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 July 1, 2006 Commission file number 1-6770
MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-0790410
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8285 Tournament Drive, Suite 150
Memphis, Tennessee 38125
(Address of principal executive offices) (Zip Code)
(901) 753-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock outstanding as of
July 25, 2006, was 36,946,768.
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MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Period Ended July 1, 2006
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Condensed Consolidated Statements of Income
for the quarters and six months ended July 1, 2006
and July 2, 2005 3
b.) Condensed Consolidated Balance Sheets
as of July 1, 2006 and December 31, 2005 7
c.) Condensed Consolidated Statements of Cash Flows
for the six months July 1, 2006
and July 2, 2005 9
d.) Notes to Condensed Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 32
Part II. Other Information
Item 1. Legal Proceedings 34
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 36
Item 4. Submission of Matters to a Vote of Security Holders 37
Item 6. Exhibits 38
Signatures 39
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
July 1, July 2,
2006 2005
(In thousands, except per share data)
Net sales $ 779,663 $ 410,506
Cost of goods sold 637,038 345,663
---------- ----------
Gross profit 142,625 64,843
Depreciation and amortization 10,376 10,411
Selling, general, and
administrative expense 39,689 29,136
---------- ----------
Operating income 92,560 25,296
Interest expense (5,214) (4,752)
Other (expense) income, net (67) 3,973
---------- ----------
Income before income taxes 87,279 24,517
Current income tax expense (29,584) (7,545)
Deferred income tax benefit 1,055 211
---------- ----------
Total income tax expense (28,529) (7,334)
---------- ----------
Net income $ 58,750 $ 17,183
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
July 1, July 2,
2006 2005
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 36,891 36,599
Effect of dilutive stock options 421 466
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,312 37,065
---------- ----------
Basic earnings per share $ 1.59 $ 0.47
========== ==========
Diluted earnings per share $ 1.57 $ 0.46
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Six Months Ended
July 1, July 2,
2006 2005
(In thousands, except per share data)
Net sales $ 1,330,702 $ 812,169
Cost of goods sold 1,094,107 679,687
---------- ----------
Gross profit 236,595 132,482
Depreciation and amortization 20,571 20,489
Selling, general, and
administrative expense 74,648 59,491
---------- ----------
Operating income 141,376 52,502
Interest expense (10,076) (9,936)
Other (expense) income, net 1,946 4,767
---------- ----------
Income before income taxes 133,246 47,333
Current income tax expense (46,077) (15,981)
Deferred income tax benefit 4,946 1,039
---------- ----------
Total income tax expense (41,131) (14,942)
---------- ----------
Net income $ 92,115 $ 32,391
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Six Months Ended
July 1, July 2,
2006 2005
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 36,791 36,552
Effect of dilutive stock options 405 556
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,196 37,108
---------- ----------
Basic earnings per share $ 2.50 $ 0.89
========== ==========
Diluted earnings per share $ 2.48 $ 0.87
========== ==========
Dividends per share $ 0.20 $ 0.20
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
July 1, 2006 December 31, 2005
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 138,887 $ 129,685
Accounts receivable, less allowance
for doubtful accounts of $7,595 in
2006 and $5,778 in 2005 408,666 248,395
Inventories:
Raw material and supplies 58,307 42,268
Work-in-process 37,711 24,610
Finished goods 152,650 130,109
---------- ----------
Total inventories 248,668 196,987
Other current assets 40,308 36,919
---------- ----------
Total current assets 836,529 611,986
Property, plant, and equipment, net 313,248 307,046
Goodwill 152,175 152,171
Other assets 17,549 33,435
---------- ----------
$ 1,319,501 $ 1,104,638
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
July 1, 2006 December 31, 2005
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 26,961 $ 4,120
Accounts payable 206,171 124,216
Accrued wages and other employee costs 36,980 38,095
Other current liabilities 95,088 84,961
---------- ----------
Total current liabilities 365,200 251,392
Long-term debt 308,483 312,070
Pension liabilities 22,702 21,721
Postretirement liabilities other
than pensions 13,132 13,515
Environmental reserves 8,997 9,073
Deferred income taxes 51,341 63,944
Other noncurrent liabilities 2,884 3,078
---------- ----------
Total liabilities 772,739 674,793
---------- ----------
Minority interest in subsidiaries 21,017 6,937
Stockholders' equity:
Preferred stock - shares authorized
4,985,000; none outstanding - -
Series A junior participating
preferred stock - $1.00 par value;
shares authorized 15,000;
none outstanding - -
Common stock - $.01 par value; shares
authorized 100,000,000; issued
40,091,502; outstanding 36,946,768
in 2006 and 36,643,590 in 2005 401 401
Additional paid-in capital, common 254,177 252,889
Retained earnings 338,174 253,433
Accumulated other comprehensive
income (loss) 1,471 (8,848)
Treasury common stock, at cost (68,478) (74,967)
---------- ----------
Total stockholders' equity 525,745 422,908
---------- ----------
Commitments and contingencies (Note 2) - -
---------- ----------
$ 1,319,501 $ 1,104,638
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
July 1, July 2,
2006 2005
(In thousands)
Cash flows from operating activities
Net income $ 92,115 $ 32,391
Reconciliation of net income
to net cash (used in) provided
by operating activities:
Depreciation and amortization 20,719 20,568
Deferred income taxes (4,946) (1,039)
Minority interest in subsidiaries 1,805 7
Share-based compensation expense 1,308 -
Equity in earnings of
unconsolidated subsidiary (964) (3,471)
Gain on early retirement of debt (97) -
Loss on disposal of properties 1,905 457
Gain on sale of equity investment (1,876) -
Income tax benefit from exercise
of stock options (1,042) 529
Changes in assets and liabilities:
Receivables (162,602) (30,347)
Inventories (51,127) (3,823)
Other assets (4,642) (1,305)
Current liabilities 93,754 20,058
Other liabilities 4,439 161
Other, net (3,657) 304
---------- ----------
Net cash (used in) provided by
operating activities (14,908) 34,490
---------- ----------
Cash flows from investing activities
Capital expenditures (20,918) (8,876)
Business acquired, net of
cash received 3,632 -
Proceeds from sales of
properties and equity investment 23,218 559
---------- ----------
Net cash provided by (used in)
investing activities 5,932 (8,317)
---------- ----------
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Six Months Ended
July 1, July 2,
2006 2005
(In thousands)
Cash flows from financing activities
Issuance of debt by joint venture $ 22,425 $ -
Dividends paid (7,373) (7,320)
Proceeds from the sale of
treasury stock 5,823 3,911
Repayments of long-term debt (3,413) (396)
Income tax benefit from exercise
of stock options 1,042 -
Acquisition of treasury stock (396) (168)
---------- ----------
Net cash provided by (used in)
financing activities 18,108 (3,973)
---------- ----------
Effect of exchange rate changes on cash 70 (509)
---------- ----------
Increase in cash and cash equivalents 9,202 21,691
Cash and cash equivalents at the
beginning of the period 129,685 47,449
---------- ----------
Cash and cash equivalents at the
end of the period $ 138,887 $ 69,140
========== ==========
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed
or omitted. Results of operations for the interim periods presented are
not necessarily indicative of results which may be expected for any
other interim period or for the year as a whole. This Quarterly Report
on Form 10-Q should be read in conjunction with the Company's Annual
Report on Form 10-K, including the annual financial statements
incorporated therein.
The accompanying unaudited interim financial statements include all
normal recurring adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods
presented. The six-month period ended July 1, 2006 contained 26 weeks
while the six-month period ended July 2, 2005 contained 27 weeks.
Note 1 - Earnings per Common Share and Stock-Based Compensation
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.
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123 (R), "Share-Based Payment",
and began recognizing compensation expense in its Condensed Consolidated
Statements of Income as a selling, general, and administrative expense,
for its stock option grants based on the fair value of the awards.
Prior to January 1, 2006, the Company accounted for stock option grants
under the recognition and measurement provisions of APB Opinion 25,
"Accounting for Stock Issued to Employees", and related Interpretations,
as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation".
No stock-based compensation expense was reflected in net income prior to
adopting SFAS 123 (R) as all options were granted at an exercise price
equal to the market value of the underlying common stock on the date of
grant. SFAS 123 (R) was adopted using the modified prospective
transition method. Under this transition method, compensation cost
recognized in the periods after adoption includes: (i) compensation
cost for all share-based payments granted prior to, but not yet vested
as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and (ii)
compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123 (R). Results from prior
periods have not been restated. As a result of adopting SFAS 123 (R),
the Company's income before income taxes and net income was decreased by
$0.7 million and $0.5 million, respectively, for the second quarter of
2006 and $1.3 million and $1.0 million, respectively, for the first six
months of 2006.
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Prior to the adoption of SFAS 123 (R), the Company presented all
tax benefits of deductions resulting from the exercise of stock options
as operating cash flows in the Condensed Consolidated Statements of Cash
Flows. SFAS 123 (R) requires the cash flows resulting from the tax
benefits resulting from tax deductions in excess of the compensation
cost recognized for those options to be classified as financing cash
flows. The $1.0 million tax benefit classified as a financing cash
inflow in the first six months of 2006 would have been classified as an
operating cash flow under previous guidance.
The following table illustrates the pro forma effect on the prior
year's net income and earnings per share as if the Company had applied
the fair value recognition provisions of SFAS 123 to options granted
under the Company's stock option plans. For purposes of this pro forma
disclosure, the value to the options is estimated using a Black-Scholes-
Merton option pricing model and amortized to expense over the options'
vesting period.
For the For the Six
Quarter Ended Months Ended
July 2, July 2,
2005 2005
(In thousands, except per share data)
Net income as reported $ 17,183 $ 32,391
Deduct: Total stock-based compensation
expense determined under a fair
value based method,
net of related tax effects (691) (1,225)
---------- ----------
SFAS No. 123 pro forma
net income $ 16,492 $ 31,166
========== ==========
Pro forma earnings per share:
Basic $ 0.45 $ 0.85
Diluted $ 0.44 $ 0.84
Earnings per share, as reported:
Basic $ 0.47 $ 0.89
Diluted $ 0.46 $ 0.87
Under existing plans, the Company may grant options to purchase
shares of common stock at prices not less than the fair market value of
the stock on the date of grant. Generally, the options vest annually in
equal increments over a five-year period beginning one year from the
date of grant. Any unexercised options expire after not more than ten
years. The fair value of each grant is estimated as a single award and
amortized into compensation expense on a straight-line basis over its
vesting period.
-12-
The Company estimates the fair value of all stock option awards as
of the grant date by applying the Black-Scholes-Merton option pricing
model. The use of this valuation model involves assumptions that are
judgmental and highly sensitive in the determination of compensation
expense and include the expected life of the option, stock price
volatility, risk-free interest rate, dividend yield, and exercise price.
Additionally under SFAS 123 (R), forfeitures are estimated at the time
of valuation and reduce expense ratably over the vesting period. The
forfeiture rate, which is estimated at a weighted average of 3.5 percent
of unvested options outstanding as of July 1, 2006, is adjusted
periodically based on the extent to which actual forfeitures differ, or
are expected to differ, from the previous estimate. Under SFAS 123 and
APB 25, the Company elected to account for forfeitures when awards were
actually forfeited and reflected the forfeitures as a cumulative
adjustment to the pro forma expense.
In accordance with SFAS 123 (R), the fair values of options granted
prior to adoption and determined for purposes of disclosure under SFAS
123 have not been changed. The fair value of options granted prior to
adoption of SFAS 123 (R), of which a portion is unvested, was estimated
assuming the following weighted averages: expected life of six years,
dividend yield of 1.3 percent for grants in 2005 and 2004 (no dividend
payments prior to 2004), risk-free interest rate of 3.8 percent, and
expected volatility of 30.6 percent.
The Company generally issues treasury shares when options are
exercised. A summary of stock option activity since our most recent
fiscal year end is as follows:
Weighted Average
Options Exercise Price
(Shares in thousands)
Outstanding at December 31, 2005 1,912 $ 21.49
Granted 10 34.46
Exercised (317) 18.43
Cancelled (6) 26.27
--------
Outstanding at July 1, 2006 1,599 20.20
========
At July 1, 2006, the aggregate intrinsic value of all outstanding
options was $21.6 million with a weighted average remaining contractual
term of 6.8 years, of which 758,714 of the outstanding options are
currently exercisable with an aggregate intrinsic value of $11.8
million, a weighted average exercise price of $20.20 and a weighted
average remaining contractual term of 5.7 years. The total intrinsic
value of options exercised during the quarter and six months ended July
1, 2006 was $1.3 million and $4.0 million, respectively. Shares
available for future employee grants were approximately 1.0 million at
July 1, 2006. The total compensation cost at July 1, 2006 related to
non-vested awards not yet recognized was $5.4 million with an average
expense recognition period of 3.0 years.
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Under the Company's 1994 Non-Employee Director Stock Option Plan,
each member of the Company's Board of Directors who is neither an
employee nor an officer of the Company is automatically granted each
year on the date of the Company's Annual Meeting of Stockholders',
without further action by the Board, an option to purchase 2,000 shares
of Common Stock at the fair market value of the Common Stock on the date
the option is granted. As of July 1, 2006, options to purchase 54,232
shares of Common Stock were outstanding under this Plan and 21,588
options are available under the Plan for future issuance.
On February 16, 2006, the Board approved an amendment and
restatement of the 2002 Stock Option Plan which, among other things,
would increase the number of shares available for issuance by 1.0
million shares. The amendment and restatement was approved by the
Company's stockholders at the Annual Meeting held on May 4, 2006.
Note 2 - Commitments and Contingencies
The Company is involved in certain litigation as a result of claims
that arose in the ordinary course of business, which management believes
will not have a material adverse effect on the Company's financial
position or results of operations. Additionally, the Company may
realize the benefit of legal claims and litigation in the future; these
gain contingencies are not recognized in the Condensed Consolidated
Financial Statements.
Beginning in September 2004, the Company has been named as a
defendant in several purported class action complaints brought by
direct and indirect purchasers alleging anticompetitive activities
with respect to the sale of copper tubes in the United States (the
Copper Tube Actions). Two such purported class actions were filed in
the United States District Court for the Western District of Tennessee
(the Federal Actions). The remaining Copper Tube Actions were filed
in state courts in Tennessee, California and Massachusetts.
Certain of the Copper Tube Actions purport to address the sale of
copper plumbing tube in particular. Plaintiffs' motions to consolidate
the Federal Actions and the actions pending in California state court,
respectively, have been granted. All of the Copper Tube Actions, which
are similar, seek monetary and other relief.
Wholly owned Company subsidiaries, WTC Holding Company, Inc., Deno
Holding Company, Inc., and Mueller Europe Ltd. (Mueller Europe), are
named in all of the Copper Tube Actions, and Deno Acquisition Eurl is
named in two of the Copper Tube Actions. The claims against WTC Holding
Company, Inc. and Deno Holding Company Inc. have been dismissed without
prejudice in the Copper Tube Actions pending in California and
Massachusetts state court.
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Motions to dismiss the Federal Actions for failure to state a claim
have been denied as to WTC Holding Company, Inc., Deno Holding Company,
Inc. and the Company. Mueller Europe's motion to dismiss the Federal
Actions for lack of personal jurisdiction and on other grounds is
pending. The Company's demurrer to the complaint and the Company's
motion to dismiss for failure to state a claim are pending in the state
court actions filed in California and Tennessee, respectively. The
Company has not yet been required to respond to the complaint in the
action pending in Massachusetts state court. Mueller Europe has not yet
been required to respond to the complaints in any of the state court
actions pending in Tennessee, California or Massachusetts.
The Company believes that the claims for relief in the Copper Tube
Actions are without merit and intends to defend the Copper Tube Actions
vigorously.
In March 2006, the Company and Mueller Europe were named in a
complaint brought by Carrier Corporation, Carrier S.A., and Carrier
Italia S.p.A. alleging anticompetitive activities with respect to the
sale of copper tubes used in the manufacturing of air-conditioning and
refrigeration units (ACR copper tubes) in the United States and
elsewhere (the Carrier Action). The Carrier Action was filed in United
States District Court for the Western District of Tennessee. Neither
the Company nor Mueller Europe has yet been required to respond to the
complaint in the Carrier Action.
In addition, beginning in April 2006, the Company has been named as
a defendant in several purported class actions lawsuits brought by
direct and indirect purchasers also alleging anticompetitive activities
with respect to the sale of ACR copper tubes in the United States and
elsewhere (the ACR Class Actions, and with the Carrier Action, the ACR
Actions). Mueller Europe is named in all of the ACR Class Actions. One
of the ACR Class Actions was filed in United States District Court for
the Northern District of California, while the remaining ACR Class
Actions were filed in the United States District Court for the Western
District of Tennessee. Plaintiffs' motion to consolidate the ACR Class
Actions brought by direct purchasers in the Western District of
Tennessee has been granted. All of the ACR Actions seek monetary and
other relief. Neither the Company nor Mueller Europe has yet been
required to respond to the complaints in any of the ACR Class Actions.
The Company believes that the claims for relief in the ACR Actions
are without merit and intends to defend the ACR Actions vigorously.
Two of the Company's subsidiaries, Mueller Copper Tube Products
Inc. and Mueller Copper Tube Company Inc., brought a lawsuit (the Price
Manipulation Action) against J.P. Morgan Chase & Co. and Morgan Guaranty
Trust Company of New York (collectively Morgan) to recover damages the
Company believes it suffered on first purchases of copper cathode
resulting from an alleged conspiracy to manipulate the price of copper
cathode by Morgan (and certain of its predecessors and affiliates) and
others in violation of the federal antitrust laws. The lawsuit was filed
on June 12, 2003, in the U.S. District Court for the Western District of
Wisconsin. The Company's lawsuit was consolidated with those of certain
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other first purchasers of copper cathode and rod under the name In re
Copper Antitrust Litigation. Although the Price Manipulation Action was
dismissed by the district court on March 2, 2004, as barred by the
statute of limitations, the U.S. Court of Appeals for the Seventh
Circuit, on February 6, 2006, reversed the district court's decision in
part and remanded the Price Manipulation Action for further proceedings
in the district court. Although the Company is unable to predict the
likely outcome of the Price Manipulation Action at this time, the
Company is prosecuting the case vigorously, and intends to continue to
do so in the future.
In June 2006, the Canada Border Services Agency (CBSA) initiated an
investigation into the alleged dumping of 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 possible U.S. exporters and importers of
these goods and requested to provide information to Canadian
authorities. The Company is responding to the CBSA's requests for
information regarding the investigation.
The Company is aware of investigations of competition in markets in
which it participates, or has participated in the past, in Europe and
Canada. On September 22, 2005, the European Commission adopted a
statement alleging infringements in Europe of competition rules by
manufacturers of copper fittings and related companies, including the
Company, WTC Holding Company, Inc., and Mueller Europe, for activities
undertaken in Europe. The Company took the lead in bringing these
issues to the attention of the European Commission and has fully
cooperated in the resulting investigation from its inception. The
Company does not anticipate any material adverse effect on its business
or financial condition as a result of the matters discussed in this
paragraph.
The Company has assessed its risk and provided estimated accruals
for various potential tax matters in a number of jurisdictions.
Although the ultimate amount of the liabilities, if any, may vary, the
Company believes it has adequate reserves for its assessed risk.
Guarantees, in the form of letters of credit, are issued by the
Company generally to guarantee the payment of insurance deductibles,
retiree health benefits, and certain operating costs of a foreign
subsidiary. 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 July 1, 2006 was $18.9 million.
-16-
Note 3 - Acquisitions and Investments
In December 2005, two subsidiaries of the Company received a
business license from a Chinese industry and commerce authority,
establishing a joint venture with Jiangsu Xingrong Hi-Tech Co., Ltd. and
Jiangsu Baiyang Industries Ltd. The joint venture, in which the Company
holds a 50.5 percent interest, produces inner groove and smooth tube in
level-wound coils, pancake coils, and straight lengths, primarily to
serve the Chinese domestic OEM air-conditioning market as well as to
complement the Company's U.S. product line. The joint venture is
located primarily in Jintan City, Jiangsu Province, China. The joint
venture entity is named Jiangsu Mueller-Xingrong Copper Industries
Limited (Mueller-Xingrong). In December 2005, the Company contributed
$7.0 million cash investment to the venture. During the first quarter
of 2006 the Company contributed an additional $12.4 million, which
completed its initial planned cash investment. Non-cash contributions
from the other joint venture parties included long-lived assets of
approximately $5.3 million in December 2005 and $8.5 million during the
first quarter of 2006. The results of operations of this joint venture
are reported in the OEM segment and are included in the Company's
Condensed Consolidated Financial Statements from January 1, 2006.
During the first quarter of 2006, Mueller-Xingrong had a temporary
Bridge Loan Facility with two banks providing for secured borrowings of
up to RMB 110 million, or $13.7 million USD, to fund working capital.
On April 4, 2006, Mueller-Xingrong entered into a Credit Agreement with
a syndicate of four banks establishing a secured RMB 320 million, or
$39.9 million USD, revolving working capital credit facility (the JV
Credit Facility) which matures in April 2007. Proceeds from the JV
Credit Facility were used to pay-off amounts outstanding under the
Bridge Loan Facility. Borrowings under the JV Credit Facility are
secured by the real property and equipment of Mueller-Xingrong and bear
interest at 98 percent of the latest base-lending rate published by the
Peoples Bank of China (currently 5.2 percent).
On August 15, 2005, the Company acquired 100 percent of the
outstanding stock of KX Group LTD (Brassware). Brassware, located in
Witton, Birmingham, England, is an import distributor of plumbing and
residential heating products with historical annual sales of
approximately $48.0 million to plumbers' merchants and builders'
merchants in the U.K. and Ireland. The cost of the acquired business,
including cash of $10.6 million plus $1.8 million of notes issued,
totaled $12.4 million. The total estimated fair value of assets
acquired was approximately $17.6 million, consisting primarily of
receivables of $8.4 million, inventory of $6.4 million and property and
equipment of $1.5 million. The total estimated fair value of
liabilities assumed was approximately $16.4 million, consisting
primarily of notes payable of $8.3 million and trade payables and other
current liabilities of $8.1 million. The excess of the purchase price
over the estimated fair value of assets acquired and liabilities assumed
of $11.2 million was allocated to goodwill of the Plumbing &
Refrigeration segment. This acquisition will broaden the Company's
product line in the U.K. The acquisition was accounted for using the
purchase method of accounting. Therefore, the results of operations of
-17-
the acquired business were included in the Company's Condensed
Consolidated Financial Statements from its acquisition date. The
purchase price, which was financed by available cash balances, has been
allocated to the assets of the acquired business based on their
respective fair market values.
In April 2006, the Company sold its approximately 38 percent
interest in Conbraco Industries, Inc. which had a net book value of
approximately $21.1 million. Aggregate cash proceeds from the sale were
approximately $23.0 million. This transaction resulted in a pre-tax
gain of approximately $1.9 million.
Note 4 - Industry Segments
The Company's businesses are aggregated into two reportable
segments: the Plumbing & Refrigeration segment and the OEM segment.
Prior to the fourth quarter of 2005, the Company disclosed its
reportable segments as Standard Products and Industrial Products.
Additional operating segments have been recognized following an internal
reorganization in 2005. 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), the Trading Group, and European
Operations. The OEM segment is composed of the Industrial Products
Division (IPD) and the Engineered Products Division (EPD). These
reportable segments are described in more detail below. SPD
manufactures and sells copper tube, copper and plastic fittings, and
valves in North America. European Operations manufactures copper tube
in Europe, which is sold in Europe and the Middle East; activities also
include import distribution. The Trading Group sources products for
import distribution in North America. 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,
through IPD, manufactures and sells brass and copper alloy rod, bar, and
shapes; aluminum and brass forgings; and aluminum and copper impact
extrusions; and through EPD, manufactures and sells refrigeration valves
and fittings; fabricated tubular products; gas valves and assemblies;
and commercial copper tube. The OEM segment sells its products
primarily to original equipment manufacturers (OEMs), many of which are
in the HVAC, plumbing, and refrigeration markets in the U.S., Mexico,
and China.
-18-
Summarized segment information is as follows:
For the Quarter Ended
July 1, July 2,
2006 2005
(In thousands)
Net sales:
Plumbing & Refrigeration $ 551,158 $ 302,435
OEM 242,128 110,958
Elimination of intersegment sales (13,623) (2,887)
---------- ----------
$ 779,663 $ 410,506
========== ==========
Operating income:
Plumbing & Refrigeration $ 78,328 $ 23,150
OEM 21,511 7,306
Unallocated expenses (7,279) (5,160)
---------- ----------
$ 92,560 $ 25,296
========== ==========
Income before income taxes:
Plumbing & Refrigeration $ 77,419 $ 23,260
OEM 19,029 7,339
Unallocated expenses (9,169) (6,082)
---------- ----------
$ 87,279 $ 24,517
========== ==========
-19-
For the Six Months Ended
July 1, July 2,
2006 2005
(In thousands)
Net sales:
Plumbing & Refrigeration $ 938,099 $ 596,332
OEM 410,100 222,283
Elimination of intersegment sales (17,497) (6,446)
---------- ----------
$ 1,330,702 $ 812,169
========== ==========
Operating income:
Plumbing & Refrigeration $ 122,521 $ 47,777
OEM 32,464 13,840
Unallocated expenses (13,609) (9,115)
---------- ----------
$ 141,376 $ 52,502
========== ==========
Income before income taxes:
Plumbing & Refrigeration $ 121,946 $ 48,142
OEM 29,584 13,888
Unallocated expenses (18,284) (14,697)
---------- ----------
$ 133,246 $ 47,333
========== ==========
July 1, 2006 December 31, 2005
(In thousands)
Segment assets:
Plumbing & Refrigeration $ 816,915 $ 718,484
OEM 293,961 197,697
General corporate 208,625 188,457
---------- ----------
$ 1,319,501 $ 1,104,638
========== ==========
Operating income and income before income taxes for the OEM segment
was reduced by a $3.9 million impairment charge during the six months
ended July 2, 2005. The quarter and six month period ended July 1,
2006, includes the acquired operations of Brassware in the Plumbing &
Refrigeration segment and Mueller-Xingrong in the OEM segment.
-20-
Note 5 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
July 1, July 2,
2006 2005
(In thousands)
Comprehensive income:
Net income $ 58,750 $ 17,183
Other comprehensive income (loss):
Foreign currency translation 5,645 (3,427)
Minimum pension liability 4,315 -
Change in the fair value
of derivatives (53) (36)
---------- ----------
$ 68,657 $ 13,720
========== ==========
For the Six Months Ended
July 1, July 2,
2006 2005
(In thousands)
Comprehensive income:
Net income $ 92,115 $ 32,391
Other comprehensive income (loss):
Foreign currency translation 5,901 (5,734)
Minimum pension liability 4,315 -
Change in the fair value
of derivatives 103 92
---------- ----------
$ 102,434 $ 26,749
========== ==========
The change in cumulative foreign currency translation adjustment
primarily relates to the Company's investment in its U.K. and Mexican
subsidiaries and fluctuations in exchange rates between their local
currencies and the U.S. dollar. During the first six months of 2006,
the value of the British pound sterling increased 7.3 percent compared
to the U.S. dollar and the value of the Mexican peso decreased 5.5
percent compared to the U.S. dollar.
-21-
Note 6 - Employee Benefits
The Company sponsors several qualified and nonqualified pension
plans and other postretirement benefit plans for certain of its
employees. The net periodic benefit (income) cost is based on estimated
values provided by independent actuaries. The components of net
periodic benefit (income) cost are as follows:
For the Quarter Ended
July 1, July 2,
2006 2005
(In thousands)
Pension benefits:
Service cost $ 422 $ 555
Interest cost 1,861 2,061
Expected return on plan assets (2,241) (2,613)
Amortization of prior service cost 93 98
Amortization of net (gain) loss 106 (159)
---------- ----------
Net periodic benefit (income) cost $ 241 $ (58)
========== ==========
Other benefits:
Service cost $ 2 $ 1
Interest cost 160 162
Amortization of prior service cost 2 (2)
Amortization of net loss 32 36
---------- ----------
Net periodic benefit cost $ 196 $ 197
========== ==========
-22-
For the Six Months Ended
July 1, July 2,
2006 2005
(In thousands)
Pension benefits:
Service cost $ 949 $ 1,109
Interest cost 3,884 4,124
Expected return on plan assets (4,849) (4,937)
Amortization of prior service cost 186 187
Amortization of net (gain) loss 418 (279)
---------- ----------
Net periodic benefit (income) cost $ 588 $ 204
========== ==========
Other benefits:
Service cost $ 4 $ 2
Interest cost 318 324
Amortization of prior service cost 4 (4)
Amortization of net loss 65 72
---------- ----------
Net periodic benefit cost $ 391 $ 394
========== ==========
The Company anticipates contributions to its pension plans for 2006
to be approximately $2.4 million. During the first six months of 2006,
approximately $1.2 million of contributions have been made to certain
pension plans.
Note 7 - Environmental Reserves
The Company is subject to normal environmental standards imposed by
federal, state, local, and foreign environmental laws and regulations.
At July 1, 2006, the Company had $9.0 million reserved for environmental
remediation, post-closure monitoring, and related obligations. The
Company periodically reassesses these amounts and estimates its
obligations over the foreseeable future based upon results of ongoing
remediation and monitoring programs, communications with regulatory
agencies, and changes in environmental law. While additional costs are
possible, the Company believes that its reserve is adequate and amounts
beyond that are not reasonably estimable. Costs of estimated future
expenditures for environmental remediation obligations are not discounted to
their present value. Accrued environmental liabilities are not reduced by
potential insurance reimbursements. Based upon information currently
available, management believes that the outcome of pending environmental
matters will not materially affect the overall financial position and
results of operations of the Company.
-23-
Note 8 - Income Taxes
The Company's effective tax rate for the second quarter of 2006 was
32.7 percent compared with 29.9 percent for the same period of last
year. The current period rate was less than the expected federal rate
due primarily to reductions to valuation allowances related to the U.K.
net operating loss carryforwards of approximately $1.0 million, or $0.03
per diluted share, recognition of a benefit from U.S. manufacturer's
deduction of $0.4 million, and recognition of a benefit of a foreign tax
holiday of approximately $1.0 million.
The Company's effective tax rate for the first six months of 2006
was 30.9 percent compared with 31.6 percent for the same period of last
year. The current period rate was less than the expected federal rate
due primarily to reductions to valuation allowances related to the U.K.
net operating loss carryforwards of approximately $3.0 million, or $0.08
per diluted share, recognition of a benefit from U.S. manufacturer's
deduction of $0.7 million, recognition of a benefit of a foreign tax
holiday of approximately $1.0 million, and recognition of approximately
$0.8 million benefit from the favorable resolution of an Internal
Revenue Service audit of tax returns filed for 2002 and 2003.
Note 9 - Other (expense) income, net
For the Quarter Ended
July 1, July 2,
2006 2005
(In thousands)
Interest income $ 1,003 $ 319
Gain on sale of equity investment 1,876 -
Equity in earnings of
unconsolidated subsidiary - 3,205
Gain on early retirement of debt 97 -
Environmental expense (140) (145)
Minority interest in income
of subsidiaries (1,412) (7)
Loss on disposal of properties, net (2,026) (364)
Rent, royalties, and other 535 965
---------- ----------
$ (67) $ 3,973
========== ==========
-24-
For the Six Months Ended
July 1, July 2,
2006 2005
(In thousands)
Interest income $ 1,963 $ 705
Gain on sale of equity investment 1,876 -
Equity in earnings of
unconsolidated subsidiary 964 3,471
Gain on early retirement of debt 97 -
Environmental expense (265) (290)
Minority interest in income
of subsidiaries (1,805) (7)
Loss on disposal of properties, net (1,905) (457)
Rent, royalties, and other 1,021 1,345
---------- ----------
$ 1,946 $ 4,767
========== ==========
Note 10 - Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements. It prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax
return. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company has not yet completed the process of evaluating
what effect, if any, the adoption of FIN 48 will have on its
consolidated statements of income or financial position.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General Overview
The Company is a leading manufacturer of copper, brass, plastic,
and aluminum products. The range of these products is broad: copper
tube and fittings; brass and copper alloy rod, bar, and shapes; aluminum
and brass forgings; aluminum and copper impact extrusions; plastic
fittings and valves; refrigeration valves and fittings; and fabricated
tubular products. The Company also resells imported brass and plastic
plumbing valves, malleable iron fittings, steel nipples, faucets and
plumbing specialty products. The Company's operations are located
throughout the United States, and in Canada, Mexico, Great Britain, and
China.
-25-
The Company's businesses are aggregated into two reportable
segments: the Plumbing & Refrigeration segment and the OEM segment.
Prior to the first quarter of 2005, the Company disclosed its reportable
segments as Standard Products and Industrial Products. Additional
operating segments have been recognized following an internal
reorganization in 2005. 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), the Trading Group, and European
Operations. The OEM segment is composed of the Industrial Products
Division (IPD) and the Engineered Products Division (EPD). These
reportable segments are described in more detail below. SPD
manufactures and sells copper tube, copper and plastic fittings, and
valves in North America. European Operations manufactures copper tube
in Europe, which is sold in Europe and the Middle East; activities also
include import distribution. The Trading Group sources products for
import distribution in North America. 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,
through IPD, manufactures and sells brass and copper alloy rod, bar, and
shapes; aluminum and brass forgings; and aluminum and copper impact
extrusions; and through EPD, manufactures and sells refrigeration valves
and fittings; fabricated tubular products; gas valves and assemblies;
and commercial copper tube. The OEM segment sells its products
primarily to original equipment manufacturers (OEMs), many of which are
in the HVAC, plumbing, and refrigeration markets in the U.S., Mexico,
and China.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration, and
plumbing markets because the principal end use of a significant portion
of the Company's products is in the construction of single and multi-
family housing and commercial buildings. Repairs and remodeling
projects are also important drivers of underlying demand for these
products.
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.
-26-
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. Imports of copper tubing from Mexico have increased in
recent years, although U.S. consumption is still predominantly supplied
by U.S. manufacturers. The six-month period ended July 1, 2006
contained 26 weeks while the six-month period ended July 2, 2005
contained 27 weeks.
Results of Operations
During the second quarter of 2006, the Company's net sales were
$779.7 million, which compares with net sales of $410.5 million over the
same period of 2005. Net sales were $1.33 billion in the first half of
2006 compared with $812.2 million in the same period of 2005. The
increase in net sales is attributable to higher selling prices,
increased volumes and acquired businesses. The average price of copper
was approximately 88 percent higher in the first half of 2006 compared
with the same period of 2005. Businesses acquired in late 2005
contributed $92.3 million of sales in the first half of 2006.
Cost of goods sold increased from $345.7 million in the second
quarter of 2005 to $637.0 million in the same period of 2006. Cost of
goods sold for the six months ended July 1, 2006 was $1.09 billion
compared with $679.7 million for the first six months of 2005. The
current year increase was attributable to higher material costs and
increased volume. Gross profit increased to $142.6 million from $64.8
million in the second quarter and increased to $236.6 million from
$132.5 for the six-month period due primarily to higher margins on
copper tube, European operations, and Brass rod. The impact of rising
raw material costs also significantly contributed to the gross profit
improvement. Inventories valued using the LIFO method totaled $26.9
million at July 1, 2006 and $33.5 million at December 31, 2005. At July
1, 2006 and December 31, 2005, the approximate FIFO cost of such
inventories was $124.2 million and $87.7 million, respectively. During
the first six months of 2006, inventory quantities valued using the LIFO
method declined. The Company expects to replenish these LIFO
inventories during 2006 and as such, has not recognized the effect of
liquidating LIFO layers.
Selling, general, and administrative expense was $39.7 million for
the second quarter of 2006 compared with $29.1 million for the same
period of 2005. Year-to-date selling, general, and administrative
expense was $74.6 million for 2006 compared with $59.5 million for the
same period of 2005. The increase for the quarter and six months was
primarily due to businesses acquired in second half of 2005 and
increased incentive compensation including stock-based compensation.
-27-
For the second quarter of 2006, operating income at the Plumbing &
Refrigeration segment was $78.3 million, which compares with $23.2
million in the same period of 2005. Year-to-date, 2006 operating income
at the Plumbing & Refrigeration segment was $122.5 million, which
compares with $47.8 million in the same period of 2005. The second
quarter and six month increase are primarily attributable to better
margins from copper tube, plastic fittings, and European operations
including contributions from acquired businesses.
Operating income at the OEM segment was $21.5 million in the second
quarter of 2006 compared with $7.3 million in the second quarter of
2005. Year-to-date, 2006 operating income at the OEM segment was $32.5
million, which compares with $13.8 million in the same period of 2005.
Improved profitability in the second quarter and first half of 2006 was
due to (i) higher volumes in the brass rod business, (ii) contributions
from Mueller-Xingrong, which reported total operating income of $3.3
million for the quarter and $4.1 million for the first half of 2006, and
(iii) improvements in other product lines. Operating income for the
first half of 2005 was reduced by a $3.9 million impairment charge.
Interest expense for the second quarter of 2006 totaled $5.2
million, compared with $4.8 million for the same period of 2005. For
the first half of 2006, interest expense was $10.1 million compared with
$9.9 million for the same period of 2005. The increase in the second
quarter and first half of 2006 is primarily attributable to increased
borrowings at Mueller-Xingrong.
Other (expense) income, net was $1.9 million for the first half of
2006 compared with $4.8 million for the same period of 2005. The
current year decrease is primarily due to a decrease in earnings from
unconsolidated subsidiary and elimination of minority interest in
Mueller-Xingrong. In April 2006, the Company sold its approximately 38
percent interest in Conbraco Industries, Inc. which had a net book value
of approximately $21.1 million. This transaction resulted in a pre-tax
gain of approximately $1.9 million. Aggregate cash proceeds from the
sale were approximately $23.0 million.
The Company's effective tax rate for the first six months of 2006
was 30.9 percent compared with 31.6 percent for the same period of last
year. The current period rate was less than the expected federal rate
due primarily to reductions to valuation allowances related to the U.K.
net operating loss carryforwards of approximately $3.0 million, or $0.08
per diluted share, recognition of a benefit from a U.S. manufacturer's
deduction of $0.7 million, recognition of a benefit of a foreign tax
holiday of approximately $1.0 million, and recognition of approximately
$0.8 million benefit from the favorable resolution of an Internal
Revenue Service audit of tax returns filed for 2002 and 2003. The
Company's effective tax rate for the second quarter of 2006 was 32.7
percent compared with 29.9 percent for the same period of last year.
The current period rate was less than the expected federal rate due
primarily to reductions to valuation allowances primarily related to the
U.K. net operating loss carryforwards of approximately $1.0 million, or
$0.03 per diluted share, recognition of a benefit from U.S.
manufacturer's deduction of $0.4 million, and recognition of a benefit
of a foreign tax holiday of approximately $1.0 million.
-28-
Liquidity and Capital Resources
Cash used in operating activities during the first half of 2006
totaled $14.9 million, which is primarily attributable to increased
receivables of $162.6 million and increased inventories of $51.1
million, offset primarily by net income of $92.1 million, depreciation
and amortization of $20.7 million, and increased current liabilities of
$93.8 million. Fluctuations in the cost of copper and other raw
materials affect the Company's liquidity. Changes in material costs
directly impact components of working capital, primarily inventories and
accounts receivable. During the first half of 2006, the average COMEX
copper price was approximately $2.81 per pound, which represents an 88
percent increase over the average price during the first half of 2005.
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 half of 2006, cash provided by investing
activities was $5.9 million, consisting primarily of $23.2 million
proceeds from the sale of properties including the equity interest in
Conbraco Industries, Inc. partially offset by capital expenditures
totaling $20.9 million. Cash provided by financing activities totaled
$18.1 million for the first half of 2006 consisting primarily of
issuance of debt to fund working capital of Mueller-Xingrong of $22.4
million and proceeds from the sale of treasury stock of $5.8 million,
partially offset by payment of dividends of $7.4 million. Repayments of
long-term debt totaled $3.4 million for the first half of 2006 which
included $1.8 million of the Company's 6% Subordinated Debentures.
The Company has a $150 million unsecured line-of-credit (Credit
Facility) which expires in November 2007. At July 1, 2006, there were
no outstanding borrowings under the Credit Facility. Approximately
$18.8 million in letters of credit were backed by the Credit Facility at
the end of the quarter. At July 1, 2006, the Company's total debt was
$335.4 million or 39 percent of its total capitalization.
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of working
capital, tangible net worth, and debt service coverage ratios. At July
1, 2006, the Company was in compliance with all of its debt covenants.
The Company declared and paid a regular quarterly cash dividend of
ten cents per common share in the first and second quarters of 2006 and
2005. Payment of dividends in the future is dependent upon the
Company's financial condition, cash flows, capital requirements,
earnings, and other factors. On May 1, 2006, the Company made its semi-
annual interest payment of approximately $9.0 million on its 6%
Subordinated Debentures.
Management believes that cash provided by operations and currently
available cash of $138.9 million will be adequate to meet the Company's
normal future capital expenditures and operational needs. The Company's
current ratio was 2.3 to 1 at July 1, 2006.
-29-
The Company's Board of Directors has authorized the repurchase
until October 2006 of 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. The Company may hold any shares purchased in
treasury or use a portion of the repurchased shares for employee benefit
plans, as well as for other corporate purposes. Through July 1, 2006,
the Company has repurchased approximately 2.4 million shares under this
authorization. Additionally, the Company may repurchase its outstanding
6% Subordinated Debentures through open market transactions. Purchases
of those securities, if any, will be funded primarily through existing
cash and cash from operations.
There have been no significant changes in the Company's contractual
cash obligations reported at December 31, 2005, except the following. At
December 31, 2005 the Company reported contractual supply commitments for
raw materials consumed in the ordinary course of business totaling $327.3
million or $2.05 per pound. At July 1, 2006 the price per pound for the
same raw materials was approximately $3.40. The increased price will
affect cash outflows during the second half of 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in raw material
costs, energy costs, interest rates, and foreign currency exchange. 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
Adequate supplies of raw material have historically been available
to the Company from primary producers, metal brokers, and scrap dealers.
Sufficient energy in the form of natural gas, fuel oils, and electricity
is available to operate the Company's production facilities. While
temporary shortages of raw material and fuels may occur occasionally, to
date they have not materially hampered the Company's operations.
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.
-30-
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. Gains or losses with respect to
these positions are deferred in stockholders' equity as a component of
comprehensive income and reflected in earnings upon the sale of
inventory. Periodic value fluctuations of the contracts generally
offset the value fluctuations of the underlying fixed-price transactions
or inventory. As of July 1, 2006, the Company held open forward
contracts to purchase approximately $18.6 million of copper through
December 2006.
Futures contracts may also be used to manage price risk associated
with natural gas purchases. Gains and losses with respect to these
positions are deferred in stockholders' equity as a component of
comprehensive income and reflected in earnings upon consumption of
natural gas. Periodic value fluctuations of the contracts generally
offset the value fluctuations of the underlying natural gas prices. At
July 1, 2006, the Company had open forward contracts to purchase $1.0
million of natural gas through March 2007. The lack of availability of
energy sources and the impact of rising energy prices could materially
affect the Company's business, results of operations and financial
condition.
Interest Rates
At July 1, 2006, the Company had variable rate debt outstanding of
$25.3 million, the majority of which relates to the debt issued during
the second quarter by Mueller-Xingrong which is discussed above. At
these borrowing levels, a hypothetical 10 percent increase in interest
rates would have had an insignificant unfavorable impact on the
Company's pre-tax earnings and cash flows. The primary interest rate
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 July 1, 2006,
one of the Company's foreign subsidiaries had $4.9 million in open
forward contracts to purchase U.S. dollars.
-31-
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, and the
Mexican peso. Additionally, with the investment in Mueller-Xingrong,
the Company is exposed to the Chinese currency (RMB). 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed
to ensure information required to be disclosed in Company reports filed
under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in
Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
The Company's management, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures
pursuant to Rule 13a-15(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,
because of the material weakness in internal controls related to the
accounting for income taxes as described below, the Company's disclosure
controls and procedures were not effective as of July 1, 2006.
The Company's management, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company's internal control over financial reporting
as of December 31, 2005 based on the control criteria established in a
report entitled Internal Control-Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on such evaluation management determined that a material weakness
related to the accounting for income taxes existed as of December 31,
2005. At July 1, 2006, management determined that the material weakness
had not yet been remediated.
-32-
As defined by the Public Company Accounting Oversight Board's
Auditing Standard No. 2, a material weakness in internal control is a
significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of
the financial statements would not be prevented or detected on a timely
basis by the Company. The principal factors contributing to the
material weakness in accounting for income taxes were (1) inadequate
staffing and technical expertise within the Company's tax department,
(2) ineffective review and approval practices, (3) inadequate processes
to effectively reconcile income tax accounts, and (4) inadequate
application of the provisions of SFAS No. 109 to tax planning
strategies. These deficiencies resulted in adjustments to correct the
Company's accounting for income taxes which were recorded prior to the
issuance of the Consolidated Financial Statements as of and for the year
ended December 31, 2005. These deficiencies, in the aggregate, were
determined to be a material weakness. As a result of the aforementioned
material weakness, management has concluded that the Company's internal
control over financial reporting was not effective as of December 31,
2005. Management has also determined that the existence of the material
weakness did not result in a material misstatement of the financial
results reported for prior annual or interim periods.
Changes in Internal Control over Financial Reporting
Management is in the process of implementing additional procedures
to enhance the controls surrounding accounting for income taxes.
Specifically, management has begun to undertake the following actions
intended to address the identified control weakness:
* Evaluate current staffing resources;
* Require additional education and training in prevailing accounting
standards that govern income tax reporting for personnel involved in
the preparation and review of income tax reporting matters;
* Engage third-party experts to conduct an independent review and
evaluation of the Company's process of accounting for and
reporting of income taxes; and
* Implement a standardized reporting system related to income tax
reporting matters that will facilitate timely information
gathering and analysis for all business units.
As of July 1, 2006, selected members of the corporate accounting
and tax departments have completed training courses in prevailing
accounting standards that govern income tax reporting, a third-party
expert has completed its initial review of the Company's process of
accounting for and reporting of income taxes, although recommendations
have not yet been implemented, and the corporate accounting department
has increased its staffing.
There were no changes in the Company's internal control over
financial reporting during the Company's fiscal quarter ending July 1,
2006, that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting. However, as described above, the Company has begun to
undertake changes in internal control over financial reporting to
correct the material weakness related to the accounting for income
taxes.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
General
The Company is involved in certain litigation as a result of claims
that arose in the ordinary course of business, which management believes
will not have a material adverse effect on the Company's financial
position or results of operations. Additionally, the Company may
realize the benefit of legal claims and litigation in the future; these
gain contingencies are not recognized in the Condensed Consolidated
Financial Statements.
Copper Tube Antitrust Litigation
Beginning in September 2004, the Company has been named as a defendant
in several purported class action complaints brought by direct and indirect
purchasers alleging anticompetitive activities with respect to the sale of
copper tubes in the United States (the Copper Tube Actions). Two such
purported class actions were filed in the United States District Court for
the Western District of Tennessee (the Federal Actions). The remaining
Copper Tube Actions were filed in state courts in Tennessee, California and
Massachusetts.
Certain of the Copper Tube Actions purport to address the sale of
copper plumbing tube in particular. Plaintiffs' motions to consolidate
the Federal Actions and the actions pending in California state court,
respectively, have been granted. All of the Copper Tube Actions, which
are similar, seek monetary and other relief.
Wholly owned Company subsidiaries, WTC Holding Company, Inc., Deno
Holding Company, Inc., and Mueller Europe Ltd. (Mueller Europe), are
named in all of the Copper Tube Actions, and Deno Acquisition Eurl is
named in two of the Copper Tube Actions. The claims against WTC Holding
Company, Inc. and Deno Holding Company Inc. have been dismissed without
prejudice in the Copper Tube Actions pending in California and
Massachusetts state court.
Motions to dismiss the Federal Actions for failure to state a claim
have been denied as to WTC Holding Company, Inc., Deno Holding Company,
Inc. and the Company. Mueller Europe's motion to dismiss the Federal
Actions for lack of personal jurisdiction and on other grounds is
pending. The Company's demurrer to the complaint and the Company's
motion to dismiss for failure to state a claim are pending in the state
court actions filed in California and Tennessee, respectively. The
Company has not yet been required to respond to the complaint in the
action pending in Massachusetts state court. Mueller Europe has not yet
been required to respond to the complaints in any of the state court
actions pending in Tennessee, California or Massachusetts.
The Company believes that the claims for relief in the Copper Tube
Actions are without merit and intends to defend the Copper Tube Actions
vigorously.
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In March 2006, the Company and Mueller Europe were named in a
complaint brought by Carrier Corporation, Carrier S.A., and Carrier
Italia S.p.A. alleging anticompetitive activities with respect to the
sale of copper tubes used in the manufacturing of air-conditioning and
refrigeration units (ACR copper tubes) in the United States and
elsewhere (the Carrier Action). The Carrier Action was filed in United
States District Court for the Western District of Tennessee. Neither
the Company nor Mueller Europe has yet been required to respond to the
complaint in the Carrier Action.
In addition, beginning in April 2006, the Company has been named as
a defendant in several purported class actions lawsuits brought by
direct and indirect purchasers also alleging anticompetitive activities
with respect to the sale of ACR copper tubes in the United States and
elsewhere (the ACR Class Actions, and with the Carrier Action, the ACR
Actions). Mueller Europe is named in all of the ACR Class Actions. One
of the ACR Class Actions was filed in United States District Court for
the Northern District of California, while the remaining ACR Class
Actions were filed in the United States District Court for the Western
District of Tennessee. Plaintiffs' motion to consolidate the ACR Class
Actions brought by direct purchasers in the Western District of
Tennessee has been granted. All of the ACR Actions seek monetary and
other relief. Neither the Company nor Mueller Europe has yet been
required to respond to the complaints in any of the ACR Class Actions.
The Company believes that the claims for relief in the ACR Actions
are without merit and intends to defend the ACR Actions vigorously.
Copper Price Manipulation Litigation
Two of the Company's subsidiaries, Mueller Copper Tube Products
Inc. and Mueller Copper Tube Company Inc., brought a lawsuit (the Price
Manipulation Action) against J.P. Morgan Chase & Co. and Morgan Guaranty
Trust Company of New York (collectively Morgan) to recover damages the
Company believes it suffered on first purchases of copper cathode
resulting from an alleged conspiracy to manipulate the price of copper
cathode by Morgan (and certain of its predecessors and affiliates) and
others in violation of the federal antitrust laws. The lawsuit was filed
on June 12, 2003, in the U.S. District Court for the Western District of
Wisconsin. The Company's lawsuit was consolidated with those of certain
other first purchasers of copper cathode and rod under the name In re
Copper Antitrust Litigation. Although the Price Manipulation Action was
dismissed by the district court on March 2, 2004, as barred by the
statute of limitations, the U.S. Court of Appeals for the Seventh
Circuit, on February 6, 2006, reversed the district court's decision in
part and remanded the Price Manipulation Action for further proceedings
in the district court. Although the Company is unable to predict the
likely outcome of the Price Manipulation Action at this time, the
Company is prosecuting the case vigorously, and intends to continue to
do so in the future.
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Canadian Dumping and Countervail Investigation
In June 2006, the Canada Border Services Agency (CBSA) initiated an
investigation into the alleged dumping of 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 possible U.S. exporters and importers of these
goods and requested to provide information to Canadian authorities. The
Company is responding to the CBSA's requests for information regarding the
investigation.
Other Matters
The Company is aware of investigations of competition in markets in
which it participates, or has participated in the past, in Europe and
Canada. On September 22, 2005, the European Commission adopted a
statement alleging infringements in Europe of competition rules by
manufacturers of copper fittings and related companies, including the
Company, WTC Holding Company, Inc., and Mueller Europe, for activities
undertaken in Europe. The Company took the lead in bringing these
issues to the attention of the European Commission and has fully
cooperated in the resulting investigation from its inception. The
Company does not anticipate any material adverse effect on its business
or financial condition as a result of the matters discussed in this
paragraph.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The Company's Board of Directors has authorized the repurchase,
until October 2006, of up to ten million shares of the Company's Common
Stock through open market transactions or through privately negotiated
transactions. The Company has no obligation to purchase any shares and
may cancel, suspend, or extend the time period for the purchase of
shares at any time. Any purchases will be funded primarily through
existing cash and cash from operations. The Company may hold any shares
purchased in treasury or use a portion of the repurchased shares for
employee benefit plans, as well as for other corporate purposes.
Through July 1, 2006, the Company had repurchased approximately 2.4
million shares under this authorization. Below is a summary of the
Company's stock repurchases for the quarterly period ended July 1, 2006.
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(a) (b) (c) (d)
Total
Number of Maximum
Shares Number of
Purchased Shares that
as Part of May Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Purchased per Share Programs Programs
7,647,030(1)
April 2 -
April 29, 2006 - $ -
April 30 -
May 27, 2006 - -
May 28 -
July 1, 2006 249(2) 31.60
(1) Shares available to be purchased under the Company's 10 million share
repurchase authorization until October 2006. This repurchase plan was
announced on October 27, 2005.
(2) Shares tendered to the Company by employee stock option holders in
payment of the option purchase price and/or withholding taxes upon
exercise.
Item 4. Submission of Matters to a Vote of Security Holders
On May 4, 2006, the Company held its Annual Meeting of Stockholders
at which three proposals were voted upon: (i) the election of
directors, (ii) the approval of the amendment and restatement of the
Company's 2002 Stock Option Plan and (iii) the approval of the
appointment of independent auditors. The following persons were duly
elected to serve, subject to the Company's Bylaws, as Directors of the
Company until the next Annual Meeting, or until election and
qualification of their successors:
Votes in Favor Votes Withheld
Alexander P. Federbush 32,977,534 1,066,755
Gennaro J. Fulvio 32,977,634 1,066,655
Gary S. Gladstein 32,276,209 1,768,080
Terry Hermanson 32,990,145 1,054,144
Robert B. Hodes 28,729,845 5,314,444
Harvey L. Karp 32,655,632 1,388,657
William D. O'Hagan 32,658,528 1,385,761
The proposal to approve the amendment and restatement of the
Company's 2002 Stock Option Plan was ratified by 29,277,127 votes in
favor, 1,151,894 votes against, 87,680 votes abstaining, and 3,527,588
broker non-votes.
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The proposal to approve the appointment of Ernst & Young LLP as the
Company's independent registered public accounting firm was ratified by
33,601,587 votes in favor, 428,416 votes against, and 10,886 votes
abstaining.
Item 6. Exhibits
10.1 Mueller Industries, Inc. 2002 Stock Option Plan
(Amended and Restated as of February 16, 2006)
(Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K dated May 10,
2006).
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended July 1, 2006. Such
report is being furnished for the information of the
Securities and Exchange Commission only and is not to be
deemed filed as part of this Quarterly Report on Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Items 1A, 3, and 5 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MUELLER INDUSTRIES, INC.
July 28, 2006 /S/ KENT A. MCKEE
Date Kent A. McKee
Executive Vice President and
Chief Financial Officer
July 28, 2006 /S/ RICHARD W. CORMAN
Date Richard W. Corman
Vice President - Controller
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EXHIBIT INDEX
Exhibits Description
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended July 1, 2006. 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.
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