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 April 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 April
26, 2006, was 36,854,675.
-1-
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Period Ended April 1, 2006
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Condensed Consolidated Statements of Income
for the quarters ended April 1, 2006
and April 2, 2005 3
b.) Condensed Consolidated Balance Sheets
as of April 1, 2006 and December 31, 2005 5
c.) Condensed Consolidated Statements of Cash Flows
for the quarters ended April 1, 2006
and April 2, 2005 7
d.) Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 27
Item 6. Exhibits 28
Signatures 29
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
April 1, 2006 April 2, 2005
(In thousands, except per share data)
Net sales $ 551,039 $ 401,663
Cost of goods sold 457,069 334,024
---------- ----------
Gross profit 93,970 67,639
Depreciation and amortization 10,195 10,078
Selling, general, and
administrative expense 34,959 30,355
---------- ----------
Operating income 48,816 27,206
Interest expense (4,862) (5,184)
Other income, net 2,013 794
---------- ----------
Income before income taxes 45,967 22,816
Current income tax expense (16,493) (8,436)
Deferred income tax benefit 3,891 828
---------- ----------
Total income tax expense (12,602) (7,608)
---------- ----------
Net income $ 33,365 $ 15,208
========== ==========
See accompanying notes to condensed consolidated financial statements.
-3-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
April 1, 2006 April 2, 2005
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 36,691 36,505
Effect of dilutive stock options 390 646
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,081 37,151
---------- ----------
Basic earnings per share $ 0.91 $ 0.42
========== ==========
Diluted earnings per share $ 0.90 $ 0.41
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to condensed consolidated financial statements.
-4-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 1, 2006 December 31, 2005
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 83,222 $ 129,685
Accounts receivable, less allowance
for doubtful accounts of $6,723 in
2006 and $5,778 in 2005 302,944 248,395
Inventories:
Raw material and supplies 44,167 42,268
Work-in-process 30,448 24,610
Finished goods 137,093 130,109
---------- ----------
Total inventories 211,708 196,987
Other current assets 40,835 36,919
---------- ----------
Total current assets 638,709 611,986
Property, plant, and equipment, net 313,974 307,046
Goodwill 151,941 152,171
Other assets 38,678 33,435
---------- ----------
$ 1,143,302 $ 1,104,638
========== ==========
See accompanying notes to condensed consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
April 1, 2006 December 31, 2005
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 16,978 $ 4,120
Accounts payable 114,510 124,216
Accrued wages and other employee costs 27,738 38,095
Other current liabilities 89,561 84,961
---------- ----------
Total current liabilities 248,787 251,392
Long-term debt 310,287 312,070
Pension liabilities 21,744 21,721
Postretirement liabilities other
than pensions 13,282 13,515
Environmental reserves 9,063 9,073
Deferred income taxes 59,916 63,944
Other noncurrent liabilities 3,011 3,078
---------- ----------
Total liabilities 666,090 674,793
---------- ----------
Minority interest in subsidiaries 19,564 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 36,854,675
in 2006 and 36,643,590 in 2005 401 401
Additional paid-in capital, common 253,050 252,889
Retained earnings 283,114 253,433
Accumulated other comprehensive loss (8,436) (8,848)
Treasury common stock, at cost (70,481) (74,967)
---------- ----------
Total stockholders' equity 457,648 422,908
---------- ----------
Commitments and contingencies (Note 2) - -
---------- ----------
$ 1,143,302 $ 1,104,638
========== ==========
See accompanying notes to condensed consolidated financial statements.
-6-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Quarter Ended
April 1, 2006 April 2, 2005
(In thousands)
Cash flows from operating activities
Net income $ 33,365 $ 15,208
Reconciliation of net income
to net cash (used in) provided
by operating activities:
Depreciation and amortization 10,240 10,118
Minority interest in subsidiary 393 -
Equity in earnings of
unconsolidated subsidiary (964) (266)
Deferred income taxes (3,891) (828)
(Gain) loss on disposal
of properties (121) 94
Share-based compensation expense 607 -
Income tax benefit from exercise
of stock options - 529
Changes in assets and liabilities:
Receivables (55,022) (19,189)
Inventories (14,813) (6,393)
Other assets (4,676) (3,130)
Current liabilities (14,807) 33,973
Other liabilities (175) 282
Other, net 104 (211)
---------- ----------
Net cash (used in) provided by
operating activities (49,760) 30,187
---------- ----------
Cash flows from investing activities
Capital expenditures (12,015) (4,814)
Business acquired, net of
cash received 3,632 -
Proceeds from sales of properties 253 25
---------- ----------
Net cash used in
investing activities (8,130) (4,789)
---------- ----------
See accompanying notes to condensed consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Quarter Ended
April 1, 2006 April 2, 2005
(In thousands)
Cash flows from financing activities
Acquisition of treasury stock $ (388) $ (168)
Dividends paid (3,684) (3,659)
Repayments of long-term debt (162) (2,972)
Isuance of debt by joint venture 11,164 -
Proceeds from the sale of
treasury stock 4,200 3,778
Income tax benefit from exercise
of stock options 228 -
---------- ----------
Net cash provided by (used in)
financing activities 11,358 (3,021)
---------- ----------
Effect of exchange rate changes on cash 69 (106)
---------- ----------
(Decrease) increase in cash
and cash equivalents (46,463) 22,271
Cash and cash equivalents at the
beginning of the period 129,685 47,449
---------- ----------
Cash and cash equivalents at the
end of the period $ 83,222 $ 69,720
========== ==========
See accompanying notes to condensed consolidated financial statements.
-8-
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 quarter ended April 1, 2006 contained 13 weeks while the
quarter ended April 2, 2005 contained 14 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). There were no option grants during the first
quarter of 2006. 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 for the first quarter of 2006 are $0.6 million and $0.5 million
lower, respectively, than if it had continued to account for share-based
compensation under APB 25.
-9-
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 Statement 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 $228
thousand tax benefit classified as a financing cash inflow in the first
quarter of 2006 would have been classified as an operating cash flow if the
Company had not adopted SFAS 123 (R).
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to options granted under the Company's stock option plans for all
periods presented. 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 periods.
For the Quarter Ended
April 1, 2006 April 2, 2005
(In thousands, except per share data)
Net income as reported $ 33,365 $ 15,208
Add: Total stock-based compensation
expense included in reported net
income, net of related tax effects 455 -
Deduct: Total stock-based compensation
expense determined under a fair
value based method,
net of related tax effects (455) (534)
---------- ----------
SFAS No. 123 (R) pro forma
net income $ 33,365 $ 14,674
========== ==========
Pro forma earnings per share:
Basic $ 0.91 $ 0.40
Diluted $ 0.90 $ 0.39
Earnings per share, as reported:
Basic $ 0.91 $ 0.42
Diluted $ 0.90 $ 0.41
-10-
Under existing plans, the Company may grant options to purchase shares
of common stock at prices not less than the fair market value of the stock on
the date of grant. Generally, the options vest annually in equal increments
over a five-year period beginning one year from the date of grant. Any
unexercised options expire after not more than ten years. The fair value of
each grant is estimated as a single award and amortized into compensation
expense on a straight-line basis over its vesting period.
The 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, exercise price, and forfeiture rate. 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, 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 reflect 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. There have been no stock options granted subsequent
to the adoption of SFAS 123 (R). 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 - -
Exercised (224) 18.78
Cancelled (3) 26.59
--------
Outstanding at April 1, 2006 1,685 21.84
========
-11-
At April 1, 2006, the aggregate intrinsic value of all outstanding
options was $15.2 million with a weighted average remaining contractual term
of 6.95 years, of which 831,832 of the outstanding options are currently
exercisable with an aggregate intrinsic value of $9.3 million, a weighted
average exercise price of $19.70 and a weighted average remaining contractual
term of 5.75 years. The total intrinsic value of options exercised during
the quarter ended April 1, 2006 was $2.6 million. Shares available for
future employee grants were approximately 17 thousand at April 1, 2006. The
total compensation cost at April 1, 2006 related to non-vested awards not yet
recognized was $6.0 million with an average expense recognition period of 3.2
years.
Under the Company's 1994 Non-Employee Director Stock Option Plan, each
member of the Company's Board of Directors who is neither an employee nor an
officer of the Company is automatically granted each year on the date of the
Company's Annual Meeting of Stockholders', without further action by the
Board, an option to purchase 2,000 shares of Common Stock at the fair market
value of the Common Stock on the date the option is granted. As of April 1,
2006, options to purchase 50,546 shares of Common Stock were outstanding
under this Plan and 26,588 options are available under the Plan for future
issuance.
There have been no modifications to the Company's share-based
compensation plans during the three-month period ended April 1, 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 certain
insurance, tax, and 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 plumbing tubes in the United States. Two such purported class actions
were filed in the United States District Court for the Western District of
Tennessee (the Federal Actions), four were filed in the Superior Court of the
State of California, County of San Francisco (the California Actions), one
was filed in the Circuit Court for Shelby County, Tennessee (the Tennessee
Action), and one was filed in the Superior Court of the Commonwealth of
Massachusetts, County of Middlesex (the Massachusetts Action, and with the
Federal Actions, the California Actions and the Tennessee Action, the Copper
Tube Actions).
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. Deno Acquisition Eurl has not been served with the
complaint in either of the Copper Tube Actions in which it is named, and only
-12-
the Company has been served with the complaint in the Tennessee Action. The
claims in the California Actions and the Massachusetts Action against WTC
Holding Company, Inc. and Deno Holding Company, Inc. have been dismissed
without prejudice.
All of the Copper Tube Actions, which are similar, seek declaratory
(except for the Massachusetts Action) and monetary relief. Plaintiffs'
motions to consolidate and for appointment of lead counsel in the Federal
Actions and plaintiffs' motion to consolidate the California Actions have
been granted. 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 in the California Actions and the
Company's motion to dismiss the Tennessee Action for failure to state a claim
are pending. The Company has not yet been required to respond to the
complaint in the Massachusetts Action. Mueller Europe has not yet been
required to respond to the complaints in the California Actions, the
Tennessee Action, and the Massachusetts Action. 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.
Beginning in April 2006, the Company has also been named in three
purported class action complaints brought by direct purchasers 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 ACR Class Actions). In
addition, in March 2006, the Company was named in a complaint brought by
Carrier Corporation, Carrier S.A., and Carrier Italia S.p.A. also alleging
anticompetitive activities with respect to the sale of ACR copper tubes in
the United States and elsewhere (the Carrier Action, and with the ACR Class
Actions, the ACR Actions). The ACR Actions were filed in the United States
District Court for the Western District of Tennessee. Mueller Europe is
named in all of the ACR Actions. Mueller Europe has not been served with any
of the complaints in the ACR Actions. The Company has been served with the
complaint in one of the ACR 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 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.
-13-
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. The ultimate
amount of the liabilities, if any, may vary, however, 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 April 1, 2006 was $12.2
million.
Note 3 - Industry Segments
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the OEM segment. Prior to 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 manufactures and sells
brass and copper alloy rod, bar, and shapes; aluminum and brass forgings;
aluminum and copper impact extrusions; refrigeration valves and fittings;
fabricated tubular products; and gas valves and assemblies. The OEM segment
sells its products primarily to original equipment manufacturers (OEMs), many
of which are in the HVAC, plumbing, and refrigeration markets.
-14-
Summarized segment information is as follows:
For the Quarter Ended
April 1, 2006 April 2, 2005
(In thousands)
Net sales:
Plumbing & Refrigeration $ 386,941 $ 293,897
OEM 167,972 111,325
Elimination of intersegment sales (3,874) (3,559)
---------- ----------
$ 551,039 $ 401,663
========== ==========
Operating income:
Plumbing & Refrigeration $ 44,193 $ 24,627
OEM 10,953 6,534
Unallocated expenses (6,330) (3,955)
---------- ----------
$ 48,816 $ 27,206
========== ==========
Note 4 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
April 1, 2006 April 2, 2005
(In thousands)
Comprehensive income:
Net income $ 33,365 $ 15,208
Other comprehensive income (loss):
Cumulative translation adjustments 256 (2,308)
Change in the fair value
of derivatives 156 128
---------- ----------
$ 33,777 $ 13,028
========== ==========
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 quarter of 2006, the value
of the British pound sterling increased 0.8 percent compared to the U.S.
dollar and the value of the Mexican peso decreased 1.5 percent compared to
the U.S. dollar.
-15-
Note 5 - 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 cost is based on estimated values provided by independent
actuaries. The components of net periodic benefit cost are as follows:
For the Quarter Ended
April 1, 2006 April 2, 2005
(In thousands)
Pension benefits:
Service cost $ 527 $ 554
Interest cost 2,023 2,063
Expected return on plan assets (2,608) (2,324)
Amortization of prior service cost 93 89
Amortization of net (gain) loss 312 (120)
---------- ----------
Net periodic benefit cost $ 347 $ 262
========== ==========
Other benefits:
Service cost $ 2 $ 1
Interest cost 158 162
Amortization of prior service cost 2 (2)
Amortization of net loss 33 36
---------- ----------
Net periodic benefit cost $ 195 $ 197
========== ==========
The Company anticipates contributions to its pension plans for 2006 to
be approximately $2.4 million. During the first quarter of 2006,
approximately $0.6 million of contributions have been made to certain pension
plans.
Note 6 - 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
-16-
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, Mueller-Xingrong had a temporary Bridge Loan
Facility with two banks providing for secured borrowings of up to RMB 110
million to fund working capital. At April 1, 2006, RMB 90 million, or the
equivalent of $11.2 million, was outstanding under this facility. On April
4, 2006, Mueller-Xingrong entered into a Credit Agreement with a syndicate of
four banks establishing a secured RMB 320 million 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 5.1 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 annual sales of approximately $48 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 as this acquisition will broaden the
Company's product line in the U.K. This acquisition was accounted for using
the purchase method of accounting. Therefore, the results of operations of
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.
Note 7 - Environmental Reserves
The Company is subject to normal environmental standards imposed by
federal, state, local, and foreign environmental laws and regulations. At
April 1, 2006, the Company had $9.1 million reserved for the 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 on 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 future expenditures for environmental remediation
obligations are not discounted to their present value. Accrued environmental
-17-
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.
Note 8 - Income Taxes
The Company's effective tax rate for the first quarter of 2006 was 27.4
percent compared with 33.4 percent for the same period of last year. The
current period rate is less than the expected federal rate due primarily to
reductions to valuation allowances primarily related to the recognition of
U.K. net operating loss carryforwards of approximately $2.0 million, or $0.05
per diluted share, and recognition of approximately $1.2 million, or $0.03
per diluted share, benefit resulting from the completion of the Internal
Revenue Service audit of tax returns filed for 2002 and 2003.
Note 9 - Subsequent Event
Subsequent to the end of the first quarter, 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 will be
recognized in the Company's second quarter and is expected to result in a
pre-tax gain of approximately $1.9 million. Aggregate cash proceeds from
the sale were approximately $23.0 million.
Note 10 - Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board (FASB)
issued Statement No. 151, "Inventory Costs" an amendment of ARB No. 43,
Chapter 4 (SFAS No. 151), which is the result of its efforts to converge
U.S. accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires abnormal amounts of idle facility expense,
freight, handling costs and wasted material or spoilage to be recognized as
current-period charges. It also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 was effective for inventory costs
incurred beginning January 1, 2006. The adoption of this standard did not
have a material impact on the Company in the first quarter of 2006.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement
No. 3" (SFAS No. 154). Previously, APB Opinion No. 20, "Accounting Changes"
and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements" required the inclusion of the cumulative effect of changes in
accounting principle in net income of the period of the change. SFAS No. 154
requires companies to recognize a change in accounting principle, including a
change required by a new accounting pronouncement when the pronouncement does
not include specific transition provisions, retrospectively to prior period
financial statements. SFAS No. 154 was effective as of January 1, 2006 and
the adoption of this standard did not have any impact on the Company in the
first quarter of 2006.
-18-
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.
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the OEM segment. Prior to 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 manufactures and sells
brass and copper alloy rod, bar, and shapes; aluminum and brass forgings;
aluminum and copper impact extrusions; refrigeration valves and fittings;
fabricated tubular products; and gas valves and assemblies. The OEM segment
sells its products primarily to original equipment manufacturers (OEMs), many
of which are in the HVAC, plumbing, and refrigeration markets.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration, and plumbing
markets because the principal end use of a significant portion of the
Company's products is in the construction of single and multi-family housing
and commercial buildings. Repairs and remodeling projects are also important
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.
-19-
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 quarter ended April 1, 2006 contained 13 weeks while the
quarter ended April 2, 2005 contained 14 weeks.
Results of Operations
During the first quarter of 2006, the Company's net sales were $551.0
million, which compares with net sales of $401.7 million over the same period
of 2005. The increase in sales for the quarter is attributable primarily to
increased selling prices reflecting the higher cost of raw materials.
Business acquired during the latter part of 2005 contributed approximately
$28.8 million to sales for the quarter ended April 1, 2006. The average
price of copper was approximately 53 percent higher in the first quarter of
2006 compared with the same period of 2005.
Cost of goods sold increased from $334.0 million in the first quarter of
2005 to $457.1 million in the same period of 2006. This increase was
primarily attributable to higher material costs and acquired businesses.
Gross profit increased from $67.6 million to $94.0 million due primarily to
higher margins and contributions of businesses acquired in the latter half of
2005. Inventories valued using the LIFO method totaled $28.5 million at
April 1, 2006 and $33.5 million at December 31, 2005. At April 1, 2006 and
December 31, 2005, the approximate FIFO cost of such inventories was $86.4
million and $87.7 million, respectively.
Depreciation and amortization expense was $10.2 million in the first
quarter of 2006 compared with $10.1 million during the first quarter of 2005.
Selling, general, and administrative expense was $35.0 million for the
quarter compared with $30.4 million for the same period of 2005. The
increase is attributable to businesses acquired in the latter half of 2005,
increased professional fees, and compensation expense of $0.6 million
associated with stock options.
For the first quarter of 2006, operating income at the Plumbing &
Refrigeration segment was $44.2 million which compares with $24.6 million in
the same period of 2005. This increase is primarily attributable to better
margins from copper tube, copper and plastic fittings, and contributions from
acquired businesses.
Operating income at the OEM segment was $11.0 million in the first
quarter of 2006 compared with $6.5 million in the first quarter of 2005.
Improved profitability was due to (i) higher volumes in the brass rod
business, (ii) contributions from the Chinese joint venture, which reported
total operating income of $0.8 million, and (iii) improvements in other
product lines.
Interest expense for the first quarter of 2006 totaled $4.9 million,
compared with $5.2 million for the same period of 2005. Other income, net
was $2.0 million for the first quarter of 2006 and $0.8 million for the same
period of 2005.
-20-
The Company's effective tax rate for the first quarter of 2006 was 27.4
percent compared with 33.4 percent for the same period of last year. The
current period rate is less than the expected federal rate due primarily to
reductions to valuation allowances primarily related to the recognition of
U.K. net operating loss carryforwards of approximately $2.0 million, or $0.05
per diluted share, and recognition of approximately $1.2 million, or $0.03
per diluted share, benefit resulting from the completion of the Internal
Revenue Service audit of tax returns filed for 2002 and 2003.
Liquidity and Capital Resources
Cash used in operating activities in the first quarter of 2006 totaled
$49.8 million, which is primarily attributable to net income plus
depreciation and amortization offset by increased receivables, increased
inventories, and decreased current liabilities. Fluctuations in the cost of
copper and other raw materials affect the Company's liquidity. Changes in
material costs directly impact components of working capital, primarily
inventories and accounts receivable. During the first three months of 2006,
the average Comex copper price was approximately $2.25 per pound, which
represents a 53 percent increase over the average price during the first
three months of 2005. This rise in the price of cathode has also resulted in
increases in the open market price for copper scrap and, to a lesser extent,
the price of brass scrap. Subsequent to the end of the first quarter, copper
prices continued to rise, trading above $3.00 per pound. Consequently, the
Company has funded increases in inventories and accounts receivable with cash
on hand.
During the first quarter of 2006, cash used in investing activities was
$8.1 million, consisting primarily of $12.0 million for capital expenditures,
of which $5.2 million relates to Mueller-Xingrong. Cash provided by
financing activities during the first quarter totaled $11.4 million
consisting primarily of $11.2 million from the issuance of debt by Mueller-
Xingrong and $4.2 million proceeds from the sale of treasury stock, partially
offset by the payment of dividends of $3.7 million.
The Company has a $150 million unsecured line-of-credit (the Credit
Facility) which expires in November 2007. At April 1, 2006, there were no
outstanding borrowings under the Credit Facility. Approximately $12.2
million in letters of credit were backed by the Credit Facility at the end of
the quarter. At April 1, 2006 the Company's total debt was $327.3 million or
41.7 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 April 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 quarter of 2006. 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 will pay approximately $9.0 million in interest on its 6%
Subordinated Debentures.
-21-
Management believes that cash provided by operations and currently
available cash of $83.2 million will be adequate to meet the Company's normal
future capital expenditures and operational needs. The Company's current
ratio was 2.6 to 1 at April 1, 2006.
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 April 1, 2006, the Company has repurchased
approximately 2.4 million shares under this authorization.
There have been no significant changes in the Company's contractual cash
obligations reported at December 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
at year-end prices. Taking into account the increased price of copper
experienced during the first quarter of 2006, the contractual cash
obligation resulting from these contracts would have been approximately
$478.7 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in raw material costs,
energy costs, 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.
-22-
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 April 1, 2006, the Company held open
forward contracts to purchase approximately $1.5 million of copper through
September 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 April 1, 2006, the Company had no open
forward contracts to purchase natural gas, however subsequent to the end of
the first quarter, the Company entered into 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.
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 April 1, 2006,
one of the Company's foreign subsidiaries had $3.3 million in open forward
contracts to purchase U.S. dollars.
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.
-23-
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 April 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 April 1,
2006, management determined that the material weakness had not yet been
remediated.
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.
-24-
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.
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending April 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.
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 certain
insurance, tax, and 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 plumbing tubes in the United States. Two such purported class actions
were filed in the United States District Court for the Western District of
Tennessee (the Federal Actions), four were filed in the Superior Court of the
State of California, County of San Francisco (the California Actions), one
was filed in the Circuit Court for Shelby County, Tennessee (the Tennessee
Action), and one was filed in the Superior Court of the Commonwealth of
Massachusetts, County of Middlesex (the Massachusetts Action, and with the
Federal Actions, the California Actions and the Tennessee Action, the Copper
Tube Actions).
-25-
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. Deno Acquisition Eurl has not been served with the
complaint in either of the Copper Tube Actions in which it is named, and only
the Company has been served with the complaint in the Tennessee Action. The
claims in the California Actions and the Massachusetts Action against WTC
Holding Company, Inc. and Deno Holding Company, Inc. have been dismissed
without prejudice.
All of the Copper Tube Actions, which are similar, seek declaratory
(except for the Massachusetts Action) and monetary relief. Plaintiffs'
motions to consolidate and for appointment of lead counsel in the Federal
Actions and plaintiffs' motion to consolidate the California Actions have
been granted. 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 in the California Actions and the
Company's motion to dismiss the Tennessee Action for failure to state a claim
are pending. The Company has not yet been required to respond to the
complaint in the Massachusetts Action. Mueller Europe has not yet been
required to respond to the complaints in the California Actions, the
Tennessee Action, and the Massachusetts Action. 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.
Beginning in April 2006, the Company has also been named in three
purported class action complaints brought by direct purchasers 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 ACR Class Actions). In
addition, in March 2006, the Company was named in a complaint brought by
Carrier Corporation, Carrier S.A., and Carrier Italia S.p.A. also alleging
anticompetitive activities with respect to the sale of ACR copper tubes in
the United States and elsewhere (the Carrier Action, and with the ACR Class
Actions, the ACR Actions). The ACR Actions were filed in the United States
District Court for the Western District of Tennessee. Mueller Europe is
named in all of the ACR Actions. Mueller Europe has not been served with any
of the complaints in the ACR Actions. The Company has been served with the
complaint in one of the ACR 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
-26-
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.
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 April 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
April 1, 2006.
-27-
(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)
January 1, 2006 -
January 28, 2006 - $ -
January 29 -
February 25, 2006 12,972(2) 29.89
February 26 -
April 1, 2006 - -
(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 6. Exhibits
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended April 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, 4 and 5 are not applicable and have been omitted.
-28-
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.
May 1, 2006 /s/ Kent A. McKee
Date Kent A. McKee
Executive Vice President and
Chief Financial Officer
May 1, 2006 /s/ Richard W. Corman
Date Richard W. Corman
Vice President - Controller
-29-
EXHIBIT INDEX
Exhibits Description
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders
for the quarter ended April 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.