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| MLI > SEC Filings for MLI > Form 10-Q on 21-Oct-2009 | All Recent SEC Filings |
21-Oct-2009
Quarterly Report
General Overview
The Company is a leading manufacturer of copper, brass, plastic, and aluminum products. The range of these products is broad: copper tube and fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic pipe, fittings and valves; refrigeration valves and fittings; fabricated tubular products; and steel nipples. The Company also resells imported brass and plastic plumbing valves, malleable iron fittings, faucets and plumbing specialty products. The Company's operations are located throughout the United States, and in Canada, Mexico, Great Britain, and China.
The Company's businesses are aggregated into two reportable segments: the Plumbing & Refrigeration segment and the OEM segment. For disclosure purposes, certain operating segments are aggregated into reportable segments. The Plumbing & Refrigeration segment is composed of the Standard Products Division (SPD), European Operations, and Mexican Operations. The OEM segment is composed of the Industrial Products Division (IPD), Engineered Products Division (EPD), and Mueller-Xingrong, the Company's Chinese joint venture. Certain administrative expenses and expenses related primarily to retiree benefits at inactive operations are combined into the Corporate and Eliminations classification. These reportable segments are described in more detail below.
SPD manufactures and sells copper tube, copper and plastic fittings, plastic pipe, line sets, and valves in North America and sources products for import distribution in North America. European Operations manufactures copper tube in Europe, which is sold in Europe and the Middle East; activities also include import distribution in the U.K. and Ireland. Mexican Operations include pipe nipple manufacturing and import distribution businesses including product lines of malleable iron fittings and other plumbing specialties. The Plumbing & Refrigeration segment sells products to wholesalers in the HVAC (heating, ventilation, and air-conditioning), plumbing, and refrigeration markets, to distributors to the manufactured housing and recreational vehicle industries, and to building material retailers.
The OEM segment manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. Mueller-Xingrong manufactures engineered copper tube for refrigeration applications; these products are sold primarily to OEM's located in China. The OEM segment sells its products primarily to original equipment manufacturers, many of which are in the HVAC, plumbing, and refrigeration markets.
New housing starts and commercial construction are important determinants of the Company's sales to the HVAC, refrigeration, and plumbing markets because the principal end use of a significant portion of the Company's products is in the construction of single and multi-family housing and commercial buildings. Repairs and remodeling projects are also important factors affecting the underlying demand for these products.
The majority of the Company's manufacturing facilities operated at significantly below capacity during 2008 and have continued to do so during the nine months ended September 26, 2009. This is due to the reduced demand for the Company's products arising from the continued decline in general economic conditions in the U.S. and in foreign markets that the Company serves. The U.S. housing and residential construction market has been adversely affected in the current economic downturn. According to the U.S. Census Bureau, new housing starts were 431 thousand in the nine months ended September 26, 2009, which is a 43 percent decrease from the same period in the prior year. The September 2009 seasonally adjusted annual rate of new housing starts was 590 thousand, representing a 28 percent decline from the September 2008 rate. While commercial construction has been more stable, it also has begun to decline. According to the U.S. Census Bureau, the August 2009 seasonally adjusted annual rate of Nonresidential Value of Construction Put in Place was $684.5 billion of which $372.6 billion was private; this is a decrease compared with $718.2 billion and $416.2 billion, respectively, at August 2008. Business conditions in the U.S. automotive industry have also been exceptionally difficult in the recent economic downturn, which has also affected the demand for various products in the Company's OEM segment. These conditions have significantly affected the demand for virtually all of the Company's core products.
Profitability of certain of the Company's product lines depends upon the "spreads" between the cost of raw material and the selling prices of its completed products. The open market prices for copper cathode and scrap, for example, influence the selling price of copper tubing, a principal product manufactured by the Company. The Company attempts to minimize the effects on profitability from fluctuations in material costs by passing through these costs to its customers. The Company's earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions.
Earnings and profitability are also impacted by unit volumes that are subject to market trends such as substitute products and imports, and market share. Plastic plumbing systems are the primary substitute product; these products represent an increasing share of consumption. U.S. consumption of copper tubing is still predominantly supplied by U.S. manufacturers, although imports from Mexico and China are significant. Brass rod consumption in the U.S. has steadily declined over the past five years, due to the outsourcing of many manufactured products as well as the current economic conditions.
Results of Operations
Third Quarter 2009 compared with Third Quarter 2008
During the third quarter of 2009, the Company's net sales were $419.9 million, which compares with net sales of $665.5 million over the same period of 2008. The decrease was due to reduced unit sales volume across the majority of the Company's product lines as a result of reduced demand arising from current economic conditions. Selling prices have also decreased due to the decreased average costs of raw materials during the period, which are generally passed on to customers. The Comex average price of copper, the Company's principal raw material, was $2.67 per pound in the third quarter of 2009, compared with $3.45 in the same period of 2008.
Cost of goods sold decreased from $588.5 million in the third quarter of 2008 to $354.0 million in the same period of 2009. The decrease was primarily due to decreased sales volume, lower average costs of raw materials, and reduced aggregate conversion costs as a result of lower production levels. Additionally, included in cost of goods sold for the third quarter of 2008 was a charge for the write-down of certain inventories totaling $3.3 million resulting primarily from the open market price of copper falling below the inventories' net book value. Depreciation and amortization decreased to $10.4 million in the third quarter of 2009 from $11.5 million in the third quarter of 2008 due to several assets becoming fully depreciated during 2008. Selling, general, and administrative expense was $27.6 million for the third quarter of 2009 compared with $35.7 million for the same period of 2008. The decrease was primarily due to decreased employment costs resulting from reduced headcount, reduced management incentive compensation, and reductions in sales and distribution expenses resulting from lower sales volume. Total headcount has declined from approximately 4,643 employees in September 2008 to approximately 3,593 employees in September 2009.
Interest expense for the third quarter of 2009 totaled $2.4 million, compared with $5.1 million for the same period of 2008. The decrease was primarily due to lower interest expense following the early extinguishment of a portion of the Company's 6% Subordinated Debentures in 2008 and 2009. Other (expense) income, net was $0.3 million expense for the third quarter of 2009 compared with $2.6 million income for the same period of 2008. The change from the prior year was primarily due to decreased interest income resulting from lower interest rates.
The Company's effective tax rate for the third quarter of 2009 was 25 percent compared with 31 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 third quarter of 2009 were reductions related to tax contingency changes of $1.7 million, return-to-provision adjustments of $0.8 million, the effect of foreign statutory rates different from U.S. and other foreign adjustments of $0.4 million, the U.S. production activities deduction of $0.4 million, and other adjustments of $0.3 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $1.1 million.
Plumbing & Refrigeration Segment
Net sales by the Plumbing and Refrigeration segment were $240.9 million in the third quarter of 2009 which is approximately a 35 percent decrease from $371.3 million for the same period in 2008. The decrease was due to decreased sales volume in the majority of the segment's product lines as a result of weak demand arising from general economic conditions and decreased selling prices resulting from lower average raw material costs. Other factors adversely affecting the segment's sales volumes included production losses resulting from a fire at the European copper tube operation in November 2008 and an explosion at the Fulton, Mississippi copper tube mill in July 2009. Of the $130.4 million decrease in net sales, approximately $73.9 million was attributable to lower unit volume and $41.2 million was due to lower selling prices in the segment's core product lines consisting primarily of copper tube, line sets, and fittings. Cost of goods sold decreased from $313.8 million in the third quarter of 2008 to $200.0 million in the third quarter of 2009. This decrease resulted from lower sales volume, decreased raw material costs, and reduced aggregate conversion costs from reductions in production levels. Also included in cost of goods sold for the third quarter of 2008 was a charge of $2.4 million to write down certain inventories to the lower of cost or market. Depreciation and amortization decreased to $6.6 million in the third quarter of 2009 from $7.3 million in the same period of 2008 due to several production assets becoming fully depreciated during 2008. Selling, general, and administrative expense decreased to $18.3 million in the third quarter of 2009 from $24.8 million in the third quarter of 2008. This decrease was primarily due to decreased employment costs from headcount reductions and lower aggregate sales and distribution expense resulting from lower unit sales volume. Operating income for the segment decreased from $25.4 million in the third quarter of 2008 to $16.0 million in the third quarter of 2009 due primarily to lower sales volume and decreased unit spreads in copper tube, partially offset by savings from reduced employment costs.
OEM Segment
Net sales for the OEM segment declined approximately 39 percent to $181.6 million in the third quarter of 2009 from $299.5 million in the third quarter of 2008. The decrease was due primarily to lower sales volume and lower selling prices resulting from lower average costs of raw materials. Of the $117.9 million decrease in net sales, approximately $64.1 million was attributable to lower unit volume and $43.3 million was due to lower selling prices in the segment's core product lines consisting primarily of brass rod, forgings, and commercial tube. Cost of goods sold decreased from $279.7 million in the third quarter 2008 to $156.4 million in the third quarter of 2009. The decrease was due primarily to lower sales volume, lower raw material costs, and lower aggregate conversion costs resulting from reductions in production levels. Also included in cost of goods sold for the third quarter of 2008 was a charge of $0.9 million to write down certain inventories to the lower of cost or market. Depreciation and amortization in the third quarter of 2009 remained relatively consistent with the same period in 2008. Selling, general, and administrative expense also remained consistent in the third quarter of 2009 compared with the same period in 2008; however, this was a function of lower employment costs from reduced headcounts offset by increased pension costs resulting from reduced investment returns. Operating income for the segment increased from $10.6 million in the third quarter of 2008 to $16.5 million in the third quarter of 2009 due primarily to improved unit spreads, especially in the segment's brass rod operations, and decreased employment costs, partially offset by reduced sales volumes.
Nine Months Ended September 26, 2009 compared with Nine Months Ended September 27, 2008
During the nine months ended September 26, 2009, the Company's net sales were $1.11 billion, which compares with net sales of $2.12 billion over the same period of 2008. The decrease was due to reduced unit sales volume across the majority of the Company's product lines as a result of reduced demand arising from current economic conditions. Selling prices have decreased due to the decreased average costs of raw materials during the period, which are generally passed on to customers. The Comex average price of copper was $2.13 per pound in the first nine months of 2009, compared with $3.59 in the same period of 2008.
Cost of goods sold decreased from $1.86 billion in the first nine months of 2008 to $954.8 million in the same period of 2009. The decrease was primarily due to decreased sales volume, lower average costs of raw materials, and reduced aggregate conversion costs as a result of reduced production levels. Additionally, included in cost of goods sold for the nine-month period ended September 27, 2008 was a charge for the write-down of certain inventories totaling $3.3 million resulting primarily from the open market price of copper falling below the inventories' net book value. Depreciation and amortization decreased to $31.3 million for the nine months ended September 26, 2009 from $33.5 million for the same period of 2008 due to several assets becoming fully depreciated during 2008. Selling, general, and administrative expense was $89.1 million for the first nine months of 2009 compared with $108.6 million for the same period of 2008. The decrease was primarily due to decreased employment costs resulting from reduced headcount, reduced management incentive compensation, and reductions in sales and distribution expenses resulting from lower sales volume. Total headcount has declined from approximately 4,643 employees in September 2008 to approximately 3,593 employees in September 2009.
Interest expense for the nine months ended September 26, 2009 totaled $7.6 million, compared with $15.8 million for the same period of 2008. The decrease was attributable to lower interest expense following the early extinguishment of a portion of the Company's 6% Subordinated Debentures in 2008 and 2009. Other income, net was $0.7 million for the nine months ended September 26, 2009 compared with $9.1 million for the same period of 2008. The current year decrease was primarily due to decreased interest income resulting from lower interest rates.
The Company's effective tax rate for the first nine months of 2009 was 30 percent compared with 34 percent for the same period last year. Factors that explain the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate for the first nine months of 2009 were changes to tax contingencies of $1.3 million, the U.S. production activities deduction of $0.5 million, return-to-provision adjustments of $0.4 million, the effect of foreign statutory rates different from U.S. and other foreign adjustments of $0.4 million, and other adjustments of $0.7 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $1.5 million and valuation allowance changes of $0.3 million. The change in the valuation allowance for the first nine months of 2009 included the addition of a valuation allowance of $3.0 million, or 8 cents per diluted share, due to the expectation that a foreign deferred tax asset will not be realized. This expense was partially offset by the reduction of a valuation allowance of $2.3 million, or 6 cents per diluted share, due to an increase in the expected future realization of a state deferred tax asset, and the net reduction of a valuation allowance of $0.4 million related to a federal deferred tax asset.
Plumbing & Refrigeration Segment
Net sales by the Plumbing and Refrigeration segment were $661.0 million in the first nine months of 2009, which is approximately a 43 percent decrease from $1.16 billion for the same period in 2008. The decrease was due to decreased sales volume in the majority of the segment's product lines as a result of weak demand stemming from current economic conditions and decreased selling prices resulting from lower average raw material costs. Other factors adversely affecting the segment's sales volumes include production losses resulting from a fire at the European copper tube operation in November 2008 and an explosion at the Fulton, Mississippi copper tube mill in July 2009. Of the $498.6 million decrease in net sales, approximately $213.2 million was attributable to lower unit volume and $231.6 million was due to lower selling prices in the segment's core product lines consisting primarily of copper tube, line sets, and fittings. Cost of goods sold decreased from $981.9 million in the first nine months of 2008 to $545.3 million in the first nine months of 2009. This decrease resulted from lower sales volume, decreased raw material costs, and reduced aggregate conversion costs from reductions in production levels. This decrease was partially offset by a provision of $2.4 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 first nine months of 2009. Also included in cost of goods sold for the nine months ended September 27, 2008 was a charge of $2.4 million to write down certain inventories to the lower of cost or market. Depreciation and amortization decreased to $19.8 million in the nine months ended September 26, 2009 from $21.8 million in the same period of 2008 due to several production assets becoming fully depreciated during 2008. Selling, general, and administrative expense decreased to $57.7 million in the first nine months of 2009 from $70.0 million in the same period of 2008. This decrease was primarily due to decreased employment costs from headcount reductions and lower aggregate sales and distribution expense resulting from lower unit sales volume. Operating income for the segment decreased from $85.9 million in the first nine months of 2008 to $38.2 million in the first nine months of 2009 due primarily to lower sales volume and decreased unit spreads in copper tube, partially offset by improved unit spreads in other core products and reduced employment costs.
OEM Segment
Net sales for the OEM segment declined approximately 53 percent to $459.9 million in the nine months ended September 26, 2009 from $979.7 million in same period of 2008. The decrease was due primarily to lower sales volume and lower selling prices resulting from lower average costs of raw materials. Of the $519.8 million decrease in net sales, approximately $351.7 million was attributable to lower unit volume and $134.3 million was due to lower selling prices in the segment's core product lines consisting primarily of brass rod, forgings, and commercial tube. Cost of goods sold decreased from $894.9 million in the first nine months of 2008 to $415.2 million in the same period of 2009. The decrease was due primarily to lower sales volume, lower raw material costs, and lower aggregate conversion costs resulting from reductions in production levels. Also included in cost of goods sold for the nine months ended September 27, 2008 was a charge of $0.9 million to write down certain inventories to the lower of cost or market. Depreciation and amortization remained relatively consistent. Selling, general, and administrative expense decreased from $18.7 million for the nine months ended September 27, 2008 to $15.7 million in same period of 2009 due primarily to reduced bad debt expense and decreased employment costs associated with headcount reductions. Operating income for the segment decreased from $55.2 million in the first nine months of 2008 to $18.3 million in the first nine months of 2009 due primarily to lower sales volumes partially offset by improved unit spreads at our brass rod operations and reduced employment costs.
Liquidity and Capital Resources
Cash provided by operating activities during the nine months ended September 26, 2009 totaled $84.4 million; which was primarily attributable to net income plus depreciation and amortization and decreased inventories, partially offset by increased receivables and decreased current liabilities. Fluctuations in the cost of copper and other raw materials affect the Company's liquidity. Changes in material costs directly impact components of working capital, primarily inventories and accounts receivable. During the nine months ended September 26, 2009, the average Comex copper price was approximately $2.13 per pound, which represented a 41 percent decrease over the average price for the same period in 2008. This decrease in the price of cathode has also resulted in sharp decreases in the open market price for copper scrap and, to a lesser extent, the price of brass scrap. However, during the third quarter of 2009, the average cost of copper increased to $2.67 per pound from the average of the previous two quarters of 2009 of $1.86 per pound, which has affected the investment in working capital.
During the first nine months of 2009, cash provided by investing activities totaled $2.4 million, which consisted of net reductions to restricted cash deposits of $12.8 million and proceeds from sales of properties of $0.6 million, partially offset by capital expenditures of $11.0 million. Cash used in financing activities during the first nine months of 2009 totaled $16.4 million, which primarily consisted of (i) the net reduction in Mueller-Xingrong's working capital debt facility of $11.8 million, (ii) dividends paid to the Company's stockholders of $11.2 million, and (iii) dividends paid by Mueller-Xingrong to its noncontrolling stockholders of $1.4 million. These amounts were partially offset by proceeds of $8.7 million from the issuance of shares related to stock options exercised during the period.
The Company has a $200 million unsecured line-of-credit (Credit Facility) which expires in December 2011. At September 26, 2009, the Company had no borrowings against the Credit Facility. The Credit Facility backed approximately $9.9 million in letters of credit at the end of the third quarter of 2009. As of September 26, 2009, the Company's total debt was $170.6 million or 18.8 percent of its total capitalization (excluding noncontrolling interest). During 2009, the Company purchased and extinguished $0.5 million of its 6% Subordinated Debentures for $0.4 million, resulting in a gain of $0.1 million for the period.
On July 3, 2009, Mueller-Xingrong's secured revolving credit facility (the JV Facility) with an availability of RMB 425 million, or approximately $62.2 million, became due. All amounts outstanding under the JV Facility were repaid in full on that date with available cash on hand. 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.
Covenants contained in the Company's financing obligations require, among other things, the maintenance of minimum levels of tangible net worth and the satisfaction of certain minimum financial ratios. As of September 26, 2009, the Company was in compliance with all of its debt covenants.
The Company declared and paid a regular quarterly cash dividend of ten cents per common share in each of the first three quarters of 2009. Payment of dividends in the future is dependent upon the Company's financial condition, cash flows, capital requirements, earnings, and other factors. On November 1, 2009, the Company will pay approximately $4.4 million in interest on the Debentures that remain outstanding.
Management believes that cash provided by operations and currently available cash of $353.9 million will be adequate to meet the Company's normal future capital expenditures and operational needs. The Company's current ratio was 4.4 to 1 at September 26, 2009.
The Company's Board of Directors has extended, until October 2010, its authorization to repurchase up to ten million shares of the Company's common stock through open market transactions or through privately negotiated transactions. The Company has no obligation to repurchase any shares and may cancel, suspend, or extend the time period for the repurchase of shares at any time. Any repurchases will be funded primarily through existing cash and cash from operations. The Company may hold any shares repurchased in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. From its initial authorization in 1999 through September 26, 2009, the Company had repurchased approximately 2.4 million shares under this authorization. In addition, the Company may repurchase portions of its 6% Subordinated Debentures through open market transactions or through privately negotiated transactions.
There have been no significant changes in the Company's contractual cash obligations reported at December 27, 2008.
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