UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2009
Commission file number 1–6770

MLI Logo

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.   Yesx  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 July 20, 2009, was 37,298,773.

 
 

MUELLER INDUSTRIES, INC.

FORM 10–Q

For the Quarterly Period Ended June 27, 2009

INDEX


   
Page Number
 
     
   
     
 
3
     
 
4
     
 
5
     
 
6
     
 
18
     
 
23
     
 
24
     
 
     
 
25
     
 
29
     
 
30
     
 
30
     
31




 
 
2

PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements

MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
For the Quarter Ended
    
For the Six Months Ended
  
   
June 27, 2009
    
June 28, 2008
    
June 27, 2009
    
June 28, 2008
  
(In thousands, except per share data)
      
                         
Net sales
  
$
367,800
    
$
753,471
    
$
694,358
    
$
1,457,579
  
                                 
Cost of goods sold
    
313,353
      
661,209
      
600,736
      
1,273,006
  
Depreciation and amortization
    
10,355
      
11,004
      
20,835
      
21,988
  
Selling, general, and administrative expense
    
30,316
      
34,618
      
61,474
      
72,909
  
                                 
Operating income
    
13,776
      
46,640
      
11,313
      
89,676
  
                                 
Interest expense
    
(2,482
)
    
(5,238
)
    
(5,118
)
    
(10,705
)
Other income, net
    
385
      
1,961
      
1,012
      
6,530
  
                                 
Income before income taxes
    
11,679
      
43,363
      
7,207
      
85,501
  
                                 
Income tax expense
    
(5,512
)
    
(15,339
)
    
(3,550
)
    
(29,570
)
                                 
Consolidated net income
    
6,167
      
28,024
      
3,657
      
55,931
  
                                 
Less: net income attributable to noncontrolling interest
    
(139
)
    
(1,010
)
    
(121
)
    
(1,562
)
                                 
Net income attributable to Mueller Industries, Inc.
  
$
6,028
    
$
27,014
    
$
3,536
    
$
54,369
  
                                 
Weighted average shares for basic earnings per share
    
37,143
      
37,119
      
37,143
      
37,108
  
Effect of dilutive stock options
    
120
      
340
      
97
      
269
  
                                 
Adjusted weighted average shares for diluted earnings per share
    
37,263
      
37,459
      
37,240
      
37,377
  
                                 
Basic earnings per share
  
$
0.16
    
$
0.73
    
$
0.10
    
$
1.47
  
                                 
Diluted earnings per share
  
$
0.16
    
$
0.72
    
$
0.09
    
$
1.45
  
                                 
Dividends per share
  
$
0.10
    
$
0.10
    
$
0.20
    
$
0.20
  
                                 
See accompanying notes to condensed consolidated financial statements.





 
3

MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
June 27, 2009
    
December 27, 2008
  
(In thousands, except share data)
      
       
Assets
                
Current assets:
                
        Cash and cash equivalents    $
333,959
      $
 278,860
  
        Accounts receivable, less allowance of doubtful accounts of $6,904 in 2009 and $6,690 in 2008
    
207,238
      
219,035
  
         Inventories
    
169,118
      
210,609
  
        Other current assets
    
32,033
      
46,322
  
                 
            Total current assets
    
742,348
      
754,826
  
                 
Property, plant, and equipment, net
    
268,017
      
276,927
  
Other assets
    
151,537
      
151,160
  
                 
Total Assets
  
$
1,161,902
    
$
1,182,913
  
                 
Liabilities
                
Current liabilities:
                
Current portion of debt
  
$
9,629
    
$
24,184
  
Accounts payable
    
59,871
      
63,732
  
Accrued wages and other employee costs
    
26,756
      
35,079
  
Other current liabilities
    
64,922
      
78,589
  
                 
Total current liabilities
    
161,178
      
201,584
  
                 
Long-term debt, less current portion
    
158,226
      
158,726
  
Pension and postretirement liabilities
    
39,688
      
38,452
  
Environmental reserves
    
23,352
      
23,248
  
Deferred income taxes
    
33,496
      
33,940
  
Other noncurrent liabilities
    
1,417
      
1,698
  
                 
Total liabilities
    
417,357
      
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
    
263,598
      
262,378
  
        Retained earnings
    
546,609
      
550,501
  
        Accumulated other comprehensive loss
    
(26,785
)
    
(48,113
)
        Treasury common stock, at cost
    
(64,484
)
    
(64,484
)
                 
            Total Mueller Industries, Inc. stockholders’ equity
    
719,339
      
700,683
  
Noncontrolling interest
    
25,206
      
24,582
  
                 
Total equity
    
744,545
      
725,265
  
                 
Commitments and contingencies
    
-
      
-
  
                 
Total Liabilities and Equity
  
$
1,161,902
    
$
1,182,913
  
                 
See accompanying notes to condensed consolidated financial statements.
  


 
4

MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
For the Six Months Ended
  
 
June 27, 2009
    
June 28, 2008
  
(In thousands)
      
       
Cash flows from operating activities
              
    Net income attributable to Mueller Industries, Inc.
 $
3,536
    
$
54,369
  
    Reconciliation of net income attributable to Mueller Industries, Inc. to net cash provided by operating activities:
              
            Depreciation and amortization
  
20,946
      
22,323
  
            Gain on early retirement of debt
  
(128
)
    
(2,482
)
Net income attributable to noncontrolling interest
  
121
      
1,562
  
Stock-based compensation expense
  
1,220
      
1,479
  
Loss on disposal of properties
  
260
      
341
  
Deferred income taxes
  
(136
)
    
130
  
Income tax benefit from exercise of stock options
  
-
      
(69
)
Changes in assets and liabilities:
              
Receivables
  
16,831
      
(66,599
)
Inventories
  
45,209
      
7,489
  
Other assets
  
1,059
      
(2,321
)
Current liabilities
  
(21,741
)
    
(12,757
)
Other liabilities
  
(546
)
    
1,342
  
Other, net
  
(101
)
    
(1,167
)
               
Net cash provided by operating activities
  
66,530
      
3,640
  
               
Cash flows from investing activities
              
Capital expenditures
  
(8,725
)
    
(14,833
)
Net withdrawals from (deposits into) restricted cash balances
  
13,039
      
(632
)
Proceeds from sales of properties
  
606
      
-
  
               
Net cash provided by (used in) investing activities
  
4,920
      
(15,465
)
               
Cash flows from financing activities
              
Repayments of long-term debt
  
(370
)
    
(23,605
)
Dividends paid to stockholders of Mueller Industries, Inc.
  
(7,428
)
    
(7,421
)
Dividends paid to noncontrolling interest
  
(1,449
)
    
-
  
(Repayment) issuance of debt by joint venture, net
  
(14,567
)
    
5,411
  
    Issuance of shares under incentive stock option plans from treasury
  
-
      
1,055
  
    Income tax benefit from exercise of stock options
  
-
      
69
  
    Acquisition of treasury stock
  
-
      
(13
)
               
Net cash used in financing activities
  
(23,814
)
    
(24,504
)
               
Effect of exchange rate changes on cash
  
7,463
      
1,331
  
               
Increase (decrease) in cash and cash equivalents
  
55,099
      
(34,998
)
Cash and cash equivalents at the beginning of the period
  
278,860
      
308,618
  
               
Cash and cash equivalents at the end of the period
$
333,959
    
$
273,620
  
               
See accompanying notes to condensed consolidated financial statements.



 
5

MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

General

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.  Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole.  This Quarterly Report on Form 10–Q should be read in conjunction with the Company’s Annual Report on Form 10–K, including the annual financial statements incorporated therein.

The accompanying unaudited interim financial statements include all normal recurring adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.


Note 1 – Earnings per Common Share

Basic per share amounts have been computed based on the average number of common shares outstanding.  Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, computed using the treasury stock method.  Approximately 1.2 million stock options were excluded from the computation of diluted earnings per share for the three-month and six-month periods ended June 27, 2009, since the options' exercise price was higher than the average market price of the Company's stock.


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.  During the second quarter of 2009, the Company recorded a provision of $2.2 million, or 4 cents per diluted share after tax, as a result of additional loss contingencies that management deemed to become probable and estimable during the period.  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.

 
6
 
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 material 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 Mills 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.

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 Comercial) as a respondent in this proceeding.  On May 29, 2009, Mueller Comercial notified DOC that it would no longer participate in the review.  The Company anticipates that certain of its subsidiaries will incur additional antidumping duties on subject imports made during the review period.  The Company does not anticipate any material adverse effect on its financial position as a result of this review, and believes it has adequately provided for such exposure.

 
7

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 material 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.  All appellate briefs have been submitted and the Company is awaiting a date for oral argument.  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

In November 2008, the Company’s European copper tube operation was damaged by fire.  Production was curtailed for approximately four weeks to make necessary temporary repairs.  Certain production equipment and portions of building structures were extensively damaged.  The total value of the loss, including business interruption, cannot be determined at this time, but is expected to be covered by property and business interruption insurance.  In 2008, as a result of the fire, the Company wrote-off certain fixed assets that were damaged which was offset by a receivable.  There have been no significant additional write-offs in 2009.  Additionally, the Company received an advance of approximately $5.0 million from the insurance company in 2008 and an additional $7.3 million in the second quarter of 2009, primarily to cover cleanup costs.  The Company recorded these advances in other current liabilities net of cleanup costs incurred of approximately $3.4 million, $1.8 million of which was incurred in 2009.  The Company has not recognized potential gains arising from property damage or business interruption insurance in the Condensed Consolidated Statements of Income during 2009, and will not do so until final settlement of the insurance claim.

 
8

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 June 27, 2009 was $9.9 million.


Note 3 – Inventories

   
June 27, 2009
    
December 27, 2008
  
(In thousands)
      
                 
Raw materials and supplies
  
$
26,911
    
$
57,536
  
Work-in-process
    
25,324
      
39,018
  
Finished goods
    
122,796
      
122,756
  
Valuation reserves
    
(5,913
)
    
(8,701
)
                 
Inventories
  
$
169,118
    
$
210,609
  
                 

The Company has deferred recognizing potential gains resulting from liquidation of LIFO inventories during the first half 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 $4.7 million, before income taxes, 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 quarter 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 (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) until the first quarter of 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.

 
9

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 that date.  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.


 
10

Summarized segment information is as follows:

 (In thousands)
  
For the Quarter Ended June 27, 2009
  
   
Plumbing & Refrigeration Segment
    
OEM
Segment
    
Corporate and Eliminations
    
Total
  
                         
Net sales
  
$
229,764
    
$
139,885
    
$
(1,849
)
  
$
367,800
  
                                 
Cost of goods sold
    
192,064
      
122,838
      
(1,549
)
    
313,353
  
Depreciation and amortization
    
6,582
      
3,502
      
271
      
10,355
  
Selling, general, and administrative expense
    
19,236
      
5,494
      
5,586
      
30,316
  
                       
 
        
Operating income
    
11,882
      
8,051
      
(6,157
)
    
13,776
  
                                 
Interest expense
                            
(2,482
)
Other income, net
                            
385
  
                                 
Income before income taxes
                          
$
11,679
  
                                 


 (In thousands)
  
For the Quarter Ended June 28, 2008
  
   
Plumbing & Refrigeration Segment
    
OEM
Segment
    
Corporate and Eliminations
    
Total
  
                         
Net sales
  
$
404,414
    
$
353,988
    
$
(4,931
)
  
$
753,471
  
                                 
Cost of goods sold
    
340,146
      
325,695
      
(4,632
)
    
661,209
  
Depreciation and amortization
    
7,261
      
3,468
      
275
      
11,004
  
Selling, general, and administrative expense
    
21,637
      
5,862
      
7,119
      
34,618
  
                       
 
        
Operating income
    
35,370
      
18,963
      
(7,693
)
    
46,640
  
                                 
Interest expense
                            
(5,238
)
Other income, net
                            
1,961
  
                                 
Income before income taxes
                          
$
43,363
  
                                 


 
11

Segment information (continued):

 (In thousands)
  
For the Six Months Ended June 27, 2009
  
   
Plumbing & Refrigeration Segment
    
OEM
Segment
    
Corporate and Eliminations
    
Total
  
                         
Net sales
  
$
420,157
    
$
278,277
    
$
(4,076
)
  
$
694,358
  
                                 
Cost of goods sold
    
345,353
      
258,861
      
(3,478
)
    
600,736
  
Depreciation and amortization
    
13,206
      
7,088
      
541
      
20,835
  
Selling, general, and administrative expense
    
39,385
      
10,543
    
 
11,546
      
61,474
  
                       
 
        
Operating income
    
22,213
      
1,785
      
(12,685
)
    
11,313
  
                                 
Interest expense
                            
(5,118
)
Other income, net
                            
1,012
  
                                 
Income before income taxes
                          
$
7,207
  
                                 


 (In thousands)
  
For the Six Months Ended June 28, 2008
  
   
Plumbing & Refrigeration Segment
    
OEM
Segment
    
Corporate and Eliminations
    
Total
  
                         
Net sales
  
$
788,298
    
$
680,195
    
$
(10,914
)
  
$
1,457,579
  
                                 
Cost of goods sold
    
668,145
      
615,176
      
(10,315
)
    
1,273,006
  
Depreciation and amortization
    
14,519
      
6,918
      
551
      
21,988
  
Selling, general, and administrative expense
    
45,180
      
13,564
      
14,165
      
72,909
  
                       
 
        
Operating income
    
60,454
      
44,537
      
(15,315
)
    
89,676
  
                                 
Interest expense
                            
(10,705
)
Other income, net
                            
6,530
  
                                 
Income before income taxes
                          
$
85,501
  
                                 


 
12

Note 6 – Comprehensive Income

Comprehensive income is as follows:

   
For the Quarter Ended
    
For the Six Months Ended
  
   
June 27, 2009
    
June 28, 2008
    
June 27, 2009
    
June 28, 2008
  
(In thousands)
      
                         
Consolidated net income
  
$
6,167
    
$
28,024
    
$
3,657
    
$
55,931
  
                                 
Other comprehensive (loss) income, net of tax:
                                
Foreign currency translation
    
21,406
      
3,163
      
18,090
      
5,867
  
Net change with respect to derivative instruments and hedging activties
    
2,798
      
(260
)
    
5,821
      
378
  
Other, net
    
(995
)
    
155
      
(631
)
    
317
  
                                 
Total other comprehensive income
    
23,209
      
3,058
      
23,280
      
6,562
  
                                 
Comprehensive income
    
29,376
      
31,082
      
26,937
      
62,493
  
Less: comprehensive income attributable to noncontrolling interest
    
(1,394
)
    
(1,724
)
    
(2,073
)
    
(3,130
)
                                 
Comprehensive income attributable to Mueller Industries, Inc.
  
$
27,982
    
$
29,358
    
$
24,864
    
$
59,363
  
                                 


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 value of the British pound sterling has increased approximately 15 percent and 13 percent during the second quarter of 2009 and first half of 2009, respectively, relative to the U.S. dollar.  The value of the Mexican peso has increased approximately 7 percent and 4 percent during the second quarter of 2009 and first half of 2009, respectively, relative to the U.S. dollar.  


Note 7 – Debt

During the second quarter of 2009, the Company repurchased and extinguished $0.5 million in principal amount of its 6% Subordinated Debentures for $0.4 million, resulting in a gain of $0.1 million for the period.

At June 27, 2009, Mueller-Xingrong had available a secured revolving credit facility (the JV Facility) with an availability of RMB 425 million, or approximately $62.2 million, that matured on July 3, 2009.  Total borrowings outstanding at June 27, 2009 approximated $9.6 million.  Prior to maturity, but subsequent to quarter-end, Mueller-Xingrong repaid in full all amounts outstanding under the JV Facility.  After repayment, Mueller-Xingrong’s remaining cash on hand was adequate to meet its operational requirements and there was no impact on its continuing operations.  On July 18, 2009, Mueller-Xingrong entered into a new credit agreement (the JV Credit Agreement) with a syndicate of four banks establishing a secured RMB 267 million, or approximately $39.1 million, revolving credit facility with a maturity date of July 18, 2010.  All other terms of the new JV Credit Agreement were substantially equivalent to the previous JV Facility.




 
13

Note 8 – Employee Benefits

The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for certain of its employees.  The components of net periodic benefit cost (income) are as follows:

   
For the Quarter Ended
    
For the Six Months Ended
  
   
June 27, 2009
    
June 28, 2008
    
June 27, 2009
    
June 28, 2008
  
(In thousands)
      
       
Pension benefits:
                        
Service cost
  
$
197
    
$
508
    
$
561
    
$
1,247
  
Interest cost
    
2,098
      
2,550
      
4,660
      
5,967
  
Expected return on plan assets
    
(2,546
)
    
(3,833
)
    
(5,744
)
    
(8,755
)
Amortization of prior service cost
    
77
      
77
      
153
      
179
  
Amortization of net loss
    
376
      
75
      
536
      
129
  
                                 
Net periodic benefit cost (income)
  
$
202
    
$
(623
)
  
$
166
    
$
(1,233
)
                                 
Other benefits:
                                
Service cost
  
$
63
    
$
83
    
$
117
    
$
163
  
Interest cost
    
265
      
376
      
603
      
755
  
Amortization of prior service cost
    
-
      
-
      
1
      
1
  
Amortization of net loss
    
43
      
70
      
84
      
126
  
                                 
Net periodic benefit cost
  
$
371
    
$
529
    
$
805
    
$
1,045
  
                                 

During the second quarter of 2009, the Company executed a Deed of Amendment (the Amendment) which froze the accrual of future benefits related to its U.K. pension plan.  Pursuant to U.K. law, past service accruals will be adjusted for the effects of inflation after the execution of the Amendment.  The Amendment had no material impact on the Company’s results of operations.

The Company anticipates contributions to its pension plans for 2009 to be approximately $1.2 million.  During the first half of 2009, contributions of approximately $0.7 million have been made to certain pension plans.


Note 9 – Income Taxes

The Company’s effective tax rate for the second quarter of 2009 was 47 percent compared with 36 percent for the same period last year.  Factors that explain the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate for the second quarter of 2009 were state income taxes of $0.8 million, the effect of foreign statutory rates different from U.S. and other foreign adjustments of $0.5 million and changes to valuation allowances of $0.3 million.  These items were partially offset by the U.S. production activities deduction of $0.2 million.

The Company’s effective tax rate for the first half of 2009 was 49 percent compared with 35 percent for the same period last year.  Factors that explain the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate for the first half of 2009 were state income taxes of $0.6 million, the effect of foreign statutory rates different from U.S. and other foreign adjustments of $0.4 million, changes to tax contingencies of $0.2 million, and valuation allowance changes of $0.2 million.  These items were partially offset by the U.S. production activities deduction of $0.1 million.  The expense from valuation allowance changes for the second quarter and first half of 2009 includes the addition of a valuation allowance of $3.3 million, or 9 cents per diluted share, due to the expectation that a foreign deferred tax asset will not be realized, partially offset by the reduction of a valuation allowance of $3.1 million, or 8 cents per diluted share, due to an increase in the expected future realization of a state deferred tax asset.


 
14

Changes in tax contingencies had an immaterial effect on the effective tax rate during the second quarter and first half of 2009.  Total unrecognized tax benefits at the end of second quarter were $8.2 million, without consideration of any applicable federal benefit, and this amount includes $1.9 million of accrued interest.  The Company includes interest and penalties related to income tax matters as a component of income tax expense.  Of the $8.2 million, approximately $6.3 million would impact the effective tax rate, if recognized.  An immaterial amount was recorded for interest accruals for the first half of 2009.

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 10 – Other Income, Net

   
For the Quarter Ended
    
For the Six Months Ended
  
   
June 27, 2009
    
June 28, 2008
    
June 27, 2009
    
June 28, 2008
  
(In thousands)
      
                         
Interest income
  
$
283
    
$
1,708
    
$
781
    
$
4,093
  
Gain on early retirement of debt
    
128
      
74
      
128
      
2,482
  
Loss on disposal of properties, net
    
(347
)
    
(2
)
    
(260
)
    
(341
)
Environmental expense, non-operating properties
    
(189
)