the Company that environmental contamination has
been identified at a former smelter site in southeast 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. The Company has
since been advised of possible connections between that same entity and two
other former smelter sites in Kansas. KDHE has requested that the Company
and another potentially responsible party (PRP) negotiate a consent order
with KDHE to address contamination at these sites. The Company has
participated in preliminary discussions with KDHE and the other PRP. The
Company believes it is not liable for the contamination but may consider
negotiating a resolution as an alternative to litigation. The extent of the
Company's obligation, if any, could depend, among other things, on (i) the
outcome of possible feasibility studies, (ii) a chosen method of
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environmental response, (iii) the existence and viability of any additional
PRPs, (iv) the terms of any cost sharing arrangement, and (v) the extent of
recoveries, if any, from claims against insurance policies. If the Company
incurs an obligation that becomes determinable and estimable, the obligation
would require recognition which could be material to the Company's results
of operations.
Other
Guarantees, in the form of letters of credit, are issued by the Company
generally to guarantee the payment of insurance deductibles and retiree
health benefits. The terms of the Company's guarantees are generally one
year but are renewable annually as required. The maximum potential amount
of future payments the Company could have been required to make under its
guarantees at June 28, 2008 was $10.0 million.
Note 3 - Inventories
June 28, 2008 December 29, 2007
(In thousands)
Raw material and supplies $ 52,799 $ 82,875
Work-in-process 76,517 51,898
Finished goods 257,334 232,404
LIFO reserve (117,766) (91,127)
Valuation reserves (5,132) (7,018)
---------- ----------
Inventories $ 263,752 $ 269,032
========== ==========
The Company has deferred recognizing potential gains resulting from
liquidation of LIFO inventories during the first six months of 2008. The
Company expects to replenish these inventories by the end of 2008 and, as
such, has not recognized the effects of liquidating LIFO layers. In the
event the Company is unable to replenish these inventories due to lack of
availability or operational reasons, the Company would recognize a non-cash
gain of approximately $22.7 million from the liquidation of LIFO layers based
on quarter-end quantities.
Note 4 - Industry Segments
The Company's reportable segments are Plumbing & Refrigeration and OEM.
For disclosure purposes, as permitted under Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information," certain operating segments are
aggregated into reportable segments. The Plumbing & Refrigeration segment
is composed of Standard Products (SPD), European Operations, and Mexican
Operations. The OEM segment is composed of Industrial Products (IPD),
Engineered Products (EPD), and Mueller-Xingrong, the Company's Chinese joint
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venture. These segments are classified primarily by the markets for their
products. Performance of segments is generally evaluated by their operating
income.
SPD manufactures copper tube, copper and plastic fittings, plastic pipe,
and line sets. These products are manufactured in the U.S. SPD also
imports and resells in North America brass and plastic plumbing valves,
malleable iron fittings, faucets, and plumbing specialty products. European
Operations consist of copper tube manufacturing, with such products being
sold in Europe and the Middle East, and import distribution of fittings,
valves, and plumbing specialties primarily in the U.K. and Ireland. Mexican
Operations consist of pipe nipple manufacturing and import distribution
businesses including product lines of malleable iron fittings and other
plumbing specialties. The Plumbing & Refrigeration segment's products are
sold primarily to plumbing, refrigeration, and air-conditioning wholesalers,
hardware wholesalers and co-ops, and building product retailers.
IPD manufactures brass rod, impact extrusions, and forgings as well as
a variety of end products including plumbing brass; automotive components;
valves and fittings; and specialty copper, copper-alloy, and aluminum tubing.
EPD manufactures and fabricates valves and assemblies for the refrigeration,
air-conditioning, gas appliance, and barbecue grill markets. The Company's
Chinese joint venture (Mueller-Xingrong) manufactures engineered copper tube
for refrigeration applications. The OEM segment sells its products
primarily to original equipment manufacturers, many of which are in the HVAC,
plumbing, and refrigeration markets. Included in the OEM segment are the
results of operations of Extruded Metals, Inc. since its acquisition on
February 27, 2007.
-11-
Summarized segment information is as follows:
Quarter Ended June 28, 2008
Plumbing &
Refrigeration OEM Corporate and
Segment Segment Eliminations Total
(In thousands)
Net sales $ 404,414 $ 353,988 $ (4,931) $ 753,471
Cost of goods sold 340,146 325,695 (4,632) 661,209
Depreciation and
amortization 7,261 3,468 275 11,004
Selling, general, and
administrative expense 21,637 5,862 7,119 34,618
---------- ---------- ---------- ----------
Operating income 35,370 18,963 (7,693) 46,640
Interest expense (5,238)
Other income, net 951
----------
Income before
income taxes $ 42,353
==========
Quarter Ended June 30, 2007
Plumbing &
Refrigeration OEM Corporate and
Segment Segment Eliminations Total
(In thousands)
Net sales $ 455,486 $ 322,201 $ (5,040) $ 772,647
Cost of goods sold 371,859 294,631 (4,744) 661,746
Depreciation and
amortization 7,298 3,733 275 11,306
Selling, general, and
administrative expense 24,583 5,838 8,550 38,971
---------- ---------- ---------- ----------
Operating income 51,746 17,999 (9,121) 60,624
Interest expense (5,689)
Other income, net 1,925
----------
Income before
income taxes $ 56,860
==========
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Summarized segment information (continued):
Six Months Ended June 28, 2008
Plumbing &
Refrigeration OEM Corporate and
Segment Segment Eliminations Total
(In thousands)
Net sales $ 788,298 $ 680,195 $ (10,914) $ 1,457,579
Cost of goods sold 668,145 615,176 (10,315) 1,273,006
Depreciation and
amortization 14,519 6,918 551 21,988
Selling, general, and
administrative expense 45,180 13,564 14,165 72,909
---------- ---------- ---------- ----------
Operating income 60,454 44,537 (15,315) 89,676
Interest expense (10,705)
Other income, net 4,968
----------
Income before
income taxes $ 83,939
==========
Six Months Ended June 30, 2007
Plumbing &
Refrigeration OEM Corporate and
Segment Segment Eliminations Total
(In thousands)
Net sales $ 825,482 $ 565,931 $ (8,984) $ 1,382,429
Cost of goods sold 683,355 524,088 (9,119) 1,198,324
Depreciation and
amortization 14,637 7,083 552 22,272
Selling, general, and
administrative expense 48,890 11,267 13,741 73,898
---------- ---------- ---------- ----------
Operating income 78,600 23,493 (14,158) 87,935
Interest expense (11,183)
Other income, net 6,878
----------
Income before
income taxes $ 83,630
==========
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Note 5 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
June 28, June 30,
2008 2007
(In thousands)
Net income $ 27,014 $ 36,398
Other comprehensive income (loss), net
of tax:
Foreign currency translation 2,449 5,084
Amortization of prior service cost
included in pension expense 49 101
Amortization of actuarial gains and
losses included in pension expense 106 110
Change in the fair value of
derivatives (260) (146)
---------- ----------
Other comprehensive income 2,344 5,149
---------- ----------
Comprehensive income $ 29,358 $ 41,547
========== ==========
For the Six Months Ended
June 28, June 30,
2008 2007
(In thousands)
Net income $ 54,369 $ 55,311
Other comprehensive income (loss), net
of tax:
Foreign currency translation 4,299 6,477
Amortization of prior service cost
included in pension expense 114 101
Amortization of actuarial gains and
losses included in pension expense 203 110
Change in the fair value of
derivatives 378 372
---------- ----------
Other comprehensive income 4,994 7,060
---------- ----------
Comprehensive income $ 59,363 $ 62,371
========== ==========
The change in cumulative foreign currency translation adjustment
primarily relates to the Company's investment in its foreign subsidiaries
and fluctuations in exchange rates between their local currencies and the
U.S. dollar. During the first six months of 2008, the value of the Chinese
renminbi and the Mexican peso increased 7 percent and 6 percent,
respectively, compared to the U.S. dollar.
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Note 6 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. The
components of net periodic benefit cost (income) are as follows:
For the Quarter Ended
June 28, June 30,
2008 2007
(In thousands)
Pension benefits:
Service cost $ 508 $ 473
Interest cost 2,550 2,025
Expected return on plan assets (3,833) (3,000)
Amortization of prior service cost 77 62
Amortization of net loss 75 206
---------- ----------
Net periodic benefit income $ (623) $ (234)
========== ==========
Other benefits:
Service cost $ 83 $ 1,057
Interest cost 376 177
Amortization of prior service cost - 2
Amortization of net loss 70 46
---------- ----------
Net periodic benefit cost $ 529 $ 1,282
========== ==========
For the Six Months Ended
June 28, June 30,
2008 2007
(In thousands)
Pension benefits:
Service cost $ 1,247 $ 1,012
Interest cost 5,967 4,156
Expected return on plan assets (8,755) (5,796)
Amortization of prior service cost 179 155
Amortization of net loss 129 439
---------- ----------
Net periodic benefit income $ (1,233) $ (34)
========== ==========
Other benefits:
Service cost $ 163 $ 1,133
Interest cost 755 335
Amortization of prior service cost 1 4
Amortization of net loss 126 92
---------- ----------
Net periodic benefit cost $ 1,045 $ 1,564
========== ==========
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The Company anticipates contributions to its pension plans for 2008 to
be approximately $2.4 million. During the first half of 2008, contributions
of approximately $1.1 million have been made to certain pension plans.
Note 7 - Acquisitions
On February 27, 2007, the Company acquired 100 percent of the
outstanding stock of Extruded Metals, Inc. (Extruded) for $32.8 million in
cash, including transaction costs of $0.8 million. Extruded, located in
Belding, Michigan, manufactures brass rod products, and during 2006 had
annual 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 obligations of $7.5 million. Immediately
following the acquisition, the Company extinguished the working capital debt
facility. The results of operations for Extruded are reported in the
Company's OEM segment and have been included in the accompanying Condensed
Consolidated Financial Statements from the acquisition date.
Note 8 - Income Taxes
The Company's effective tax rate for the second quarter of 2008 was
36.2 percent compared with 36.0 percent for the same period last year.
Factors that explain the difference between the effective tax rate and what
would be computed using the U.S. federal statutory tax rate for the second
quarter of 2008 were the effect of foreign statutory rates lower than the
U.S. rate and other foreign adjustments of $0.9 million and the effect of
the U.S. production activities deduction of $0.6 million. These items were
offset by state and local income tax expense, net of federal benefit, of
$0.9 million and other differences of $1.1 million.
The Company's effective tax rate for the first half of 2008 was 35.2
percent compared with 33.9 percent for the same period last year. Factors
that explain the difference between the effective tax rate and what would be
computed using the U.S. federal statutory tax rate for the first half of
2008 were the effect of foreign statutory rates lower than the U.S. rate and
other foreign adjustments of $1.6 million and the U.S. production activities
deduction effect of $1.3 million. These items were offset by state and
local income tax expense, net of federal benefit, of $2.1 million and other
differences of $1.0 million.
Changes in tax contingencies had an immaterial effect on the effective
tax rate during the second quarter and first half of 2008. Total
unrecognized tax benefits at June 28, 2008 were $11.6 million, without
consideration of any applicable federal benefit, and this amount includes
$2.5 million of accrued interest. The Company includes interest and
penalties related to income tax matters as a component of income tax expense.
Of the $11.6 million, approximately $9.6 million would impact the effective
-16-
tax rate, if recognized. During the first half of 2008, a benefit of $0.4
million, without consideration of any applicable federal benefit, was
recorded as a result of various audit settlements and was offset by interest
expense related to other unrecognized tax benefits of $0.6 million. 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 unrecognized tax benefits may change in the next twelve months
by up to $5.2 million.
The Company files a consolidated U.S. federal income tax return and
files numerous consolidated and separate income tax returns in many state,
local, and foreign jurisdictions. The Company is no longer subject to U.S.
federal income tax examinations for years before 2004 and with few
exceptions is no longer subject to state, local, or foreign income tax
examinations by tax authorities for years before 2001. The Internal Revenue
Service is currently examining the Company's 2005 and 2006 consolidated U.S.
federal income tax returns. Additionally, various state taxing authorities
are currently examining a number of the Company's state income tax returns
for years from 2004 forward. The results of these examinations are not
expected to have a material impact on the Company's financial position or
results of operations.
-17-
Note 9 - Other Income (Expense), Net
For the Quarter Ended
June 28, June 30,
2008 2007
(In thousands)
Interest income $ 1,708 $ 2,660
Gain on early retirement of debt 74 -
Minority interest in income of
subsidiary (1,010) (944)
(Loss) gain on disposal of
properties, net (2) 5
Environmental expense,
non-operating properties (152) (257)
Other 333 461
---------- ----------
Other income (expense), net $ 951 $ 1,925
========== ==========
For the Six Months Ended
June 28, June 30,
2008 2007
(In thousands)
Interest income $ 4,093 $ 4,932
Gain on early retirement of debt 2,482 -
Minority interest in income of
subsidiary (1,562) (1,346)
(Loss) gain on disposal of
properties, net (341) 3,137
Environmental expense,
non-operating properties (270) (368)
Other 566 523
---------- ----------
Other income (expense), net $ 4,968 $ 6,878
========== ==========
Note 10 - Recently Issued Accounting Standards
Effective December 30, 2007, the Company adopted SFAS No. 157, "Fair
Value Measurements" and SFAS No. 159 "The Fair Value Option for Financial
Assets and Financial Liabilities." SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosure about fair value measurements.
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
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subsequent reporting date. The impact of adoption of these standards was not
material.
In 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans." SFAS No. 158 requires employers to recognize the
funded status of all pension and other postretirement plans in the statement
of financial position, and requires employers to use its fiscal year-end as
the measurement date for assets and liabilities of all its defined benefit
pension and postretirement plans. Any adjustment as a result of the adoption
of the measurement period provisions of SFAS No. 158 would be recorded as an
adjustment to retained earnings. The Company adopted the measurement and
disclosure provisions of SFAS No. 158 on December 30, 2006. The measurement
period provisions of SFAS No. 158 are required to be adopted in fiscal years
ending after December 15, 2008. In prior years, the Company used November 30
as the measurement date for the majority of its pension and postretirement
plans. The Company will adopt the measurement period provisions for its
fiscal year-end in 2008 and does not expect the impact of the adoption to be
material.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities." SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." It requires qualitative
disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. SFAS No. 161 is effective for financial
statements issued for fiscal periods beginning after Nov. 15, 2008. The
Company does not expect the adoption of SFAS No. 161 to have a material
impact on its Consolidated Financial Statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting principles to be used
in the preparation and presentation of financial statements in accordance
with generally accepted accounting principles. This statement will be
effective 60 days after the Securities and Exchange Commission approves the
Public Company Accounting Oversight Board's amendments to AU Section 411,
"The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles." The Company does not expect the adoption of SFAS
No. 162 to have a material impact on its Consolidated Financial Statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Overview
The Company is a leading manufacturer of copper, brass, plastic, and
aluminum products. The range of these products is broad: copper tube and
fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic 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.
The Company's operations are located throughout the United States, and in
Canada, Mexico, Great Britain, and China.
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the OEM segment. For disclosure
purposes, as permitted under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," certain operating segments are
aggregated into reportable segments. The Plumbing & Refrigeration segment
is composed of the Standard Products Division (SPD), European Operations,
and Mexican Operations. The OEM segment is composed of the Industrial
Products Division (IPD) and Engineered Products Division (EPD). These
reportable segments are described in more detail below. SPD manufactures
and sells copper tube, copper and plastic fittings, 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 in the U.K. and Ireland. Mexican Operations include pipe
nipple manufacturing and import distribution businesses including product
lines of malleable iron fittings and other plumbing specialties. The
Plumbing & Refrigeration segment sells products to wholesalers in the HVAC
(heating, ventilation, and air-conditioning), plumbing, and refrigeration
markets, to distributors 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.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration, and plumbing
markets because the principal end use of a significant portion of the
Company's products is in the construction of single and multi-family housing
and commercial buildings. Repairs and remodeling projects are also
important factors affecting the underlying demand for these products.
Profitability of certain of the Company's product lines depends upon
the "spreads" between the cost of raw material and the selling prices of its
completed products. The open market prices for copper cathode and scrap,
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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 are 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.
Results of Operations
During the second quarter of 2008, the Company's net sales were $753.5
million, which compares with net sales of $772.6 million over the same
period of 2007. The decrease is due to reduced unit sales volumes in the
Plumbing and Refrigeration segment, partially offset by the increased cost
of copper, which is generally passed on to customers. Net sales were $1.46
billion in the first half of 2008 compared with $1.38 billion in the same
period of 2007. The increase in net sales for the six-month period was
primarily attributable to the increased cost of copper and increased sales
following the acquisition of Extruded Metals, Inc. (Extruded) on February 27,
2007, partially offset by reduced sales volumes in the Plumbing &
Refrigeration segment. The COMEX average price of copper was $3.67 in the
first half of 2008, a 19 percent increase over the same period of 2007.
Cost of goods sold decreased from $661.7 million in the second quarter
of 2007 to $661.2 million in the same period of 2008. The decrease
primarily resulted from decreased unit sales volumes and reduced aggregate
conversion costs, partially offset by increased cost of raw material. Cost
of goods sold for the six months ended June 30, 2008 was $1.27 billion
compared with $1.20 billion for the first six months of 2007. The current
year increase was attributable to higher material costs and increased costs
following the acquisition of Extruded, partially offset by volume declines
and reduced aggregate conversion costs. The Company has deferred recognizing
potential gains resulting from liquidation of LIFO inventories during the
first six months of 2008. The Company expects to replenish these inventories
by the end of 2008 and, as such, has not recognized the effects of
liquidating LIFO layers. In the event the Company is unable to replenish
these inventories due to lack of availability or operational reasons, the
Company would recognize a non-cash gain of approximately $22.7 million from
the liquidation of LIFO layers based on quarter-end quantities.
Depreciation and amortization remained consistent for all periods
presented. Selling, general, and administrative expense was $34.6 million
for the second quarter of 2008 compared with $39.0 million for the same
period of 2007. The decrease is primarily due to decreased employment costs
and lower sales and distribution expenses resulting from lower volumes.
Year-to-date selling, general, and administrative expense was $72.9 million
for 2008 compared with $73.9 million for the same period of 2007. This
decrease is also due to decreased employment costs and lower sales and
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distribution expense, partially offset by increased bad debt expense and
additional expenses following the acquisition of Extruded.
Interest expense for the second quarter of 2008 totaled $5.2 million,
compared with $5.7 million for the same period of 2007. For the first half
of 2008, interest expense was $10.7 million compared with $11.2 million for
the same period of 2007. The reduced interest expense is attributable to
lower interest following the early extinguishment of $26.2 million of the
Company's 6% Subordinated Debentures, partially offset by interest from
increased borrowings at Mueller-Xingrong.
Other income (expense), net was $1.0 million for the second quarter of
2008 compared with $1.9 million for the same period of 2007. The current
year decrease was primarily due to decreased interest income from lower
interest rates. Year-to-date, other income (expense), net was $5.0 million
in 2008 compared with $6.9 million for the same period of 2007. The current
year decrease is due primarily to the nonrecurring items included in each
period. The first six months of 2008 includes a net gain of $2.5 million
from the early extinguishment of the 6% Subordinated Debentures, while the
same period in 2007 includes the recognition of a $3.1 million gain from the
sale of non-operating royalty producing properties. Additionally, interest
income decreased by $0.8 million due to lower interest rates.
The Company's effective tax rate for the second quarter of 2008 was
36.2 percent compared with 36.0 percent for the same period last year.
Factors that explain the difference between the effective tax rate and what
would be computed using the U.S. federal statutory tax rate for the second
quarter of 2008 were the effect of foreign statutory rates lower than the
U.S. rate and other foreign adjustments of $0.9 million and the effect of
the U.S. production activities deduction of $0.6 million. These items were
offset by state and local income tax expense, net of federal benefit, of
$0.9 million and other differences of $1.1 million.
The Company's effective tax rate for the first half of 2008 was 35.2
percent compared with 33.9 percent for the same period last year. Factors
that explain the difference between the effective tax rate and what would be
computed using the U.S. federal statutory tax rate for the first half of
2008 were the effect of foreign statutory rates lower than the U.S. rate and
other foreign adjustments of $1.6 million and the U.S. production activities
deduction effect of $1.3 million. These items were offset by state and
local income tax expense, net of federal benefit, of $2.1 million and other
differences of $1.0 million.
Plumbing & Refrigeration Segment
Net sales by the Plumbing and Refrigeration segment were $404.4 million
in the second quarter of 2008 compared with $455.5 million in the second
quarter of 2007. Net sales for the first six months of 2008 were $788.3
million compared with $825.5 million over the same period in 2007. These
decreases are primarily due to decreased unit sales volume in the majority
of the segment's product lines, partially offset by the increase in the cost
of copper. Cost of goods sold decreased from $371.9 million in the second
quarter of 2007 to $340.1 million in the second quarter of 2008, and
decreased from $683.4 million in the first six months of 2007 to $668.1
million in the first six months of 2008. These decreases resulted from
-22-
lower sales volume and reduced aggregate conversion costs, partially offset
by increased copper costs and increased per-unit freight costs.
Depreciation and amortization remained consistent in all periods presented.
Selling, general and administrative expense decreased from $24.6 million in
the second quarter of 2007 to $21.6 million in the second quarter of 2008,
and decreased from $48.9 million in the first six months of 2007 to $45.2
million in the first six months of 2008. These decreases are primarily due
to decreased employment costs and lower sales and distribution expense
resulting from lower unit sales volume. Operating income for the segment
decreased from $51.7 million in the second quarter of 2007 to $35.4 million
in the second quarter of 2008, and decreased from $78.6 million in the first
six months of 2007 to $60.5 million in the first six months of 2008 due
primarily to lower sales volumes and reduced spreads in copper tube and
fittings.
OEM Segment
Net sales for the OEM segment increased from $322.2 million in the
second quarter of 2007 to $354.0 million in the second quarter of 2008. The
increase is due primarily to the increased raw material costs, which are
generally passed on to customers. Net sales were $680.2 million in the
first six months of 2008 compared with $565.9 million over the same period
in 2007. The increase is due primarily to the acquisition of Extruded in
February 2007, which contributed net sales of $213.8 million in 2008
compared with $129.5 million in 2007, and the increased cost of raw material.
Cost of goods sold increased from $294.6 million in the second quarter 2007
to $325.7 million in the second quarter of 2008 and from $524.1 million in
the first six months of 2007 to $615.2 million in the second quarter of 2008
due to the increased cost of raw material and the acquisition of Extruded.
Depreciation and amortization remained consistent in all periods presented.
Selling, general, and administrative expense remained consistent in the
second quarter of 2008 compared with the second quarter of 2007 at
approximately $5.8 million. Selling, general, and administrative expense
increased to $13.6 million in the first six months of 2008 from $11.3
million in the first six months of 2007, due primarily to increased bad debt
expense and additional expense following the acquisition of Extruded.
Operating income for the segment increased from $18.0 million in the second
quarter of 2007 to $19.0 million in the second quarter of 2008, and
increased from $23.5 million in the first six months of 2007 to $44.5
million in the first six months of 2008 due primarily to higher spreads and
lower aggregate conversion costs at the Company's brass rod operations and
the acquisition of Extruded.
Liquidity and Capital Resources
Cash provided by operating activities during the first half of 2008
totaled $3.6 million, which is primarily attributable to net income and
depreciation and amortization, partially offset by increased receivables and
decreased current liabilities. Fluctuations in the cost of copper and other
raw materials affect the Company's liquidity. Changes in material costs
directly impact components of working capital, primarily inventories and
accounts receivable. During the first half of 2008, the average COMEX
copper price was approximately $3.67 per pound, which represents a 19
percent increase over the average price during the first half of 2007. This
rise in the price of cathode has also resulted in sharp increases in the
-23-
open market price for copper scrap and, to a lesser extent, the price of
brass scrap. Subsequent to the end of the second quarter, copper prices
continued to rise, trading above $4.07 per pound. Consequently, the Company
has funded increases in working capital with cash on hand.
During the first half of 2008, cash used in investing activities
totaled $15.5 million, which consisted primarily of capital expenditures of
$14.8 million. Cash used in financing activities during the first six
months of 2008 totaled $24.5 million, which consisted primarily of
repayments of long-term debt of $23.6 million and dividends paid totaling
$7.4 million. During the first half of 2008, the Company repurchased and
extinguished $26.2 million of its 6% Subordinated Debentures for $23.5
million, which after inclusion of the write-off of related debt issuance
costs, resulted in a net gain of approximately $2.5 million.
The Company has a $200 million unsecured line-of-credit (Credit
Facility) which expires in December 2011. At June 28, 2008, the Company had
no borrowings against the Credit Facility. The Credit Facility backed
approximately $9.9 million in letters of credit at the end of the second
quarter of 2008. As of June 28, 2008, the Company's total debt was $337.0
million or 31 percent of its total capitalization.
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of tangible net worth
and the satisfaction of certain minimum financial ratios. As of June 28,
2008, the Company was in compliance with all of its debt covenants.
The Company declared and paid a regular quarterly cash dividend of ten
cents per common share in the first and second quarters of 2008. Payment of
dividends in the future is dependent upon the Company's financial condition,
cash flows, capital requirements, earnings, and other factors. On May 1,
2008, the Company paid approximately $8.1 million in interest on its 6%
Subordinated Debentures.
Management believes that cash provided by operations and currently
available cash of $273.6 million will be adequate to meet the Company's
normal future capital expenditures and operational needs. The Company's
current ratio was 3.2 to 1 at June 28, 2008.
The Company's Board of Directors has extended, until October 2008, its
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. From its initial authorization in 1999
through June 28, 2008, the Company had repurchased approximately 2.4 million
shares under this authorization.
There have been no significant changes in the Company's contractual
cash obligations reported at December 29, 2007.
-24-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in raw material and
energy costs, interest rates, and foreign currency exchange rates. To
reduce such risks, the Company may periodically use financial instruments.
All hedging transactions are authorized and executed pursuant to policies
and procedures. Further, the Company does not buy or sell financial
instruments for trading purposes.
Cost and Availability of Raw Materials and Energy
Copper and brass represent the largest component of the Company's
variable costs of production. The cost of these materials is subject to
global market fluctuations caused by factors beyond the Company's control.
Significant increases in the cost of metal, to the extent not reflected in
prices for the Company's finished products, or the lack of availability
could materially and adversely affect the Company's business, results of
operations and financial condition.
The Company occasionally enters into forward fixed-price arrangements
with certain customers. The Company may utilize forward contracts to hedge
risks associated with forward fixed-price arrangements. The Company may
also utilize forward contracts to manage price risk associated with
inventory. Depending on the nature of the hedge, changes in the fair value
of the forward contracts will either be offset against the change in fair
value of the inventory through earnings or recognized as a component of
comprehensive income and reflected in earnings upon the sale of inventory.
Periodic value fluctuations of the contracts generally offset the value
fluctuations of the underlying fixed-price transactions or inventory. At
June 28, 2008, the Company held open forward contracts to purchase
approximately $12.3 million of copper over the next six months related to
fixed-price sales orders.
Futures contracts may also be used to manage price risk associated with
natural gas purchases. The effective portion of gains and losses with
respect to these positions are deferred in stockholders' equity as a
component of comprehensive income and reflected in earnings upon consumption
of natural gas. Periodic value fluctuations of the contracts generally
offset the value fluctuations of the underlying natural gas prices. At June
28, 2008, the Company held no open forward contracts to purchase natural gas.
Interest Rates
At June 28, 2008, the Company had variable-rate debt outstanding of
$64.7 million, the majority of which related to the debt issued by Mueller-
Xingrong. At these borrowing levels, a hypothetical 10 percent increase in
interest rates would have had an insignificant unfavorable impact on the
Company's pretax earnings and cash flows. The primary interest rate
exposure on floating-rate debt is based on LIBOR and on the base-lending
rate published by the People's Bank of China.
-25-
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other
than an entity's functional currency. The Company and its subsidiaries
generally enter into transactions denominated in their respective functional
currencies. Foreign currency exposures arising from transactions
denominated in currencies other than the functional currency are not
material; however, the Company may utilize certain forward fixed-rate
contracts to hedge such transactional exposures. Gains and losses with
respect to these positions are deferred in stockholders' equity as a
component of comprehensive income and reflected in earnings upon collection
of receivables. At June 28, 2008, the Company held no open forward fixed-
rate contracts.
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars.
The primary currencies to which the Company is exposed include the Canadian
dollar, the British pound sterling, the Euro, the Mexican peso, and the
Chinese renminbi. The Company generally views as long-term its investments
in foreign subsidiaries with a functional currency other than the U.S.
dollar. As a result, the Company generally does not hedge these net
investments.
Cautionary Statement Regarding Forward Looking Information
Statements in this Quarterly Report on Form 10-Q that are not strictly
historical may be "forward-looking" statements, which involve risks and
uncertainties. These include economic and currency conditions, continued
availability of raw materials and energy, market demand, pricing,
competitive and technological factors, and the availability of financing,
among others, as set forth in the Company's filings with the Securities and
Exchange Commission (SEC). The words "outlook," "estimate," "project,"
"intend," "expect," "believe," "target," and similar expressions are
intended to identify forward-looking statements. The reader should not
place undue reliance on forward-looking statements, which speak only as of
the date of this report. The Company has no obligation to publicly update
or revise any forward-looking statements to reflect events after the date of
this report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure information required to be disclosed in Company reports filed under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized, and reported within the time periods
specified in the SEC'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.
-26-
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures pursuant
to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by
this report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective as of June 28, 2008 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.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending June 28, 2008, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. However, during the
first half of 2008, the Company began its implementation of an upgrade to
its transaction processing system. The implementation process is ongoing.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
General
The Company is involved in certain litigation as a result of claims
that arose in the ordinary course of business. Additionally, the Company
may realize the benefit of certain legal claims and litigation in the
future; these gain contingencies are not recognized in the Condensed
Consolidated Financial Statements.
Copper Tube Antitrust Litigation
The Company has been 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.
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 Ltd. (Mueller Europe) are named in
the Carrier ACR Tube Action.
-27-
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 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.
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. Deno Acquisition Eurl has not been
served with the complaint in the Indirect-Purchaser Copper Tube Action.
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. The Company, WTC Holding Company, Inc.
(WTC Holding Company), Deno Holding Company, Inc. (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.
-28-
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 other Copper Tube Actions.
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. On April 1, 2008, the CBSA initiated a new review
process, which will result in the issuance of revised normal values on or
before August 27, 2008. Depending on the level of these revised normal
values, the Company's ability to compete in Canada could be affected.
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.
-29-
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.
Environmental Matters
Southeast Kansas Sites
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 site in southeast 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. The Company has
since been advised of possible connections between that same entity and two
other former smelter sites in Kansas. KDHE has requested that the Company
and another potentially responsible party (PRP) negotiate a consent order
with KDHE to address contamination at these sites. The Company has
participated in preliminary discussions with KDHE and the other PRP. The
Company believes it is not liable for the contamination but may consider
negotiating a resolution as an alternative to litigation. The extent of the
Company's obligation, if any, could depend, among other things, on (i) the
outcome of possible feasibility studies, (ii) a chosen method of
environmental response, (iii) the existence and viability of any additional
PRPs, (iv) the terms of any cost sharing arrangement, and (v) the extent of
recoveries, if any, from claims against insurance policies. If the Company
incurs an obligation that becomes determinable and estimable, the obligation
would require recognition which could be material to the Company's results
of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The Company's Board of Directors has extended, until October 2008, its
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. From its initial authorization in 1999
through June 28, 2008, 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 June 28, 2008.
(a) (b) (c) (d)
Total
Number of Maximum
Shares Number of
Purchased Shares that
as Part of May Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Purchased per Share Programs Programs
7,647,030(1)
March 30 - April 26, 2008 - $ -
April 27, -
May 24, 2008 401 (2) 32.68
May 25 - June 28, 2008 - -
(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.
(2) Shares tendered to the Company by employee stock option holders in payment
of the option purchase price and/or withholding taxes upon exercise.
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Item 4. Submission of Matters to a Vote of Security Holders
On May 1, 2008, the Company held its Annual Meeting of Stockholders at
which three proposals were voted upon (i) the election of directors, (ii)
the appointment of independent auditors, and (iii) a stockholder proposal
regarding board membership. The following persons were duly elected to
serve, subject to the Company's Bylaws, as Directors of the Company until
the next Annual Meeting, or until election and qualification of their
successors:
Votes in Favor Votes Withheld
Alexander P. Federbush 33,753,221 1,402,990
Paul J. Flaherty 34,569,601 586,610
Gennaro J. Fulvio 34,340,772 815,439
Gary S. Gladstein 34,591,389 564,822
Scott J. Goldman 34,598,657 557,554
Terry Hermanson 31,309,212 3,846,999
Harvey L. Karp 34,398,373 757,838
William D. O'Hagan 31,599,607 3,556,604
The proposal to approve the appointment of Ernst & Young LLP as the
Company's independent registered public accounting firm was ratified by
34,901,815 votes in favor, 241,923 votes against, and 12,472 votes
abstaining. The stockholder proposal regarding board inclusiveness failed
by 15,837,591 votes against, 14,303,024 votes in favor, and 2,770,619 votes
abstaining. There were 2,244,977 broker non-votes related to the
stockholder proposal.
Item 6. Exhibits
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended June 28, 2008. Such
report is being furnished for the information of the
Securities and Exchange Commission only and is not to be
deemed filed as part of this Quarterly Report on Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Items 1A, 3, and 5 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MUELLER INDUSTRIES, INC.
July 22, 2008 /s/ Kent A. McKee
Date Kent A. McKee
Executive Vice President and
Chief Financial Officer
July 22, 2008 /s/ Richard W. Corman
Date Richard W. Corman
Vice President - Controller
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EXHIBIT INDEX
Exhibits Description
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders
for the quarter ended June 28, 2008. Such report is being
furnished for the information of the Securities and Exchange
Commission only and is not to be deemed filed as part of this
Quarterly Report on Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.