MUELLER INDUSTRIES INC - Quarter Report: 2009 March (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 March 28, 2009
|
Commission
file number 1–6770
|
![MLI Logo](https://www.sec.gov/Archives/edgar/data/0000089439/000008943909000010/mli_logo.jpg)
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 Noo
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o Noo
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 April 20,
2009, was 37,143,163.
MUELLER
INDUSTRIES, INC.
FORM
10–Q
For
the Quarterly Period Ended March 28, 2009
Page
Number
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||
Part
I. Financial Information
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||
3
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||
4
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||
5
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||
6
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||
15
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||
18
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||
19
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||
Part
II. Other Information
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||
20
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24
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25
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26
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PART I.
FINANCIAL INFORMATION
MUELLER
INDUSTRIES, INC.
(Unaudited)
For
the Quarter Ended
|
||||||||
March
28, 2009
|
March
29, 2008
|
|||||||
(In
thousands, except per share data)
|
||||||||
Net
sales
|
$
|
326,558
|
$
|
704,108
|
||||
Cost
of goods sold
|
287,383
|
611,797
|
||||||
Depreciation
and amortization
|
10,480
|
10,984
|
||||||
Selling,
general, and administrative expense
|
31,158
|
38,291
|
||||||
Operating
(loss) income
|
(2,463
|
)
|
43,036
|
|||||
Interest
expense
|
(2,636
|
)
|
(5,467
|
)
|
||||
Other
income, net
|
627
|
4,569
|
||||||
(Loss)
income before income taxes
|
(4,472
|
)
|
42,138
|
|||||
Income
tax benefit (expense)
|
1,962
|
(14,231
|
)
|
|||||
Consolidated
net (loss) income
|
(2,510
|
)
|
27,907
|
|||||
Less:
net loss (income) attributable to noncontrolling
interest
|
18
|
(552
|
)
|
|||||
Net
(loss) income attributable to Mueller Industries,
Inc.
|
$
|
(2,492
|
)
|
$
|
27,355
|
|||
Weighted
average shares for basic (loss) earnings per share
|
37,143
|
37,089
|
||||||
Effect
of dilutive stock options
|
-
|
192
|
||||||
Adjusted
weighted average shares for diluted (loss) earnings per
share
|
37,143
|
37,281
|
||||||
Basic
(loss) earnings per share
|
$
|
(0.07
|
)
|
$
|
0.74
|
|||
Diluted
(loss) earnings per share
|
$
|
(0.07
|
)
|
$
|
0.73
|
|||
Dividends
per share
|
$
|
0.10
|
$
|
0.10
|
||||
See
accompanying notes to condensed consolidated financial
statements.
|
MUELLER
INDUSTRIES, INC.
(Unaudited)
March
28, 2009
|
December
27, 2008
|
|||||||
(In
thousands, except share data)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
300,336
|
$
|
278,860
|
||||
Accounts
receivable, less allowance of doubtful accounts of $6,688 in 2009 and
$6,690 in 2008
|
190,172
|
219,035
|
||||||
Inventories
|
170,968
|
210,609
|
||||||
Other current assets
|
37,596
|
46,322
|
||||||
Total
current assets
|
699,072
|
754,826
|
||||||
Property,
plant, and equipment, net
|
270,626
|
276,927
|
||||||
Other
assets
|
148,487
|
151,160
|
||||||
Total
Assets
|
$
|
1,118,185
|
$
|
1,182,913
|
||||
Liabilities
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of debt
|
$
|
14,022
|
$
|
24,184
|
||||
Accounts
payable
|
52,476
|
63,732
|
||||||
Accrued
wages and other employee costs
|
22,807
|
35,079
|
||||||
Other
current liabilities
|
55,455
|
78,589
|
||||||
Total
current liabilities
|
144,760
|
201,584
|
||||||
Long-term
debt, less current portion
|
158,726
|
158,726
|
||||||
Pension
and postretirement liabilities
|
37,692
|
38,452
|
||||||
Environmental
reserves
|
23,184
|
23,248
|
||||||
Deferred
income taxes
|
32,663
|
33,940
|
||||||
Other
noncurrent liabilities
|
1,441
|
1,698
|
||||||
Total
liabilities
|
398,466
|
457,648
|
||||||
Equity
|
||||||||
Mueller
Industries, Inc. 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 2009 and 2008
|
401
|
401
|
||||||
Additional paid-in capital
|
262,985
|
262,378
|
||||||
Retained earnings
|
544,295
|
550,501
|
||||||
Accumulated other comprehensive loss
|
(48,739
|
)
|
(48,113
|
)
|
||||
Treasury common stock, at cost
|
(64,484
|
)
|
(64,484
|
)
|
||||
Total
Mueller Industries, Inc. stockholders’ equity
|
694,458
|
700,683
|
||||||
Noncontrolling
interest
|
25,261
|
24,582
|
||||||
Total
equity
|
719,719
|
725,265
|
||||||
Commitments
and contingencies
|
-
|
-
|
||||||
Total
Liabilities and Equity
|
$
|
1,118,185
|
$
|
1,182,913
|
||||
See
accompanying notes to condensed consolidated financial
statements.
|
MUELLER
INDUSTRIES, INC.
(Unaudited)
For
the Quarter Ended
|
|||||||
March
28, 2009
|
March
29, 2008
|
||||||
(In
thousands)
|
|||||||
Cash
flows from operating activities
|
|||||||
Net
(loss) income attributable to Mueller Industries,
Inc.
|
$
|
(2,492
|
)
|
$
|
27,355
|
||
Reconciliation
of net (loss) income attributable to Mueller Industries, Inc. to net cash
provided by (used in) operating activities:
|
|||||||
Depreciation and amortization
|
10,521
|
11,110
|
|||||
Gain on early retirement of debt
|
-
|
(2,408
|
)
|
||||
Net
(loss) income attributable to noncontrolling
interest
|
(18
|
)
|
552
|
||||
Stock-based
compensation expense
|
607
|
731
|
|||||
(Gain)
loss on disposal of properties
|
(87
|
)
|
339
|
||||
Deferred
income taxes
|
(248
|
)
|
(429
|
)
|
|||
Changes
in assets and liabilities:
|
|||||||
Receivables
|
28,010
|
(62,218
|
)
|
||||
Inventories
|
38,657
|
(3,664
|
)
|
||||
Other
assets
|
3,070
|
(6,780
|
)
|
||||
Current
liabilities
|
(42,167
|
)
|
14,264
|
||||
Other
liabilities
|
(620
|
)
|
2,566
|
||||
Other,
net
|
(261
|
)
|
(2,708
|
)
|
|||
Net
cash provided by (used in) operating activities
|
34,972
|
(21,290
|
)
|
||||
Cash
flows from investing activities
|
|||||||
Capital
expenditures
|
(4,842
|
)
|
(8,573
|
)
|
|||
Net
withdrawals from restricted cash balances
|
5,852
|
85
|
|||||
Proceeds
from the sales of properties
|
402
|
-
|
|||||
Net
cash provided by (used in) investing activities
|
1,412
|
(8,488
|
)
|
||||
Cash
flows from financing activities
|
|||||||
Repayments
of long-term debt
|
-
|
(22,979
|
)
|
||||
Dividends
paid
|
(3,714
|
)
|
(3,709
|
)
|
|||
(Repayment)
issuance of debt by joint venture, net
|
(10,152
|
)
|
21,032
|
||||
Issuance of shares under incentive stock option plans from
treasury
|
-
|
266
|
|||||
Net
cash used in financing activities
|
(13,866
|
)
|
(5,390
|
)
|
|||
Effect
of exchange rate changes on cash
|
(1,042
|
)
|
830
|
||||
Increase
(decrease) in cash and cash equivalents
|
21,476
|
(34,338
|
)
|
||||
Cash
and cash equivalents at the beginning of the period
|
278,860
|
308,618
|
|||||
Cash
and cash equivalents at the end of the period
|
$
|
300,336
|
$
|
274,280
|
|||
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. For the first quarter of 2009, the Company reported a net
loss. Therefore the effect of the inclusion of all potentially dilutive
securities was anti-dilutive when computing diluted loss per share; thus, the
computation for both basic and diluted loss per share was the same for that
period. Potentially dilutive securities totaled approximately 73
thousand shares for the quarter ended March 28, 2009.
Note
2 – Commitments and Contingencies
The
Company is involved in certain litigation as a result of claims that arose in
the ordinary course of business, which management believes will not have a
material adverse effect on the Company's financial position or results of
operations. The Company may also 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 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.
Shasta Area Mine
Sites
Mining
Remedial Recovery Company (MRRC), a wholly owned subsidiary of the Company, 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.
U.S.S.
Lead
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 this site are handled pursuant
to a post-closure permit issued by the Indiana Department of Environmental
Management (IDEM) 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. On April 9, 2009, pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),
the EPA added the Lead Refinery site to the National Priorities List
(NPL). The NPL is a list of priority sites where EPA has determined
that there has been a release or threatened release of contaminants that warrant
investigation and, if appropriate, remedial action. The NPL does not
assign liability to any party or to the owner of a property placed on the
NPL. The placement of a site on the NPL does not necessarily mean
that remedial action must be taken. 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 placement of this site on the
NPL. Lead Refinery lacks the financial resources needed to undertake
any investigations or remedial action that may be required by EPA pursuant to
CERCLA.
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 predecessor, Sharon Steel Corporation, acquired land within the
Eureka Mills Site from UV Industries, Inc. in 1979. Pursuant to
the court-approved 1990 bankruptcy plan of reorganization for Sharon Steel
Corporation, the land was transferred by the Company to Amwest Exploration
Company, a wholly-owned subsidiary of the Company, which later sold the land to
a third-party in 1993. 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 Site. The second request
for information concerned historic mining activities. In responding to
EPA’s November 2008 letter and also to a recent third request for information
received in March, 2009, the Company stated that it does not believe it is
liable for the contamination. The Company has agreed to suspend
temporarily the running of the time period during which the EPA must bring a
lawsuit in order to allow time for the Company and the EPA to discuss this
matter. 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. The Company is continuing to evaluate this
matter.
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 also 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, the Court found Peter Berkman in contempt for resisting
discovery, and Peter Berkman has since filed a notice of appeal with the
Illinois Appellate Court, Second Judicial District. 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.
Other
Guarantees,
in the form of letters of credit, are issued by the Company generally to
guarantee the payment of insurance deductibles and certain retiree health
benefits. The terms of the Company’s guarantees are generally one
year but are renewable annually as required. These letters are
primarily backed by the Company’s line of credit facility. The
maximum potential amount of future payments the Company could have been required
to make under its guarantees at March 28, 2009 was $10.0 million.
Note
3 – Inventories
March
28, 2009
|
December
27, 2008
|
|||||||
(In
thousands)
|
||||||||
Raw
materials and supplies
|
$
|
27,865
|
$
|
57,536
|
||||
Work-in-process
|
24,810
|
39,018
|
||||||
Finished
goods
|
124,291
|
122,756
|
||||||
Valuation
reserves
|
(5,998
|
)
|
(8,701
|
)
|
||||
Inventories
|
$
|
170,968
|
$
|
210,609
|
||||
The
Company has deferred recognizing potential gains resulting from liquidation of
LIFO inventories during the first quarter of 2009. The Company
expects to replenish these inventories by the end of 2009 and, as such, has not
recognized the effects of liquidating LIFO layers. In the event the
Company is not able to replenish these inventories due to lack of availability
or operational reasons, the Company would recognize a non-cash gain of
approximately $5.4 million from the liquidation of LIFO layers based on
quarter-end quantities.
Note
4 – Goodwill
The
Company recognized an estimated goodwill impairment charge of $18.0 million in
the period ended December 27, 2008 related to its Mexican Operations, a part of
the Plumbing & Refrigeration segment. An estimate was recorded
because the Company did not complete step two of its annual impairment test as
required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142) until the quarter ended March 28,
2009. The impairment resulted from revised projections of future cash
flows as well as other estimates and assumptions due to prevailing market
conditions.
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
annually at the beginning of the fourth quarter and, on an interim basis if
certain events or circumstances indicate that impairment may have been
incurred. The analysis of potential impairment of goodwill requires a
two-step process. The first step is the estimation of fair
value. If this estimate indicates that impairment potentially exists,
the second step is performed to quantify the amount of impairment, if
any. Goodwill impairment exists when the implied fair value of
goodwill is less than its carrying value.
The
Company uses a discounted cash flow model (DCF model) to estimate the fair value
of reporting units based on expected earnings, because there are no observable
inputs available (Level 3 hierarchy as defined by SFAS No. 157, Fair Value
Measurements). Cash flows are projected to equal (i) projected
future earnings adjusted for the capital investment required to support
operations and depreciation expense for a five-year period plus (ii) a terminal
value. This cash flow stream is discounted to its present value to
arrive at a fair value of each reporting unit. Future earnings are
estimated using the Company’s most recent annual projection, applying a growth
rate to future periods. The discount rate used in the DCF model
equals the Company’s cost of capital plus a specific reporting unit risk
premium.
The
results of step one indicated goodwill was impaired at the Company’s Mexican
Operations as the estimated fair value was less than the carrying value of the
reporting unit. As such, step two of the goodwill impairment test was
performed to determine the actual amount of goodwill impairment. In
this step, the Company was required to allocate the fair value of the reporting
unit, as determined in step one, to all the reporting unit’s assets and
liabilities in a hypothetical purchase price allocation as if the Company’s
Mexican Operations had been acquired on the date of the test. Upon
completion of this step, the Company’s original estimate did not
change.
The
determination of fair value of the reporting units requires the Company to make
significant estimates and assumptions. Due to the inherent
uncertainty involved in making these estimates, actual results could differ
materially for those estimates.
Note
5 – Industry Segments
The
Company’s reportable segments are Plumbing & Refrigeration and Original
Equipment Manufacturer (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, as noted above, 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
segment information is as follows:
(In
thousands)
|
For
the Quarter Ended March 28, 2009
|
|||||||||||||||
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
Net
sales
|
$
|
190,393
|
$
|
138,392
|
$
|
(2,227
|
)
|
$
|
326,558
|
|||||||
Cost
of goods sold
|
153,289
|
136,023
|
(1,929
|
)
|
287,383
|
|||||||||||
Depreciation
and amortization
|
6,624
|
3,586
|
270
|
10,480
|
||||||||||||
Selling,
general, and administrative expense
|
20,149
|
5,049
|
5,960
|
31,158
|
||||||||||||
|
||||||||||||||||
Operating
income (loss)
|
10,331
|
(6,266
|
)
|
(6,528
|
)
|
(2,463
|
)
|
|||||||||
Interest
expense
|
(2,636
|
)
|
||||||||||||||
Other
income, net
|
627
|
|||||||||||||||
Loss
before income taxes
|
$
|
(4,472
|
)
|
|||||||||||||
(In
thousands)
|
For
the Quarter Ended March 29, 2008
|
|||||||||||||||
Plumbing
& Refrigeration Segment
|
OEM
Segment
|
Corporate
and Eliminations
|
Total
|
|||||||||||||
Net
sales
|
$
|
383,884
|
$
|
326,207
|
$
|
(5,983
|
)
|
$
|
704,108
|
|||||||
Cost
of goods sold
|
327,999
|
289,481
|
(5,683
|
)
|
611,797
|
|||||||||||
Depreciation
and amortization
|
7,258
|
3,450
|
276
|
10,984
|
||||||||||||
Selling,
general, and administrative expense
|
23,543
|
7,702
|
7,046
|
38,291
|
||||||||||||
|
||||||||||||||||
Operating
income
|
25,084
|
25,574
|
(7,622
|
)
|
43,036
|
|||||||||||
Interest
expense
|
(5,467
|
)
|
||||||||||||||
Other
income, net
|
4,569
|
|||||||||||||||
Income
before income taxes
|
$
|
42,138
|
||||||||||||||
Note
6 – Comprehensive (Loss) Income
Comprehensive
(loss) income is as follows:
For
the Quarter Ended
|
||||||||
March
28, 2009
|
March
29, 2008
|
|||||||
(In
thousands)
|
||||||||
Consolidated
net (loss) income
|
$
|
(2,510
|
)
|
$
|
27,907
|
|||
Other
comprehensive (loss) income, net of tax:
|
||||||||
Foreign
currency translation
|
(3,316
|
)
|
2,704
|
|||||
Net
change with respect to derivative instruments and hedging
activities
|
3,023
|
638
|
||||||
Other,
net
|
364
|
162
|
||||||
Total
other comprehensive income
|
71
|
3,504
|
||||||
Comprehensive
(loss) income
|
(2,439
|
)
|
31,411
|
|||||
Less:
comprehensive income attributable to noncontrolling
interest
|
(679
|
)
|
(1,406
|
)
|
||||
Comprehensive
(loss) income attributable to Mueller Industries,
Inc.
|
$
|
(3,118
|
)
|
$
|
30,005
|
|||
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. The values
of the British pound sterling and the Mexican peso decreased approximately 1.8
percent and 3.1 percent, respectively, relative to the U.S. dollar during the
first quarter of 2009.
Note
7 – 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
|
||||||||
March
28, 2009
|
March
29, 2008
|
|||||||
(In
thousands)
|
||||||||
Pension
benefits:
|
||||||||
Service
cost
|
$
|
364
|
$
|
739
|
||||
Interest
cost
|
2,562
|
3,417
|
||||||
Expected
return on plan assets
|
(3,198
|
)
|
(4,922
|
)
|
||||
Amortization
of prior service cost
|
76
|
102
|
||||||
Amortization
of net loss
|
160
|
54
|
||||||
Net
periodic benefit income
|
$
|
(36
|
)
|
$
|
(610
|
)
|
||
Other
benefits:
|
||||||||
Service
cost
|
$
|
54
|
$
|
80
|
||||
Interest
cost
|
338
|
379
|
||||||
Amortization
of prior service cost
|
1
|
1
|
||||||
Amortization
of net loss
|
41
|
56
|
||||||
Net
periodic benefit cost
|
$
|
434
|
$
|
516
|
||||
The
Company anticipates contributions to its pension plans for 2009 to be
approximately $1.6 million. During the first quarter of 2009,
contributions of approximately $0.4 million have been made to certain pension
plans.
Note
8 – Income Taxes
The
Company’s effective tax rate for the first quarter of 2009 was 44 percent
compared with 34 percent for the same period last year. The
difference between the reported income tax benefit and what would be computed
using the U.S. federal statutory tax rate for the first quarter of 2009 was $0.4
million. None of the items creating differences between the effective
and statutory rates are material.
Changes
in tax contingencies had an immaterial effect on the effective tax rate during
the first quarter of 2009. Total unrecognized tax benefits at the end
of first quarter were $8.0 million, without consideration of any applicable
federal benefit, and this amount includes $1.7 million of accrued
interest. The Company includes interest and penalties related to
income tax matters as a component of income tax expense. Of the $8.0
million, approximately $6.0 million would impact the effective tax rate, if
recognized. An immaterial amount was recorded for interest accruals
for the quarter.
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 2005 and with few exceptions is no
longer subject to state, local, or foreign income tax examinations by tax
authorities for years before 2002. The Internal Revenue Service has
concluded its examination of the Company’s 2005 and 2006 consolidated U.S.
federal income tax returns, the results of which were immaterial to the
Company. The Internal Revenue Service is beginning an examination of
the Company’s 2007 consolidated U.S. federal income tax return, as well as a
federal return of an entity acquired by the Company. 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
9 – Other Income, Net
For
the Quarter Ended
|
||||||||
March
28, 2009
|
March
29, 2008
|
|||||||
(In
thousands)
|
||||||||
Interest
income
|
$
|
498
|
$
|
2,385
|
||||
Gain
on early retirement of debt
|
-
|
2,408
|
||||||
Gain
(loss) on disposal of properties, net
|
87
|
(339
|
)
|
|||||
Environmental
expense, non-operating properties
|
(139
|
)
|
(118
|
)
|
||||
Other
|
181
|
233
|
||||||
Other
income, net
|
$
|
627
|
$
|
4,569
|
||||
Note
10 – Derivative Instruments and Hedging Activities
The
Company adopted SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133 (SFAS No. 161) during the first quarter of 2009. SFAS No.
161 requires enhanced disclosures for derivative instruments and hedging
activities. The adoption of SFAS No. 161 did not have any impact on
the Company’s condensed consolidated financial statements.
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. The Company occasionally enters into forward
fixed-price arrangements with certain customers; the risk of these arrangements
is managed with commodity futures contracts. The Company accounts for
these futures contracts in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No.
133). These futures contracts have been designated as
cash flow hedges. The fair value of open futures contracts are
recognized as a component of accumulated other comprehensive income until the
position is closed which corresponds to the period when the related hedged
transaction is recognized in earnings. 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 no longer probable of occurring, all
deferred gains and losses related to the hedge will be immediately reclassified
from accumulated other comprehensive income into earnings. In the
next twelve months, the Company will reclassify into earnings realized gains or
losses of cash flow hedges; at March 28, 2009, the net fair value of these
contracts was approximately a $3.4 million loss.
At
March 28, 2009 the Company held open futures contracts to purchase approximately
$16.2 million of copper over the next twelve months related to fixed price sales
orders. The fair value of those futures contracts was a $3.0 million
loss position, which was determined by obtaining quoted market prices (Level 1
hierarchy as defined by SFAS No. 157). The Company does not offset
fair value of amounts for derivative instruments and fair value amounts
recognized for the right to reclaim cash collateral. At March 28,
2009, the Company had recorded restricted cash of $1.9 million related to open
futures contracts.
Derivative
instruments designated as hedging instruments under SFAS No. 133 are reflected
in the Condensed Consolidated Balance Sheets as follows:
March
28, 2009
|
|||||
Location
|
Fair
value
|
||||
(In
thousands)
|
|||||
Commodity
contracts
|
Other
current assets
|
$
|
289
|
||
Commodity
contracts
|
Other
current liabilities
|
3,795
|
|||
Commodity
contracts
|
Other
current liabilities
|
(281
|
)
|
||
The
following tables summarize activities related to the Company’s derivative
instruments, classified as cash flow hedges in accordance with SFAS No. 133 for
the period ended March 28, 2009:
Gain
(Loss) Recognized in Accumulated OCI (Effective Portion), Net of
Tax
|
|||||||
March
28, 2009
|
|||||||
(In
thousands)
|
|||||||
Commodity
contracts
|
$
|
732
|
(1)
|
||||
(1) Includes $57 thousand attributable to noncontrolling interest. | |||||||
(Gain)
Loss Reclassified from Accumulated OCI into Income (Effective Portion),
Net of Tax
|
||||||
Location
|
Amount
|
|||||
(In
thousands)
|
||||||
Commodity
contracts
|
Cost
of goods sold
|
$
|
2,291
|
|
||
The
Company enters into futures contracts that closely match the terms of the
underlying transactions. As a result, the ineffective portion of the
open hedge contracts at March 28, 2009 is not material to the Condensed
Consolidated Statements of Operations.
Note
11 – 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). 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 Operations, (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. The Company adopted the provisions of
SFAS No. 160 in the first quarter of 2009. As a result of the
adoption, the Company has reported noncontrolling interests as a component of
equity in the Condensed Consolidated Balance Sheets and the net income or loss
attributable to noncontrolling interests has been separately identified in the
Condensed Consolidated Statement of Operations. The prior periods
presented have also been reclassified to conform to the current classification
required by SFAS No. 160.
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.
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. 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,
line sets, 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
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.
The
majority of the Company’s manufacturing facilities operated at significantly
below capacity during 2008 and have continued to do so during the first quarter
of 2009. This is due to the reduced demand for the Company’s products
arising from the continued decline in general economic conditions in the U.S.
and in foreign markets that the Company serves. The U.S. housing and
residential construction market has been adversely affected in the current
economic downturn. According to the U.S. Census Bureau, new housing
starts were 113 thousand in the first quarter of 2009, which is a 51 percent
decrease from the same period in the prior year. The March 2009
seasonally adjusted annual rate of new housing starts was 510 thousand,
representing a 48 percent decline from the March 2008 rate. While
commercial construction has been more stable, it also has begun to
decline. Per the U.S. Census Bureau, the February 2009 seasonally
adjusted annual rate of Nonresidential Value of Construction Put in Place was
$684.9 billion of which $390.7 billion was private; this is a slight increase
compared with $676.4 billion and $391.6 billion at February 2008 but a slight
decline when compared with $706.6 billion and $406.9 billion at December
2008. These conditions have significantly affected the demand for
many of the Company’s core 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 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.
Results
of Operations
During
the first quarter of 2009, the Company’s net sales were $326.6 million, which
compares with net sales of $704.1 million over the same period of
2008. The decrease is due to reduced unit sales volume across the
majority of the Company’s product lines as a result of reduced demand arising
from current economic conditions. Additionally, selling prices have
decreased due to the decreased average cost of raw material during the period,
which is generally passed on to customers. The Comex average price of
copper, the Company’s principal raw material, was $1.57 per pound in the
first quarter of 2009, compared with $3.53 in the same period of
2008.
Cost of
goods sold decreased from $611.8 million in the first quarter of 2008 to $287.4
million in the same period of 2009. The decrease is primarily due to
decreased sales volume, lower average cost of raw material, and reduced
aggregate conversion costs as a result of reduced production workforce and lower
utility costs. Depreciation and amortization decreased to $10.5
million in the first quarter of 2009 from $11.0 million in the first quarter of
2008 due to several assets becoming fully depreciated during
2008. Selling, general, and administrative expense was $31.2 million
for the first quarter of 2009 compared with $38.3 million for the same period of
2008. The decrease is primarily due to decreased employment costs
resulting from reduced headcount, reduced management incentive compensation,
reductions in sales and distribution expenses resulting from lower sales volume,
and lower bad debt expense. Total headcount has declined from
approximately 4,086 employees in December 2008 to approximately 3,675 employees
in March 2009.
Interest
expense for the first quarter of 2009 totaled $2.6 million, compared with $5.5
million for the same period of 2008. The decrease is attributable to
lower interest expense following the early extinguishment of the Company’s 6%
Subordinated Debentures in 2008. Other income, net was $0.6 million
for the first quarter of 2009 compared with $4.6 million for the same period of
2008. The current year decrease was primarily due to decreased
interest income resulting from lower interest rates, and a gain from early
extinguishment of the Company’s 6% Subordinated Debentures recognized in the
first quarter of 2008.
The
Company’s effective tax rate for the first quarter of 2009 was 44 percent
compared with 34 percent for the same period last year. The
difference between the reported income tax benefit and what would be computed
using the U.S. federal statutory tax rate for the first quarter of 2009 was $0.4
million. None of the items creating differences between the effective
and statutory rates are material.
Plumbing
& Refrigeration Segment
Net sales
by the Plumbing and Refrigeration segment were $190.4 million in the first
quarter of 2009 which is approximately a 50 percent decrease from $383.9 million
for the same period in 2008. The decrease is due to decreased sales
volume in the majority of the segment’s product lines as a result of weak demand
and decreased selling prices resulting from lower average raw material
costs. Of the $193.5 million decrease in net sales, approximately
$93.0 million is attributable to lower unit volume and $85.6 million is due to
lower selling prices in the segment’s core product lines consisting primarily of
copper tube, line sets, and fittings. Additionally, the European
copper tube operation has suffered lower sales volume following a fire in
November 2008. Cost of goods sold decreased from $328.0 million in
the first quarter of 2008 to $153.3 million in the first quarter of
2009. This decrease resulted from lower sales volume, decreased raw
material costs, and reduced aggregate conversion costs from reductions in
production workforce and lower utility costs. Depreciation and
amortization decreased to $6.6 million in the first quarter of 2009 from $7.3
million in the same period of 2008 due to several production assets becoming
fully depreciated during 2008. Selling, general, and administrative
expense decreased to $20.1 million in the first quarter of 2009 from $23.5
million in the first quarter of 2008. These decreases are primarily
due to decreased employment costs from headcount reductions and lower aggregate
sales and distribution expense resulting from lower unit sales
volume. Operating income for the segment decreased from $25.1 million
in the first quarter of 2008 to $10.3 million in the first quarter of 2009 due
primarily to lower sales volume, partially offset by improved unit spreads in
many of SPD’s product lines.
OEM
Segment
Net sales
for the OEM segment declined approximately 58 percent to $138.4 million in the
first quarter of 2009 from $326.2 million in the first quarter of
2008. The decrease is due primarily to lower sales volume and lower
selling prices resulting from lower average costs of raw material. Of
the $187.8 million decrease in net sales, approximately $133.0 million is
attributable to lower unit volume and $44.4 million is due to lower selling
prices in the segment’s core product lines consisting primarily of brass rod,
forgings, and commercial tube. Cost of goods sold decreased from
$289.5 million in the first quarter 2008 to $136.0 million in the first quarter
of 2009. The decrease is due primarily to lower sales volume, lower
raw material costs, and lower aggregate conversion costs resulting from
reductions in production employees and lower energy
costs. Depreciation and amortization remained
consistent. Selling, general, and administrative expense decreased
$2.7 million to $5.0 million in the first quarter of 2009 due primarily to
reduced bad debt expense and decreased employment costs associated with
headcount reductions. Operating income for the segment
decreased from $25.6 million in the first quarter of 2008 to an operating
loss of $6.3 million in the first quarter of 2009 due primarily to lower sales
volumes and decreased unit spreads, especially in the segment’s brass rod
operations.
Liquidity
and Capital Resources
Cash
provided by operating activities during the first quarter of 2009 totaled $35.0
million, which is primarily attributable to decreased receivables and
inventories, partially offset by 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 quarter of 2009, the average
Comex copper price was approximately $1.57 per pound, which represents a 56
percent decrease over the average price during the first quarter of
2008. This decrease in the price of cathode has also resulted in
sharp decreases in the open market price for copper scrap and, to a lesser
extent, the price of brass scrap.
During
the first quarter of 2009, cash provided by investing activities totaled $1.4
million, which consisted of net reductions to restricted cash deposits of $5.9
million and proceeds from sales of properties of $0.4 million, partially offset
by capital expenditures of $4.8 million. Cash used in financing
activities during the first quarter of 2009 totaled $13.9 million, which
consisted of the net reduction in Mueller-Xingrong’s working capital debt
facility of $10.1 million and dividends paid totaling $3.7 million.
The
Company has a $200 million unsecured line-of-credit (Credit Facility) which
expires in December 2011. At March 28, 2009, 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 first quarter
of 2009. As of March 28, 2009, the Company’s total debt was $172.7
million or 20 percent of its total capitalization (excluding noncontrolling
interest).
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 March 28, 2009, the Company
was in compliance with all of its debt covenants.
The
Company declared and paid a regular quarterly cash dividend of ten cents per
common share in the first quarter of 2009. Payment of dividends in
the future is dependent upon the Company’s financial condition, cash flows,
capital requirements, earnings, and other factors. On May 1, 2009,
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 $300.3
million will be adequate to meet the Company’s normal future capital
expenditures and operational needs. The Company’s current ratio was
4.8 to 1 at March 28, 2009.
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 repurchase any shares
and may cancel, suspend, or extend the time period for the repurchase of shares
at any time. Any repurchases will be funded primarily through
existing cash and cash from operations. The Company may hold any
shares repurchased 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 March 28, 2009, 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.
There
have been no significant changes in the Company’s contractual cash obligations
reported at December 27, 2008.
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 futures 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
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 March 28, 2009, the Company held open futures contracts
to purchase approximately $16.2 million of copper through March 2010 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 March 28, 2009, the Company held no open contracts to
purchase natural gas.
Interest
Rates
At March
28, 2009, the Company had variable-rate debt outstanding of $24.1 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 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
March 28, 2009, the Company held no open foreign currency futures
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 March 28, 2009 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 March 28, 2009, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting. However, during the first quarter
of 2009, the Company began an implementation of the transaction processing
system currently used by its U.S. operations for its Mexican
operations. The implementation process is ongoing and is expected to
be completed in 2009.
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 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 have been 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. Given that these normal values are calculated on the basis
of sales and cost data provided by the Company and given that the cost of copper
has declined significantly since the issuance of the normal values in August
2008, the Company has experienced a decrease in its sales volumes of copper pipe
fittings subject to the dumping order, particularly during the fourth quarter of
2008. 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.
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 although, as discussed
above, export sales to Canada comprise only a small percentage of the Company’s
total sales. The “sunset review” process, pursuant to which Canadian
authorities will examine whether the dumping order should be revoked or
maintained for another five years, will initiate in April 2011.
United
States Department of Commerce Antidumping Review
On
December 24, 2008, the United States Department of Commerce (DOC) initiated an
antidumping administrative review of the antidumping duty order covering
circular welded non-alloy steel pipe and tube from Mexico. The review
will determine the final antidumping duties owed, if any, on U.S. imports by
certain subsidiaries of the Company during the period November 1, 2007 through
October 31, 2008, pursuant to the existing antidumping duty
order. DOC has selected Mueller Comercial de Mexico, S. de R.L.
de C.V. (Mueller Mexico) as a respondent in this proceeding, and Mueller Mexico
is currently preparing its response to the questionnaire. It is
possible that certain subsidiaries of the Company will incur additional
antidumping duties 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 also 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, the Court found Peter Berkman in contempt for resisting
discovery, and Peter Berkman has since filed a notice of appeal with the
Illinois Appellate Court, Second Judicial District. 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.
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 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.
Shasta Area Mine
Sites
Mining
Remedial Recovery Company (MRRC), a wholly owned subsidiary of the Company, 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.
U.S.S.
Lead
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 this site are handled pursuant
to a post-closure permit issued by the Indiana Department of Environmental
Management (IDEM) 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. On April 9, 2009, pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA),
the EPA added the Lead Refinery site to the National Priorities List
(NPL). The NPL is a list of priority sites where EPA has determined
that there has been a release or threatened release of contaminants that warrant
investigation and, if appropriate, remedial action. The NPL does not
assign liability to any party or to the owner of a property placed on the
NPL. The placement of a site on the NPL does not necessarily mean
that remedial action must be taken. 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 placement of this site on the
NPL. Lead Refinery lacks the financial resources needed to undertake
any investigations or remedial action that may be required by EPA pursuant to
CERCLA.
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 predecessor, Sharon Steel Corporation, acquired land within the
Eureka Mills Site from UV Industries, Inc. in 1979. Pursuant to
the court-approved 1990 bankruptcy plan of reorganization for Sharon Steel
Corporation, the land was transferred by the Company to Amwest Exploration
Company, a wholly-owned subsidiary of the Company, which later sold the land to
a third-party in 1993. 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 Site. The second request
for information concerned historic mining activities. In responding to
EPA’s November 2008 letter and also to a recent third request for information
received in March, 2009, the Company stated that it does not believe it is
liable for the contamination. The Company has agreed to suspend
temporarily the running of the time period during which the EPA must bring a
lawsuit in order to allow time for the Company and the EPA to discuss this
matter. 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. The Company is continuing to evaluate this
matter.
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 repurchase any shares
and may cancel, suspend, or extend the time period for the repurchase of shares
at any time. Any repurchases will be funded primarily through
existing cash and cash from operations. The Company may hold any
shares repurchased 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 March 28, 2009, 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 March 28, 2009.
(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)
|
||||||||||||||||||||||||
December
28, 2008 –
January
24, 2009
|
—
|
$
|
—
|
||||||||||||||||||||||
January
25 – February 21, 2009
|
—
|
—
|
|||||||||||||||||||||||
February
22 – March 28, 2009
|
—
|
—
|
|||||||||||||||||||||||
(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.
|
|||||||||||||||||||||||||
19.1
|
Mueller
Industries, Inc.’s Quarterly Report to Stockholders for the quarter ended
March 28, 2009. 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.
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
|
|
April
21, 2009
|
Executive
Vice President and
|
Date
|
Chief
Financial Officer
|
/S/
Richard
W.
Corman
|
|
April
21, 2009
|
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
March 28, 2009. 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.
|