MUELLER INDUSTRIES INC - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10–Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended September 27, 2008
|
Commission
file number 1–6770
|
MUELLER
INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
25-0790410
|
|
(State
or other jurisdiction
|
(I.R.S.
Employer
|
|
of
incorporation or organization)
|
Identification
No.)
|
|
8285
Tournament Drive, Suite 150
|
|
|
Memphis,
Tennessee
|
38125
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(901)
753-3200
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large
accelerated filer x
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
The
number of shares of the Registrant’s common stock outstanding as of October 20,
2008, was 37,141,323.
MUELLER
INDUSTRIES, INC.
FORM
10–Q
For
the Quarterly Period Ended September 27, 2008
|
Page
Number
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Part
I. Financial Information
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Item
1. - Financial Statements (Unaudited)
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3
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4
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6
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7
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||
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15
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19
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||
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20
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Part
II. Other Information
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21
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||
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24
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||
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26
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||
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Signatures
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27
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PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
MUELLER
INDUSTRIES, INC.
(Unaudited)
|
For
the Quarter Ended
|
For
the Nine Months Ended
|
|||||||||||||||
|
September
27, 2008
|
September
29, 2007
|
September
27, 2008
|
September
29, 2007
|
|||||||||||||
|
(In
thousands, except per share data)
|
||||||||||||||||
|
Net
sales
|
$
|
665,496
|
$
|
693,682
|
$
|
2,123,075
|
$
|
2,076,111
|
||||||||
|
Cost
of goods sold
|
588,469
|
603,219
|
1,861,475
|
1,801,543
|
||||||||||||
|
Depreciation
and amortization
|
11,529
|
11,582
|
33,517
|
33,854
|
||||||||||||
|
Selling,
general, and administrative expense
|
35,674
|
36,246
|
108,583
|
110,144
|
||||||||||||
|
Copper
antitrust litigation settlement
|
—
|
(8,865
|
)
|
—
|
(8,865
|
)
|
||||||||||
|
Operating
income
|
29,824
|
51,500
|
119,500
|
139,435
|
||||||||||||
|
Interest
expense
|
(5,050
|
)
|
(5,384
|
)
|
(15,755
|
)
|
(16,567
|
)
|
||||||||
|
Other
income, net
|
2,319
|
4,060
|
7,287
|
10,938
|
||||||||||||
|
Income
before income taxes
|
27,093
|
50,176
|
111,032
|
133,806
|
||||||||||||
|
Income
tax expense
|
(8,422
|
)
|
(18,852
|
)
|
(37,992
|
)
|
(47,171
|
)
|
||||||||
|
Net
income
|
$
|
18,671
|
$
|
31,324
|
$
|
73,040
|
$
|
86,635
|
||||||||
|
Weighted
average shares for basic earnings per share
|
37,136
|
37,075
|
37,117
|
37,054
|
||||||||||||
|
Effect
of dilutive stock options
|
176
|
234
|
238
|
185
|
||||||||||||
|
Adjusted
weighted average shares for diluted earnings per share
|
37,312
|
37,309
|
37,355
|
37,239
|
||||||||||||
|
Basic
earnings per share
|
$
|
0.50
|
$
|
0.84
|
$
|
1.97
|
$
|
2.34
|
||||||||
|
Diluted
earnings per share
|
$
|
0.50
|
$
|
0.84
|
$
|
1.96
|
$
|
2.33
|
||||||||
|
Dividends
per share
|
$
|
0.10
|
$
|
0.10
|
$
|
0.30
|
$
|
0.30
|
||||||||
|
See
accompanying notes to condensed consolidated financial
statements.
|
||||||||||||||||
MUELLER
INDUSTRIES, INC.
(Unaudited)
|
September
27, 2008
|
December
29, 2007
|
||||||
|
(In
thousands)
|
|||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
308,351
|
$
|
308,618
|
|||
|
Accounts
receivable, less allowance for doubtful accounts
|
|||||||
|
of
$7,118 in 2008 and $5,015 in 2007
|
350,290
|
323,003
|
|||||
|
Inventories
|
260,937
|
269,032
|
|||||
|
Other
current assets
|
38,849
|
39,694
|
|||||
|
Total
current assets
|
958,427
|
940,347
|
|||||
|
Property,
plant, and equipment, net
|
294,530
|
308,383
|
|||||
|
Goodwill
|
151,680
|
153,263
|
|||||
|
Other
assets
|
51,719
|
47,211
|
|||||
|
$
|
1,456,356
|
$
|
1,449,204
|
||||
|
See accompanying notes to
condensed consolidated financial statements.
|
|||||||
MUELLER
INDUSTRIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
September
27, 2008
|
December
29, 2007
|
|||||||
|
(In
thousands, except share data)
|
||||||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt
|
$
|
160,453
|
$
|
72,743
|
||||
|
Accounts
payable
|
125,239
|
140,497
|
||||||
|
Accrued
wages and other employee costs
|
36,666
|
39,984
|
||||||
|
Other
current liabilities
|
83,773
|
81,829
|
||||||
|
Total
current liabilities
|
406,131
|
335,053
|
||||||
|
Long-term
debt
|
158,726
|
281,738
|
||||||
|
Pension
liabilities
|
13,135
|
14,805
|
||||||
|
Postretirement
liabilities other than pensions
|
21,845
|
21,266
|
||||||
|
Environmental
reserves
|
8,853
|
8,897
|
||||||
|
Deferred
income taxes
|
52,784
|
52,156
|
||||||
|
Other
noncurrent liabilities
|
3,041
|
2,029
|
||||||
|
Total
liabilities
|
664,515
|
715,944
|
||||||
|
Minority
interest in subsidiary
|
26,558
|
22,765
|
||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock – shares authorized 5,000,000; none outstanding
|
—
|
—
|
||||||
|
Common
stock – $.01 par value; shares authorized 100,000,000;
|
||||||||
|
issued
40,091,502; outstanding 37,136,309 in 2008 and
|
||||||||
|
37,079,903
in 2007
|
401
|
401
|
||||||
|
Additional
paid-in capital
|
262,083
|
259,611
|
||||||
|
Retained
earnings
|
546,441
|
484,534
|
||||||
|
Accumulated
other comprehensive income
|
20,992
|
31,808
|
||||||
|
Treasury
common stock, at cost
|
(64,634
|
)
|
(65,859
|
)
|
||||
|
Total
stockholders’ equity
|
765,283
|
710,495
|
||||||
|
Commitments
and contingencies
|
—
|
—
|
||||||
|
$
|
1,456,356
|
$
|
1,449,204
|
|||||
|
See
accompanying notes to condensed consolidated financial
statements.
|
||||||||
MUELLER
INDUSTRIES, INC.
(Unaudited)
|
For
the Nine Months Ended
|
|||||||
|
September
27, 2008
|
September
29, 2007
|
||||||
|
(In
thousands)
|
|||||||
|
Cash
flows from operating activities
|
|||||||
|
Net
income
|
$
|
73,040
|
$
|
86,635
|
|||
|
Reconciliation
of net income to net cash provided
|
|||||||
|
by
operating activities:
|
|||||||
|
Depreciation
and amortization
|
33,984
|
34,107
|
|||||
|
Gain
on early retirement of debt
|
(2,482
|
)
|
—
|
||||
|
Minority
interest in subsidiary, net of dividend paid
|
1,816
|
(644
|
)
|
||||
|
Stock-based
compensation expense
|
2,238
|
1,975
|
|||||
|
Loss
(gain) on disposal of properties
|
306
|
(3,114
|
)
|
||||
|
Deferred
income taxes
|
(515
|
)
|
(3,026
|
)
|
|||
|
Income
tax benefit from exercise of stock options
|
(92
|
)
|
(130
|
)
|
|||
|
Changes
in assets and liabilities, net of business acquired:
|
|||||||
|
Receivables
|
(29,130
|
)
|
(36,370
|
)
|
|||
|
Inventories
|
6,635
|
57,656
|
|||||
|
Other
assets
|
(5,350
|
)
|
(6,103
|
)
|
|||
|
Current
liabilities
|
(16,027
|
)
|
13,669
|
||||
|
Other
liabilities
|
784
|
3,754
|
|||||
|
Other,
net
|
(719
|
)
|
(1,003
|
)
|
|||
|
Net
cash provided by operating activities
|
64,488
|
147,406
|
|||||
|
Cash
flows from investing activities
|
|||||||
|
Capital
expenditures
|
(17,871
|
)
|
(22,776
|
)
|
|||
|
Net
withdrawals from restricted cash balances
|
678
|
—
|
|||||
|
Acquisition
of business, net of cash received
|
—
|
(31,970
|
)
|
||||
|
Proceeds
from sales of properties
|
77
|
3,033
|
|||||
|
Net
cash used in investing activities
|
(17,116
|
)
|
(51,713
|
)
|
|||
|
Cash
flows from financing activities
|
|||||||
|
Repayments
of long-term debt
|
(23,650
|
)
|
(18,273
|
)
|
|||
|
Dividends
paid
|
(11,133
|
)
|
(11,117
|
)
|
|||
|
(Repayment)
issuance of debt by joint venture, net
|
(12,491
|
)
|
4,506
|
||||
|
Issuance
of shares under incentive stock option plans from treasury
|
1,074
|
1,093
|
|||||
|
Income
tax benefit from exercise of stock options
|
92
|
130
|
|||||
|
Acquisition
of treasury stock
|
(31
|
)
|
(54
|
)
|
|||
|
Net
cash used in financing activities
|
(46,139
|
)
|
(23,715
|
)
|
|||
|
Effect
of exchange rate changes on cash
|
(1,500
|
)
|
762
|
||||
|
(Decrease)
increase in cash and cash equivalents
|
(267
|
)
|
72,740
|
||||
|
Cash
and cash equivalents at the beginning of the period
|
308,618
|
200,471
|
|||||
|
Cash
and cash equivalents at the end of the period
|
$
|
308,351
|
$
|
273,211
|
|||
|
See
accompanying notes to condensed consolidated financial
statements.
|
|||||||
MUELLER
INDUSTRIES, INC.
(Unaudited)
General
Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted. Results of operations for the interim
periods presented are not necessarily indicative of results which may be
expected for any other interim period or for the year as a
whole. This Quarterly Report on Form 10–Q should be read in
conjunction with the Company’s Annual Report on Form 10–K, including the annual
financial statements incorporated therein.
The accompanying unaudited interim
financial statements include all normal recurring adjustments which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented.
Note
1 – Earnings per Common Share
Basic per share amounts have been
computed based on the average number of common shares
outstanding. Diluted per share amounts reflect the increase in
average common shares outstanding that would result from the assumed exercise of
outstanding stock options, computed using the treasury stock
method.
Note
2 – Commitments and Contingencies
The Company is involved in certain
litigation as a result of claims that arose in the ordinary course of
business. Due to the procedural stage of certain matters, the Company
is unable to determine the likelihood of a materially adverse outcome in those
matters or the amount or range of a potential loss. Additionally, the
Company may realize the benefit of certain legal claims and litigation in the
future; these gain contingencies are not recognized in the Condensed
Consolidated Financial Statements.
Environmental
Matters
Southeast Kansas
Sites
By letter dated October 10, 2006, the
Kansas Department of Health and Environment (KDHE) advised the Company that
environmental contamination has been identified at a former smelter site in
southeast Kansas. KDHE asserts that the Company is a corporate
successor to an entity that is alleged to have owned and operated the smelter
from 1915 to 1918. The Company has since been advised of possible
connections between that same entity and two other former smelter sites in
Kansas. KDHE has requested that the Company and another potentially
responsible party (PRP) negotiate a consent order with KDHE to address
contamination at these sites. The Company has participated in
preliminary discussions with KDHE and the other PRP. The Company
believes it is not liable for the contamination but may consider negotiating a
resolution as an alternative to litigation. The extent of the
Company's obligation, if any, could depend, among other things, on (i) the
outcome of possible feasibility studies, (ii) a chosen method of environmental
response, (iii) the existence and viability of any additional PRPs, (iv) the
terms of any cost sharing arrangement, and (v) the extent of recoveries, if any,
from claims against insurance policies. If the Company incurs an
obligation that becomes determinable and estimable, the obligation would require
recognition which could be material to the Company's results of
operations.
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 United States Environmental Protection
Agency (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.
U.S.S.
Lead
On September 3, 2008, the EPA proposed
to add the U.S.S. Lead Refinery, Inc. (Lead Refinery), a wholly owned subsidiary
of the Company, site to the National Priorities List (NPL) established pursuant
to the Comprehensive Environmental Response, Compensation, and Liability
Act. The NPL is a list of sites where EPA has determined there has
been a release or threatened release of contaminants. Listing on the
NPL 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. Comments on the proposed listing on the NPL must
be submitted to EPA by November 3, 2008. Lead Refinery intends to
submit 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 this matter. Lead Refinery,
without additional financial assistance, lacks the resources needed to complete
any additional remediation that may be required
Other
Guarantees, in the form of letters of
credit, are issued by the Company generally to guarantee the payment of
insurance deductibles and retiree health benefits. The terms of the
Company’s guarantees are generally one year but are renewable annually as
required. The maximum potential amount of future payments the Company
could have been required to make under its guarantees at September 27, 2008 was
$10.0 million.
Note
3 – Long-term Debt
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 the first nine months of 2008, the Company
repurchased and extinguished $26.2 million of the Debentures for $23.5 million,
which resulted in a net gain of approximately $2.5
million. Subsequent to quarter-end, the Company repurchased, through
a privately negotiated transaction, and extinguished $122.9 million in principal
amount of the Debentures for approximately $103.2 million. As such,
this principal amount is classified as current at September 27,
2008. The net gain from this repurchase of approximately $19.1
million, after inclusion of the write-off of related debt issuance costs, will
be recognized in the fourth quarter of 2008.
Note
4 – Inventories
|
September
27, 2008
|
December
29, 2007
|
|||||||
|
(In
thousands)
|
||||||||
|
Raw
material and supplies
|
$
|
62,939
|
$
|
82,875
|
||||
|
Work-in-process
|
63,201
|
51,898
|
||||||
|
Finished
goods
|
244,263
|
232,404
|
||||||
|
LIFO
reserve
|
(101,503
|
)
|
(91,127
|
)
|
||||
|
Valuation
reserves
|
(7,963
|
)
|
(7,018
|
)
|
||||
|
Inventories
|
$
|
260,937
|
$
|
269,032
|
||||
The Company has deferred recognizing
potential gains resulting from liquidation of LIFO inventories during the first
nine months of 2008. The Company expects to replenish these
inventories by the end of 2008 and, as such, has not recognized the effects of
liquidating LIFO layers. In the event the Company is unable to
replenish these inventories due to lack of availability or operational reasons,
the Company would recognize a non-cash gain of approximately $18.4 million from
the liquidation of LIFO layers based on quarter-end quantities.
At September 27, 2008 certain
inventories were written down to the lower of cost or market. The
write down of approximately $3.3 million, or 6 cents per diluted share after
tax, resulted from the open market price of copper falling below the
inventories’ net book value.
Note
5 – Industry Segments
The Company’s reportable segments are
Plumbing & Refrigeration and OEM. For disclosure purposes, as
permitted under Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of
an Enterprise and Related Information, certain operating segments are
aggregated into reportable segments. The Plumbing & Refrigeration
segment is composed of Standard Products (SPD), European Operations, and Mexican
Operations. The OEM segment is composed of Industrial Products (IPD),
Engineered Products (EPD), and Mueller-Xingrong, the Company’s Chinese joint
venture. These segments are classified primarily by the markets for
their products. Performance of segments is generally evaluated by
their operating income.
SPD manufactures copper tube, copper
and plastic fittings, plastic pipe, and linesets. These products are
manufactured in the U.S. SPD also imports and resells in North
America brass and plastic plumbing valves, malleable iron fittings, faucets, and
plumbing specialty products. European Operations consist of copper
tube manufacturing, with such products being sold in Europe and the Middle East,
and import distribution of fittings, valves, and plumbing specialties primarily
in the U.K. and Ireland. Mexican Operations consist of pipe nipple
manufacturing and import distribution businesses including product lines of
malleable iron fittings and other plumbing specialties. The Plumbing
& Refrigeration segment’s products are sold primarily to plumbing,
refrigeration, and air-conditioning wholesalers, hardware wholesalers and
co-ops, and building product retailers.
IPD manufactures brass rod, impact
extrusions, and forgings as well as a variety of end products including plumbing
brass; automotive components; valves and fittings; and specialty copper,
copper-alloy, and aluminum tubing. EPD manufactures and fabricates
valves and assemblies for the refrigeration, air-conditioning, gas appliance,
and barbecue grill markets. Mueller-Xingrong, the Company’s Chinese
joint venture, manufactures engineered copper tube for refrigeration
applications. The OEM segment sells its products primarily to
original equipment manufacturers, many of which are in the HVAC, plumbing, and
refrigeration markets. Included in the OEM segment are the results of
operations of Extruded Metals, Inc. since its acquisition on February 27,
2007.
Summarized
segment information is as follows:
|
For
the Quarter Ended September 27, 2008
|
||||||||||||||||
|
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
371,315
|
$
|
299,470
|
$
|
(5,289
|
)
|
$
|
665,496
|
|||||||
|
Cost
of goods sold
|
313,760
|
279,696
|
(4,987
|
)
|
588,469
|
|||||||||||
|
Depreciation
and amortization
|
7,287
|
3,966
|
276
|
11,529
|
||||||||||||
|
Selling,
general, and administrative expense
|
24,819
|
5,165
|
5,690
|
35,674
|
||||||||||||
|
Operating
income
|
25,449
|
10,643
|
(6,268
|
)
|
29,824
|
|||||||||||
|
Interest
expense
|
(5,050
|
)
|
||||||||||||||
|
Other
income, net
|
2,319
|
|||||||||||||||
|
Income
before income taxes
|
$
|
27,093
|
||||||||||||||
|
For
the Quarter Ended September 29, 2007
|
||||||||||||||||
|
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
397,855
|
$
|
302,122
|
$
|
(6,295
|
)
|
$
|
693,682
|
|||||||
|
Cost
of goods sold
|
322,807
|
286,384
|
(5,972
|
)
|
603,219
|
|||||||||||
|
Depreciation
and amortization
|
7,549
|
3,756
|
277
|
11,582
|
||||||||||||
|
Selling,
general, and administrative expense
|
24,104
|
6,373
|
5,769
|
36,246
|
||||||||||||
|
Copper
antitrust litigation settlement
|
(8,865
|
)
|
—
|
—
|
(8,865
|
)
|
||||||||||
|
Operating
income
|
52,260
|
5,609
|
(6,369)
|
51,500
|
||||||||||||
|
Interest
expense
|
(5,384
|
)
|
||||||||||||||
|
Other
income, net
|
4,060
|
|||||||||||||||
|
Income
before income taxes
|
$
|
50,176
|
||||||||||||||
Summarized
segment information (continued):
|
For
the Nine Months Ended September 27, 2008
|
||||||||||||||||
|
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
1,159,613
|
$
|
979,665
|
$
|
(16,203
|
)
|
$
|
2,123,075
|
|||||||
|
Cost
of goods sold
|
981,905
|
894,872
|
(15,302
|
)
|
1,861,475
|
|||||||||||
|
Depreciation
and amortization
|
21,806
|
10,884
|
827
|
33,517
|
||||||||||||
|
Selling,
general, and administrative expense
|
69,999
|
18,729
|
19,855
|
108,583
|
||||||||||||
|
Operating
income
|
85,903
|
55,180
|
(21,583
|
)
|
119,500
|
|||||||||||
|
Interest
expense
|
(15,755
|
)
|
||||||||||||||
|
Other
income, net
|
7,287
|
|||||||||||||||
|
Income
before income taxes
|
$
|
111,032
|
||||||||||||||
|
For
the Nine Months Ended September 29, 2007
|
||||||||||||||||
|
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
1,223,337
|
$
|
868,053
|
$
|
(15,279
|
)
|
$
|
2,076,111
|
|||||||
|
Cost
of goods sold
|
1,006,162
|
810,472
|
(15,091
|
)
|
1,801,543
|
|||||||||||
|
Depreciation
and amortization
|
22,186
|
10,839
|
829
|
33,854
|
||||||||||||
|
Selling,
general, and administrative expense
|
72,994
|
17,640
|
19,510
|
110,144
|
||||||||||||
|
Copper
antitrust litigation settlement
|
(8,865
|
)
|
—
|
—
|
(8,865
|
)
|
||||||||||
|
Operating
income
|
130,860
|
29,102
|
(20,527
|
)
|
139,435
|
|||||||||||
|
Interest
expense
|
(16,567
|
)
|
||||||||||||||
|
Other
income, net
|
10,938
|
|||||||||||||||
|
Income
before income taxes
|
$
|
133,806
|
||||||||||||||
Note
6 – Comprehensive Income
Comprehensive income is as
follows:
|
For
the Quarter Ended
|
For
the Nine Months Ended
|
|||||||||||||||
|
September
27, 2008
|
September
29, 2007
|
September
27, 2008
|
September
29, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Net
income
|
$
|
18,671
|
$
|
31,324
|
$
|
73,040
|
$
|
86,635
|
||||||||
|
Other
comprehensive (loss) income, net of tax:
|
||||||||||||||||
|
Foreign
currency translation
|
(15,847
|
)
|
2,883
|
(11,548
|
)
|
9,360
|
||||||||||
|
Amortization
of prior service cost included in pension expense
|
49
|
47
|
163
|
148
|
||||||||||||
|
Amortization
of actuarial gains and losses included in pension expense
|
579
|
(10
|
)
|
782
|
100
|
|||||||||||
|
Net
unrealized gain on marketable securities
|
240
|
—
|
240
|
—
|
||||||||||||
|
Change
in the fair value of derivatives
|
(831
|
)
|
228
|
(453
|
)
|
600
|
||||||||||
|
Other
comprehensive (loss) income
|
(15,810
|
)
|
3,148
|
(10,816
|
)
|
10,208
|
||||||||||
|
Comprehensive
income
|
$
|
2,861
|
$
|
34,472
|
$
|
62,224
|
$
|
96,843
|
||||||||
The change in cumulative foreign currency translation adjustment primarily relates to the Company’s investment in its foreign subsidiaries and fluctuations in exchange rates between their local currencies and the U.S. dollar. During the first nine months of 2008, the value of the Chinese renminbi and the Mexican peso increased 8 percent and 1 percent, respectively, compared to the U.S. dollar while the U.K. pound sterling and the Canadian dollar decreased 8 percent and 5 percent, respectively, compared to the U.S. dollar.
Note
7 – Acquisitions
On February 27, 2007, the Company
acquired 100 percent of the outstanding stock of Extruded Metals, Inc.
(Extruded) for $32.8 million in cash, including transaction costs of $0.8
million. Extruded, located in Belding, Michigan, manufactures brass
rod products, and during 2006 had annual sales of approximately $360
million. The acquisition of Extruded complements the Company’s
existing brass rod product line. The total estimated fair values of
the assets acquired totaled $74.6 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 obligations of $7.5
million. Immediately following the acquisition, the Company
extinguished the working capital debt facility. The results of
operations for Extruded are reported in the Company’s OEM segment and have been
included in the accompanying Condensed Consolidated Financial Statements from
the acquisition date.
Note
8 – Employee Benefits
The Company sponsors several qualified
and nonqualified pension plans and other postretirement benefit plans for
certain of its employees. The components of net periodic benefit cost
(income) are as follows:
|
For
the Quarter Ended
|
For
the Nine Months Ended
|
|||||||||||||||
|
September
27, 2008
|
September
29, 2007
|
September
27, 2008
|
September
29, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Pension
benefits:
|
||||||||||||||||
|
Service
cost
|
$
|
529
|
$
|
506
|
$
|
1,776
|
$
|
1,518
|
||||||||
|
Interest
cost
|
2,548
|
2,078
|
8,515
|
6,234
|
||||||||||||
|
Expected
return on plan assets
|
(3,744
|
)
|
(2,952
|
)
|
(12,499
|
)
|
(8,748
|
)
|
||||||||
|
Amortization
of prior service cost
|
77
|
78
|
256
|
233
|
||||||||||||
|
Amortization
of net loss
|
51
|
219
|
180
|
658
|
||||||||||||
|
Net
periodic benefit income
|
$
|
(539
|
)
|
$
|
(71
|
)
|
$
|
(1,772
|
)
|
$
|
(105
|
)
|
||||
|
Other
benefits:
|
||||||||||||||||
|
Service
cost
|
$
|
74
|
$
|
(284
|
)
|
$
|
237
|
$
|
849
|
|||||||
|
Interest
cost
|
326
|
437
|
1,081
|
772
|
||||||||||||
|
Amortization
of prior service cost (credit)
|
1
|
(2
|
)
|
2
|
2
|
|||||||||||
|
Amortization
of net loss
|
54
|
45
|
180
|
137
|
||||||||||||
|
Curtailment
gain
|
—
|
(194
|
)
|
—
|
(194
|
)
|
||||||||||
|
Net
periodic benefit cost
|
$
|
455
|
$
|
2
|
$
|
1,500
|
$
|
1,566
|
||||||||
The Company anticipates contributions
to its pension plans for 2008 to be approximately $2.4
million. During the first nine months of 2008, contributions of
approximately $1.7 million have been made to certain pension plans.
Note
9 – Income Taxes
The Company’s effective tax rate for
the third quarter of 2008 was 31.1 percent compared with 37.6 percent for the
same period last year. The difference between the effective tax rate
and what would be computed using the U.S. Federal statutory tax rate for the
third quarter of 2008 is primarily related to the recognition of benefits from
the U.S. production activities deduction of $0.5 million, valuation allowance
changes resulting in a benefit of $1.3 million, and other benefits of $1.1
million. These benefits were partially offset by the provision for
state taxes of $1.3 million, net of federal benefit and foreign items totaling
$0.6 million.
The Company’s effective tax rate for
the first nine months of 2008 was 34.2 percent compared with 35.3 percent for
the same period last year. Factors that explain the difference
between the effective tax rate and what would be computed using the U.S. Federal
statutory tax rate for the first nine months of 2008 were a benefit of $1.0
million related to valuation allowance changes, a benefit from the U.S.
production activities deduction of $1.8 million, and other benefits of $1.5
million, partially offset by the provision for state taxes of $3.4 million, net
of federal benefit.
Changes in tax contingencies had an
immaterial effect on the effective tax rate during the third quarter and first
nine months of 2008. Total unrecognized tax benefits at September 27,
2008 were $11.3 million, without consideration of any applicable federal
benefit, and this amount includes $2.5 million of accrued
interest. The Company includes interest and penalties related to
income tax matters as a component of income tax expense. Of the $11.3
million, approximately $9.3 million would impact 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 unrecognized tax benefits may change in the next
twelve months by up to $5.2 million.
The Company files a consolidated U.S.
federal income tax return and files numerous consolidated and separate income
tax returns in many state, local, and foreign jurisdictions. The
Company is no longer subject to U.S. federal income tax examinations for years
before 2004 and with few exceptions is no longer subject to state, local, or
foreign income tax examinations by tax authorities for years before
2001. The Internal Revenue Service is currently examining the
Company’s 2005 and 2006 consolidated U.S. federal income tax
returns. Additionally, various state taxing authorities are currently
examining a number of the Company’s state income tax returns for years from 2005
forward. The results of these examinations are not expected to have a
material impact on the Company’s financial position or results of
operations.
Note
10 – Other Income, Net
|
For
the Quarter Ended
|
For
the Nine Months Ended
|
|||||||||||||||
|
September
27, 2008
|
September
29, 2007
|
September
27, 2008
|
September
29, 2007
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Interest
income
|
$
|
2,023
|
$
|
3,168
|
$
|
6,116
|
$
|
8,100
|
||||||||
|
Gain
on early retirement of debt
|
—
|
—
|
2,482
|
—
|
||||||||||||
|
Minority
interest in (income) loss of subsidiary
|
(254
|
)
|
626
|
(1,816
|
)
|
(720
|
)
|
|||||||||
|
Gain
(loss) on disposal of properties, net
|
35
|
(23
|
)
|
(306
|
)
|
3,114
|
||||||||||
|
Environmental
expense, non-operating properties
|
(126
|
)
|
(119
|
)
|
(396
|
)
|
(487
|
)
|
||||||||
|
Other
|
641
|
408
|
1,207
|
931
|
||||||||||||
|
Other
income, net
|
$
|
2,319
|
$
|
4,060
|
$
|
7,287
|
$
|
10,938
|
||||||||
Note
11 – Recently Issued Accounting Standards
Effective December 30, 2007, the
Company adopted SFAS No. 157, Fair Value Measurements and
SFAS No. 159 The Fair Value
Option for Financial Assets and Financial Liabilities. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. SFAS No. 159 permits entities to choose to
measure eligible items at fair value at specified election dates and report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. The impact of
adoption of these standards was not material.
In 2006, the Financial Accounting
Standards Board (FASB) issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158
requires employers to recognize the funded status of all pension and other
postretirement plans in the statement of financial position, and requires
employers to use its fiscal year-end as the measurement date for assets and
liabilities of all its defined benefit pension and postretirement
plans. Any adjustment as a result of the adoption of the measurement
period provisions of SFAS No. 158 would be recorded as an adjustment to retained
earnings. The Company adopted the measurement
and
disclosure provisions of SFAS No. 158 on December 30, 2006. The
measurement period provisions of SFAS No. 158 are required to be adopted in
fiscal years ending after December 15, 2008. In prior years, the
Company used November 30 as the measurement date for the majority of its pension
and postretirement plans. The Company will adopt the measurement
period provisions for its fiscal year-end in 2008 and does not expect the impact
of the adoption to be material.
In March 2008, the FASB issued
SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities. SFAS No.
161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. It requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. SFAS No. 161 is effective for financial statements issued
for fiscal periods beginning after Nov. 15, 2008. The Company does
not expect the adoption of SFAS No. 161 to have a material impact on its
Consolidated Financial Statements.
In May 2008, the FASB issued
SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles. SFAS
No. 162 identifies the sources of accounting principles and the framework for
selecting principles to be used in the preparation and presentation of financial
statements in accordance with generally accepted accounting principles. This
statement will be effective 60 days after the Securities and Exchange
Commission approves the Public Company Accounting Oversight Board’s amendments
to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company does not expect the adoption of SFAS
No. 162 to have a material impact on its Consolidated Financial
Statements.
General
Overview
The Company is a leading manufacturer
of copper, brass, plastic, and aluminum products. The range of these
products is broad: copper tube and fittings; brass and copper alloy
rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact
extrusions; plastic pipe, fittings and valves; refrigeration valves and
fittings; fabricated tubular products; and steel nipples. The Company
also resells imported brass and plastic plumbing valves, malleable iron
fittings, faucets and plumbing specialty products. The Company's
operations are located throughout the United States, and in Canada, Mexico,
Great Britain, and China.
The Company's businesses are aggregated
into two reportable segments: the Plumbing & Refrigeration segment and the
OEM segment. For disclosure purposes, as permitted under SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information, certain operating
segments are aggregated into reportable segments. The Plumbing &
Refrigeration segment is composed of the Standard Products Division (SPD),
European Operations, and Mexican Operations. The OEM segment is
composed of the Industrial Products Division (IPD), Engineered Products Division
(EPD), and Mueller-Xingrong, the Company’s Chinese joint
venture. These reportable segments are described in more detail
below. SPD manufactures and sells copper tube, copper and plastic
fittings, plastic pipe, and valves in North America and sources products for
import distribution in North America. European Operations
manufactures copper tube in Europe, which is sold in Europe and the Middle East;
activities also include import distribution in the U.K. and
Ireland. Mexican Operations include pipe nipple manufacturing and
import distribution businesses including product lines of malleable iron
fittings and other plumbing specialties. The Plumbing &
Refrigeration segment sells products to wholesalers in the HVAC (heating,
ventilation, and air-conditioning), plumbing, and refrigeration markets, to
distributors to the manufactured housing and recreational vehicle industries,
and to building material retailers. The OEM segment manufactures and
sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings;
aluminum and copper impact extrusions; refrigeration valves and fittings;
fabricated tubular products; and gas valves and assemblies. The
Company’s Chinese joint venture (Mueller-Xingrong) manufactures engineered
copper tube for refrigeration applications; these products are sold primarily to
OEM’s located in China. The OEM segment sells its products primarily
to original equipment manufacturers, many of which are in the HVAC, plumbing,
and refrigeration markets.
New housing starts and commercial
construction are important determinants of the Company's sales to the HVAC,
refrigeration, and plumbing markets because the principal end use of a
significant portion of the Company's products is in the construction of single
and multi-family housing and commercial buildings. Repairs and
remodeling projects are also important factors affecting the underlying demand
for these products.
Profitability of certain of the
Company's product lines depends upon the "spreads" between the cost of raw
material and the selling prices of its completed products. The open
market prices for copper cathode and scrap, for example, influence the selling
price of copper tubing, a principal product manufactured by the
Company. The Company attempts to minimize the effects on
profitability from fluctuations in material costs by passing through these costs
to its customers. The Company’s earnings and cash flow are dependent
upon these spreads that fluctuate based upon market conditions.
Earnings and profitability are also
subject to market trends such as substitute products and
imports. Plastic plumbing systems are the primary substitute product;
these products represent an increasing share of consumption. U.S.
consumption of copper tubing is still predominantly supplied by U.S.
manufacturers, although imports from Mexico are a significant
factor. Brass rod consumption in the U.S. has steadily declined over
the past five years, due to the outsourcing of many manufactured
products.
Results
of Operations
During the third quarter of 2008, the
Company’s net sales were $665.5 million, which compares with net sales of $693.7
million over the same period of 2007. The decrease is due to reduced
unit sales volume, partially offset by the increased selling prices resulting
from the increased average cost of raw material during the period, which is
generally passed on to customers. Net sales were $2.12 billion for
the nine months ended September 27, 2008 compared with $2.08 billion in the same
period of 2007. The increase in net sales for the nine-month period
was primarily attributable to the increased selling prices and contributions
from the acquisition of Extruded Metals, Inc. (Extruded) on February 27, 2007,
partially offset by reduced unit sales volume. The COMEX average
price of copper, the Company’s principal raw material, was $3.59 in the first
nine months of 2008, a 12 percent increase over the same period of
2007.
Cost of goods sold decreased from
$603.2 million in the third quarter of 2007 to $588.5 million in the same period
of 2008. The decrease primarily resulted from decreased sales volume,
partially offset by increased average cost of raw material, increased utilities,
and increased freight costs during the current quarter. Cost of goods
sold for the nine months ended September 27, 2008 was $1.86 billion compared
with $1.80 billion for the first nine months of 2007. The current
year increase was attributable to higher average raw material costs, increased
utilities and freight, and increased costs following the acquisition of
Extruded, partially offset by sales volume declines. Additionally,
during the final week of the quarter and continuing into the following two weeks
subsequent to quarter-end, the market value of copper, the Company’s principal
raw material, declined by approximately 34 percent. As a result,
certain inventories were written down to the lower of cost or market at
September 27, 2008. The write down of approximately $3.3 million, or
6 cents per diluted share after tax, resulted from the open market price of
copper falling below the inventories’ net book value.
The Company has also deferred
recognizing potential gains resulting from liquidation of LIFO inventories
during the first nine months of 2008. The Company expects to
replenish these inventories by the end of 2008 and, as such, has not recognized
the effects of liquidating LIFO layers. In the event the Company is
unable to replenish these inventories due to lack of availability or operational
reasons, the Company would recognize a non-cash gain of approximately $18.4
million from the liquidation of LIFO layers based on quarter-end
quantities.
Depreciation and amortization remained
consistent for all periods presented. Selling, general, and
administrative expense was $35.7 million for the third quarter of 2008 compared
with $36.2 million for the same period of 2007. The decrease is
primarily due to decreased employment costs and lower sales and distribution
expenses resulting from lower sales volume. Year-to-date selling,
general, and administrative expense was $108.6 million for 2008 compared with
$110.1 million for the same period of 2007. This decrease is also due
to decreased employment costs and lower aggregate sales and distribution
expense, partially offset by increased bad debt expense and additional expenses
following the acquisition of Extruded.
During the third quarter of 2007, the
Company recognized a nonrecurring pre-tax gain of approximately $8.9 million
resulting from a settlement agreement terminating a lawsuit against J.P Morgan
Chase & Co. and Morgan Guaranty Trust Company of New York (collectively
Morgan).
Interest expense for the third quarter
of 2008 totaled $5.1 million, compared with $5.4 million for the same period of
2007. Year-to-date, interest expense was $15.8 million in 2008
compared with $16.6 million for the same period of 2007. The reduced
interest expense is attributable to lower interest following the early
extinguishment of $26.2 million of the Company’s 6% Subordinated Debentures in
the first half of 2008, partially offset by interest from increased borrowings
at Mueller-Xingrong.
Other income, net was $2.3 million for
the third quarter of 2008 compared with $4.1 million for the same period of
2007. The current year decrease was primarily due to decreased
interest income resulting from lower interest rates, and increased elimination
of minority interest in the third quarter of 2008 versus minority interest
benefit in the same period of 2007. Year-to-date, other income, net
was $7.3 million in 2008 compared with $10.9 million for the same period of
2007. The current year decrease is due primarily to decreased
interest income of $2.0 million resulting from lower interest rates and
increased elimination of minority interest. Additionally,
year-to-date 2008 includes a net gain of $2.5 million from the early
extinguishment of the 6% Subordinated Debentures, while the same period in 2007
includes the recognition of a $3.1 million gain from the sale of non-operating
royalty producing properties.
The Company’s effective tax rate for
the third quarter of 2008 was 31.1 percent compared with 37.6 percent for the
same period last year. The difference between the effective tax rate
and what would be computed using the U.S. Federal statutory tax rate for the
third quarter of 2008 is primarily related to the recognition of benefits from
the U.S. production activities deduction of $0.5 million, valuation allowance
changes resulting in a benefit of $1.3 million, and other benefits of $1.1
million. These benefits were partially offset by the provision for
state taxes of $1.3 million, net of federal benefit and foreign items totaling
$0.6 million.
The Company’s effective tax rate for
the first nine months of 2008 was 34.2 percent compared with 35.3 percent for
the same period last year. Factors that explain the difference
between the effective tax rate and what would be computed using the U.S. Federal
statutory tax rate for the first nine months of 2008 were a benefit of $1.0
million related to valuation allowance changes, a benefit from the U.S.
production activities deduction of $1.8 million, and other benefits of $1.5
million, partially offset by the provision for state taxes of $3.4 million, net
of federal benefit.
Plumbing
& Refrigeration Segment
Net sales by the Plumbing and
Refrigeration segment were $371.3 million in the third quarter of 2008 compared
with $397.9 million in the third quarter of 2007. Net sales for the
first nine months of 2008 were $1.16 billion compared with $1.22 billion over
the same period in 2007. These decreases are primarily due to
decreased sales volume in the majority of the segment’s product lines, partially
offset by the increased selling prices. Cost of goods sold decreased
from $322.8 million in the third quarter of 2007 to $313.8 million in the third
quarter of 2008, and decreased from $1.01 billion in the first nine months of
2007 to $0.98 billion in the first nine months of 2008. These
decreases resulted from lower sales volume, partially offset by increased
average raw material costs, increased utilities, and increased per-unit freight
costs. Also impacting 2008 quarterly and year-to-date cost of goods
sold was a $2.4 million pre-tax charge to write down certain inventories to the
lower of cost or market. Depreciation and amortization remained
consistent in all periods presented. Selling, general and
administrative expense remained relatively consistent in the third quarter of
2008 compared with the third quarter of 2007, and decreased to $70.0 million in
the first nine months of 2008 from $73.0 million in the first nine months of
2007. These decreases are primarily due to decreased employment costs
and lower aggregate sales and distribution expense resulting from lower unit
sales volume. Operating income for the segment decreased from $52.3
million in the third quarter of 2007 to $25.4 million in the third quarter of
2008, and decreased from $130.9 million in the first nine months of 2007 to
$85.9 million in the first nine months of 2008 due primarily to lower sales
volume in the majority of the segment’s core product lines, increased utilities
and freight costs, and a nonrecurring pre-tax gain from the Morgan copper
antitrust litigation settlement agreement of $8.9 million recognized in the
third quarter of 2007.
OEM
Segment
Net sales for the OEM segment declined
from $302.1 million in the third quarter of 2007 to $299.5 million in the third
quarter of 2008. The decrease is due primarily to lower sales volume,
partially offset by increased selling prices. Net sales were $979.7
million in the first nine months of 2008 compared with $868.1 million over the
same period in 2007. The increase is due primarily to the acquisition
of Extruded in February 2007, which contributed net sales of $300.5 million in
2008 compared with $222.9 million in 2007, and the increased average cost of raw
material, partially offset by reduced sales volume. Cost of goods
sold decreased from $286.4 million in the third quarter 2007 to $279.7 million
in the third quarter of 2008. The decrease is due primarily to
lower sales volume, partially offset by increased average raw material
costs. Year-to-date, cost of goods sold increased from $810.5 million
in 2007 to $894.9 million in 2008 due to the increased average cost of raw
material and the acquisition of Extruded, partially offset by reduced sales
volume. Additionally, 2008 quarterly and year-to-date cost of goods
sold reflects a $0.9 million pre-tax charge to write down certain inventories to
the lower of cost or market. Depreciation and amortization remained
consistent in all periods presented. Selling, general, and
administrative expense decreased $1.2 million to $5.2 million in the third
quarter of 2008 due primarily to the impact of foreign currency transaction
gains and declines in various other costs. Selling, general, and
administrative expense increased to $18.7 million in the first nine months of
2008 from $17.6 million in the first nine months of 2007, due primarily to
increased bad debt expense and additional expense following the acquisition of
Extruded. Operating income for the segment increased from $5.6
million in the third quarter of 2007 to $10.6 million in the third quarter of
2008, and increased from $29.1 million in the first nine months of 2007 to $55.2
million in the first nine months of 2008 due primarily to higher spreads at the
Company’s brass rod operations and the acquisition of Extruded.
Liquidity
and Capital Resources
Cash provided by operating activities
during the first nine months of 2008 totaled $64.5 million, which is primarily
attributable to net income and depreciation and amortization, partially offset
by increased receivables and decreased current
liabilities. Fluctuations in the cost of copper and other raw
materials affect the Company’s liquidity. Changes in material costs
directly impact components of working capital, primarily inventories and
accounts receivable. During the first nine months of 2008, the
average COMEX copper price was approximately $3.59 per pound, which represents a
12 percent increase over the average price during the first nine months of
2007. This rise in the price of cathode has also resulted in sharp
increases in the open market price for copper scrap and, to a lesser extent, the
price of brass scrap.
During the first nine months of 2008,
cash used in investing activities totaled $17.1 million, which consisted
primarily of capital expenditures of $17.9 million reduced by net withdrawals
from restricted cash balances and proceeds from sales of
properties. Cash used in financing activities during the first nine
months of 2008 totaled $46.1 million, which consisted primarily of repayments of
long-term debt of $36.1 million and dividends paid totaling $11.1
million.
The Company repurchased and
extinguished, during the first nine months of 2008, $26.2 million of its 6%
Subordinated Debentures (the Debentures) for $23.5 million, which resulted in a
net gain of approximately $2.5 million. Subsequent to quarter-end,
the Company repurchased, through a privately negotiated transaction, and
extinguished $122.9 million in principal amount of the Debentures for
approximately $103.2 million. As such, this principal amount is
classified as current at September 27, 2008. The net gain from this
repurchase of approximately $19.1 million, after inclusion of the write-off of
related debt issuance costs, will be recognized in the fourth quarter of
2008.
The Company has a $200 million
unsecured line-of-credit (Credit Facility) which expires in December
2011. At September 27, 2008, the Company had no borrowings against
the Credit Facility. The Credit Facility backed approximately $9.9
million in letters of credit at the end of the third quarter of
2008. As of September 27, 2008, the Company’s total debt was $319.2
million or 29 percent of its total capitalization.
Covenants contained in the Company’s
financing obligations require, among other things, the maintenance of minimum
levels of tangible net worth and the satisfaction of certain minimum financial
ratios. As of September 27, 2008, the Company was in compliance with
all of its debt covenants.
The Company declared and paid a regular
quarterly cash dividend of ten cents per common share in each of the first three
quarters of 2008. Payment of dividends in the future is dependent
upon the Company’s financial condition, cash flows, capital requirements,
earnings, and other factors. On November 1, 2008, the Company will
pay approximately $4.5 million in interest on the Debentures that remain
outstanding.
Management believes that cash provided
by operations and currently available cash of $308.4 million, prior to the
Debenture repurchase, will be adequate to meet the Company’s normal future
capital expenditures and operational needs. The Company’s current
ratio was 2.4 to 1 at September 27, 2008.
The Company’s Board of Directors has
extended, until October 2009, its authorization to repurchase up to ten million
shares of the Company’s Common Stock through open market transactions or through
privately negotiated transactions. The Company has no obligation to
purchase any shares and may cancel, suspend, or extend the time period for the
purchase of shares at any time. Any purchases will be funded
primarily through existing cash and cash from operations. The Company
may hold any shares purchased in treasury or use a portion of the repurchased
shares for employee benefit plans, as well as for other corporate
purposes. From its initial authorization in 1999 through September
27, 2008, the Company had repurchased approximately 2.4 million shares under
this authorization.
There have been no significant changes
in the Company’s contractual cash obligations reported at December 29,
2007.
The Company is exposed to market risk
from changes in raw material and energy costs, interest rates, and foreign
currency exchange rates. To reduce such risks, the Company may
periodically use financial instruments. All hedging transactions are
authorized and executed pursuant to policies and procedures. Further,
the Company does not buy or sell financial instruments for trading
purposes.
Cost
and Availability of Raw Materials and Energy
Copper and brass represent the largest
component of the Company’s variable costs of production. The cost of
these materials is subject to global market fluctuations caused by factors
beyond the Company’s control. Significant increases in the cost of
metal, to the extent not reflected in prices for the Company’s finished
products, or the lack of availability could materially and adversely affect the
Company’s business, results of operations and financial condition.
The Company occasionally enters into
forward fixed-price arrangements with certain customers. The Company
may utilize forward contracts to hedge risks associated with forward fixed-price
arrangements. The Company may also utilize forward contracts to
manage price risk associated with inventory. Depending on the nature
of the hedge, changes in the fair value of the forward contracts will either be
offset against the change in fair value of the inventory through earnings or
recognized as a component of accumulated other comprehensive income and
reflected in earnings upon the sale of inventory. Periodic value
fluctuations of the contracts generally offset the value fluctuations of the
underlying fixed-price transactions or inventory. At September 27,
2008, the Company held open forward contracts to purchase approximately $17.2
million of copper through December 2009 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 accumulated other
comprehensive income and reflected in earnings upon consumption of natural
gas. Periodic value fluctuations of the contracts generally offset
the value fluctuations of the underlying natural gas prices. At
September 27, 2008, the Company held no open forward contracts to purchase
natural gas.
Interest
Rates
At September 27, 2008, the Company had
variable-rate debt outstanding of $46.9 million, the majority of which related
to the debt issued by Mueller-Xingrong. At these borrowing levels, a
hypothetical 10 percent increase in interest rates would have had an
insignificant unfavorable impact on the Company’s pretax earnings and cash
flows. The primary interest rate exposure on floating-rate debt is
based on LIBOR and on the base-lending rate published by the People’s Bank of
China.
Foreign
Currency Exchange Rates
Foreign currency exposures arising from
transactions include firm commitments and anticipated transactions denominated
in a currency other than an entity’s functional currency. The Company
and its subsidiaries generally enter into transactions denominated in their
respective functional currencies. Foreign currency exposures arising
from transactions denominated in currencies other than the functional currency
are not material; however, the Company may utilize certain forward fixed-rate
contracts to hedge such transactional exposures. Gains and losses
with respect to these positions are deferred in stockholders’ equity as a
component of comprehensive income and reflected in earnings upon collection of
receivables. At September 27, 2008, the Company held no open forward
fixed-rate contracts.
The Company’s primary foreign currency
exposure arises from foreign-denominated revenues and profits and their
translation into U.S. dollars. The primary currencies to which the
Company is exposed include the Canadian dollar, the British pound sterling, the
Euro, the Mexican peso, and the Chinese renminbi. The Company
generally views as long-term its investments in foreign subsidiaries with a
functional currency other than the U.S. dollar. As a result, the
Company generally does not hedge these net investments.
Cautionary
Statement Regarding Forward Looking Information
Statements in this Quarterly Report on
Form 10-Q that are not strictly historical may be "forward-looking" statements,
which involve risks and uncertainties. These include economic and
currency conditions, continued availability of raw materials and energy, market
demand, pricing, competitive and technological factors, and the availability of
financing, among others, as set forth in the Company's filings with the
Securities and Exchange Commission (SEC). The words "outlook,"
"estimate," "project," "intend," "expect," "believe," "target," and similar
expressions are intended to identify forward-looking statements. The
reader should not place undue reliance on forward-looking statements, which
speak only as of the date of this report. The Company has no
obligation to publicly update or revise any forward-looking statements to
reflect events after the date of this report.
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.
The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures pursuant to Rule 13a-15(b) of the Exchange Act as of the end of
the period covered by this report. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures were effective as of
September 27, 2008 to ensure that information required to be disclosed in
Company reports filed under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms and (ii) accumulated and communicated to management, including the
Company's principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
Changes
in Internal Control over Financial Reporting
There were no changes in the Company’s
internal control over financial reporting during the Company’s fiscal quarter
ending September 27, 2008, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting. However, during the first nine months of 2008, the Company
began its implementation of an upgrade to its transaction processing
system. The implementation process is ongoing.
PART
II. OTHER INFORMATION
General
The Company is involved in certain
litigation as a result of claims that arose in the ordinary course of
business. Additionally, the Company may realize the benefit of
certain legal claims and litigation in the future; these gain contingencies are
not recognized in the Condensed Consolidated Financial Statements.
Copper
Tube Antitrust Litigation
The Company has been named as a
defendant in several pending litigations (the Copper Tube Actions) brought by
direct and indirect purchasers of various forms of copper tube. The
Copper Tube Actions allege anticompetitive activities with respect to the sale
of copper plumbing tubes (copper plumbing tubes) and/or copper tubes used in,
among other things, the manufacturing of air-conditioning and refrigeration
units (ACR copper tubes). All of the Copper Tube Actions seek monetary and other
relief.
Carrier ACR Tube
Action
A Copper Tube Action (the Carrier ACR
Tube Action) was filed in March 2006 in the United States District Court for the
Western District of Tennessee by Carrier Corporation, Carrier S.A., and Carrier
Italia S.p.A. (collectively, Carrier). The Carrier ACR Tube Action
alleges anticompetitive activities with respect to the sale to Carrier of ACR
copper tubes. The Company and Mueller Europe Ltd. (Mueller Europe)
are named in the Carrier ACR Tube Action.
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.
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.
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.
On September 5, 2008 Peter Berkman
withdrew prior responses to discovery and asserted the privilege against
self-incrimination of the Fifth Amendment as to all discovery 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 20, 2008, the Company filed motion
seeking leave to interpose an Amended Answer and Affirmative Defenses to Peter
Berkman’s and Jeffrey Berkman’s Counterclaims and an Amended Answer and
Affirmative Defenses to Homewerks Worldwide LLC’s Complaint, setting
forth new affirmative defenses 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.
Environmental
Matters
Southeast Kansas
Sites
By letter dated October 10, 2006, the
Kansas Department of Health and Environment (KDHE) advised the Company that
environmental contamination has been identified at a former smelter site in
southeast Kansas. KDHE asserts that the Company is a corporate
successor to an entity that is alleged to have owned and operated the smelter
from 1915 to 1918. The Company has since been advised of possible
connections between that same entity and two other former smelter sites in
Kansas. KDHE has requested that the Company and another potentially
responsible party (PRP) negotiate a consent order with KDHE to address
contamination at these sites. The Company has participated in
preliminary discussions with KDHE and the other PRP. The Company
believes it is not liable for the contamination but may consider negotiating a
resolution as an alternative to litigation. The extent of the
Company's obligation, if any, could depend, among other things, on (i) the
outcome of possible feasibility studies, (ii) a chosen method of environmental
response, (iii) the existence and viability of any additional PRPs, (iv) the
terms of any cost sharing arrangement, and (v) the extent of recoveries, if any,
from claims against insurance policies. If the Company incurs an
obligation that becomes determinable and estimable, the obligation would require
recognition which could be material to the Company's results of
operations.
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 United States Environmental Protection
Agency (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.
U.S.S.
Lead
On September 3, 2008, the EPA proposed
to add the U.S.S. Lead Refinery, Inc. (Lead Refinery), a wholly owned subsidiary
of the Company, site to the National Priorities List (NPL) established pursuant
to the Comprehensive Environmental Response, Compensation, and Liability
Act. The NPL is a list of sites where EPA has determined there has
been a release or threatened release of contaminants. Listing on the
NPL 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. Comments on the proposed listing on the NPL must
be submitted to EPA by November 3, 2008. Lead Refinery intends to
submit 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 this matter. Lead Refinery,
without additional financial assistance, lacks the resources needed to complete
any additional remediation that may be required.
Issuer
Purchases of Equity Securities
The Company’s Board of Directors has
extended, until October 2009, its authorization to repurchase up to ten million
shares of the Company’s Common Stock through open market transactions or through
privately negotiated transactions. The Company has no obligation to
purchase any shares and may cancel, suspend, or extend the time period for the
purchase of shares at any time. Any purchases will be funded
primarily through existing cash and cash from operations. The Company
may hold any shares purchased in treasury or use a portion of the repurchased
shares for employee benefit plans, as well as for other corporate
purposes. From its initial authorization in 1999 through September
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 September 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)
|
||||||||||||||||
|
June
29 – July 26, 2008
|
—
|
$
|
—
|
||||||||||||||
|
July
27 – August 23, 2008
|
—
|
—
|
|||||||||||||||
|
August
24 – September 27, 2008
|
678
|
(2)
|
—
|
||||||||||||||
|
(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.
|
|||||||||||||||||
|
(2)
Shares tendered to the Company by employee stock option holders in payment
of the option purchase
|
|||||||||||||||||
|
price
and/or withholding taxes upon exercise.
|
|||||||||||||||||
|
10.1
|
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).
|
||
|
19.1
|
Mueller
Industries, Inc.’s Quarterly Report to Stockholders for the quarter ended
September 27, 2008. Such report is being furnished for the
information of the Securities and Exchange Commission only and is not to
be deemed filed as part of this Quarterly Report on Form
10-Q.
|
||
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
Items 1A, 3, 4, and 5 are
not applicable and have been omitted.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
MUELLER
INDUSTRIES, INC.
|
|
|
/s/ Kent A.
McKee
|
|
|
Kent
A. McKee
|
|
|
October
21, 2008
|
Executive
Vice President and
|
|
Date
|
Chief
Financial Officer
|
|
/s/ Richard W.
Corman
|
|
|
October
21, 2008
|
Richard
W. Corman
|
|
Date
|
Vice
President – Controller
|
|
EXHIBIT
INDEX
|
|
|
Exhibits
|
Description
|
|
19.1
|
Mueller
Industries, Inc.’s Quarterly Report to Stockholders for the quarter ended
September 27, 2008. Such report is being furnished for the
information of the Securities and Exchange Commission only and is not to
be deemed filed as part of this Quarterly Report on Form
10-Q.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|