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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 fiscal quarter ended September 25, 2004 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 a 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
The number of shares of the Registrant's common stock outstanding as of
October 12, 2004, was 36,342,888.
-1-
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Period Ended September 25, 2004
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Consolidated Statements of Income
for the quarters and nine months ended
September 25, 2004 and September 27, 2003 3
b.) Consolidated Balance Sheets
as of September 25, 2004 and December 27, 2003 7
c.) Consolidated Statements of Cash Flows
for the nine months ended September 25, 2004
and September 27, 2003 9
d.) Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
Item 4. Controls and Procedures 28
Part II. Other Information
Item 1. Legal Proceedings 28
Item 5. Other Information 28
Item 6. Exhibits 29
Signatures 30
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
September 25, September 27,
2004 2003
(In thousands, except per share data)
Net sales $ 322,512 $ 251,053
Cost of goods sold 263,188 201,960
---------- ----------
Gross profit 59,324 49,093
Depreciation and amortization 10,278 9,777
Selling, general, and
administrative expense 24,529 24,301
Impairment charge - -
---------- ----------
Operating income 24,517 15,015
Interest expense (236) (267)
Environmental expense (240) (306)
Other income, net 1,597 826
---------- ----------
Income from continuing operations
before income taxes 25,638 15,268
Current income tax expense (5,895) (856)
Deferred income tax (expense) benefit (989) 5,325
---------- ----------
Total income tax (expense) benefit (6,884) 4,469
---------- ----------
Income from continuing operations 18,754 19,737
Loss from operation of
discontinued operations, net
of income taxes - -
Gain on disposition of discontinued
operations - 1,699
---------- ----------
Net income $ 18,754 $ 21,436
========== ==========
See accompanying notes to consolidated financial statements.
-3-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
September 25, September 27,
2004 2003
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 35,283 34,267
Effect of dilutive stock options 1,631 2,590
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 36,914 36,857
---------- ----------
Basic earnings (loss) per share:
From continuing operations $ 0.53 $ 0.58
From discontinued operations - -
From gain on disposition of
discontinued operations - 0.05
---------- ----------
Basic earnings per share $ 0.53 $ 0.63
========== ==========
Diluted earnings (loss) per share:
From continuing operations $ 0.51 $ 0.53
From discontinued operations - -
From gain on disposition of
discontinued operations - 0.05
---------- ----------
Diluted earnings per share $ 0.51 $ 0.58
========== ==========
Cash dividends per share $ 0.10 $ -
========== ==========
See accompanying notes to consolidated financial statements.
-4-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Nine Months Ended
September 25, September 27,
2004 2003
(In thousands, except per share data)
Net sales $ 1,049,293 $ 731,296
Cost of goods sold 847,937 597,336
---------- ----------
Gross profit 201,356 133,960
Depreciation and amortization 30,402 29,239
Selling, general, and
administrative expense 79,410 71,172
Impairment charge 3,941 -
---------- ----------
Operating income 87,603 33,549
Interest expense (659) (870)
Environmental expense (678) (770)
Other income, net 5,839 3,565
---------- ----------
Income from continuing operations
before income taxes 92,105 35,474
Current income tax expense (28,738) (3,593)
Deferred income tax (expense) benefit 395 1,295
---------- ----------
Total income tax (expense) benefit (28,343) (2,298)
---------- ----------
Income from continuing operations 63,762 33,176
Loss from operation of
discontinued operations, net
of income taxes - (539)
Gain on disposition of discontinued
operations - 1,699
---------- ----------
Net income $ 63,762 $ 34,336
========== ==========
See accompanying notes to consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Nine Months Ended
September 25, September 27,
2004 2003
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 34,973 34,262
Effect of dilutive stock options 1,932 2,550
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 36,905 36,812
---------- ----------
Basic earnings (loss) per share:
From continuing operations $ 1.82 $ 0.97
From discontinued operations - (0.02)
From gain on disposition of
discontinued operations - 0.05
---------- ----------
Basic earnings per share $ 1.82 $ 1.00
========== ==========
Diluted earnings (loss) per share:
From continuing operations $ 1.73 $ 0.89
From discontinued operations - (0.01)
From gain on disposition of
discontinued operations - 0.05
---------- ----------
Diluted earnings per share $ 1.73 $ 0.93
========== ==========
Cash dividends per share $ 0.30 $ -
========== ==========
See accompanying notes to consolidated financial statements.
-6-
MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 25,2004 December 27, 2003
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 291,915 $ 255,088
Accounts receivable, less allowance
for doubtful accounts of $3,832 in
2004 and $4,734 in 2003 183,957 163,006
Inventories:
Raw material and supplies 40,835 22,261
Work-in-process 23,691 20,395
Finished goods 118,038 97,892
---------- ----------
Total inventories 182,564 140,548
Current deferred income taxes 14,114 9,035
Other current assets 3,632 2,678
---------- ----------
Total current assets 676,182 570,355
Property, plant, and equipment, net 328,636 345,537
Goodwill, net 112,791 104,849
Other assets 32,634 34,443
---------- ----------
$ 1,150,243 $ 1,055,184
========== ==========
See accompanying notes to consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
September 25, 2004 December 27, 2003
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 260 $ 2,835
Accounts payable 56,478 42,081
Accrued wages and other employee costs 36,242 25,631
Other current liabilities 47,317 42,959
---------- ----------
Total current liabilities 140,297 113,506
Long-term debt 11,236 11,437
Pension and postretirement liabilities 32,437 31,643
Environmental reserves 9,734 9,560
Deferred income taxes 68,418 63,734
Other noncurrent liabilities 10,182 10,238
---------- ----------
Total liabilities 272,304 240,118
---------- ----------
Minority interest in subsidiaries 57 208
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 36,022,685
in 2004 and 34,276,343 in 2003 401 401
Additional paid-in capital, common 252,984 259,110
Retained earnings 708,665 655,495
Accumulated other comprehensive loss (3,920) (5,586)
Treasury common stock, at cost (80,248) (94,562)
---------- ----------
Total stockholders' equity 877,882 814,858
Commitments and contingencies (Note 2) - -
---------- ----------
$ 1,150,243 $ 1,055,184
========== ==========
See accompanying notes to consolidated financial statements.
-8-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 25, September 27,
2004 2003
(In thousands)
Cash flows from operating activities
Net income from continuing operations $ 63,762 $ 33,176
Reconciliation of net income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 30,402 29,239
Income tax benefit from exercise
of stock options 29,252 -
Impairment charge 3,941 -
Equity in loss of unconsolidated
subsidiaries 2,376 336
(Gain) loss on disposal
of properties (5,156) 349
Deferred income taxes (395) (1,295)
Minority interest in subsidiaries,
net of dividends paid (151) (173)
Changes in assets and liabilities,
net of business acquired:
Receivables (14,742) (32,666)
Inventories (33,969) (2,658)
Other assets (1,388) 699
Current liabilities 18,671 6,343
Other liabilities 546 879
Other, net 288 (128)
---------- ----------
Net cash provided by operating activities 93,437 34,101
---------- ----------
Cash flows from investing activities
Capital expenditures (13,073) (24,100)
Proceeds from sales of properties 5,493 1,350
Acquisition of business (14,583) -
Purchase of Conbraco Industries, Inc.
common stock - (10,806)
Escrowed IRB proceeds - 449
---------- ----------
Net cash used in investing activities (22,163) (33,107)
---------- ----------
See accompanying notes to consolidated financial statements.
-9-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Nine Months Ended
September 25, September 27,
2004 2003
(In thousands)
Cash flows from financing activities
Dividends paid $ (10,591) $ -
Acquisition of treasury stock (28,409) -
Proceeds from the sale of
treasury stock 7,344 244
Repayments of long-term debt (2,776) (2,969)
---------- ----------
Net cash used in financing activities (34,432) (2,725)
---------- ----------
Effect of exchange rate changes on cash (15) 3,158
---------- ----------
Increase in cash and
cash equivalents 36,827 1,427
Cash provided by discontinued operations - 252
Cash and cash equivalents at the
beginning of the period 255,088 217,601
---------- ----------
Cash and cash equivalents at the
end of the period $ 291,915 $ 219,280
========== ==========
See accompanying notes to consolidated financial statements.
-10-
MUELLER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with United States generally
accepted accounting principles 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
adjustments which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods presented.
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.
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related Interpretations.
No stock-based employee compensation expense is reflected in net income
because the exercise price of the Company's incentive employee stock options
equals the market price of the underlying stock on the date of grant. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123), to stock-based employee compensation.
-11-
For the Quarter Ended
September 25, September 27,
2004 2003
(In thousands, except per share data)
Net income $ 18,754 $ 21,436
SFAS No. 123 compensation
expense, net of income taxes (576) (609)
---------- ----------
SFAS No. 123 pro forma
net income $ 18,178 $ 20,827
========== ==========
Pro forma earnings per share:
Basic $ 0.52 $ 0.61
Diluted $ 0.49 $ 0.57
Earnings per share, as reported:
Basic $ 0.53 $ 0.63
Diluted $ 0.51 $ 0.58
For the Nine Months Ended
September 25, September 27,
2004 2003
(In thousands, except per share data)
Net income $ 63,762 $ 34,336
SFAS No. 123 compensation
expense, net of income taxes (1,644) (1,507)
---------- ----------
SFAS No. 123 pro forma
net income $ 62,118 $ 32,829
========== ==========
Pro forma earnings per share:
Basic $ 1.78 $ 0.96
Diluted $ 1.68 $ 0.89
Earnings per share, as reported:
Basic $ 1.82 $ 1.00
Diluted $ 1.73 $ 0.93
Note 2 - Commitments and Contingencies
The Company is subject to normal environmental standards imposed by
federal, state, local, and foreign environmental laws and regulations. At
September 25, 2004, the Company had $9.7 million reserved for the environmental
remediation, post-closure monitoring, and related obligations. The Company
periodically reassesses these amounts and estimates its obligations over the
-12-
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 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.
In addition, the Company is involved in certain litigation as either
plaintiff or defendant as a result of claims that have arisen in the ordinary
course of business which management believes will not have a material effect on
the Company's financial condition or results of operations.
The Company has guarantees which are letters of credit 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 these guarantees at September
25, 2004 was $9.1 million.
During the second quarter, the Company (1) entered into consulting
agreements with Harvey L. Karp, Chairman of the Board, and William D. O'Hagan,
Chief Executive Officer, and (2) amended Mr. Karp's employment agreement with
the Company. The amendment to Mr. Karp's employment agreement eliminates the
three-year rolling term of the agreement and imposes a fixed term ending on
December 31, 2007. The consulting agreements provide for post-employment
consulting services to be provided by Messrs. Karp and O'Hagan for a six-year
period. During the first four years of the consulting period, an annual
consulting fee equal to two-thirds of each executive's Final Base Compensation
will be payable for the consulting services. During the final two years of the
consulting period, the annual consulting fee is set at one-third of each
Executive's Final Base Compensation. Final Base Compensation is defined, in
each case, as the lesser of (1) the executive's highest annual cash
compensation (consisting of base salary and annual bonus) during the last three
years of his employment with the Company, or (2) two million dollars. Each
executive can terminate his consulting agreement with or without Good Reason
(as defined in his consulting agreement) upon thirty days' advance written
notice and the Company may terminate either consulting agreement with or
without Cause (as defined in such consulting agreement) upon thirty days'
advance written notice. If an executive terminates his consulting relationship
for Good Reason or the Company terminates the consulting relationship without
Cause, such executive will be entitled to receive the remaining amounts due
under his consulting agreement, as if such agreement had continued through the
remainder of the six-year term, in a lump sum, discounted for early lump sum
payment at the Federal Funds rate. During the consulting period, each
executive agrees not to engage in Competitive Activity (as defined in his
consulting agreement) and will be entitled to receive certain other benefits
from the Company. The term of Mr. O'Hagan's consulting agreement will commence
upon Mr. O'Hagan's termination of employment by the Company without Cause (as
defined in his current employment agreement) or his voluntary resignation from
-13-
employment with the Company for Good Reason (as defined in his current
employment agreement). The term of Mr. Karp's consulting agreement will
commence on the earlier of January 1, 2008 (the day following the end of his
fixed employment term) or his termination of employment by the Company without
Cause (as defined in his employment agreement) or his voluntary resignation for
Good Reason (as defined in his employment agreement). The Company will expense
the cost of the consulting agreements during the respective terms of the
agreements.
Note 3 - Impairment Charge
During the first quarter of 2004, the Company recognized a $3.9 million
impairment charge related to its subsidiary, Overstreet-Hughes Co., Inc., of
which $2.3 million was goodwill and the remainder was property, plant, and
equipment. The results of Overstreet-Hughes, a component of the Industrial
Products Division, which manufactures tubular components and assemblies
primarily for the original equipment manufacturer (OEM) air-conditioning
market, have not met expectations. Furthermore, Overstreet-Hughes' primary
customer has announced the closure of its facility that consumes the majority
of Overstreet-Hughes' output. Consequently, the Company has reduced its
carrying cost in these long-lived assets to its best estimate of fair value.
This estimate was determined based on a discounted cash flow method.
Note 4 - Industry Segments
Summarized segment information is as follows:
For the Quarter Ended
September 25, September 27,
2004 2003
(In thousands)
Net sales:
Standard Products Division $ 233,651 $ 184,306
Industrial Products Division 92,565 70,145
Elimination of intersegment sales (3,704) (3,398)
---------- ----------
$ 322,512 $ 251,053
========== ==========
Operating income:
Standard Products Division $ 22,202 $ 15,555
Industrial Products Division 6,012 2,938
Unallocated expenses (3,697) (3,478)
---------- ----------
$ 24,517 $ 15,015
========== ==========
-14-
For the Nine Months Ended
September 25, September 27,
2004 2003
(In thousands)
Net sales:
Standard Products Division $ 762,210 $ 522,625
Industrial Products Division 298,246 216,677
Elimination of intersegment sales (11,163) (8,006)
---------- ----------
$ 1,049,293 $ 731,296
========== ==========
Operating income:
Standard Products Division $ 84,376 $ 34,513
Industrial Products Division 15,699 10,586
Unallocated expenses (12,472) (11,550)
---------- ----------
$ 87,603 $ 33,549
========== ==========
September 25, December 27,
2004 2003
(In thousands)
Segment assets:
Standard Products Division $ 635,499 $ 594,236
Industrial Products Division 183,409 159,303
General Corporate 331,335 301,645
---------- ----------
$ 1,150,243 $ 1,055,184
========== ==========
-15-
Note 5 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
September 25, September 27,
2004 2003
(In thousands)
Comprehensive income:
Net income $ 18,754 $ 21,436
Other comprehensive income (loss):
Cumulative translation adjustments (578) 201
Change in the fair value
of derivatives 18 223
---------- ----------
$ 18,194 $ 21,860
========== ==========
For the Nine Months Ended
September 25, September 27,
2004 2003
(In thousands)
Comprehensive income:
Net income $ 63,762 $ 34,336
Other comprehensive income (loss):
Cumulative translation adjustments 1,611 5,348
Change in the fair value
of derivatives 55 97
---------- ----------
$ 65,428 $ 39,781
========== ==========
The change in cumulative foreign currency translation adjustment primarily
relates to the Company's investment in its U.K. and Canadian subsidiaries and
fluctuations in exchange rates between their local currencies and the U.S.
dollar. During the first nine months of 2004, the value of the British pound
sterling increased 2 percent compared to the U.S. dollar, while the value of
the Canadian dollar increased 3 percent compared to the U.S. dollar.
-16-
Note 6 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans and
other postretirement benefit plans for certain of its employees. The net
periodic benefit cost is based on estimated values provided by independent
actuaries. The components of net periodic benefit cost are as follows:
For the Quarter Ended
September 25, September 27,
2004 2003
(In thousands)
Pension benefits:
Service cost $ 467 $ 365
Interest cost 1,913 1,899
Expected return on plan assets (2,208) (2,006)
Amortization of prior service cost 93 123
Amortization of net loss 227 114
---------- ----------
Net periodic benefit cost $ 492 $ 495
========== ==========
Other benefits:
Service cost $ 1 $ 1
Interest cost 174 213
Expected return on plan assets (2) (2)
Amortization of prior service cost 30 31
---------- ----------
Net periodic benefit cost $ 203 $ 243
========== ==========
-17-
For the Nine Months Ended
September 25, September 27,
2004 2003
(In thousands)
Pension benefits:
Service cost $ 1,401 $ 1,095
Interest cost 5,738 5,698
Expected return on plan assets (6,624) (6,018)
Amortization of prior service cost 280 368
Amortization of net loss 680 342
---------- ----------
Net periodic benefit cost $ 1,475 $ 1,485
========== ==========
Other benefits:
Service cost $ 3 $ 3
Interest cost 521 640
Expected return on plan assets (6) (6)
Amortization of prior service cost 90 92
---------- ----------
Net periodic benefit cost $ 608 $ 729
========== ==========
The Company previously disclosed in its financial statements for the year
ended December 27, 2003, that it expected to contribute between $1.0 million
and $1.5 million to its pension plans and approximately $1.0 million to its
other postretirement benefit plans in 2004. Contributions have been made to
certain pension plans of $0.3 million during the third quarter of 2004, and
$0.8 million in the first nine months of 2004; contributions have been made to
other postretirement benefit plans of $0.2 million in the third quarter of
2004, and $0.5 million in the first nine months of 2004. The impact of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 has been
determined to be immaterial.
Note 7 - Income Taxes
The differences between the reported income tax expense and a tax
determined by applying the applicable U.S. federal statutory income tax rate to
income from continuing operations before income taxes for the third quarter and
first nine months of 2004 include certain valuation allowance adjustments.
During the third quarter of 2004, the Company utilized previously unrecognized
foreign net operating loss carryforwards of approximately $1.6 million and
recognized a deferred income tax benefit, upon the closure of open tax years,
by reducing a valuation allowance of $1.2 million. Upon completion of the
prior year's federal tax return during the second quarter, the Company
recognized a reduction in the estimated valuation allowance for foreign tax
credit carryforwards by approximately $1.3 million. During the first quarter,
certain property sales resulted in capital gains allowing the Company to
recognize a reduction of the valuation allowance associated with capital loss
carryforwards by approximately $0.9 million.
-18-
During the third quarter of 2003, the Company recognized a deferred income
tax benefit, upon the closure of open tax years, by reducing a valuation
allowance of $9.3 million related to an operating loss resulting from the 1999
sale of a subsidiary. Realization of the tax benefit occurred during the year
of sale. Without this deferred income tax benefit, the Company would have
recognized income tax expense of approximately $4.8 million, or approximately
32 percent of pretax income from continuing operations during the third quarter
of 2003. Without this deferred income tax benefit, the Company's income from
continuing operations would have been approximately $10.4 million, or 28 cents
per diluted share for the third quarter and would have been approximately $23.9
million, or 65 cents per diluted share, for the first three quarters of 2003.
Note 8 - Stockholders' Equity
On August 31, 2004, the Company's Board of Directors authorized a special
dividend of $15.00 per common share, payable $6.50 in cash and $8.50 in
principal amount of the Company's 6 percent Subordinated Debentures due 2014.
The authorization of the special dividend was subject to, among other things,
the Company obtaining requisite approvals under the Credit Facility, which were
obtained subsequent to the end of the third quarter. The Subordinated
Debentures totaling approximately $305 million will be due November 1, 2014,
and will be unsecured and subordinated to all Senior Indebtedness of the
Company. The subordinated notes will be callable by the Company subject to a
declining premium during the first five years. The special dividend is payable
on October 26, 2004 to stockholders of record on October 12, 2004.
Note 9 - Acquisitions
On August 27, 2004, the Company acquired 100 percent of the outstanding
stock of Vemco Brasscapri Limited (Vemco). Vemco, located in Wellington,
Somerset, England, is an import distributor of plumbing products with annual
sales of approximately $26 million to plumbers' merchants and builders'
merchants throughout the U.K. This acquisition, by Standard Products Division,
will broaden the Company's product line in the U.K. and should provide
opportunities to leverage our manufacturing operations. Total consideration
paid at closing was approximately $14.6 million. The acquisition was accounted
for using the purchase method. Therefore, the results of operations of Vemco
are included in the consolidated financial statements of the Company from the
acquisition date. The purchase price, which was financed by existing cash, has
been preliminarily allocated to the acquired assets based on their fair market
value awaiting additional information.
-19-
Note 10 - Subsequent Events
Amendment to Credit Facility
Subsequent to the end of the third quarter, the Company amended its Credit
Agreement (the Agreement) with a syndicate of five banks. The amendment
extended the term of the Company's unsecured $150 million revolving credit
facility (the Credit Facility) for one year, to mature in November 2007. The
amendment also revised the pricing schedule for the Credit Facility and
restated certain covenants effective with the issuance of the Subordinated
Debentures. Following the amendment, borrowings under the Credit Facility bear
interest, at the Company's option, at (i) LIBOR plus a variable premium or (ii)
the greater of Prime or the Federal Funds rate plus .50 percent. LIBOR
advances may be based upon the one, two, three, or six-month LIBOR. The
variable premium over LIBOR is based on certain financial ratios, and can range
from 37.5 to 67.5 basis points. Additionally, a facility fee is payable
quarterly on the total commitment and varies from 12.5 to 20.0 basis points
based upon the Company's capitalization ratio. Availability of funds under the
Credit Facility is reduced by the amount of certain outstanding letters of
credit, which totaled approximately $9.0 million at September 25, 2004.
-20-
Special Dividend
Subsequent to the end of the third quarter, the Company satisfied
conditions necessary to effect payment of the special dividend. The special
dividend on its common stock will be payable October 26, 2004, to stockholders
of record on October 12, 2004. The special dividend will consist of $6.50 in
cash and $8.50 in principal amount of the Company's 6 percent Subordinated
Debentures due 2014 for each share of common stock. The Debentures will be
subordinated to all other funded debt of the Company and will be callable in
whole or in part at the option of the Company, subject to declining call
premiums during the first five years. Interest will be payable semiannually on
May 1 and November 1, commencing May 1, 2005. The action will significantly
alter the Company's capital structure. The following condensed pro forma
consolidated balance sheet presents the estimated impact of paying the special
dividend:
Condensed Consolidated Pro Forma Balance Sheet
As of September 25, 2004
(In millions)
Impact of
As Reported Special Dividend Pro Forma
----------- ---------------- ---------
Assets
Cash $ 292 $ (240) a $ 52
Other current assets 384 - 384
Noncurrent assets 474 - 474
--------- -------------- -------
$ 1,150 $ (240) $ 910
========= ============== ========
Liabilities and stockholders'
equity
Current liabilities $ 140 $ - $ 140
Long-term debt 11 305 b 316
Other noncurrent liabilities
and minority interest in
subsidiaries 121 - 121
Stockholders' equity 878 (545) c 333
--------- -------------- --------
$ 1,150 $ (240) $ 910
========= ============== ========
a Includes estimated payment of fractional debentures.
b Assumes issuance at par value without premium or discount.
c Based on 36.3 million shares outstanding as of October 12, 2004.
-21-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Overview
Mueller Industries, Inc. is a leading manufacturer of 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. Mueller's
operations are located throughout the United States, and in Canada, Mexico, and
Great Britain.
The Company's businesses are managed and organized into two segments:
Standard Products Division (SPD) and Industrial Products Division (IPD).
SPD manufactures and sells copper tube, copper and plastic fittings, and
valves. Outside of the United States, SPD manufactures and sells copper tube
in Europe. SPD sells these 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.
IPD 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. IPD sells its products primarily to original equipment
manufacturers (OEMs), many of which are in the HVAC, plumbing, and
refrigeration markets. Brass rod is the most significant product line in IPD
and accounts for the majority of net sales and operating income.
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 of
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 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.
-22-
Results of Operations
Net income was $18.8 million, or 51 cents per diluted share, for the third
quarter of 2004, compared with net income of $21.4 million, or 58 cents per
diluted share, for the same period of 2003. Year-to-date, net income was $63.8
million, or $1.73 per diluted share, compared with net income of $34.3 million,
or 93 cents per diluted share, for the same period of 2003.
During the third quarter of 2004, the Company's net sales were $322.5
million, which compares with net sales of $251.1 million over the same period
of 2003. The increase in net sales for the quarter is attributable to higher
selling prices partially offset by reduced volumes. Net sales were $1.05
billion in the first nine months of 2004 compared with $731.3 million in the
same period of 2003. The increase in year-to-date net sales is attributable to
higher selling prices and shipment volumes. The average price of copper was
approximately 63 percent higher in the first nine months of 2004 compared with
the same period of 2003. During the third quarter of 2004, the Company's
manufacturing businesses shipped 170.8 million pounds of product compared to
175.0 million pounds in the same quarter of 2003. The Company shipped 566.9
million pounds of product in the first nine months of 2004 compared with 517.1
million in the same period of 2003.
Cost of goods sold increased to $263.2 million in the third quarter of
2004 from $202.0 million in the same period of 2003. This increase was
primarily attributable to higher material costs. Gross profit increased to
$59.3 million from $49.1 million due primarily to copper tube and copper
fittings spread improvements, offset somewhat by lower volume. Inventories
valued using the LIFO method totaled $47.2 million at September 25, 2004 and
$34.2 million at December 27, 2003. At September 25, 2004 and December 27,
2003, the approximate FIFO cost of such inventories was $71.6 million and $42.0
million, respectively.
Selling, general, and administrative expense totaled $24.5 million in the
third quarter of 2004 which is comparable to the third quarter of 2003. Year-
to date, the increase of $8.2 million is primarily due to higher distribution
costs and incentive compensation.
In the first quarter of 2004, the Company recognized a $3.9 million
impairment charge related to its subsidiary, Overstreet-Hughes Co., Inc., of
which $2.3 million was goodwill and the remainder was property, plant, and
equipment. The results of Overstreet-Hughes, a component of IPD, which
manufactures tubular components and assemblies primarily for the OEM air-
conditioning market, have not met expectations. Furthermore, Overstreet-
Hughes' primary customer has announced the closure of its facility that
consumes the majority of Overstreet-Hughes' output. Consequently, the Company
has reduced its carrying cost in these long-lived assets to its best estimate
of fair value. This estimate was determined based on a discounted cash flow
method.
Interest expense for the third quarter of 2004 totaled $0.2 million,
compared with $0.3 million for the same period of 2003. For the first nine
months of 2004, interest expense was $0.7 million compared with $0.9 million
for the same period of 2003. Total interest in the third quarter and first
nine months of 2004 decreased due to debt reductions.
-23-
Other income, net was $5.8 million in the nine months ended September 25,
2004 which, in addition to interest income, included a gain on the sale of land
and a recognized loss on investment. During the first quarter of 2004, the
Company completed the sale of certain undeveloped land that resulted in
recognizing a gain of $5.2 million. The proceeds realized from sale were $5.2
million. Also during the first quarter of 2004, the Company recognized a $3.3
million loss related to its equity interest in Conbraco Industries, Inc. The
loss relates primarily to certain federal income tax audit exposures of
Conbraco that were assessed during the first quarter of 2004; during the second
quarter of 2004, the Internal Revenue Service proposed a settlement offer that
Conbraco agreed to which, if approved, would result in a reduction of the loss
recognized for this matter. During the third quarter, the Company recognized
$0.4 million of income representing its share in the earnings of the operation
of Conbraco for that period.
The expense related to environmental remediation at certain non-operating
properties of the Company, classified as environmental expense, totaled $0.2
million during the third quarter and $0.7 million during nine months ended
September 25, 2004. This compares with expenses of $0.3 million and $0.8
million for the respective periods in the prior year. Expense related to
operating properties is included as a component of cost of goods sold and was
not significant for the periods presented.
On August 27, 2004, the Company acquired 100 percent of the outstanding
stock of Vemco Brasscapri Limited (Vemco). Vemco, located in Wellington,
Somerset, England, is an import distributor of plumbing products with annual
sales of approximately $26 million to plumbers' merchants and builders'
merchants throughout the U.K. This acquisition, by Standard Products Division,
will broaden the Company's product line in the U.K. and should provide
opportunities to leverage our manufacturing operations. Total consideration
paid at closing was approximately $14.6 million. The acquisition was accounted
for using the purchase method. Therefore, the results of operations of Vemco
are included in the consolidated financial statements of the Company from the
acquisition date. The purchase price, which was financed by existing cash, has
been preliminarily allocated to the acquired assets based on their fair market
value awaiting additional information.
The Company's effective income tax rate for the nine months ended
September 25, 2004 was 30.8 percent. The 2004 rate has been reduced by the
recognition of a capital loss carryforward related to the sale of land that had
a tax basis significantly less than the realized proceeds and recognition of
foreign tax credit carryforwards. During the third quarter of 2004, the
Company recognized previously unrecognized foreign net operating loss
carryforwards of approximately $1.6 million and recognized a deferred income
tax benefit, upon the closure of open tax years, by reducing a valuation
allowance of $1.2 million.
During the third quarter of 2003, the Company recognized a deferred income
tax benefit, upon the closure of open tax years, by reducing a valuation
allowance of $9.3 million related to an operating loss resulting from the 1999
sale of a subsidiary. Realization of the tax benefit occurred during the year
of sale. Without this deferred income tax benefit, the Company would have
recognized income tax expense of approximately $4.8 million, or approximately
32 percent of pretax income from continuing operations during the third quarter
of 2003. Without this deferred income tax benefit, the Company's income from
-24-
continuing operations would have been approximately $10.4 million, or 28 cents
per diluted share, for the third quarter of 2003 and approximately $23.9
million, or 65 cents per diluted share, for the first three quarters of 2003.
In 2003, the Company's Consolidated Statement of Income reflected an
operating loss from discontinued operations. This loss was incurred by Mueller
Europe S.A. for the period the business operated during the first quarter of
2003. During the third quarter of 2003 the Company recognized a $1.7 million
after-tax gain to reflect adjustments to the previous estimates on disposition
of discontinued operations.
Liquidity and Capital Resources
Cash provided by operating activities in the first nine months of 2004
totaled $93.4 million, which is primarily attributable to net income from
continuing operations, depreciation and amortization, the income tax benefit
from the exercise of stock options, and an increase in liabilities partially
offset by increased receivables and increased inventories. Fluctuations in the
cost of copper and other raw materials affect the Company's liquidity and
working capital requirements. Changes in raw material costs that directly
impact components of working capital, primarily inventories and accounts
receivable, cannot be predicted as they are determined by globally traded
commodity markets. During the first nine months of 2004, the average COMEX
copper price was approximately $1.24 per pound, which represents a 63 percent
increase over the average price during the same period of 2003. This rise in
the price of cathode has also resulted in increases in the market price for
copper scrap and, to a lesser extent, the price of brass scrap. These
increases required additional investment in accounts receivable and inventories
because these costs are a significant component of these accounts.
During the first nine months of 2004, cash used for investing activities
was $22.2 million, consisting primarily of $14.6 million for the acquisition of
Vemco, $13.1 million for capital expenditures reduced by $5.5 million proceeds
from sales of properties. The Company also used $34.4 million for financing
activities during the first nine months, consisting primarily of the
acquisition of treasury stock and payment of dividends, partially offset by the
proceeds from stock option exercises.
During the first quarter of 2004, the Chairman of the Company's Board of
Directors, Mr. Harvey L. Karp, exercised options to purchase 900,000 shares of
Company stock. During the third quarter, Mr. Karp exercised options to
purchase 1,500,000 shares of Company stock. As provided in Mr. Karp's option
agreement, the Company withheld the number of shares, at their fair market
value, sufficient to cover the minimum withholding taxes incurred by the
exercises. These shares withheld have been classified as acquisition of
treasury stock on the Company's Consolidated Statement of Cash Flows. The
income tax benefit of $19.6 million for the third quarter, and $29.3 million
year to date, from the exercise of stock options was recognized as a direct
addition to additional paid-in capital and, therefore, had no effect on the
Company's earnings.
The Company has a $150 million unsecured line-of-credit (Credit Facility)
which under an amendment completed September 27, 2004 has been extended until
November 2007. At September 25, 2004, there were no outstanding borrowings
under the Credit Facility. Approximately $9.0 million in letters of credit
-25-
were backed by the Credit Facility at the end of the quarter. At September 25,
2004 the Company's total debt was $11.5 million or 1.3 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 September 25, 2004, 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, second, and third quarters of 2004. Cash
dividends paid aggregated $3.5 million in the first quarter of 2004, $3.5
million in the second quarter of 2004, and $3.6 million in the third quarter of
2004. Payment of dividends in the future is dependent upon the Company's
financial condition, cash flows, capital requirements, earnings, and other
factors.
Management believes that cash provided by operations, currently available
cash of $291.9 million less the estimated $240 million cash component of the
special dividend, and the Credit Facility will be adequate to meet the
Company's normal future capital expenditures and operational needs. The
Company's current ratio was 4.8 to 1 at September 25, 2004.
As of September 25, 2004, there have been no material changes to the
contractual obligations discussed in the Company's December 27, 2003 Form 10-K,
except for (1) consulting agreements with Harvey L. Karp, Chairman of the
Board, and William D. O'Hagan, Chief Executive Officer, and (2) an amendment to
Mr. Karp's employment agreement with the Company as discussed in Footnote 2.
Contractual obligations of the Company will increase during the fourth
quarter of 2004 by the issuance of approximately $305 million of Subordinated
Debentures due in 2014.
The Company's Board of Directors has authorized the repurchase until
October 2005 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 September 25, 2004, the Company has repurchased
approximately 2.4 million shares under this authorization.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange, raw material costs, and energy costs. 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.
-26-
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 September 25, 2004, the Company
had no open forward contract to exchange foreign currency.
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. 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.
Cost and Availability of Raw Materials and Energy
Copper and brass represent the largest component of the Company's variable
costs of production. The cost of these materials is subject to global market
fluctuations caused by factors beyond the Company's control. Significant
increases in the cost of metal, to the extent not reflected in prices for the
Company's finished products, or the lack of availability could materially and
adversely affect the Company's business, results of operations and financial
condition.
The Company occasionally enters into 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.
During the third quarter, the Company entered into forward contracts to
purchase approximately $0.9 million of copper. As of September 25, 2004, the
Company held open forward contracts to purchase approximately $1.9 million of
copper through March 2005.
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. During the third quarter, the Company entered
into forward contracts to purchase approximately $2.0 million of natural gas
through March 2005.
-27-
Item 4. 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, under the supervision and 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
as of the end of the period covered by this report. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective.
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending September 25, 2004, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Competition Matters
The Company is aware of investigations of competition in certain markets
in which it participates, or has participated in the past, in Europe and
Canada. The Company has not been fined as a result of any such investigations
and does not anticipate any material adverse effect on its business or
financial condition as a result of those investigations.
Recently Filed Lawsuit
The Company, together with WTC Holding Company, Inc., DENO Holding
Company, Inc., and Mueller Europe Ltd, have recently been named as defendants
in a purported class action complaint brought by American Copper & Brass, Inc.
alleging anticompetitive activities with respect to the sale of copper plumbing
tubes and arising out of conduct allegedly occurring in Europe. The lawsuit is
pending in the United States District Court for the Western District of
Tennessee and seeks declaratory and monetary relief. The Company believes that
the allegations in the complaint are without merit and intends to defend the
suit vigorously.
Item 5. Other Information
Commerce Department Petition
On April 7, 2004, two metals-industry groups filed a petition with the
Commerce Department to restrict exports of copper scrap and copper-alloy scrap.
The Commerce Department has 105 days to determine whether to impose temporary
-28-
monitoring and export controls and 45 more days to publish final regulations
and effect any possible relief. The Company is unable to estimate the extent,
if any, that the filing of this petition will affect near-term availability of
scrap or the likelihood that meaningful relief will be obtained. On July 21,
2004, the Commerce Department denied the request.
Labor Relations Update
The Company's labor contracts with certain bargaining unit employees at
its Port Huron and Marysville, Michigan operations expired on April 1, 2004.
Bargaining unit employees continued working under an extension of the expired
contracts. A three-year contract, effective as of April 2, 2004, was ratified
on May 7, 2004.
On June 25, 2004, employees at the Company's operations in Brighton,
Michigan voted to seek representation through collective bargaining. The
validity of the election has been challenged by the Company. Approximately 160
employees will be represented if the Company's challenge is rejected by the
National Labor Relations Board.
Item 6. Exhibits
(a) Exhibits
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.
99.1 Questions and Answers Regarding the Company's Special Dividend.
(b) During the quarter ended September 25, 2004, the Registrant filed the
following Current Reports on Form 8-K:
July 13, 2004: Item 7. Financial Statements and Exhibits. Item 12.
Results of Operations and Financial Condition. Second Quarter
Earnings Release.
August 4, 2004: Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits. Press Release:
Declaration of a Dividend.
September 2, 2004: Item 8.01. Other Events. Item 9.01. Financial
Statements and Exhibits. Press Release: Declaration of Special
Dividend.
Items 2, 3, and 4 are not applicable and have been omitted.
-29-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on
October 15, 2004.
MUELLER INDUSTRIES, INC.
/s/ Kent A. McKee
Kent A. McKee
Vice President and
Chief Financial Officer
/s/ Richard W. Corman
Richard W. Corman
Corporate Controller
-30-
EXHIBIT INDEX
Exhibits Description
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.
99.1 Questions and Answers Regarding the Company's Special Dividend.