MUELLER INDUSTRIES INC - Annual Report: 2008 (Form 10-K)
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
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For
the fiscal year ended December 27, 2008
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Commission
file number 1–6770
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MUELLER
INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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25-0790410
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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8285
Tournament Drive, Suite 150
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Memphis,
Tennessee
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38125
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (901) 753-3200
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common
Stock, $0.01 Par Value
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New
York Stock Exchange
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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 SNo £
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 S
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 SNo £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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):
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Large
accelerated filer S
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Accelerated
filer £
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Non-accelerated
filer £
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Smaller
reporting company £
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Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £No S
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 $1,181,601,927.
The
number of shares of the Registrant’s common stock outstanding as of February 20,
2009 was 37,143,163 excluding 2,948,339 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 2009 Annual Meeting of
Stockholders, scheduled to be mailed on or about March 25, 2009 (Part
III).
MUELLER
INDUSTRIES, INC.
_____________________
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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Part
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Item
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Part
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Part
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F-1
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PART
I
ITEM
1. BUSINESS
Introduction
The Company is a leading manufacturer
of copper, brass, plastic, and aluminum products. The range of these
products is broad: copper tube and fittings; brass and copper alloy
rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact
extrusions; plastic 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), Engineered Products Division
(EPD), and Mueller-Xingrong, the Company’s Chinese joint
venture. Certain administrative expenses and expenses related
primarily to retiree benefits at inactive operations are combined into the
Corporate and Eliminations classification. 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 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. Mueller-Xingrong manufactures engineered copper tube
primarily for air conditioning applications; these products are sold primarily
to OEMs located in China. The OEM segment sells its products
primarily to original equipment manufacturers, many of which are in the HVAC,
plumbing, and refrigeration markets.
Information concerning segments and
geographic information appears under “Note 14 - Industry Segments” in the Notes
to Consolidated Financial Statements for the year ended December 27, 2008 in
Item 8 of this Report, which is incorporated herein by reference.
The majority of the Company's
manufacturing facilities operated at moderate levels during the first half of
2006. Since then, 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 are important economic indicators that impact
the Company’s businesses. Per the U.S. Census Bureau, new housing
starts in the U.S. were 0.9 million, 1.4 million, and 1.8 million in 2008, 2007,
and 2006, respectively. The Value of Private Non-Residential
Construction put in place was $417.9 billion in 2008, $349.8 billion in 2007,
and $295.7 billion in 2006. The average 30-year fixed mortgage rate
was 5.33 percent in December 2008, 6.10 percent in December 2007, and 6.14
percent in December 2006.
During the latter half of 2008, general
economic conditions in the U.S. deteriorated significantly, especially in the
housing market and have led to financial distress for many financial
institutions. The financial distress experienced by those
institutions has significantly reduced the availability of
credit. These factors, as well as declining consumer confidence, have
led to significantly reduced new housing construction in virtually all U.S.
markets, which significantly affects sales volumes in many of the Company’s
business units. Per the U.S. Census Bureau, during the fourth quarter
of 2008, new housing starts were approximately 0.2 million, which was a 44
percent decrease from the same period in 2007. This condition has
continued to worsen in 2009, as January new housing starts decreased 57 percent
from the same period in 2008. Similar conditions in the U.K. also
have slowed shipment volumes in that market. Should these market
conditions continue for prolonged periods of time, it could adversely affect the
Company’s results of operations in future periods.
The Company is a Delaware corporation
incorporated on October 3, 1990.
Plumbing
& Refrigeration Segment
Mueller’s Plumbing & Refrigeration
segment includes SPD which manufactures a broad line of copper tube, in sizes
ranging from 1/8 inch to 8 inch diameter, 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.
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 27, 2008 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 LLC (a subsidiary of Industrias Unidas
S.A. de C.V.), 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 several 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 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 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 27, 2008 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.
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 27, 2008, the Company
employed approximately 4,086 employees, of which approximately 1,993 were
represented by various unions. Those union contracts will expire as
follows:
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Location
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Expiration Date
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Port
Huron, Michigan (Local 218 I.A.M.)
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May
1, 2010
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Port
Huron, Michigan (Local 44 U.A.W.)
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June
13, 2010
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Belding,
Michigan
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August
25, 2009
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Wynne,
Arkansas
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June
28, 2010
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Fulton,
Mississippi
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August
1, 2012
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North
Wales, Pennsylvania
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July
28, 2009
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Waynesboro,
Tennessee
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November
7, 2009
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Jacksboro,
Tennessee
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September
15, 2009
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The union agreements 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 27, 2008, approximately
8 percent of the Company's employees were covered by collective bargaining or
similar agreements that will expire during 2009.
Raw
Material and Energy Availability
The major portion of Mueller’s base
metal requirements (primarily copper) is normally obtained through short-term
supply contracts with competitive pricing provisions (for cathode) and the open
market (for scrap). Other raw materials used in the production of
brass, including brass scrap, zinc, tin, and lead, are obtained from zinc and
lead producers, open-market dealers, and customers with brass process
scrap. Raw materials used in the fabrication of aluminum and plastic
products are purchased in the open market from major producers.
Adequate supplies of raw material have
historically been available to the Company from primary producers, metal
brokers, and scrap dealers. Sufficient energy in the form of natural
gas, fuel oils, and electricity is available to operate the Company’s production
facilities. While temporary shortages of raw material and fuels may
occur occasionally, to date they have not materially hampered the Company’s
operations.
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
2009. 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 matters related to non-operating properties was
$15.4 million for 2008, $0.7 million for 2007 and $0.6 million in
2006. Environmental costs related to operating properties are
classified as costs of goods sold and are not significant. The
Company does not anticipate that it will need to make material expenditures for
compliance activities related to operating properties during the remainder of
the 2009 fiscal year, or for the next two fiscal years.
Mining
Remedial Recovery Company
Shasta Area Mine
Sites
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 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 $0.5 million in 2008, and $0.4 million in 2007, and
estimates it will spend between approximately $11.1 million and $13.5 million
over the next twenty years.
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 United States Environmental Protection Agency (EPA) under Superfund for
information on whether there were releases of hazardous substances from Lead
Refinery into 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
potentially responsible parties (PRPs) that had adversely impacted natural
resources. Lead Refinery is in settlement negotiations in an effort
to settle potential claims by EPA and IDEM for alleged natural resources damages
to the Grand Calumet River/Indiana Harbor Canal.
In 1991, Lead Refinery also responded
to an information request under Superfund regarding its site in East Chicago,
Indiana. In 1992, the EPA advised Lead Refinery of its intent to list
Lead Refinery’s property on the National Priorities List (NPL) established by
Superfund but 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 requires corrective
action at Lead Refinery’s 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 Lead
Refinery’s 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 monitoring and
maintenance activities at its 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. EPA has informed Lead Refinery that the
Consent Order would be terminated upon issuance of the IDEM post-closure permit
in effect. Lead Refinery spent approximately $0.1 million in 2008 and
$0.2 million in 2007 with respect to this site. Approximate costs to
comply with the post-closure permit, including associated general and
administrative costs, are between $2.2 million and $3.6 million over the next
twenty years. The Company is aware that EPA has been evaluating under
Superfund whether further action should be undertaken to address environmental
conditions at off-site residential properties located near Lead Refinery’s
facility. In 2006 and 2007, the Company received and responded to
information requests from EPA under Superfund primarily concerning MRRC and
transactions between the Company and MRRC. On September 3, 2008,
the EPA proposed to list the site on Superfund’s NPL. Such listing is
not a determination of liability but a determination of which sites require
further investigation of the risks associated with the release or threatened
release of hazardous substances. Lead Refinery submitted comments in
response to EPA’s proposal. The Company is unable to determine the
likelihood of a materially adverse outcome or the amount or range of a potential
loss with respect to any further proceedings under Superfund. Lead
Refinery lacks the financial resources needed to complete any additional
investigations or remediation that may be required by EPA.
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 contribution of response costs
from Lead Refinery 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. 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.
Lead Refinery does not have sufficient
information to determine the extent of its liability, if any, or to quantify the
approximate costs associated with the Pedricktown, New Jersey and NL/Taracorp
matters. Moreover, Lead Refinery does not possess the financial
resources to fund any additional remedial or investigatory actions that may
arise in connection with these matters.
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. Effective
November 17, 2008, MCTP entered into a Settlement Agreement and Administrative
Order by Consent to submit a Supplemental Investigation Work Plan and subsequent
Final Remediation Work Plan for the site. The Company expects the
estimated cost of the remedial measures will be between $0.4 and $0.8
million.
Mueller Brass EPA
Settlement
Effective September 30, 2008, Mueller
Brass Co., a wholly owned subsidiary of the Company, entered into
a Consent Agreement and Final Order (CAFO) with the EPA to resolve alleged
violations of certain federal and state regulations, including the Resource
Conservation and Recovery Act, relating to hazardous waste treatment, storage
and disposal at the Company’s facilities in Michigan. Under the CAFO,
Mueller Brass Co. will pay a civil penalty of $0.1 million, submit a closure
plan for its steam cleaner tank system to the Michigan Department of
Environmental Quality, and implement and complete a Supplemental Environmental
Project with a capital expenditure of approximately $0.6 million. The
penalty was paid during the fourth quarter of 2008 and
work is
underway to complete the
submission of the closure plan and to implement and complete the Supplemental
Environmental Project.
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
connection between that same entity and two other former smelter sites in
Kansas. KDHE has requested that the Company and another 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 as an alternative to litigation, the Company has entered into
settlement negotiations with the other PRP. The negotiations are
ongoing. In 2008, the Company established a reserve of $9.5 million
for this matter.
Eureka Mills
Site
In November 2008, the Company received
a general notice of liability and second request for information under CERCLA
from the EPA concerning the Eureka Mills Superfund Site (the Eureka Mills Site)
located in Juab County, Utah. The Eureka Mills Site is an area where
mining and milling of various metals occurred over the course of several
decades. The EPA has been investigating and remediating contamination
associated with these activities. The Company’s connection to the
Eureka Mills Site appears to be through land within the Eureka Mills Site that
was owned by Sharon Steel Corporation, its predecessor. In 2001, the
Company responded to an earlier request for information concerning milling
activities stating that it was not responsible for any such activities at the
Eureka Mills Site. The recent request for information concerns
historic mining activities. In responding to EPA’s November 2008
letter, the Company stated that it does not believe it is liable for the
contamination. The Company is continuing to evaluate this matter and
expects to participate in further discussions with EPA. At this
juncture, the Company does not know the extent to which EPA may seek to hold the
Company liable for cleanup or whether the Company would have claims against any
other parties.
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. During
2008, the Company repurchased and extinguished $149.0 million in principal
amount of the Debentures.
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 2008, 2007, or
2006. 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.
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 volatile
during the last several years, which has resulted in changes in production and
distribution costs. While we typically attempt to pass costs through
to our customers or to modify or adapt our activities to mitigate the impact of
increases, we may not be able to do so successfully. Failure to fully
pass 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.
The recent deterioration of the general
economic environment, distress in the financial markets and general uncertainty
about the economy is having a significant negative impact on businesses and
consumers around the world. The well-publicized downturn in the
housing market in particular has caused a slowdown in construction, both
residential and commercial, including construction lending, which may result in
decreased demand for our products. In addition, the impact of the
economy on the operations or liquidity of any party with which we conduct our
business, including our suppliers and customers, may adversely impact our
business. We are unsure of the duration and severity of this economic
crisis. However, if the crisis persists or worsens and economic
conditions remain weak over a long period, the likelihood of the crisis having a
significant impact on our business increases.
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 time to time, involved in
various claims, litigation matters, and regulatory proceedings. These
matters may include, among other things, contract disputes, personal injury
claims, environmental claims or proceedings, other tort claims, employment and
tax matters and other litigation including class actions that arise in the
ordinary course of our business. Although we intend to defend these
matters vigorously, we cannot predict with certainty the outcome or effect of
any claim or other litigation matter, and there can be no assurance as to the
ultimate outcome of any litigation or regulatory
proceeding. Litigation and regulatory proceedings may have a material
adverse effect on us because of potential adverse outcomes, defense costs, the
diversion of our management’s resources, availability of insurance coverage and
other factors.
A
strike or other work stoppage, or our inability to renew collective bargaining
agreements on favorable terms, could impact our cost structure and our ability
to operate our facilities and produce our products, which could have an adverse
effect on our results of operations.
As of December 27, 2008, approximately
49 percent of our 4,086 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.
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.
|
Location
|
Approximate
Property Size
|
Description
|
|||||
|
Plumbing & Refrigeration
Segment
|
|||||||
|
Fulton,
MS
|
418,000
sq. ft.
52.37
acres
|
Copper
tube mill. Facility includes 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.
11.9
acres
|
Casting
facility. Facility includes casting equipment to produce copper
billets used in the adjoining copper tube mill.
|
|||||
|
Wynne,
AR
|
682,000
sq. ft.
39.2
acres
|
(1)
|
Copper
tube mill and plastic fittings plant. Facility includes
casting, extruding and finishing equipment to produce copper tubing and
copper tube line sets, and produces DWV fittings using injection molding
equipment.
|
||||
|
Fulton,
MS
|
58,500
sq. ft.
15.53
acres
|
Packaging
and bar coding facility for retail channel sales.
|
|||||
|
Fulton,
MS
|
70,000
sq. ft.
7.68
acres
|
(2)
|
Copper
fittings plant. High-volume facility that produces copper
fittings using tube feedstock from the Company’s adjacent copper tube
mill.
|
||||
|
Covington,
TN
|
159,500
sq. ft.
40.88
acres
|
Copper
fittings plant. Facility produces copper fittings using tube
feedstock from the Company’s copper tube mills.
|
|||||
|
Portage,
MI
|
205,000
sq. ft.
18
acres
|
Plastic
fittings plant. Produces DWV fittings using injection molding
equipment.
|
|||||
|
Ontario,
CA
|
211,000
sq. ft.
10
acres
|
(3)
|
Plastics
fittings plant. Produces DWV fittings using injection molding
equipment.
|
||||
|
Fort
Pierce, FL
|
69,875
sq. ft.
5.60
acres
|
Plastic
fittings plant. Produces pressure fittings using injection
molding equipment.
|
|||||
|
Monterrey,
Mexico
|
120,000
sq. ft.
3.4
acres
|
(3)
|
Pipe
nipples plant. Produces pipe nipples, cut pipe and merchant
couplings.
|
||||
|
Bilston,
England, United Kingdom
|
402,500
sq. ft.
14.95
acres
|
Copper
tube mill. Facility includes casting, extruding, and finishing
equipment to produce copper tubing.
|
|||||
(continued)
ITEM
2.
PROPERTIES
|
(continued)
|
||||||
|
Location
|
Approximate
Property Size
|
Description
|
||||
|
OEM Segment
|
||||||
|
Port
Huron, MI
|
322,500
sq. ft.
71.5
acres
|
Brass
rod mill. Facility includes casting, extruding, and finishing
equipment to produce brass rods and bars, in various shapes and
sizes.
|
||||
|
Belding,
MI
|
293,068
sq. ft.
17.64
acres
|
Brass
rod mill. Facility includes 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.
6.72
acres
|
Aluminum
and copper impacts plant. Produces made-to-order parts using
cold impact processes.
|
||||
|
Hartsville,
TN
|
78,000
sq. ft.
4.51
acres
|
Refrigeration
products plant. Produces products used in refrigeration
applications such as ball valves, line valves, and compressor
valves.
|
||||
|
Carthage,
TN
|
67,520
sq. ft.
10.98
acres
|
Fabrication
facility. Produces precision tubular components and
assemblies.
|
||||
|
Jacksboro,
TN
|
65,066
sq. ft.
11.78
acres
|
Bending
and fabricating facility. Produces gas burners, supply tubes,
and manifolds for the gas appliance industry.
|
||||
|
Waynesboro,
TN
|
57,000
sq. ft.
5.0
acres
|
(4)
|
Gas
valve plant. Facility produces brass valves and assemblies for
the gas appliance industry.
|
|||
|
North
Wales, PA
|
174,000
sq. ft.
18.9
acres
|
Precision
Tube factory. Facility 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.
|
|||
|
Middletown,
OH
|
55,000
sq. ft.
2.0
acres
|
Fabricating
facility. Produces burner systems and manifolds for the gas
appliance industry.
|
||||
|
Jintan
City, Jiangsu Province, China
|
322,580 sq.
ft
33.0
acres
|
(5)
|
Copper
tube mill. Facility includes casting, and finishing equipment
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.
|
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 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, Limited (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 ACR Tube
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, and briefing on the appeals is
proceeding.
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, Inc. (WTC Holding Company), Deno Holding Company, Inc. (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, Mueller Europe, WTC Holding Company, Deno Holding Company, 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 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 August 27, 2008, 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 August 27,
2008. Mueller’s normal values are subject to potential review and
revision in the future. 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.
United
States Department of Commerce Antidumping Review
On December 24, 2008, the United States
Department of Commerce initiated an antidumping administrative review covering
imports of circular welded non-alloy steel pipe and tube from
Mexico. This review will determine the final antidumping duty owed on
U.S. imports made during the period November 1, 2007 through October 31, 2008,
pursuant to an existing antidumping order. The domestic industry has already
requested that Mueller Comercial de Mexico, S. de R.L. de C.V. (Mueller
Mexico) be selected as a respondent in this proceeding, and we are currently
awaiting the respondent selection decision from the U.S. Department of
Commerce. Regardless of whether Mueller Mexico is selected as a
respondent in this review, it is possible that certain subsidiaries of Mueller
Industries, Inc. will incur additional antidumping duty liability on subject
imports made during the review period. The amount of such potential
liability, if any, is not known at this time.
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 2007, 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 2007, 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 2007, 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 proceeded to
discovery of the relevant facts. Since that time, depositions and
document productions have been ongoing. However, on September 5,
2008, Peter Berkman withdrew prior responses to discovery requests and asserted
the Fifth Amendment privilege against self-incrimination as to all requests
directed to him. By that assertion, he took the position that his
testimony about his actions would have the potential of exposing him to a
criminal charge or criminal charges. On October 3, 2008, in response
to a motion to compel filed by the Company, the Court held that Peter Berkman
could not withhold documents on Fifth Amendment grounds, amongst other
things. Peter Berkman moved for reconsideration of that order and his
request was denied on November 19, 2008. On December 10, 2008, Peter
Berkman moved for the opportunity to file an interlocutory appeal regarding the
Court’s ruling on the Company’s motion to compel. On January 7, 2009,
the motion for interlocutory appeal was granted and the Court found Peter
Berkman in contempt for resisting discovery. On October 24, 2008, the
defendants filed a motion seeking leave to interpose an Amended Answer and
Amended Counterclaims. On December 19, 2008, the Company filed an
answer to the Amended Counterclaims that included a new affirmative defense
based on the assertion of the Fifth Amendment by Peter Berkman. The
Company believes that the 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.
None.
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
As of February 20, 2009, the number of
holders of record of Mueller’s common stock was approximately
1,384. On February 20, 2009, the closing price for Mueller’s common
stock on the New York Stock Exchange was $20.14.
Issuer
Purchases of Equity Securities
The Company’s Board of Directors has
extended, until October 2009, 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 its stock-based compensation plans, as well as for other corporate
purposes. From its initial authorization in 1999 through December 27,
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 December 27, 2008.
|
(a)
|
(b)
|
(c)
|
(d)
|
||||||||||||||||
|
Total Number
of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares That May Yet Be Purchased Under the Plans or
Programs
|
||||||||||||||||
|
7,647,030
|
(1)
|
||||||||||||||||||
|
September
28 – October 25, 2008
|
-
|
$
|
-
|
|
|||||||||||||||
|
October
26 – November 22, 2008
|
-
|
-
|
|||||||||||||||||
|
November
23 – December 27, 2008
|
-
|
-
|
|||||||||||||||||
|
(1
|
)
|
Shares
available to be purchased under the Company's 10 million share repurchase
authorization until October 2009. The extension of the
authorization was announced on October 21, 2008.
|
|||||||||||||||||
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 2008 and 2007. Payment of dividends in the
future is dependent upon the Company’s financial condition, cash flows, capital
requirements, earnings, and other factors.
The high, low, and closing prices of
Mueller's common stock on the New York Stock Exchange for each fiscal quarter of
2008 and 2007 were as follows:
|
High
|
Low
|
Close
|
||||||||||
|
2008
|
||||||||||||
|
Fourth
quarter
|
$
|
26.28 |
$
|
15.69 |
$
|
22.81 | ||||||
|
Third
quarter
|
33.33 | 24.85 | 26.83 | |||||||||
|
Second
quarter
|
36.73 | 28.49 | 32.29 | |||||||||
|
First
quarter
|
31.21 | 23.57 | 29.43 | |||||||||
|
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 | |||||||||
PERFORMANCE
GRAPH
The following table compares total
stockholder return since December 27, 2003 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.
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|
|
Mueller
Industries, Inc.
|
100
|
147
|
128
|
149
|
141
|
110
|
|
Dow
Jones U.S. Total Market Index
|
100
|
113
|
121
|
140
|
149
|
90
|
|
Dow
Jones U.S. Building Materials & Fixtures Index
|
100
|
134
|
142
|
164
|
158
|
104
|
ITEM
6.
SELECTED FINANCIAL DATA
|
(In
thousands, except per share data)
|
|||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||||||||
|
For
the fiscal year: (2)
|
|||||||||||||||||||||||||||||||||||
|
Net
sales
|
$
|
2,558,448
|
$
|
2,697,845
|
$
|
2,510,912
|
$
|
1,729,923
|
$
|
1,379,056
|
|||||||||||||||||||||||||
|
Operating
income
|
126,096
|
(6
|
)
|
191,621
|
(5
|
)
|
218,885
|
(3
|
)
|
131,758
|
112,490
|
||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
|
Net
income from continuing operations
|
80,814
|
(7
|
)
|
115,475
|
148,869
|
(4
|
)
|
89,218
|
79,416
|
||||||||||||||||||||||||||
|
Diluted
earnings per share from continuing operations
|
2.17
|
3.10
|
4.00
|
2.40
|
2.15
|
||||||||||||||||||||||||||||||
|
Cash
dividends per share
|
0.40
|
0.40
|
0.40
|
0.40
|
6.90
|
(1
|
)
|
||||||||||||||||||||||||||||
|
At
year-end:
|
|||||||||||||||||||||||||||||||||||
|
Total
assets
|
1,182,913
|
1,449,204
|
1,268,907
|
1,116,928
|
971,328
|
||||||||||||||||||||||||||||||
|
Long-term
debt
|
158,726
|
281,738
|
308,154
|
312,070
|
310,650
|
(1
|
)
|
||||||||||||||||||||||||||||
|
(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
the net-of-tax effect of the inventory write-down described in (3) above,
plus a $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.
|
|||||||||||||||||||||||||||||||||
|
(6
|
)
|
Includes
$14.9 million pre-tax gain from liquidation of LIFO layers less a pre-tax
charge of $4.9 million to write down inventories to the
lower-of-cost-or-market and a goodwill impairment charge of $18.0
million.
|
|||||||||||||||||||||||||||||||||
|
(7
|
)
|
Includes
the net-of-tax effect of all of the items described in (6) above, plus a
provision of $15.4 million ($9.6 million after tax) related to
environmental settlements and obligations and a gain of $21.6 million
related to the early extinguishment of debt.
|
|||||||||||||||||||||||||||||||||
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.
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.
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 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.
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 SEC, 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 27, 2008 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 27, 2008.
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 27, 2008, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
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 27, 2008, 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.
In our
opinion, Mueller Industries, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 27, 2008,
based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Mueller
Industries, Inc. as of December 27, 2008 and December 29, 2007, and the related
consolidated statements of income, stockholders’ equity and cash flows for each
of the three years in the period ended December 27, 2008 and our report dated
February 24, 2009 expressed an unqualified opinion thereon.
|
/S/
Ernst
& Young LLP
|
|
|
Memphis,
Tennessee
|
|
|
February
24, 2009
|
ITEM
9B.
OTHER INFORMATION
None.
PART
III
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 2009 Annual Meeting of Stockholders to be filed with the SEC
on or about March 25, 2009, 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 2008,” “2008 Grants of Plan Based Awards Table,”
“Outstanding Equity Awards at Fiscal 2008 Year-End,” “2008 Option Exercises,”
“Employment and Consulting Agreements,” “Potential Payments Under Employment and
Consulting Agreements as of the End of 2008,” “2008 Director Compensation,”
“Report of the Compensation Committee of the Board of Directors on Executive
Compensation” and “Corporate Governance” in the Company’s Proxy Statement for
its 2009 Annual Meeting of Stockholders to be filed with the SEC on or about
March 25, 2009, 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 27, 2008 (shares in thousands):
|
(a)
|
(b)
|
(c)
|
|||||
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants,
and rights
|
Weighted
average exercise price of outstanding options, warrants, and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
||||
|
Equity
compensation plans approved by security holders
|
1,773
|
$ 27.86
|
304
|
||||
|
Equity
compensation plans not approved by security holders
|
311
|
(1)
|
18.27
|
-
|
|||
|
Total
|
2,084
|
$
26.43
|
304
|
||||
|
(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). The O’Hagan Treasury Options may only be exercised
for shares of common stock held in treasury by the Company and will remain
exercisable by his estate for a period of up to 12 months following Mr.
O’Hagan’s death on October 27, 2008.
|
||||||
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 2009 Annual Meeting of
Stockholders to be filed with the SEC on or about March 25, 2009, 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 2009 Annual Meeting of Stockholders to be filed with the SEC
on or about March 25, 2009, which is incorporated herein by
reference.
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 2009 Annual Meeting of
Stockholders to be filed with the SEC on or about March 25, 2009, which is
incorporated herein by reference.
PART
IV
|
(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).
|
|
|
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 SEC.
|
|
|
10.1
|
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).
|
|
|
10.2
|
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).
|
|
|
10.3
|
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).
|
|
|
10.4
|
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).
|
|
|
10.5
|
Fourth
Amendment, dated December 2, 2008, to the Amended and Restated Employment
Agreement, dated as of September 17, 1997, by and between the Registrant
and Harvey Karp.
|
|
|
10.6
|
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).
|
|
|
10.7
|
Amendment
No. 1, dated December 2, 2008, to the Amended and Restated Consulting
Agreement, dated October 25, 2007, by and between the Registrant and
Harvey Karp.
|
|
|
10.8
|
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).
|
|
|
10.9
|
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).
|
|
|
10.10
|
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).
|
|
|
10.11
|
Third
Amendment, dated November 26, 2008, to the Amended and Restated Employment
Agreement dated as of September 17, 1997, by and between the Registrant
and William D. O’Hagan.
|
|
|
10.12
|
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).
|
|
|
10.13
|
Stock
Option Agreement, dated February 13, 2003, by and between the Registrant
and William D. O’Hagan (Incorporated herein by reference to Exhibit 10.16
of the Registrant’s Annual Report on Form 10-K, dated March 1, 2004, for
the fiscal year ended December 27, 2003).
|
|
|
10.14
|
Amended
and Restated Consulting Agreement between the Registrant and William D.
O’Hagan, dated September 11, 2008 (Incorporated herein by reference to
Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed
September 16, 2008).
|
|
|
10.15
|
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).
|
|
|
10.16
|
Amendment
No. 1, dated December 10, 2008, to the Employment Agreement, effective
October 17, 2002, by and between the Registrant and Kent A.
McKee.
|
|
|
10.17
|
Amended
and Restated Employment Agreement, effective October 30, 2008, by and
between the Registrant and Gregory L. Christopher (Incorporated herein by
reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K,
dated December 26, 2008).
|
|
|
10.18
|
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).
|
|
|
10.19
|
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).
|
|
|
10.20
|
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).
|
|
|
10.21
|
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).
|
|
|
10.22
|
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).
|
|
|
10.23
|
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).
|
|
|
10.24
|
Summary
description of the Registrant’s 2009 incentive plan for certain key
employees.
|
|
|
10.25
|
Securities
Purchase Agreement, dated December 14, 2004, among Mueller Comercial de
Mexico, S. de R.L. de C.V., WTC HOLDCO I, LLC, MIYAR LLC, NICNA, GmbH, and
The Seller Parties (Incorporated herein by reference to Exhibit 10.21 of
the Registrant’s Annual Report on Form 10-K, dated March 4, 2005, for the
fiscal year ended December 25, 2004).
|
|
|
10.26
|
Inventory
Purchase Agreement, dated December 14, 2004, by and between Niples del
Norte S.A. de C.V. and Mueller de Mexico S.A. de C.V (Incorporated herein
by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form
10-K, dated March 4, 2005, for the fiscal year ended December 25,
2004).
|
|
10.27
|
Credit
Agreement, dated as of December 1, 2006, among the Registrant (as
Borrower) and Lasalle Bank Midwest National Association (as agent), and
certain lenders named therein (Incorporated herein by reference to Exhibit
10.1 of the Registrant’s Current Report on Form 8-K, dated December 1,
2006).
|
|
|
10.28
|
Equity
Joint Venture Agreement, among Mueller Streamline China, LLC, Mueller
Streamline Holding, S.L., Jiangsu Xingrong Hi-Tech Co., Ltd. and Jiangsu
Baiyang Industries Ltd. (Incorporated herein by reference to Exhibit 10.1
of the Registrant’s Current Report on Form 8-K, dated December 5,
2005).
|
|
|
10.29
|
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).
|
|
|
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.
|
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 24, 2009.
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, and Director
|
February
24, 2009
|
|
Harvey
L. Karp
|
||
|
/S/Alexander P.
Federbush
|
Director
|
February
24, 2009
|
|
Alexander
P. Federbush
|
||
|
/S/ Paul J.
Flaherty
|
Director
|
February
24, 2009
|
|
Paul
J. Flaherty
|
||
|
/S/ Gennaro J.
Fulvio
|
Director
|
February
24, 2009
|
|
Gennaro
J. Fulvio
|
||
|
/S/ Gary S.
Gladstein
|
Director
|
February
24, 2009
|
|
Gary
S. Gladstein
|
||
|
/S/ Scott J.
Goldman
|
Director
|
February
24, 2009
|
|
Scott
J. Goldman
|
||
|
/S/ Terry
Hermanson
|
Director
|
February
24, 2009
|
|
Terry
Hermanson
|
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 and Title
|
Date
|
|
|
/S/ Gregory L. Christopher
|
February
24, 2009
|
|
|
Gregory
L. Christopher
|
||
|
Chief
Executive Officer
|
||
|
(Principal
Executive Officer)
|
||
|
/S/ Kent A.
McKee
|
February
24, 2009
|
|
|
Kent
A. McKee
|
||
|
Executive
Vice President and Chief Financial Officer
|
||
|
(Principal
Financial and Accounting Officer)
|
||
|
/S/ Richard W.
Corman
|
February
24, 2009
|
|
|
Richard
W. Corman
|
||
|
Vice
President – Controller
|
MUELLER
INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
|
F-2
|
|
|
F-12
|
|
|
F-13
|
|
|
F-14
|
|
|
F-15
|
|
|
F-16
|
|
|
F-43
|
|
FINANCIAL
STATEMENT SCHEDULE
|
Schedule
for the years ended December 27, 2008, December 29, 2007, and December 30,
2006
|
|
|
F-44
|
|
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. 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), Engineered Products Division
(EPD), and Mueller-Xingrong, the Company’s Chinese joint
venture. Certain administrative expenses and expenses related
primarily to retiree benefits at inactive operations are combined into the
Corporate and Eliminations classification. 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. Mueller–Xingrong manufactures engineered copper tube
primarily for air conditioning applications; these products are sold primarily
to OEM’s located in China. 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 the first half of
2006. Since then, 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 are important economic indicators that impact
the Company’s businesses. Per the U.S. Census Bureau, new housing
starts in the U.S. were 0.9 million, 1.4 million, and 1.8 million in 2008, 2007,
and 2006, respectively. The Value of Private Non-Residential
Construction put in place was $417.9 billion in 2008, $349.8 billion in 2007,
and $295.7 billion in 2006. The average 30-year fixed mortgage rate
was 5.33 percent in December 2008, 6.10 percent in December 2007, and 6.14
percent in December 2006.
During the latter half of 2008, general
economic conditions in the U.S. deteriorated significantly, especially in the
housing market and have led to financial distress for many financial
institutions. The financial distress experienced by those
institutions has significantly reduced the availability of
credit. These factors, as well as declining consumer confidence, have
led to significantly reduced new housing construction in virtually all U.S.
markets, which significantly affects sales volumes in many of the Company’s
business units. Per the U.S. Census Bureau, during the fourth quarter
of 2008, new housing starts were approximately 0.2 million, which was a 44
percent decrease from the same period in 2007. This condition has
continued to worsen in 2009, as January new housing starts decreased 57 percent
from the same period in 2008. Similar conditions in the U.K. also
have slowed shipment volumes in that market. Should these market
conditions continue for prolonged periods of time, it could adversely affect the
Company’s results of operations in future periods.
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
impacted by unit volumes that are subject to market trends, such as substitute
products and imports, and market share. 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 from
offshore regions.
Results
of Operations
2008
Performance Compared with 2007
Consolidated net sales in 2008 were
$2.56 billion, a 5 percent decrease compared with net sales of $2.70 billion in
2007. The decrease was primarily attributable to lower unit sales
volumes in each of the Company’s primary product lines and the decline in base
metal prices, primarily copper. Net selling prices generally
fluctuate with changes in raw material costs. Changes in raw material
costs are generally passed through to customers by adjustment to selling
prices. The Comex average copper price in 2008 was approximately
$3.13 per pound, or approximately 3 percent lower than the 2007 average of
$3.22.
Cost of goods sold was $2.23 billion in
2008 compared with $2.32 billion in 2007. The year over year decrease
was due primarily to reduced sales volume in core product lines and the decline
in the market value of copper, the Company’s principal raw
material. During the fourth quarter of 2008, the Company recognized a
$14.9 million gain resulting from the liquidation of last-in, first-out (LIFO)
inventory layers compared with a LIFO gain of $10.0 million in the fourth
quarter of 2007. In addition, during the fourth quarter of 2008 and
2007, certain inventories valued using the first-in, first-out (FIFO) method
were written down to the lower-of-cost-or-market resulting in increases to cost
of goods sold of $4.9 million and $2.7 million, respectively.
Depreciation and amortization expense
was $44.3 million in 2008, which is relatively consistent with $44.2 million in
2007. Selling, general, and administrative expenses decreased to
$136.9 million in 2008; this $6.4 million decrease was due to reduced employment
costs, including incentive compensation, and lower sales and distribution
expenses associated with lower shipment volume. Additionally, during
2007, the Company recognized a gain of $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).
During 2008, the Company recognized a
charge of $18.0 million for the estimated impairment of goodwill as a result of
its annual assessment. The estimate will be adjusted after valuation
procedures are completed as required by generally accepted accounting
principles. The estimated charge relates to the Company’s Mexican
Operations. The Company revised its projected operating results and
cash flows for the 2008 annual assessment which indicated that the fair market
value (based upon a discounted cash flow model) is less than the net carrying
value, including goodwill. During 2007, based upon its required
annual assessment of goodwill, the Company recognized an impairment charge of
$2.8 million related to its Mexican Operations.
Interest expense decreased to $19.1
million in 2008 from $22.1 million in 2007. The decrease is due
primarily to reduced expense following the early extinguishment of $149.0
million of the Company’s 6% Subordinated
Debentures. Other income, net was $12.1 million in 2008 compared with
$13.7 million in 2007. The decrease is due to reduced interest income
of $4.0 million resulting from lower interest rates and lower average invested
cash balances. This decrease was partially offset by the net increase
in the other components included in other income of $2.4
million. Included in 2008 are gains of approximately $21.6 million on
early extinguishment of $149.0 million of the Company’s 6% Subordinated
Debentures and increased environmental expense related to estimated settlements
and obligations for non-operating properties to $15.4 million. In
2007, the Company recognized a gain of $3.1 million from a sale of a
non-operating natural resource property.
Income tax expense was $38.3 million,
for an effective rate of 32 percent. This rate is lower than what
would be computed using the U.S. statutory federal rate primarily due to the
effect of the early extinguishment of debt of $7.6 million, the effect of the
federal production activities deduction of $2.3 million, and a reduction in tax
contingencies of $1.7 million. These decreases were partially offset
by state income tax expense of $3.9 million and by the $6.3 million effect of a
goodwill impairment charge.
The Company’s employment was
approximately 4,086 at the end of 2008 compared with 4,875 at the end of
2007. The Company has reduced employment levels to adjust its
workforce size to correspond with lower production levels as a result of
declining demand.
Plumbing
& Refrigeration Segment
Net sales by the Plumbing &
Refrigeration segment declined 11 percent to $1.40 billion in 2008 from $1.57
billion in 2007. The decrease in net sales is due to lower unit sales
volumes resulting from weak demand in the majority of the segment’s core product
lines and from lower selling prices resulting from declining copper
prices. Cost of goods sold declined from $1.27 billion in 2007 to
$1.16 billion in 2008 also due to lower sales volume and declining copper
prices. Also included in cost of goods sold for the segment was a
gain resulting from the liquidation of LIFO inventory layers of $14.9 million
and $10.0 million in 2008 and 2007, respectively, and charges to write down
certain inventories using the FIFO method to the lower-of-cost-or-market of $2.7
million in 2008 and in 2007. Depreciation and amortization decreased
from $29.8 million in 2007 to $28.8 million in 2008 due to certain assets
becoming fully depreciated late in 2007 and in 2008. Selling,
general, and administrative expenses decreased from $95.6 million in 2007 to
$89.3 million in 2008. The decrease is primarily due to decreased
sales and distribution expenses resulting from lower sales volume, and decreased
employment costs, including incentive compensation. The segment
recorded a charge of $18.0 million in 2008 and $2.8 million in 2007 for
impairment of goodwill related to the Company’s Mexican
Operations. Also recorded in 2007 was an $8.9 million gain from the
monetary settlement on the Morgan copper litigation. Operating income
for the segment declined from $178.4 million to $106.8 million due to lower
sales volume in the segment’s core product lines, higher per-unit conversion
costs associated with lower production volume, an increased goodwill impairment
charge in 2008, and the gain from the monetary settlement on the Morgan copper
litigation in 2007.
OEM
Segment
The OEM segment’s net sales were $1.18
billion in 2008 compared with $1.14 billion in 2007. The increase is
primarily due to increased contributions resulting from the acquisition of
Extruded Metals, Inc. (Extruded) in the first quarter of 2007. This
increase was partially offset by decreased sales in the majority of the
segment’s businesses and declining raw material prices. Cost of goods
sold increased 2 percent to $1.09 billion in 2008 due to contributions from
Extruded, which was partially offset by lower volume and declining raw material
costs. Also included in cost of goods sold for 2008 was a $2.2
million charge to write down certain inventories using the FIFO method to the
lower-of-cost-or-market. Depreciation and amortization increased from
$13.3 million in 2007 to $14.5 million in 2008 due primarily to increased
depreciation expense from the assets acquired in the Extruded
acquisition. Selling, general, and administrative expenses were $23.6
million in 2008 compared with $22.9 million in 2007. The increase is
primarily attributable to additional expenses of Extruded in 2008 compared with
2007. Operating income increased from $38.2 million in 2007 to $45.3
million in 2008, due primarily to increased spreads in our brass rod businesses,
partially offset by reduced sales volumes and higher per-unit conversion costs
in the segment’s other businesses.
2007
Performance Compared with 2006
Consolidated net sales in 2007 were
$2.70 billion, a 7 percent increase over net sales of $2.51 billion in
2006. The increase was primarily attributable to the acquisition of
Extruded during the first quarter of 2007 and higher average selling prices,
partially offset by lower unit sales volumes in each of the Company’s primary
product lines. 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 10
percent, to $2.32 billion in 2007. This increase was attributable
primarily to the acquisition of Extruded and to higher raw material
costs. During the fourth quarter of 2007, the Company recognized a
$10.0 million gain resulting from the liquidation of LIFO inventory
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 percent to $44.2 million in 2007 from $41.6 million in 2006 primarily due to
increased expense from assets acquired in 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. Also, during 2007, the Company received $8.9 million from
the monetary settlement on the Morgan copper litigation.
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 $0.6 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.
Plumbing
& Refrigeration Segment
Net sales by the Plumbing &
Refrigeration segment were $1.57 billion in 2007 compared with $1.72 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 resulting from higher average copper values. Cost of goods
sold declined to $1.27 billion in 2007 from $1.39 billion in
2006. This is due primarily to reduced sales volume and a $10.0
million gain from liquidation of LIFO inventory layers. 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 additional depreciation
expense relating to recent capital expenditures. Selling, general,
and administrative expenses were $95.6 million in 2007 compared with $99.0
million in 2006. The decrease is primarily due to decreased
employment costs, including 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 an $8.9 million gain from
the monetary settlement on the Morgan copper litigation. Operating
income for the segment decreased from $197.4 million in 2006 to $178.4 million
in 2007 due primarily to reduced sales volumes and a goodwill impairment charge
in 2007, offset partially by increased spreads in copper tube and fittings and a
LIFO liquidation gain in 2007.
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 sales by Extruded totaling $311 million since its
acquisition in February 2007. The contributions from Extruded were
partially offset by net decreased sales across the remainder of the segment’s
businesses. Cost of goods sold increased from $757.5 million in 2006
to $1.07 billion in 2007 due primarily to the Extruded
acquisition. Depreciation and amortization increased from $11.8
million in 2006 to $13.3 million in 2007 due primarily to increased expense from
assets acquired in recent acquisitions. Selling, general, and
administrative expenses were $22.9 million in 2007 compared with $21.3 million
in 2006. The increase is primarily attributable to the Extruded
acquisition. Operating income decreased from $44.8 million in 2006 to
$38.2 million in 2007 resulting primarily from the lower sales volumes, offset
partially by contributions from Extruded and higher profits at the aluminum
impacts operation.
Liquidity
and Capital Resources
The Company’s cash and cash equivalents
balance decreased to $278.9 million at December 27, 2008, from $308.6 million at
December 29, 2007, for a net decrease of $29.8 million. Major
components of the 2008 change included $185.8 million of cash provided by
operating activities, $33.1 million of cash used in investing activities, $166.1
million of cash used in financing activities, and unfavorable effects of changes
in exchange rates of $16.3 million.
Net income of $80.8 million in 2008 was
the primary component of cash provided by operating
activities. Depreciation and amortization of $44.9 million, a gain on
early extinguishment of debt of $21.6 million and a goodwill impairment charge
of $18.0 million were the primary non-cash adjustments. Major changes
in working capital included an $89.1 million decrease in trade accounts
receivable, $44.6 million decrease in inventories and $84.6 million decrease in
current liabilities.
The major components of net cash used
for investing activities during 2008 included $22.3 million used for capital
expenditures and $10.9 million of net deposits into restricted cash
balances. Net cash used in financing activities totaled $166.1
million, which consists primarily of $126.9 million cash used in the early
extinguishment of $149.0 million in principal amount of the 6% Subordinated
Debentures, $14.9 million used for payment of regular quarterly dividends, and
$25.6 million used in the net reduction of working capital debt at
Mueller-Xingrong. The reduction in cash resulting from exchange rates
is primarily attributable to functional currencies (U.K. pound sterling, Mexican
peso) that declined in value relative to the U.S. dollar during
2008.
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 $9.9 million in letters of credit were backed
by the Credit Facility at the end of 2008. As of December 27, 2008,
the Company’s total debt was $182.9 million or 21 percent of its total
capitalization. During 2008, the Company purchased and extinguished
approximately $149.0 million in principal amount of its 6% Subordinated
Debentures at discounts off 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 27, 2008, the Company was in compliance with
all of its debt covenants.
The Company expects to invest between
$20 and $25 million for capital expenditures during 2009.
Contractual cash obligations of the
Company as of December 27, 2008 included the following:
|
Payments
Due by Year
|
|||||||||||||||||||||
|
(In
millions)
|
Total
|
2009
|
2010-2011
|
2012-2013
|
Thereafter
|
||||||||||||||||
|
Long
term debt, including capital lease obligations
|
$
|
182.9
|
$
|
24.2
|
$
|
0.8
|
$
|
2.0
|
$
|
155.9
|
|||||||||||
|
Interest
on fixed rate debt
|
53.4
|
8.9
|
17.8
|
17.8
|
8.9
|
||||||||||||||||
|
Consulting
Agreement (1)
|
6.7
|
1.3
|
2.7
|
2.0
|
0.7
|
||||||||||||||||
|
Operating
leases
|
31.7
|
5.7
|
8.7
|
5.9
|
11.4
|
||||||||||||||||
|
Purchase
commitments (2)
|
138.7
|
136.3
|
2.4
|
-
|
-
|
||||||||||||||||
|
Total
contractual cash obligations
|
$
|
413.4
|
$
|
176.4
|
$
|
32.4
|
$
|
27.7
|
$
|
176.9
|
|||||||||||
|
(1)
|
See
Note 10 to Consolidated Financial Statements. For the purposes
of this disclosure, the Company assumed the Consulting Agreement is
effective immediately.
|
||||||||||||||||||||
|
(2)
|
Purchase
commitments included $30.7 million of open fixed price purchases of raw
materials. Additionally, the Company has contractual supply
commitments for raw materials totaling $108.0 million at year
end prices; these contracts contain variable pricing based on Comex.
These commitments are for purchases of raw materials that are expected to
be consumed in the ordinary course of business.
|
||||||||||||||||||||
The above obligations will be satisfied
with existing cash, the Credit Facility, and cash generated by
operations. Cash flows to fund pension and other post-employment
benefit (OPEB) obligations were $3.7 million in 2008 and $3.8 million in
2007. Significant investment losses were recognized by the pension
plans that the Company sponsors in 2008, and pension plan contributions are
expected to moderately increase in the future. The U.S. pension plans
are overfunded at December 27, 2008; hence, no additional contributions are
expected in 2009. The Company expects to contribute approximately
$1.6 million to its pension plans and $1.5 million to its OPEB plans in
2009. 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, $3.22 in 2007, and $3.13 in 2008. During 2008 and
2006, the price of copper exceeded $4.00 per pound at certain
times. However, during the fourth quarter of 2008, the price of
copper declined precipitously, and was approximately $1.27 per pound at
year-end.
The Company’s Board of Directors
declared a regular quarterly dividend of 10 cents per share on its common stock
during each quarter of 2008, 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.
Management believes that cash provided
by operations, the Credit Facility, and currently available cash of $278.9
million will be adequate to meet the Company’s normal future capital expenditure
and operational needs. The Company’s current ratio (current assets
divided by current liabilities) was 3.7 to 1 as of December 27,
2008.
The Company’s Board of Directors has
extended, until October 2009, 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 its stock-based compensation plans, as well as for other corporate
purposes. From its initial authorization in 1999 through December 27,
2008, 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.
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 futures contracts to hedge risks associated with forward fixed-price
arrangements. The Company may also utilize futures contracts to
manage price risk associated with inventory. Depending on the nature
of the hedge, changes in the fair value of the futures 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 futures
contracts to purchase approximately $18.3 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 27, 2008.
Interest
Rates
At December 27, 2008 and December 29,
2007, the fair value of the Company’s debt was estimated at $158.7 million and
$329.2 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 27, 2008 and December 29, 2007
by $24.2 million and $25.3 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 $18.3 million at December 27,
2008 and $13.5 million at December 29, 2007.
The Company had variable-rate debt
outstanding of $34.2 million at December 27, 2008 and $46.7 million at December
29, 2007. At these borrowing levels, a hypothetical 10 percent
increase in interest rates would have had an insignificant unfavorable impact on
the Company’s pre-tax earnings and cash flows. The primary interest
rate exposures on floating-rate debt are based on LIBOR and the base-lending
rate published by the People’s Bank of China.
Foreign
Currency Exchange Rates
Foreign currency exposures arising from
transactions include firm commitments and anticipated transactions denominated
in a currency other than an entity’s functional currency. The Company
and its subsidiaries generally enter into transactions denominated in their
respective functional currencies. Foreign currency exposures arising
from transactions denominated in currencies other than the functional currency
are not material; however, the Company may utilize certain futures 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 contracts to sell 3.5
million euros in January 2009 to protect euro denominated accounts receivable
from fluctuating foreign currency exchange rates.
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 $199.0 million at December 27, 2008 and $199.4
million at December 29, 2007. 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
27, 2008 and December 29, 2007 amounted to $19.9 million and $21.1 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.
During 2008, exchange rates with
respect to many foreign currencies fluctuated significantly with respect to the
U.S. dollar. The Company has significant investments in foreign
operations whose functional currency is the British pound sterling and the
Mexican peso. The British pound sterling and the Mexican peso
decreased approximately 26.9 percent and 20.8 percent, respectively, relative to
the U.S. dollar during 2008. The resulting foreign currency
translation losses are recorded as a component of accumulated other
comprehensive income.
Critical
Accounting Policies and Estimates
The Company’s Consolidated Financial
Statements are prepared in accordance with accounting principles generally
accepted in the United States. Application of these principles
requires the Company to make estimates, assumptions, and judgments that affect
the amounts reported in the Consolidated Financial
Statements. Management believes the most complex and sensitive
judgments, because of their significance to the Consolidated Financial
Statements, result primarily from the need to make estimates about the effects
of matters, which are inherently uncertain. The accounting policies
and estimates that are most critical to aid in understanding and evaluating the
results of operations and financial position of the Company include the
following:
Inventory
Valuation
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 LIFO
basis. Other manufactured inventories, including the non-material
components of U.S. copper tube and copper fittings, are valued on a FIFO
basis. Certain inventories purchased for resale are valued on an
average cost basis. 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.
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.
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 is performed by
the Company as of the first day of the fourth quarter of each fiscal year,
unless circumstances dictate more frequent testing. For testing
purposes, the Company uses components of its operating segments; components of a
segment having similar economic characteristics are combined. The
annual impairment test is a two-step process. The first step compares
the fair value of reporting units, which is determined using a discounted cash
flow model, to the carrying value of its net assets, including
goodwill. If the fair value of the reporting unit is less than the
carrying value, the second step is performed to measure the amount of impairment
loss to be recorded, if any. The second step compares the implied
fair value of goodwill with the current carrying amount. If the
implied fair value of goodwill is less than the carrying value, an impairment
charge is recorded as a part of operations. Inputs to that model
include various estimates, including cash flow projections, and
assumptions. Some of the inputs are highly subjective and are
affected by changes in business conditions and other factors. Changes
in any of the inputs could have an effect on future tests and result in material
impairment charges.
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 an 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 27, 2008,
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 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 in the Consolidated Statements of
Income.
Allowance for Doubtful Accounts
The Company provides an allowance for
receivables that may not be fully collected. In circumstances where
the Company is aware of a customer’s inability to meet its financial obligations
(e.g., bankruptcy filings or substantial down-grading of credit ratings), it
records a reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount it believes most likely will be
collected. For all other customers, the Company recognizes reserves
for bad debts based on its historical collection experience. If
circumstances change (e.g., greater than expected defaults or an unexpected
material change in a major customer’s ability to meet its financial
obligations), the Company’s estimate of the recoverability of amounts due could
be changed by a material amount.
Recently
Issued Accounting Standards
In December 2007, the Financial
Accounting Standards Board (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 applied prospectively. However, the
presentation and disclosure requirements of the statement shall be applied
retrospectively for all periods presented.
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 November 15,
2008. The Company does not expect the adoption of SFAS No. 161 will
have a material impact on its Consolidated Financial
Statements.
In December 2008,
the FASB issued FASB Staff Position FSP 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets, which provides additional guidance on
employers' disclosures about plan assets of a defined benefit pension or other
postretirement plan. This interpretation is effective for financial
statements issued for fiscal years ending after December 15,
2009. The adoption of this interpretation will increase the
disclosures
in the Notes to the Consolidated Financial Statements related to the assets of
the Company's defined benefit pension plans.
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) the impact of the current
economic decline; (iv) availability and price fluctuations in commodities
(including copper, natural gas, and other raw materials, including crude oil
that indirectly affects plastic resins); (v) competitive factors and competitor
responses to the Company’s initiatives; (vi) stability of government laws and
regulations, including taxes; (vii) availability of financing; and (viii)
continuation of the environment to make acquisitions, domestic and foreign,
including regulatory requirements and market values of candidates.
MUELLER
INDUSTRIES, INC.
Years
Ended December 27, 2008, December 29, 2007, and December 30, 2006
|
(In
thousands, except per share data)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
sales
|
$
|
2,558,448
|
$
|
2,697,845
|
$
|
2,510,912
|
||||||
|
Cost
of goods sold
|
2,233,123
|
2,324,924
|
2,109,436
|
|||||||||
|
Depreciation
and amortization
|
44,345
|
44,153
|
41,619
|
|||||||||
|
Selling,
general, and administrative expense
|
136,884
|
143,284
|
140,972
|
|||||||||
|
Copper
litigation settlement
|
-
|
(8,893
|
)
|
-
|
||||||||
|
Goodwill
impairment charges
|
18,000
|
2,756
|
-
|
|||||||||
|
Operating
income
|
126,096
|
191,621
|
218,885
|
|||||||||
|
Interest
expense
|
(19,050
|
)
|
(22,071
|
)
|
(20,477
|
)
|
||||||
|
Other
income, net
|
12,100
|
13,731
|
5,171
|
|||||||||
|
Income
before income taxes
|
119,146
|
183,281
|
203,579
|
|||||||||
|
Income
tax expense
|
(38,332
|
)
|
(67,806
|
)
|
(54,710
|
)
|
||||||
|
Net
income
|
$
|
80,814
|
$
|
115,475
|
$
|
148,869
|
||||||
|
Weighted
average shares for basic earnings per share
|
37,123
|
37,060
|
36,893
|
|||||||||
|
Effect
of dilutive stock options
|
186
|
163
|
353
|
|||||||||
|
Adjusted
weighted average shares for diluted earnings per share
|
37,309
|
37,223
|
37,246
|
|||||||||
|
Basic
earnings per share
|
$
|
2.18
|
$
|
3.12
|
$
|
4.04
|
||||||
|
Diluted
earnings per share
|
$
|
2.17
|
$
|
3.10
|
$
|
4.00
|
||||||
|
Dividends
per share
|
$
|
0.40
|
$
|
0.40
|
$
|
0.40
|
||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||
MUELLER
INDUSTRIES, INC.
As
of December 27, 2008 and December 29, 2007
|
(In
thousands, except share data)
|
2008
|
2007
|
||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$
|
278,860
|
$
|
308,618
|
||||
|
Accounts receivable, less allowance for doubtful accounts of $6,690 in
2008 and $5,015 in 2007
|
219,035
|
323,003
|
||||||
|
Inventories
|
210,609
|
269,032
|
||||||
|
Current
deferred income taxes
|
17,212
|
19,853
|
||||||
|
Other
current assets
|
29,110
|
19,841
|
||||||
|
Total
current assets
|
754,826
|
940,347
|
||||||
|
Property,
plant, and equipment, net
|
276,927
|
308,383
|
||||||
|
Goodwill
|
129,186
|
153,263
|
||||||
|
Other
assets
|
21,974
|
47,211
|
||||||
|
Total
Assets
|
$
|
1,182,913
|
$
|
1,449,204
|
||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
portion of debt
|
$
|
24,184
|
$
|
72,743
|
||||
|
Accounts
payable
|
63,732
|
140,497
|
||||||
|
Accrued
wages and other employee costs
|
35,079
|
39,984
|
||||||
|
Other
current liabilities
|
78,589
|
81,829
|
||||||
|
Total
current liabilities
|
201,584
|
335,053
|
||||||
|
Long-term
debt, less current portion
|
158,726
|
281,738
|
||||||
|
Pension
liabilities
|
13,903
|
14,805
|
||||||
|
Postretirement
benefits other than pensions
|
24,549
|
21,266
|
||||||
|
Environmental
reserves
|
23,248
|
8,897
|
||||||
|
Deferred
income taxes
|
33,940
|
52,156
|
||||||
|
Other
noncurrent liabilities
|
1,698
|
2,029
|
||||||
|
Total
liabilities
|
457,648
|
715,944
|
||||||
|
Minority
interest in subsidiary
|
24,582
|
22,765
|
||||||
|
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 37,143,163 in 2008 and 37,079,903 in
2007
|
401
|
401
|
||||||
|
Additional
paid-in capital
|
262,378
|
259,611
|
||||||
|
Retained
earnings
|
550,501
|
484,534
|
||||||
|
Accumulated
other comprehensive (loss) income
|
(48,113
|
)
|
31,808
|
|||||
|
Treasury
common stock, at cost
|
(64,484
|
)
|
(65,859
|
)
|
||||
|
Total
stockholders' equity
|
700,683
|
710,495
|
||||||
|
Commitments
and contingencies
|
-
|
-
|
||||||
|
Total
Liabilities and Stockholders' Equity
|
$
|
1,182,913
|
$
|
1,449,204
|
||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||
MUELLER
INDUSTRIES, INC.
Years
Ended December 27, 2008, December 29, 2007, and December 30, 2006
|
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
activities:
|
||||||||||||
|
Net
income
|
$
|
80,814
|
$
|
115,475
|
$
|
148,869
|
||||||
|
Reconciliation
of net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
43,666
|
43,605
|
41,179
|
|||||||||
|
Amortization
of intangibles
|
679
|
548
|
440
|
|||||||||
|
Amortization
of Subordinated Debenture costs
|
539
|
324
|
236
|
|||||||||
|
Stock-based
compensation expense
|
2,915
|
2,737
|
2,789
|
|||||||||
|
Income
tax benefit from exercise of stock options
|
(92
|
)
|
(73
|
)
|
(1,065
|
)
|
||||||
|
Goodwill
impairment charges
|
18,000
|
2,756
|
-
|
|||||||||
|
Deferred
income taxes
|
(4,465
|
)
|
3,094
|
(19,339
|
)
|
|||||||
|
Provision
for doubtful accounts receivable
|
2,654
|
(177
|
)
|
1,109
|
||||||||
|
Minority
interest in subsidiaries, net of dividend paid
|
1,796
|
(781
|
)
|
2,610
|
||||||||
|
Gain
on sale of equity investment
|
-
|
-
|
(1,876
|
)
|
||||||||
|
Gain
on early retirement of debt
|
(21,575
|
)
|
-
|
(97
|
)
|
|||||||
|
Loss
(gain) on disposal of properties
|
598
|
(2,468
|
)
|
2,620
|
||||||||
|
Equity
in earnings of unconsolidated subsidiary
|
-
|
-
|
(964
|
)
|
||||||||
|
Changes
in assets and liabilities, net of businesses acquired:
|
||||||||||||
|
Receivables
|
89,051
|
(7,937
|
)
|
(15,459
|
)
|
|||||||
|
Inventories
|
44,591
|
20,411
|
(56,786
|
)
|
||||||||
|
Other
assets
|
(3,027
|
)
|
(4,120
|
)
|
1,449
|
|||||||
|
Current
liabilities
|
(84,584
|
)
|
12,704
|
(41,357
|
)
|
|||||||
|
Other
liabilities
|
12,741
|
1,809
|
(2,578
|
)
|
||||||||
|
Other,
net
|
1,459
|
(2,063
|
)
|
2,759
|
||||||||
|
Net
cash provided by operating activities
|
185,760
|
185,844
|
64,539
|
|||||||||
|
Investing
activities:
|
||||||||||||
|
Capital
expenditures
|
(22,261
|
)
|
(29,870
|
)
|
(41,206
|
)
|
||||||
|
Acquisition
of businesses, net of cash received
|
-
|
(32,243
|
)
|
3,632
|
||||||||
|
Proceeds
from sales of properties and equity investment
|
81
|
3,809
|
23,528
|
|||||||||
|
Net
deposits into restricted cash balances
|
(10,945
|
)
|
(4,194
|
)
|
-
|
|||||||
|
Net
cash used in investing activities
|
(33,125
|
)
|
(62,498
|
)
|
(14,046
|
)
|
||||||
|
Financing
activities:
|
||||||||||||
|
Repayments
of long-term debt
|
(126,877
|
)
|
(18,765
|
)
|
(2,058
|
)
|
||||||
|
Dividends
paid
|
(14,847
|
)
|
(14,825
|
)
|
(14,776
|
)
|
||||||
|
(Repayment)
issuance of debt by joint venture, net
|
(25,564
|
)
|
16,635
|
28,759
|
||||||||
|
Acquisition
of treasury stock
|
(32
|
)
|
(54
|
)
|
(1,092
|
)
|
||||||
|
Issuance
of shares under incentive stock option plans from treasury
|
1,167
|
1,124
|
7,701
|
|||||||||
|
Income
tax benefit from exercise of stock options
|
92
|
73
|
1,065
|
|||||||||
|
Net
cash (used in) provided by financing activities
|
(166,061
|
)
|
(15,812
|
)
|
19,599
|
|||||||
|
Effect
of exchange rate changes on cash
|
(16,332
|
)
|
613
|
694
|
||||||||
|
(Decrease)
increase in cash and cash equivalents
|
(29,758
|
)
|
108,147
|
70,786
|
||||||||
|
Cash
and cash equivalents at the beginning of the year
|
308,618
|
200,471
|
129,685
|
|||||||||
|
Cash
and cash equivalents at the end of the year
|
$
|
278,860
|
$
|
308,618
|
$
|
200,471
|
||||||
|
For
supplemental disclosures of cash flow information, see Notes 1, 5, 6, 7,
and 13.
|
||||||||||||
|
See
accompanying notes to consolidated financial statements.
|
||||||||||||
MUELLER
INDUSTRIES, INC.
Years
Ended December 27, 2008, December 29, 2007, and December 30, 2006
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
(In
thousands)
|
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
|
$
|
259,611
|
$
|
256,906
|
$
|
252,889
|
||||||||||||||||||
|
Issuance
of shares under incentive stock option plans
|
(240
|
)
|
(105
|
)
|
(1,324
|
)
|
||||||||||||||||||
|
Stock-based
compensation
|
2,915
|
2,737
|
4,276
|
|||||||||||||||||||||
|
Income
tax benefit from exercise of stock options
|
92
|
73
|
1,065
|
|||||||||||||||||||||
|
Balance
at end of year
|
$
|
262,378
|
$
|
259,611
|
$
|
256,906
|
||||||||||||||||||
|
Retained
earnings:
|
||||||||||||||||||||||||
|
Balance
at beginning of year
|
$
|
484,534
|
$
|
386,038
|
$
|
253,433
|
||||||||||||||||||
|
Adjustment
to retained earnings due to the adoption of FIN 48
|
-
|
(2,154
|
)
|
-
|
||||||||||||||||||||
|
Net
income
|
80,814
|
115,475
|
148,869
|
|||||||||||||||||||||
|
Dividends
and other
|
(14,847
|
)
|
(14,825
|
)
|
(16,264
|
)
|
||||||||||||||||||
|
Balance
at end of year
|
$
|
550,501
|
$
|
484,534
|
$
|
386,038
|
||||||||||||||||||
|
Accumulated
other comprehensive (loss) income:
|
||||||||||||||||||||||||
|
Foreign
currency translation
|
$
|
(51,701
|
)
|
$
|
4,606
|
$
|
17,778
|
|||||||||||||||||
|
Minimum
pension liability adjustment, net of tax of $(1,165)
|
-
|
-
|
7,108
|
|||||||||||||||||||||
|
Change
in fair value of derivatives, net of tax of $1,347,
$(166), $199
|
(3,819
|
)
|
285
|
(355
|
)
|
|||||||||||||||||||
|
Net
actuarial (loss) gain on pension and postretirement obligations, net of
tax of $14,867 and $(7,116)
|
(26,542
|
)
|
14,170
|
-
|
||||||||||||||||||||
|
Other,
net
|
2,141
|
244
|
-
|
|||||||||||||||||||||
|
Total
other comprehensive (loss) income
|
(79,921
|
)
|
19,305
|
24,531
|
||||||||||||||||||||
|
Balance
at beginning of year
|
31,808
|
12,503
|
(8,848
|
)
|
||||||||||||||||||||
|
Adjustment
to initially apply SFAS No. 158, net of tax of $1,526
|
-
|
-
|
(3,180
|
)
|
||||||||||||||||||||
|
Balance
at end of year
|
$
|
(48,113
|
)
|
$
|
31,808
|
$
|
12,503
|
|||||||||||||||||
|
|
||||||||||||||||||||||||
|
Treasury
stock:
|
||||||||||||||||||||||||
|
Balance
at beginning of year
|
3,012
|
$
|
(65,859
|
)
|
3,067
|
$
|
(67,034
|
)
|
3,448
|
$
|
(74,967
|
)
|
||||||||||||
|
Issuance
of shares under incentive stock option plans
|
(65
|
)
|
1,407
|
(57
|
)
|
1,229
|
(414
|
)
|
9,025
|
|||||||||||||||
|
Repurchase
of common stock
|
2
|
(32
|
)
|
2
|
(54
|
)
|
33
|
(1,092
|
)
|
|||||||||||||||
|
Balance
at end of year
|
2,949
|
$
|
(64,484
|
)
|
3,012
|
$
|
(65,859
|
)
|
3,067
|
$
|
(67,034
|
)
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Total
comprehensive income:
|
||||||||||||||||||||||||
|
Net
income
|
$
|
80,814
|
$
|
115,475
|
$
|
148,869
|
||||||||||||||||||
|
Other
comprehensive (loss) income
|
(79,921
|
)
|
19,305
|
24,531
|
||||||||||||||||||||
|
Total
comprehensive income
|
$
|
893
|
$
|
134,780
|
$
|
173,400
|
||||||||||||||||||
|
See
accompanying 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 and product returns 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 27, 2008 and December 29, 2007, temporary investments consisted of
money market mutual funds, commercial paper, bank repurchase agreements, and
U.S. and foreign government securities totaling $258.9 million and $282.5
million, respectively. Included in other current assets is restricted
cash of $15.3 million. This amount primarily represents required
deposits into brokerage accounts that facilitate the Company’s hedging
activities.
Allowance
for Doubtful Accounts
The Company provides an allowance for
receivables that may not be fully collected. In circumstances where
the Company is aware of a customer’s inability to meet its financial obligations
(e.g., bankruptcy filings or substantial down-grading of credit ratings), it
records a reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount it believes most likely will be
collected. For all other customers, the Company recognizes reserves
for bad debts based on its historical collection experience. If
circumstances change (e.g., greater than expected defaults or an unexpected
material change in a major customer’s ability to meet its financial
obligations), the Company’s estimate of the recoverability of amounts due could
be changed by a material amount.
Inventories
The Company’s inventories are valued at
the lower-of-cost-or-market. The material component of its U.S.
copper tube and copper fittings inventories is valued on a last-in, first-out
(LIFO) basis. Other 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. 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.
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.
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 is performed by
the Company as of the first day of the fourth quarter of each fiscal year,
unless circumstances dictate more frequent testing. For testing
purposes, the Company uses components of its operating segments; components of a
segment having similar economic characteristics are combined. The
annual impairment test is a two-step process. The first step compares
the fair value of reporting units, which is determined using a discounted cash
flow model, to the carrying value of its net assets, including
goodwill. If the fair value of the reporting unit is less than the
carrying value, the second step is performed to measure the amount of impairment
loss to be recorded, if any. The second step compares the implied
fair value of goodwill with the current carrying amount. If the
implied fair value of goodwill is less than the carrying value, an impairment
charge is recorded as a part of operations. No impairment loss
resulted from the 2006 annual test performed under SFAS No. 142; however, as
discussed in Note 4, impairment charges were recognized in 2008 and
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 27, 2008 and December 29, 2007.
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 1.3 million
and 0.7 million stock options were excluded from the computation of diluted
earnings per share at December 27, 2008 and December 29, 2007, respectively, as
the options' exercise price was higher than the average market price of the
Company's stock.
Income
Taxes
Deferred tax assets and liabilities are
recognized on the difference between the financial statement and the tax law
treatment of certain items. Realization of certain components of
deferred tax assets is dependent upon the occurrence of future
events. The Company records valuation allowances to reduce its
deferred tax assets to the amount it believes is more likely than not to be
realized. These valuation allowances can be impacted by changes in
tax laws, changes to statutory tax rates, and future taxable income levels and
are based on the Company’s judgment, estimates, and assumptions regarding those
future events. In the event the Company were to determine that it
would not be able to realize all or a portion of the net deferred tax assets in
the future, the Company would increase the valuation allowance through a charge
to income tax expense in the period that such determination is
made. Conversely, if the Company were to determine that it would be
able to realize its deferred tax assets in the future, in excess of the net
carrying amounts, the Company would decrease the recorded valuation allowance
through a decrease to income tax expense in the period that such determination
is made.
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 27, 2008,
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
The Company has in effect stock
incentive plans under which incentive stock options have been granted to certain
employees and members of its board of directors. Stock options are
accounted for in accordance with SFAS No. 123 (R) Share-Based
Payment. As such, stock-based compensation expense is
recognized in the Consolidated Statements of Income as a selling, general, and
administrative expense based on the grant date fair value of the
awards.
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.
Derivative
Instruments and Hedging Activities
The Company has utilized futures
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, in the past, 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 futures 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 accumulated other 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. Depending on
position, the unrealized gain or loss on futures contracts are classified as
other current assets or other current liabilities in the Consolidated Balance
Sheets, and any changes thereto are recorded in changes in assets and
liabilities in the Consolidated Statements of Cash Flows.
At December 27, 2008, the Company held
open futures contracts to purchase approximately $18.3 million of copper over
the next twelve months related to fixed-price sales
orders. Additionally at December 27, 2008, the Company held contracts
to sell 3.5 million euros in January 2009 to protect euro denominated accounts
receivable from fluctuating foreign currency exchange rates.
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
In September 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 does not establish requirements for
any new fair value measurements, but it does apply to existing accounting
pronouncements in which fair value measurements are already
required. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value
measurements. The Company adopted the provisions of SFAS No. 157 as
of the first day of the fiscal year ended December 27, 2008. Although
the adoption of SFAS No. 157 has not materially impacted its financial
condition, results of operations, or cash flows, the Company is now required to
provide additional disclosures as part of its Consolidated Financial
Statements.
SFAS No. 157 establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable inputs
such as quoted prices in active markets; Level 2, defined as inputs other than
quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which little or no
market data exists, therefore requiring an entity to develop its own
assumptions.
As of December 27, 2008, the
Company held certain items that are required to be measured at fair value on a
recurring basis, including futures contracts to buy copper and sell foreign
currencies. The fair value of the futures contracts related to copper
and foreign currencies was $(7.9) million and $(0.7) million,
respectively. These amounts were determined by obtaining quoted
market prices (Level 1). Additionally, in the event an impairment to
goodwill is determined under the Company’s annual impairment test, the related
adjustment to goodwill is subject to the disclosure provisions of SFAS No. 157
for fiscal years beginning after November 15, 2008. For further
discussion regarding goodwill, see Note 4 to the Consolidated Financial
Statements.
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 $158.7 million and $329.2 million at December 27, 2008 and December 29,
2007, respectively. Fair value estimates are made at a specific point
in time based on relevant market information about the financial
instrument.
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 (losses) gains of $ (0.7) million in 2008, $2.0 million for 2007 and
$(0.5) million in 2006.
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.
Recently Issued Accounting
Standards
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.
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 November 15,
2008. The Company does not expect the adoption of SFAS No. 161 to
have a material impact on its Consolidated Financial Statements.
In December 2008, the FASB
issued FASB Staff Position FSP 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets, which provides additional guidance on
employers' disclosures about plan assets of a defined benefit pension or other
postretirement plan. This interpretation is effective for financial
statements issued for fiscal years ending after December 15,
2009. The adoption of this interpretation will increase the
disclosures in the Notes to the Consolidated Financial Statements related to the
assets of the Company’s defined benefit pension plans.
Note
2 – Inventories
|
(In
thousands)
|
2008
|
2007
|
||||||
|
Raw
materials and supplies
|
$
|
57,536
|
$
|
47,568
|
||||
|
Work-in-process
|
39,018
|
37,350
|
||||||
|
Finished
goods
|
122,756
|
191,132
|
||||||
|
Valuation
reserves
|
(8,701
|
)
|
(7,018
|
)
|
||||
|
Inventories
|
$
|
210,609
|
$
|
269,032
|
||||
Inventories
valued using the LIFO method totaled $20.9 million at December 27, 2008 and
$25.2 million at December 29, 2007. At December 27, 2008 and December
29, 2007, the approximate FIFO cost of such inventories was $58.9 million and
$116.3 million, respectively. During 2008 and 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 $47.1 million and $59.6 million at the end of 2008 and
2007, respectively.
The
effect of liquidation of LIFO layers decreased cost of sales by approximately
$14.9 million, or 25 cents per diluted share after tax in 2008 and $10.0
million, or 17 cents per diluted share after tax in 2007. During 2008
and 2007, certain inventories were written down to the
lower-of-cost-or-market. The write-down of approximately $4.9
million, or 8 cents per diluted share after tax, and $2.7 million, or 5 cents
per diluted share after tax, during 2008 and 2007, respectively, resulted from
the open market price of copper falling below the inventories’ net book
value.
At December 27, 2008, the FIFO value of inventory consigned to
others was $7.0 million compared with $20.5 million at the end of 2007.
Note
3 – Property, Plant, and Equipment, Net
|
(In
thousands)
|
2008
|
2007
|
||||||
|
Land
and land improvements
|
$
|
12,569
|
$
|
13,477
|
||||
|
Buildings
|
110,541
|
108,621
|
||||||
|
Machinery
and equipment
|
563,984
|
565,371
|
||||||
|
Construction
in progress
|
4,678
|
11,005
|
||||||
|
691,772
|
698,474
|
|||||||
|
Less
accumulated depreciation
|
(414,845
|
)
|
(390,091
|
)
|
||||
|
Property,
plant, and equipment, net
|
$
|
276,927
|
$
|
308,383
|
||||
Note
4 – Goodwill
The changes in the carrying amount of
goodwill were as follows:
|
(In
thousands)
|
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Total
|
|||||||||
|
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
|
|||||||||
|
Impairment
charge
|
(18,000
|
)
|
-
|
(18,000
|
)
|
|||||||
|
Foreign
currency translation adjustment
|
(6,077
|
)
|
-
|
(6,077
|
)
|
|||||||
|
Balance
at December 27, 2008
|
$
|
119,215
|
$
|
9,971
|
$
|
129,186
|
||||||
In accordance with SFAS No. 142, the
Company applies a fair value based impairment test to the net book value of
goodwill and indefinite-lived intangible assets on an annual basis and, if
certain events or circumstances indicate that an impairment loss may have been
incurred, on an interim basis. The analysis of potential impairment
of goodwill requires a two-step process. The first step is the
estimation of fair value. If step one indicates that impairment
potentially exists, the second step is performed to measure the amount of
impairment, if any. Goodwill impairment exists when the implied fair
value of goodwill is less than its carrying value.
The Company performs its annual
impairment test as of the first day of the fourth quarter of each fiscal
year. For the purposes of this analysis, the Company estimates of
fair value are based on the income approach, which estimates the fair value of
its reporting units based on the future discounted cash flows and other
assumptions. Based on the results of the annual impairment test, the
Company has concluded that an impairment loss is probable and can be reasonably
estimated. A non-cash goodwill impairment charge of $18.0 million, or
48 cents per diluted share, was recorded in the fourth quarter of 2008 related
to the Company’s Mexican Operations, representing the Company’s best
estimate.
The Company expects to finalize its
goodwill impairment analysis during the first quarter of 2009, which will
include completion of certain valuation procedures. Adjustments, if
any, to the preliminary estimate as a result of completing the analysis will be
recorded in the Consolidated Financial Statements for the first quarter of
2009.
The annual impairment test uses a
discounted cash flow model to estimate fair value of business
units. Inputs to that model include various estimates, including cash
flow projections, and assumptions. Some of the inputs are highly
subjective and could be affected by future changes in business conditions and
other factors. Changes in any of the inputs could have a material
effect on future tests and result in additional impairment charges.
During its annual impairment test
performed 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, or 8 cents per
diluted share, reducing the carrying value of the business.
Note
5 – Debt
|
(In
thousands)
|
2008
|
2007
|
||||||
|
6%
Subordinated Debentures, due 2014
|
$
|
148,676
|
$
|
297,688
|
||||
|
2001
Series IRB’s with interest at 3.08%, due 2011 through 2021
|
10,000
|
10,000
|
||||||
|
Mueller-Xingrong
line of credit with interest at 5.04%, due 2009
|
24,184
|
46,627
|
||||||
|
Other,
including capitalized lease obligations
|
50
|
166
|
||||||
|
182,910
|
354,481
|
|||||||
|
Less
current portion of debt
|
(24,184
|
)
|
(72,743
|
)
|
||||
|
Long-term
debt
|
$
|
158,726
|
$
|
281,738
|
||||
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 2008, the Company repurchased and extinguished
$149.0 million in principal amount of the Debentures. The Debentures
may be redeemed in whole at any time or in part from time to time at the option
of the Company. If the Debentures are redeemed during the
twelve-month period beginning October 26, 2008, the redemption price is 101
percent of the principal amount. If redeemed after October 26, 2009,
the redemption price is 100 percent of the principal amount.
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 27, 2008, the premium was 27.5 basis points. Additionally, a
facility fee is payable quarterly on the total commitment and varies from 10.0
to 20.0 basis points based upon the Company’s capitalization
ratio. Availability of funds under the Credit Facility is reduced by
the amount of certain outstanding letters of credit, which are used to secure
the Company's payment of insurance deductibles and certain retiree health
benefits, totaling approximately $9.9 million at December 27,
2008. Terms of the letters of credit are generally one year but are
renewable annually as required. There were no borrowings outstanding
as of December 27, 2008.
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 the facility (the Amended JV
Facility). The Amended JV Facility was a secured RMB 450 million, or
$60.76 million, revolving working capital facility which matured in April
2008. The Amended JV Facility was extended for 90 days, and on July
3, 2008, the Company paid off the
Amended JV Facility and simultaneously entered into a new Financing Agreement
with a syndicate of four banks (the JV Financing Agreement) establishing a
secured RMB 425 million, or $62.18 million, revolving credit facility that
matures on July 3, 2009. Borrowings under the JV Financing Agreement
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 People’s
Bank of China (5.04 percent at year-end).
Borrowings under the Agreement and the
JV Financing Agreement require, among other things, the satisfaction of certain
financial ratios. The JV Financing Agreement also requires lender
consent for the payment of dividends. At December 27, 2008, the
Company was in compliance with all debt covenants.
Aggregate annual maturities of the
Company’s debt are $24.2 million in 2009, $0.8 million in 2011,
$1.0 million in 2012, $1.0 million in 2013, and $155.9 million
thereafter. Interest paid in 2008, 2007, and 2006 was $19.9 million,
$20.0 million, and $20.4 million, respectively. No interest was
capitalized in 2008, 2007, or 2006.
Note
6 – Stockholders’ Equity
The Company’s Board of Directors has
authorized the repurchase, until October 2009, 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 its
stock-based compensation plans, as well as for other corporate
purposes. From its initial authorization in 1999 through December 27,
2008, the Company had repurchased approximately 2.4 million shares under this
authorization.
Components
of accumulated other comprehensive (loss) income are as follows:
|
(In
thousands)
|
2008
|
2007
|
||||||
|
Cumulative
foreign currency translation adjustment
|
$
|
(21,781
|
)
|
$
|
29,920
|
|||
|
Unrecognized
prior service cost, net of income tax
|
(408
|
)
|
(620
|
)
|
||||
|
Unrecognized
actuarial net (loss) gain, net of income tax
|
(22,101
|
)
|
2,596
|
|||||
|
Unrecognized
derivative losses, net of income tax
|
(3,907
|
)
|
(88
|
)
|
||||
|
Unrealized
gain on marketable securities, net of income tax
|
84
|
-
|
||||||
|
Accumulated
other comprehensive (loss) income
|
$
|
(48,113
|
)
|
$
|
31,808
|
|||
The change in cumulative foreign
currency translation adjustment primarily relates to the Company’s investment in
foreign subsidiaries and fluctuations in exchange rates between their local
currencies and the U.S. dollar. During 2008, exchange rates between
the functional currencies of the Company’s foreign subsidiaries and the U.S.
dollar fluctuated significantly. The values of the British pound
sterling and the Mexican peso decreased approximately 26.9 percent and 20.8
percent, respectively, relative to the U.S. dollar during 2008. The
decreases were partially offset by an increase in value of the Chinese renmimbi
of 8.4 percent and the tax effect of certain intercompany transactions of
approximately $2.4 million.
Note
7 – Income Taxes
The
components of income (loss) before income taxes were taxed under the following
jurisdictions:
|
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Domestic
|
$
|
131,472
|
$
|
168,936
|
$
|
188,919
|
||||||
|
Foreign
|
(12,326
|
)
|
14,345
|
14,660
|
||||||||
|
Income
before income taxes
|
$
|
119,146
|
$
|
183,281
|
$
|
203,579
|
||||||
Income
tax expense consists of the following:
|
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Current
tax expense (benefit):
|
||||||||||||
|
Federal
|
$
|
40,743
|
$
|
62,215
|
$
|
69,119
|
||||||
|
Foreign
|
3,356
|
3,735
|
5,460
|
|||||||||
|
State
and local
|
(1,302
|
)
|
(1,238
|
)
|
(530
|
)
|
||||||
|
Current
tax expense
|
42,797
|
64,712
|
74,049
|
|||||||||
|
Deferred
tax (benefit) expense:
|
||||||||||||
|
Federal
|
(3,686
|
)
|
2,379
|
(10,544
|
)
|
|||||||
|
Foreign
|
(3,204
|
)
|
7,061
|
(4,504
|
)
|
|||||||
|
State
and local
|
2,425
|
(6,346
|
)
|
(4,291
|
)
|
|||||||
|
Deferred
tax (benefit) expense
|
(4,465
|
)
|
3,094
|
(19,339
|
)
|
|||||||
|
Income
tax expense
|
$
|
38,332
|
$
|
67,806
|
$
|
54,710
|
||||||
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 before income taxes is reconciled as
follows:
|
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Expected
income tax expense
|
$
|
41,701
|
$
|
64,148
|
$
|
71,253
|
||||||
|
State
and local income tax, net of federal benefit
|
3,920
|
6,497
|
1,947
|
|||||||||
|
Effect
of foreign statutory rates different from U.S. and other foreign
adjustments
|
(1,015
|
)
|
603
|
(2,163
|
)
|
|||||||
|
Valuation
allowance changes
|
(246
|
)
|
(1,920
|
)
|
(7,663
|
)
|
||||||
|
Adjustment
for the correction of prior year tax provision
|
-
|
2,239
|
-
|
|||||||||
|
U.S.
production activities deduction
|
(2,275
|
)
|
(3,150
|
)
|
(2,355
|
)
|
||||||
|
Gain
on early retirement of debt
|
(7,551
|
)
|
-
|
-
|
||||||||
|
Goodwill
impairment
|
6,321
|
966
|
-
|
|||||||||
|
Tax
contingency changes
|
(1,740
|
)
|
(1,449
|
)
|
(5,633
|
)
|
||||||
|
Other,
net
|
(783
|
)
|
(128
|
)
|
(676
|
)
|
||||||
|
Income
tax expense
|
$
|
38,332
|
$
|
67,806
|
$
|
54,710
|
||||||
A foreign income tax holiday was in
effect for 2007 and 2006, 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 has imposed a reduced tax
rate.
During 2008, the Company reduced
valuation allowances by $0.2 million due primarily to changes in estimates
regarding the expected future utilization of certain tax
attributes. 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.
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.
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 109 (FIN 48), which clarifies
accounting for income taxes under FAS 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.
The following table summarizes the
activity related to the Company’s unrecognized tax benefits:
|
(In
thousands)
|
2008
|
2007
|
||||||
|
Beginning
balance
|
$
|
11,332
|
$
|
11,792
|
||||
|
Increases
related to prior year tax positions
|
1,557
|
5,800
|
||||||
|
Increases
related to current year tax positions
|
77
|
316
|
||||||
|
Decreases
related to prior year tax positions
|
(3,281
|
)
|
(4,500
|
)
|
||||
|
Decreases
related to settlements with taxing authorities
|
(596
|
)
|
-
|
|||||
|
Decreases
due to lapses in the statute of limitations
|
(1,148
|
)
|
(2,076
|
)
|
||||
|
Ending
balance
|
$
|
7,941
|
$
|
11,332
|
||||
Federal income tax benefits associated
with state tax uncertainties and interest on federal tax uncertainties are
recorded as a deferred tax asset. As of December 27, 2008, this asset
totaled $1.2 million. Of the $7.9 million of unrecognized tax
benefits and accrued interest, approximately $5.9 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 a range of zero dollars to $5.0 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 totaled $1.6 million and $1.9 million as of
December 27, 2008 and December 29, 2007, respectively, without consideration of
any applicable federal benefit. The reduction to income tax expense
related to penalties and interest was $0.3 million and $1.3 million in 2008 and
2007, respectively.
The Internal Revenue Service is
expected to conclude an examination of the Company’s 2005 and 2006 federal
income tax returns during 2009, the results of which are expected to be
immaterial. During 2006, the Internal Revenue Service concluded an
examination of the Company’s federal income tax returns for years 2002 and
2003. 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 2005
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.
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)
|
2008
|
2007
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Accounts
receivable
|
$
|
2,622
|
$
|
1,692
|
||||
|
Inventories
|
5,290
|
6,348
|
||||||
|
OPEB
and accrued items
|
14,816
|
14,393
|
||||||
|
Pension
|
13,438
|
-
|
||||||
|
Other
reserves
|
13,364
|
9,098
|
||||||
|
Interest
|
2,272
|
3,741
|
||||||
|
Federal
and foreign tax attributes
|
11,030
|
8,137
|
||||||
|
State
tax attributes, net of federal benefit
|
32,956
|
25,240
|
||||||
|
Other
|
1,902
|
1,341
|
||||||
|
Total
deferred tax assets
|
97,690
|
69,990
|
||||||
|
Less
valuation allowance
|
(32,624
|
)
|
(22,980
|
)
|
||||
|
Deferred
tax assets, net of valuation allowance
|
65,066
|
47,010
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property,
plant, and equipment
|
58,617
|
61,969
|
||||||
|
Foreign
withholding tax
|
1,652
|
1,958
|
||||||
|
Pension
|
7,855
|
6,888
|
||||||
|
Other
|
1,276
|
754
|
||||||
|
Total
deferred tax liabilities
|
69,400
|
71,569
|
||||||
|
Net
deferred tax liability
|
$
|
(4,334
|
)
|
$
|
(24,559
|
)
|
||
Valuation allowances were increased by
$12.2 million during 2008 to fully offset deferred tax assets related to certain
state tax attributes, which were previously unrecognized. Also, gross
deferred tax assets and the associated valuation allowances were reduced by $2.0
million due to the expiration of certain state tax attributes.
As of December 27, 2008, after
consideration of the federal benefit, the Company had state income tax credit
carryforwards of $1.2 million with various expirations through 2023 and other
state income tax credit carryforwards of $19.1 million with unlimited
lives. The Company had state NOL carryforwards with potential tax
benefits before any valuation allowance of $12.7 million, net of federal
benefit, expiring between 2009 and 2023. The state tax credit and NOL
carryforwards are offset by valuation allowances totaling $24.7
million.
As of December 27, 2008, the Company
had federal and foreign tax attributes with potential tax benefits before any
valuation allowance of $11.0 million, some of which has an unlimited life but
most of which expire from 2013 to 2015. These attributes were offset
by valuation allowances of $5.6 million. Other foreign deferred tax
assets were offset by valuation allowances of $2.3 million.
Income taxes paid were approximately
$48.0 million in 2008, $62.3 million in 2007, and $73.2 million in
2006.
Note
8 – Other Current Liabilities
Included in other current liabilities
were accrued discounts and allowances of $39.2 million at December 27, 2008 and
$49.2 million at December 29, 2007, and taxes payable of $9.1 million at
December 27, 2008 and $11.2 million at December 29, 2007.
Note
9 – Employee Benefits
The Company sponsors several qualified
and nonqualified pension plans and other postretirement benefit plans for
certain of its employees. On December 30, 2006, the Company adopted
the recognition and disclosure provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans which required the Company
to recognize the funded status of its pension and postretirement plans in its
Consolidated Balance Sheets, 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, 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
accumulated 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 initial application of SFAS No. 158
resulted in a decrease to accumulated other comprehensive income of $3.2 million
and had no effect on the Company’s Consolidated Statement of
Income. 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.
During 2008, the Company adopted the
measurement date provisions of SFAS No. 158, which required the Company to use
its fiscal year-end as the measurement date for all its pension and
postretirement plans. Prior to 2008, the Company used November 30 as
the measurement date for the majority of the plans. The effect of the
adoption was not material.
The following tables provide a
reconciliation of the changes in the plans' benefit obligations and the fair
value of the plans' assets for 2008 and 2007, and a statement of the plans’
aggregate funded status as of December 27, 2008 and December 29,
2007:
|
(In
thousands)
|
Pension
Benefits
|
Other
Benefits
|
||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Change
in benefit obligation:
|
||||||||||||||||
|
Obligation
at beginning of year
|
$
|
180,231
|
$
|
165,438
|
$
|
19,438
|
$
|
11,432
|
||||||||
|
Service
cost
|
1,783
|
2,410
|
310
|
1,897
|
||||||||||||
|
Interest
cost
|
11,472
|
9,775
|
1,379
|
1,129
|
||||||||||||
|
Participant
contributions
|
454
|
533
|
-
|
-
|
||||||||||||
|
Business
acquisitions
|
-
|
25,237
|
-
|
7,477
|
||||||||||||
|
Actuarial
(gain) loss
|
(19,254
|
)
|
(14,986
|
)
|
2,314
|
(1,046
|
)
|
|||||||||
|
Benefit
payments
|
(10,119
|
)
|
(9,464
|
)
|
(1,348
|
)
|
(1,197
|
)
|
||||||||
|
Curtailment
|
-
|
-
|
-
|
(256
|
)
|
|||||||||||
|
Settlement
|
-
|
(165
|
)
|
103
|
-
|
|||||||||||
|
Foreign
currency translation adjustment
|
(18,062
|
)
|
1,453
|
(227
|
)
|
2
|
||||||||||
|
Obligation
at end of year
|
$
|
146,505
|
$
|
180,231
|
$
|
21,969
|
$
|
19,438
|
||||||||
|
Change
in fair value of plan assets:
|
||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
$
|
199,062
|
$
|
153,042
|
$
|
-
|
$
|
-
|
||||||||
|
Actual
return on plan assets
|
(42,933
|
)
|
19,270
|
-
|
-
|
|||||||||||
|
Employer
contributions
|
2,387
|
2,610
|
1,348
|
1,197
|
||||||||||||
|
Participant
contributions
|
454
|
533
|
-
|
-
|
||||||||||||
|
Business
acquisitions
|
-
|
32,173
|
-
|
-
|
||||||||||||
|
Benefit
payments
|
(10,119
|
)
|
(9,464
|
)
|
(1,348
|
)
|
(1,197
|
)
|
||||||||
|
Settlement
|
-
|
(165
|
)
|
-
|
-
|
|||||||||||
|
Foreign
currency translation adjustment
|
(13,227
|
)
|
1,063
|
-
|
-
|
|||||||||||
|
Fair
value of plan assets at end of year
|
$
|
135,624
|
$
|
199,062
|
$
|
-
|
$
|
-
|
||||||||
|
Funded
status:
|
||||||||||||||||
|
(Underfunded)
funded status at end of year
|
$
|
(10,881
|
)
|
$
|
18,831
|
$
|
(21,969
|
)
|
$
|
(19,438
|
)
|
|||||
|
Amounts
recognized in accumulated other comprehensive income:
|
||||||||||||||||
|
Unrecognized
net actuarial loss (gain)
|
29,265
|
(7,523
|
)
|
4,117
|
2,011
|
|||||||||||
|
Unrecognized
prior service cost
|
604
|
936
|
44
|
47
|
||||||||||||
|
Total
recognized in accumulated other comprehensive (loss)
income
|
29,869
|
(6,587
|
)
|
4,161
|
2,058
|
|||||||||||
|
Net
amount recognized
|
$
|
18,988
|
$
|
12,244
|
$
|
(17,808
|
)
|
$
|
(17,380
|
)
|
||||||
The Company sponsors one pension plan
in the U.K. which comprises 33 percent of the above benefit obligation and 25
percent of the above plan assets as of December 27, 2008.
As of December 27, 2008, $1.4 million
of the actuarial net loss and $0.3 million of the prior service cost will,
through amortization, be recognized as components of net periodic benefit cost
in 2009.
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 Sheets as follows as of December 27, 2008 and December 29,
2007:
|
(In
thousands)
|
Pension
Benefits
|
Other
Benefits
|
||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Long-term
asset
|
$
|
2,820
|
$
|
32,547
|
$
|
-
|
$
|
-
|
||||||||
|
Current
liability
|
-
|
-
|
(1,452
|
)
|
(1,729
|
)
|
||||||||||
|
Long-term
liability
|
(13,701
|
)
|
(13,716
|
)
|
(20,517
|
)
|
(17,709
|
)
|
||||||||
|
Total
(underfunded) funded status
|
$
|
(10,881
|
)
|
$
|
18,831
|
$
|
(21,969
|
)
|
$
|
(19,438
|
)
|
|||||
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 $47.9 million,
$47.9 million, and $34.2 million, respectively, as of December 27, 2008, and
were $77.5 million, $74.6 million, and $63.8 million, respectively, as of
December 29, 2007.
The components of net periodic benefit
cost (income) are as follows:
|
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Pension
benefits:
|
||||||||||||
|
Service
cost
|
$
|
1,783
|
$
|
2,410
|
$
|
2,104
|
||||||
|
Interest
cost
|
11,472
|
9,775
|
8,419
|
|||||||||
|
Expected
return on plan assets
|
(16,844
|
)
|
(13,672
|
)
|
(10,619
|
)
|
||||||
|
Amortization
of prior service cost
|
332
|
311
|
373
|
|||||||||
|
Amortization
of net (gain) loss
|
(399
|
)
|
622
|
1,112
|
||||||||
|
Effect
of curtailment and settlements
|
-
|
59
|
704
|
|||||||||
|
Net
periodic benefit (income) cost
|
$
|
(3,656
|
)
|
$
|
(495
|
)
|
$
|
2,093
|
||||
|
Other
benefits:
|
||||||||||||
|
Service
cost
|
$
|
310
|
$
|
1,897
|
$
|
7
|
||||||
|
Interest
cost
|
1,379
|
1,129
|
641
|
|||||||||
|
Amortization
of prior service cost
|
3
|
2
|
8
|
|||||||||
|
Amortization
of net loss
|
222
|
175
|
179
|
|||||||||
|
Effect
of curtailments and settlements
|
100
|
(194
|
)
|
-
|
||||||||
|
Net
periodic benefit cost
|
$
|
2,014
|
$
|
3,009
|
$
|
835
|
||||||
During 2007, the Company ceased
postretirement life insurance benefits for certain employees, 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
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Discount
rate
|
6.44%
|
6.18%
|
6.24%
|
6.21%
|
||||||||||||
|
Expected
return on plan assets
|
8.12%
|
8.01%
|
N/A
|
N/A
|
||||||||||||
|
Rate
of compensation increases
|
2.75%
|
4.43%
|
5.04%
|
5.04%
|
||||||||||||
The
weighted average assumptions used in the measurement of the Company's net
periodic benefit cost are as follows:
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||
|
Discount
rate
|
6.18%
|
5.40%
|
5.59%
|
6.21%
|
5.75%
|
6.00%
|
||||||
|
Expected
return on plan assets
|
8.01%
|
7.83%
|
7.94%
|
N/A
|
N/A
|
N/A
|
||||||
|
Rate
of compensation increases
|
4.43%
|
4.00%
|
4.00%
|
5.04%
|
N/A
|
N/A
|
||||||
The Company’s U.K. pension plan and its
Mexican postemployment plans use the rate of compensation increase in the
benefit formulas. All other pension plans are based on length of
service.
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 to 10 percent for 2008, 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 $2.0 million and the service and interest cost components
of net periodic postretirement benefit costs by $0.1 million for
2008. 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 2008 by $1.8 million and $0.1 million,
respectively.
The weighted average asset allocation
of the Company’s pension fund assets are as follows:
|
Pension
Plan Assets
|
||||||||
|
Asset
category
|
2008
|
2007
|
||||||
|
Equity
securities (includes equity index funds)
|
49 | % | 62 | % | ||||
|
Fixed
income securities
|
3 | 6 | ||||||
|
Cash
and equivalents
|
38 | 24 | ||||||
|
Alternative
investments
|
10 | 8 | ||||||
|
Total
|
100 | % | 100 | % | ||||
At December 27, 2008, 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 current asset
allocation for pension assets is outside of the target allocation percentages
due to the unusual economic conditions that existed during 2008.
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.
The plans’ assets do not include
investment in securities issued by the Company. The Company expects
to contribute approximately $1.6 million to its pension plans and $1.5 million
to its other postretirement benefit plans in 2009. The Company
expects future benefits to be paid from the plans as follows:
|
(In
thousands)
|
Pension
Benefits
|
Other
Benefits
|
||||||
|
2009
|
$
|
9,446
|
$
|
1,452
|
||||
|
2010
|
9,442
|
1,506
|
||||||
|
2011
|
9,523
|
1,557
|
||||||
|
2012
|
10,153
|
1,597
|
||||||
|
2013
|
10,356
|
1,623
|
||||||
|
2014-2018
|
52,107
|
6,244
|
||||||
|
Total
|
$
|
101,027
|
$
|
13,979
|
||||
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 2008, $2.5 million in 2007, and $2.4
million in 2006. 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 $3.9 million in 2008 and $4.4 million in
2007.
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 2008,
$1.0 million in 2007, and $0.9 million for 2006.
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 $15.4 million in 2008, $0.7 million in 2007, and $0.6
million in 2006 for pending environmental matters. The basis for the
provision is updated information and results of ongoing remediation and
monitoring programs. Environmental reserves totaled $23.2 million in
2008 and $8.9 million in 2007.
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
connection 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 as an alternative to
litigation, the Company has entered into settlement negotiations with the other
PRP. The negotiations are ongoing. In 2008, the Company
established a reserve of $9.5 million for this matter. Due to the
ongoing nature of negotiations, the timing of potential payment has not yet been
determined.
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 a series of orders issued by the California Regional Water
Quality Control Board (QCB). The remedial activities performed by
MRRC have reduced impacts of acid rock drainage; however full compliance has not
been achieved. The QCB is presently renewing MRRC’s discharge permit
and will concurrently issue a new order. At this site, MRRC spent
approximately $0.5 million in 2008, and $0.4 million in 2007, and estimates it
will spend between approximately $11.1 million and $13.5 million over the next
twenty years.
U.S.S. Lead Refinery, Inc., (Lead
Refinery), a wholly owned subsidiary of MRRC, has been conducting remedial
actions pursuant to a Consent Order with the U.S. Environmental Protection
Agency (EPA) pursuant to Section 3008(h) of the Resource Conservation and
Recovery Act. The Consent Order requires corrective action at Lead
Refinery’s East Chicago, Indiana site and provides for Lead Refinery to complete
certain on-site interim remedial activities and studies that extend
off-site. Site activities, which began in December 1996, have been
substantially concluded. Lead Refinery’s ongoing monitoring and
maintenance activities at its East Chicago, Indiana site will be handled
pursuant to a post-closure permit issued by the Indiana Department of
Environmental Management (IDEM) in December 2007 and effective as of January 22,
2008. EPA has informed Lead Refinery that the Consent Order would be
terminated upon issuance of the IDEM post-closure permit in
effect. Lead Refinery spent approximately $0.1 million in 2008 and
$0.2 million in 2007 with respect to this site. Approximate costs to
comply with the post-closure permit, including associated general and
administrative costs, are between $2.2 million and $3.6 million over the next
twenty years. Lead Refinery is also subject to other matters
including offsite investigations by the EPA. Lead Refinery does not
have sufficient information to determine the extent of its liability, if any, or
to quantify the approximate costs associated with these other
matters.
During 2008, MRRC developed additional
remediation programs over several years to meet certain water quality standards
related to its Shasta Area Mine sites. Additionally, during 2008,
MRRC re-evaluated its long-term plans with respect to future costs pursuant to
the issuance of the post-closure permit at the Lead Refinery site. As
a result, the Company recognized additional expense of $2.4 million relating to
additional anticipated projects at Shasta Area Mine and Lead Refinery
remediation sites. Additionally, the Company recognized an expense of
$2.9 million, or 5 cents per diluted share after tax, for changes in estimates
with respect to future operations and maintenance costs at those
sites. 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.
The estimates contained in the
environmental reserves are based on assumptions that are highly
subjective. Many of the remedial activities performed by the Company
are pursuant to performance-based obligations imposed by various regulatory
bodies in which certain standards regarding levels of contaminants must be
met. The most subjective assumption that affects the estimates at
these sites is the assumed length of time to comply with the remedial
requirements set by the regulatory authorities. This assumption is
subject to change based on the regulatory environment, unanticipated delays and
events that could limit access to these sites, unforeseen negative sampling
results, and other factors. Changes in any of these factors could
have a material impact on future environmental expense.
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. 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 2007, 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 2007, 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 2007, 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 proceeded to
discovery of the relevant facts. Since that time, depositions and
document productions have been ongoing. However, on September 5,
2008, Peter Berkman withdrew prior responses to discovery requests and asserted
the Fifth Amendment privilege against self-incrimination as to all requests
directed to him. By that assertion, he took the position that his
testimony about his actions would have the potential of exposing him to a
criminal charge or criminal charges. On October 3, 2008, in response
to a motion to compel filed by the Company, the Court held that Peter Berkman
could not withhold documents on Fifth Amendment grounds, amongst other
things. Peter Berkman moved for reconsideration of that order and his
request was denied on November 19, 2008. On December 10, 2008, Peter
Berkman moved for the opportunity to file an interlocutory appeal regarding the
Court’s ruling on the Company’s motion to compel. On January 7, 2009,
the motion for interlocutory appeal was granted and the Court found Peter
Berkman in contempt for resisting discovery. On October 24, 2008, the
defendants filed a motion seeking leave to interpose an Amended Answer and
Amended Counterclaims. On December 19, 2008, the Company filed an
answer to the Amended Counterclaims that included a new affirmative defense
based on the assertion of the Fifth Amendment by Peter Berkman. The
Company believes that the 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.
Leases
The Company leases certain facilities
and equipment under operating leases expiring on various dates through
2023. The lease payments under these agreements aggregate to
approximately $5.7 million in 2009, $4.7 million in 2010, $4.0 million in 2011,
$3.3 million in 2012, $2.6 million in 2013, and $11.4 million
thereafter. Total lease expense amounted to $9.3 million in 2008,
$10.4 million in 2007, and $9.4 million in 2006.
Consulting
Agreement
During 2004, the Company entered into a
consulting and non-compete agreement (the Consulting Agreement) with Harvey L.
Karp, Chairman of the Board. The Consulting Agreement provides for
post-employment services to be provided by Mr. Karp for a six-year
period. During the first four years of the Consulting Agreement, an
annual fee equal to two-thirds of the executive’s Final Base Compensation (as
defined in the Consulting Agreement) will be payable. During the
final two years, the annual fee is set at one-third of the executive’s Final
Base Compensation. During the term of the Consulting Agreement, the
executive agrees not to engage in Competitive Activity (as defined in the
Consulting Agreement) and will be entitled to receive certain other benefits
from the Company. The term of the Consulting Agreement 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 executive’s current employment agreement. 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 Agreement, the Company will expense the value of the Consulting
Agreement over its term.
Other
During the fourth quarter of 2008, the
Company’s European copper tube operation was damaged by
fire. Production was curtailed for approximately four weeks to make
necessary temporary repairs. Certain production equipment and
portions of building structures were extensively damaged requiring further
assessment which is underway; rehabilitation alternatives are also being
evaluated. The total value of the loss, including business
interruption, cannot be determined at this time, but is expected to be covered
by property and business interruption insurance. As a result of the
fire, the Company wrote-off $3.4 million representing the net book value of
certain production equipment and building structures that were damaged in the
fire. The Company also recorded a receivable of the same amount less
the insurance deductible of $0.5 million. The write-down and
offsetting recovery were both recorded in other income, net in the Consolidated
Statements of Income during 2008. Any proceeds received for property
damage in excess of the receivable will be recognized upon settlement of the
insurance claim. The Company has received an advance of approximately
$5.0 million from the insurance company primarily to cover cleanup
costs. The Company recorded this amount in other current liabilities
net of cleanup costs incurred of approximately $1.6 million. The
Company has not recognized any amounts from business interruption in the
Consolidated Statements of Income during 2008, and will not do so until final
settlement of the insurance claim.
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.
Note
11 – Other Income, Net
|
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Interest
income
|
$
|
7,294
|
$
|
11,281
|
$
|
6,073
|
||||||
|
Gain
on early retirement of debt
|
21,575
|
-
|
97
|
|||||||||
|
(Loss)
gain on disposal of properties, net
|
(598
|
)
|
2,468
|
(2,620
|
)
|
|||||||
|
Rent
and royalties
|
1,057
|
1,262
|
1,971
|
|||||||||
|
Environmental
expense, non-operating properties
|
(15,432
|
)
|
(698
|
)
|
(580
|
)
|
||||||
|
Minority
interest in income of subsidiaries
|
(1,796
|
)
|
(582
|
)
|
(2,610
|
)
|
||||||
|
Gain
on sale of equity investment
|
-
|
-
|
1,876
|
|||||||||
|
Equity
in earnings of unconsolidated subsidiary
|
-
|
-
|
964
|
|||||||||
|
Other
income, net
|
$
|
12,100
|
$
|
13,731
|
$
|
5,171
|
||||||
Note
12 – Stock-Based Compensation
The Company accounts for its
stock-based compensation plans in accordance with the provisions of SFAS No. 123
(R). 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 2008, 2007, and 2006 were $7.49, $11.25, and $11.59,
respectively. During the years ended December 27, 2008, December 29,
2007, and December 30, 2006, the Company recognized stock-based compensation in
its Consolidated Statements of Income of $2.9 million, $2.7 million, and $2.8
million, respectively. The related tax benefit was $0.6 million in
2008 and $0.7 million in both 2007 and 2006.
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 in the determination of compensation expense involves certain assumptions
that are judgmental and/or highly sensitive 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 per annum of unvested options outstanding, is adjusted
periodically based on the extent to which actual forfeitures differ, or are
expected to differ, from the previous estimate. 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:
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
term
|
6.2
years
|
6.4
years
|
6.4
years
|
|||||||||
|
Expected
price volatility
|
0.266 | 0.241 | 0.269 | |||||||||
|
Risk-free
interest rate
|
3.7% | 4.7% | 4.9% | |||||||||
|
Dividend
yield
|
1.5% | 1.1% | 1.2% | |||||||||
Expected term – This is the
period of time over which the options granted are expected to remain
outstanding. Prior to 2008, the Company used 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. For options
granted during 2008, the expected term was estimated based on historical
experience. 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.
The
Company generally issues treasury shares when options are
exercised. A summary of the stock option activity and related
information follows:
|
(Shares
in thousands)
|
Options
|
Weighted
Average Exercise Price
|
||||||
|
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
|
||||||
|
Granted
|
466
|
27.03
|
||||||
|
Exercised
|
(64
|
)
|
18.12
|
|||||
|
Cancelled
|
(321
|
)
|
31.60
|
|||||
|
Outstanding
at December 27, 2008
|
2,084
|
26.43
|
||||||
At December 27, 2008, the aggregate
intrinsic value of all outstanding options, for which the market value of the
Company’s common stock exceeded the exercise price, was $2.9 million with a
weighted average exercise price of $19.14 and a weighted average remaining
contractual term of 4.0 years. Of the outstanding options, 814
thousand are currently exercisable with an aggregate intrinsic value of $2.8
million, a weighted average exercise price of $19.06, and a weighted average
remaining contractual term of 3.9 years. The total intrinsic value of
options exercised was $0.8 million, $0.7 million, and $5.7 million in 2008,
2007, and 2006, respectively. The total compensation expense not yet
recognized related to non-vested awards at December 27, 2008 was $6.8 million
with an average expense recognition period of 3.4 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 two thousand shares of common
stock at the fair market value of the common stock on the date the option is
granted. As of December 27, 2008, options to purchase approximately
45 thousand shares of common stock were outstanding under this Plan and four
thousand options are available under the Plan for future issuance.
Approximately 300 thousand shares were
available for future employee grants at December 27, 2008.
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 $74.6 million, consisting primarily of receivables
of $29.5 million, inventories of $29.1 million, property, plant, and equipment
of $8.3 million, and prepaid pension asset of $6.9 million. The total
estimated fair values of liabilities assumed totaled $41.8 million, consisting
primarily of a working capital debt facility of $10.0 million, accounts payable
and accrued expenses of $23.0 million, and postretirement benefit 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 Consolidated Financial Statements from the
acquisition date.
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 in Jintan
City, Jiangsu Province, China. The joint venture entity is named
Jiangsu Mueller-Xingrong Copper Industries Limited. In December 2005,
the Company contributed $7.0 million cash investment to the
venture. During the first quarter of 2006, the Company contributed an
additional $12.4 million, which completed its initial planned cash
investment. Non-cash contributions from the other joint venture
parties included long-lived assets of approximately $5.3 million in December
2005 and $8.5 million during the first quarter of 2006. The results
of operations of this joint venture are reported in the OEM segment and are
included in the Company’s Consolidated Financial Statements from January 1,
2006.
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 – 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),
Engineered Products (EPD), and Mueller-Xingrong. These segments are
classified primarily by the markets for their products. Performance
of segments is generally evaluated by their operating
income. Intersegment transactions are generally conducted on an
arms-length basis.
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. Mueller-Xingrong manufactures engineered
copper tube primarily for air conditioning applications. 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 $289.6 million in 2008, $322.1
million in 2007, and $370.8 million in 2006, which represented 11 percent in
2008, 12 percent in 2007, and 15 percent in 2006 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)
|
2008
|
2007
|
2006
|
|||||||||
|
Tube
and fittings
|
$
|
1,138,590
|
$
|
1,288,968
|
$
|
1,428,979
|
||||||
|
Brass
rod and forgings
|
788,843
|
733,325
|
499,878
|
|||||||||
|
OEM
components, tube & assemblies
|
328,868
|
339,227
|
267,452
|
|||||||||
|
Valves
and plumbing specialties
|
245,110
|
266,649
|
261,844
|
|||||||||
|
Other
|
57,037
|
69,676
|
52,759
|
|||||||||
|
$
|
2,558,448
|
$
|
2,697,845
|
$
|
2,510,912
|
|||||||
Geographic
Information:
|
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
sales:
|
||||||||||||
|
United
States
|
$
|
2,027,339
|
$
|
2,105,801
|
$
|
1,963,666
|
||||||
|
United
Kingdom
|
272,715
|
336,133
|
326,047
|
|||||||||
|
Other
|
258,394
|
255,911
|
221,199
|
|||||||||
|
$
|
2,558,448
|
$
|
2,697,845
|
$
|
2,510,912
|
|||||||
|
Long-lived
assets:
|
||||||||||||
|
United
States
|
$
|
346,192
|
$
|
375,061
|
$
|
356,854
|
||||||
|
United
Kingdom
|
44,794
|
67,705
|
72,978
|
|||||||||
|
Other
|
37,101
|
66,091
|
62,881
|
|||||||||
|
$
|
428,087
|
$
|
508,857
|
$
|
492,713
|
|||||||
Net assets of foreign operations at
December 27, 2008 included $144.5 million in the United Kingdom, $32.5 million
in Mexico, and $21.8 million in China.
Segment
Information:
|
(In
thousands)
|
For
the Year Ended December 27, 2008
|
|||||||||||||||
|
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
|
Net
sales
|
$
|
1,400,682
|
$
|
1,176,892
|
$
|
(19,126
|
)
|
$
|
2,558,448
|
|||||||
|
Cost
of goods sold
|
1,157,896
|
1,093,504
|
(18,277
|
)
|
2,233,123
|
|||||||||||
|
Depreciation
and amortization
|
28,751
|
14,489
|
1,105
|
44,345
|
||||||||||||
|
Selling,
general, and administrative expense
|
89,250
|
23,621
|
24,013
|
136,884
|
||||||||||||
|
Impairment
charge
|
18,000
|
-
|
-
|
18,000
|
||||||||||||
|
Operating
income
|
106,785
|
45,278
|
(25,967
|
)
|
126,096
|
|||||||||||
|
Interest
expense
|
(19,050
|
)
|
||||||||||||||
|
Other
income, net
|
12,100
|
|||||||||||||||
|
Income
before income taxes
|
$
|
119,146
|
||||||||||||||
Segment
Information (continued):
|
(In
thousands)
|
For
the Year Ended December 29, 2007
|
|||||||||||||||
|
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
|
Net
sales
|
$
|
1,572,565
|
$
|
1,144,302
|
$
|
(19,022
|
)
|
$
|
2,697,845
|
|||||||
|
Cost
of goods sold
|
1,274,989
|
1,069,890
|
(19,955
|
)
|
2,324,924
|
|||||||||||
|
Depreciation
and amortization
|
29,777
|
13,271
|
1,105
|
44,153
|
||||||||||||
|
Selling,
general, and administrative expense
|
95,569
|
22,926
|
24,789
|
143,284
|
||||||||||||
|
Copper
litigation settlement
|
(8,893
|
)
|
-
|
-
|
(8,893
|
)
|
||||||||||
|
Impairment
charge
|
2,756
|
-
|
-
|
2,756
|
||||||||||||
|
Operating
income
|
178,367
|
38,215
|
(24,961
|
)
|
191,621
|
|||||||||||
|
Interest
expense
|
(22,071
|
)
|
||||||||||||||
|
Other
income, net
|
13,731
|
|||||||||||||||
|
Income
before income taxes
|
$
|
183,281
|
||||||||||||||
|
(In
thousands)
|
For
the Year Ended December 30, 2006
|
|||||||||||||||
|
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
|
Net
sales
|
$
|
1,716,613
|
$
|
835,339
|
$
|
(41,040
|
)
|
$
|
2,510,912
|
|||||||
|
Cost
of goods sold
|
1,391,510
|
757,481
|
(39,555
|
)
|
2,109,436
|
|||||||||||
|
Depreciation
and amortization
|
28,722
|
11,754
|
1,143
|
41,619
|
||||||||||||
|
Selling,
general, and administrative expense
|
98,979
|
21,340
|
20,653
|
140,972
|
||||||||||||
|
Operating
income
|
197,402
|
44,764
|
(23,281
|
)
|
218,885
|
|||||||||||
|
Interest
expense
|
(20,477
|
)
|
||||||||||||||
|
Other
income, net
|
5,171
|
|||||||||||||||
|
Income
before income taxes
|
$
|
203,579
|
||||||||||||||
|
(In
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Expenditures
for long-lived assets (including business acquisitions):
|
||||||||||||
|
Plumbing
& Refrigeration
|
$
|
15,770
|
$
|
22,229
|
$
|
15,847
|
||||||
|
OEM
|
6,440
|
39,884
|
24,852 | |||||||||
|
$
|
22,210
|
$
|
62,113
|
$
|
40,699
|
|||||||
|
Segment
assets:
|
||||||||||||
|
Plumbing
& Refrigeration
|
$
|
692,004
|
$
|
771,206
|
$
|
760,147
|
||||||
|
OEM
|
376,792
|
364,154
|
280,692
|
|||||||||
|
General
corporate
|
114,117
|
313,844
|
228,068
|
|||||||||
|
$
|
1,182,913
|
$
|
1,449,204
|
$
|
1,268,907
|
|||||||
Note
15 – Quarterly Financial Information (Unaudited)
|
(In thousands, except per share
data)
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||
|
2008
|
||||||||||||||||
|
Net
sales
|
$
|
704,108
|
$
|
753,471
|
$
|
665,496
|
$
|
435,373
|
||||||||
|
Gross
profit (1)
|
92,311
|
92,262
|
77,027
|
63,725
|
(2)
|
|||||||||||
|
Net
income
|
27,355
|
27,014
|
18,671
|
7,774
|
(3)
|
|||||||||||
|
Basic
earnings per share
|
0.74
|
0.73
|
0.50
|
0.21
|
||||||||||||
|
Diluted
earnings per share
|
0.73
|
0.72
|
0.50
|
0.21
|
||||||||||||
|
Dividends
per share
|
0.10
|
0.10
|
0.10
|
0.10
|
||||||||||||
|
2007
|
|
|||||||||||||||
|
Net
sales
|
$
|
609,782
|
$
|
772,647
|
$
|
693,682
|
$
|
621,734
|
||||||||
|
Gross
profit (1)
|
73,204
|
110,901
|
90,463
|
98,353
|
(4)
|
|||||||||||
|
Net
income
|
18,913
|
36,398
|
31,324
|
28,840
|
(5)
|
|||||||||||
|
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
|
||||||||||||
|
(1)
Gross profit is net sales less cost of goods sold, which excludes
depreciation and amortization.
|
||||||||||||||||
|
(2)
Fourth quarter of 2008 includes an adjustment to write down inventories to
the lower-of-cost-or-market of $4.9 million, and a gain of $14.9 million
resulting from the liquidation of LIFO layers.
|
||||||||||||||||
|
(3)
Fourth quarter of 2008 includes the net-of-tax effect of both of the items
described in (2) above, plus a gain of $19.1 million related to the early
extinguishment of debt, environmental provisions of $15.0 million ($9.4
million after tax) pertaining to estimated environmental settlements and
obligations, and a goodwill impairment charge of $18.0 million related to
the Company’s Mexican Operations.
|
||||||||||||||||
|
(4)
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.
|
||||||||||||||||
|
(5)
Fourth quarter of 2007 includes the net-of-tax effect of both of the items
included in (4) above plus a goodwill impairment charge of $2.8 million
related to the Company’s Mexican Operations.
|
||||||||||||||||
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 27, 2008 and December 29, 2007, and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the three
years in the period ended December 27, 2008. 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 27, 2008 and December 29, 2007, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 27, 2008, 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 27, 2008, 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 24, 2009
expressed an unqualified opinion thereon.
|
/S/
Ernst
& Young LLP
|
|
|
Memphis,
Tennessee
|
|
|
February
24, 2009
|
MUELLER
INDUSTRIES, INC.
Years
Ended December 27, 2008, December 29, 2007, and December 30, 2006
|
(In
thousands)
|
Additions
|
|||||||||||||||||||||||
|
Balance
at beginning of year
|
Charged
to costs and expenses
|
Other
additions
|
Deductions
|
Balance
at end of year
|
||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
5,015
|
$
|
2,654
|
$
|
14
|
(1
|
)
|
$
|
993
|
$
|
6,690
|
||||||||||||
|
Environmental
reserves
|
$
|
8,897
|
$
|
15,432
|
$
|
-
|
|
$
|
1,081
|
$
|
23,248
|
|||||||||||||
|
|
||||||||||||||||||||||||
|
Valuation
allowance for deferred tax assets
|
$
|
22,980
|
$
|
(246
|
)
|
$
|
12,943
|
(2
|
)
|
$
|
3,053
|
(4
|
)
|
$
|
32,624
|
|||||||||
|
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
|
|||||||||||
|
(1)
Other consists primarily of the opening balance related to the acquisition
of Extruded Metals, Inc. for 2007, and bad debt recoveries as well as the
effect of fluctuating foreign currency exchange rates in all years
presented.
|
||||||||||||||||||||||||
|
(2)
Other includes the additions to valuation allowances during 2008 and 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.
|
||||||||||||||||||||||||
|
(4)
Deductions include foreign currency translation adjustments and reductions
to valuation allowances relating to certain tax attributes in which the
carryforward period had expired.
|
||||||||||||||||||||||||
EXHIBIT
INDEX
|
Exhibits
|
Description
|
|||
|
10.5
|
Fourth
Amendment, dated December 2, 2008, to the Amended and Restated Employment
Agreement, dated as of September 17, 1997, by and between the Registrant
and Harvey Karp.
|
|||
|
10.7
|
Amendment
No. 1, dated December 2, 2008, to the Amended and Restated Consulting
Agreement, dated October 25, 2007, by and between the Registrant and
Harvey Karp.
|
|||
|
10.11
|
Third
Amendment, dated November 26, 2008, to the Amended and Restated Employment
Agreement dated as of September 17, 1997, by and between the Registrant
and William D. O’Hagan.
|
|||
|
10.16
|
Amendment
No. 1, dated December 10, 2008, to the Employment Agreement, effective
October 17, 2002, by and between the Registrant and Kent A.
McKee.
|
|||
|
10.24
|
Summary
description of the Registrant’s 2009 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.
|