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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Registrant's telephone number, including area code: (901) 753-3200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.[ ]
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 aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently
completed second fiscal quarter was $1,232,634,595.
The number of shares of the Registrant's common stock outstanding as of
March 1, 2005 was 36,589,824 excluding 3,501,678 treasury shares.
-1-
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into this
Report: Registrant's Definitive Proxy Statement for the 2005 Annual Meeting
of Stockholders, scheduled to be mailed on or about March 28, 2005 (Part
III).
MUELLER INDUSTRIES, INC.
-------------------
As used in this report, the terms "Company", "Mueller", and "Registrant" mean
Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole,
unless the context indicates otherwise.
-------------------
TABLE OF CONTENTS
Page
Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
Item 9A. Controls and Procedures 16
Item 9B. Other Information 20
Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20
Item 13. Certain Relationships and Related Transactions 22
Item 14. Principal Accounting Fees and Services 22
Part IV
Item 15. Exhibits, Financial Statement Schedules 23
Signatures 28
Index to Consolidated Financial Statements F-1
-2-
PART I
ITEM 1. BUSINESS
Introduction
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. 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 copper tube in
Europe which is sold in Europe and the Middle East. 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. The majority of the Company's manufacturing
facilities operated at moderate levels during 2004, 2003 and 2002.
During 2002, the Company sold its wholly owned subsidiary, Utah Railway
Company. Certain expenses related primarily to retiree benefits at inactive
operations were formerly combined with the operations of Utah Railway
Company under a third industry segment, Other Businesses. Following the
sale of Utah Railway Company and its classification as discontinued
operations, these expenses of inactive operations have been combined into
the unallocated expenses classification.
Information concerning segments and geographic information appears
under "Note 15 - Industry Segments" in the Notes to Consolidated Financial
Statements for the year ended December 25, 2004 in Item 8 of this Report,
which is incorporated herein by reference.
The Company is a Delaware corporation incorporated on October 3, 1990.
Standard Products Division
Mueller's Standard Products Division includes a broad line of copper
tube, which ranges in size from 1/8 inch to 8 inch diameter, and is sold in
various straight lengths and coils. Mueller is a market leader in the air-
conditioning and refrigeration service tube markets. Additionally, Mueller
supplies a variety of water tube in straight lengths and coils used for
plumbing applications in virtually every type of construction project.
-3-
SPD also includes copper and plastic fittings and related components
for the plumbing and heating industry that are used in water distribution
systems, heating systems, air-conditioning, and refrigeration applications,
and drainage, waste, and vent systems. A major portion of Mueller's
products are ultimately used in the domestic residential and commercial
construction markets.
Through its subsidiary, B&K Industries, SPD resells imported brass and
plastic plumbing valves, malleable iron fittings, steel nipples, faucets,
and plumbing specialty products to plumbing wholesalers, distributors to the
manufactured housing and recreational vehicle industries and building
materials retailers. Additionally, 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. and Ireland.
On December 14, 2004, the Company acquired shares in seven companies
and inventory of another (collectively Mueller Comercial S.A.). These
operations, with annual sales of approximately $60 million, include pipe
nipple manufacturing in Mexico and import distribution businesses which
product lines include malleable iron fittings and other plumbing specialties.
On September 27, 2002, the Company acquired certain assets of Colonial
Engineering, Inc.'s Fort Pierce, Florida operations. These operations
manufacture injected molded plastic pressure fittings for plumbing,
agricultural, and industrial use including a line of PVC Schedule 40 and 80
and CPVC fittings.
In December 2002, the Company initiated a plan to sell or liquidate its
French manufacturing operations, Mueller Europe S.A. On March 3, 2003,
Mueller Europe S.A. filed a petition for liquidation with the Commercial
Court of Provins Province, France and, on March 4, 2003, the Court declared
the entity to be in liquidation. The disposition of remaining assets and
obligations of Mueller Europe S.A. is under the jurisdiction of the Court.
In 2003, the Company recognized operating losses from discontinued
operations incurred by Mueller Europe S.A. for the period the business
operated.
SPD markets primarily through its own sales and distribution
organization, which maintains sales offices and distribution centers
throughout the United States and in Canada, Mexico, and Europe.
Additionally, products are sold and marketed through a network of agents,
which, when combined with the Company's sales organization, provide the
Company broad geographic market representation.
The businesses in which SPD is engaged are highly competitive. The
principal methods of competition for Mueller's products are customer service,
availability, and price. The total amount of order backlog for SPD as of
December 25, 2004 was not significant.
-4-
The Company competes with various companies, depending on the product
line. In the U.S. copper tubing business, the domestic competition includes
Cerro Flow Products, Inc., Cambridge-Lee Industries (Reading Tube
Corporation), Wolverine Tube, Inc., and Howell Metal Company (a subsidiary
of Commercial Metals Company), as well as many actual and potential foreign
competitors. In the European copper tubing business, Mueller competes with
at least eight European-based manufacturers of copper tubing as well as
other foreign-based manufacturers. In the copper fittings market,
competitors include Elkhart Products Company, a subsidiary of Aalberts
Industries N.V., and NIBCO, Inc., as well as several foreign manufacturers.
Additionally, the Company's copper tube and fittings businesses compete with
a large number of manufacturers of substitute products made from other
metals and plastic. The plastic fittings competitors include NIBCO, Inc.,
Charlotte Pipe & Foundry, and other companies. Management believes that no
single competitor offers such a wide-ranging product line as Mueller and
that this is a competitive advantage in some markets.
Industrial Products Division
Mueller's Industrial Products Division includes brass rod, nonferrous
forgings, and impact extrusions that are sold primarily to OEMs in the
plumbing, refrigeration, fluid power, and automotive industries, as well as
to other manufacturers and distributors. The Port Huron, Michigan mill
extrudes brass, bronze, and copper alloy rod in sizes ranging from 3/8
inches to 4 inches in diameter. These alloys are used in applications that
require a high degree of machinability, wear and corrosion resistance, as
well as electrical conductivity. IPD also manufactures brass and aluminum
forgings, which are used in a wide variety of end products, including
automotive components, brass fittings, industrial machinery, valve bodies,
gear blanks, and computer hardware. The Company also serves the automotive,
military ordnance, aerospace, and general manufacturing industries with
cold-formed aluminum and copper impact extrusions. Typical applications for
impacts are high strength ordnance, high-conductivity electrical components,
builders' hardware, hydraulic systems, automotive parts, and other uses
where toughness must be combined with varying complexities of design and
finish. Other products include valves and custom OEM products for
refrigeration and air-conditioning applications, and shaped and formed tube,
produced to tight tolerances, for baseboard heating, appliances, and medical
instruments. The total amount of order backlog for IPD as of December 25,
2004 was not significant.
On August 21, 2002, the Company acquired 100 percent of the outstanding
stock of Overstreet-Hughes, Co., Inc. Overstreet-Hughes, located in
Carthage, Tennessee, manufactures precision tubular components and
assemblies primarily for the OEM air-conditioning market.
During 2000, the Company completed two acquisitions: (i) Micro Gauge,
Inc. and a related business, Microgauge Machining, Inc., a specialized
machining operation, and (ii) Propipe Technologies, Inc., a fabricator of
gas train manifold systems.
-5-
IPD primarily sells directly to OEM customers. Competitors, primarily
in the brass rod market, include Cerro Metal Products Company, Inc., Chase
Industries, Inc., a subsidiary of Olin Corporation, Extruded Metals Inc.,
and others both domestic and foreign. Outside of North America, IPD sells
products through various channels.
Labor Relations
At December 25, 2004, the Company employed approximately 4,500
employees, of which approximately 2,400 were represented by various unions.
The union contracts that cover employees at the Company's Port Huron,
Michigan facilities expire April 1, 2007, and the union contract that covers
employees at the Company's Wynne, Arkansas facility expires December 1, 2009.
The Company expects to renew these contracts without material disruption of
its operations. The union contract at the Company's U.K. operation is
renewed annually. Other contracts expire on various dates through October
2006.
On February 25, 2005, the union contract that covers employees at the
Company's Fulton, Mississippi facility was extended through August 1, 2007.
On June 25, 2004, employees at the Company's operations in Brighton,
Michigan voted to seek representation through collective bargaining. The
election has been certified by the National Labor Relations Board and
bargaining will begin in early 2005. Approximately 160 employees will be
represented.
Raw Material and Energy Availability
The major portion of Mueller's base metal requirements (primarily
copper) is normally obtained through short-term supply contracts with
competitive pricing provisions (for cathode) and the open market (for scrap).
Other raw materials used in the production of brass, including brass scrap,
zinc, tin, and lead, are obtained from zinc and lead producers, open-market
dealers, and customers with brass process scrap. Raw materials used in the
fabrication of aluminum and plastic products are purchased in the open
market from major producers.
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.
During the first portion of 2004, an increasing demand for copper and
copper alloy from China had an affect on the global distribution of such
commodities. The increased demand for copper (cathode and scrap) and copper
alloy products from the export market caused a tightening in the domestic
raw materials market. Mueller's copper tube facilities can accommodate both
refined copper and copper scrap as the primary feedstock. The Company has
commitments from refined copper producers for a portion of its metal
requirements for 2005. Adequate quantities of copper scrap are currently
available and this represents a major source of supply. While the Company
will continue to react to market developments, resultant pricing volatility
or supply disruptions, if any, could nonetheless adversely affect the
Company.
-6-
Environmental Matters
Compliance with environmental laws and regulations is a matter of high
priority for the Company. Mueller's provision for environmental compliance
related to non-operating properties was $1.0 million in 2004, $1.2 million
in 2003, and $1.6 million in 2002. Environmental costs related to operating
properties is classified as cost of goods sold and is not significant.
Other than as discussed below, the Company is not involved in any Superfund
sites other than as one of numerous potentially responsible parties (PRPs)
in which cases management believes that any obligation would be
insignificant. Except as discussed below, the Company does not anticipate
that it will need to make material expenditures for such compliance
activities during the remainder of the 2005 fiscal year, or for the next two
fiscal years.
Mining Remedial Recovery Company
Mining Remedial Recovery Company (MRRC), a wholly owned subsidiary, was
formed for the purpose of managing the remediation of certain properties and
the appropriate disposition thereof. These properties and related
obligations were transferred to MRRC as part of a court-ordered bankruptcy
reorganization in 1990. MRRC was the owner of property at a Superfund site
in Midvale, Utah but the Company's obligation to contribute to remediation
was resolved by a settlement with the Government in 1990. This property was
sold during 2004.
Mammoth Mine Site
MRRC owns certain inactive mines in Shasta County, California. MRRC
has continued a program, begun in the late 1980s, of sealing mine portals
with concrete plugs in mine adits which were discharging water. The sealing
program has achieved a reduction in the metal load in discharges from these
adits; however, additional reductions are being required. In response to a
1996 Order issued by the California Regional Water Quality Control Board
(QCB), MRRC completed a feasibility study in 1997 describing measures
designed to mitigate the effects of acid rock drainage. In December 1998,
the QCB modified the order extending MRRC's time to comply with water
quality standards until December 1, 2003. In September 2002, the QCB
adopted a new order requiring MRRC to adopt Best Management Practices (BMP)
to control discharges of acid mine drainage. The new order extends the time
to comply with water quality standards until September 2007. MRRC has
agreed to implement BMP to reduce or prevent the discharge of acid mine
drainage until such point as compliance with the order is achieved or,
through the Use Attainability Analysis process, the designated, beneficial
uses of the respective watercourses are modified, allowing for the adoption
of alternative receiving water limits. At this site, MRRC estimates it will
spend between $0.5 and $1.0 million annually over the next ten years.
Future expenditures beyond a ten year horizon are not reasonably estimable
or foreseeable.
-7-
U.S.S. Lead
In 1991, U.S.S. Lead Refinery, Inc. (Lead Refinery) responded to an
information request from the EPA under Superfund for information on whether
Lead Refinery arranged for the disposal of hazardous substances in the
vicinity of the Grand Calumet River/Indiana Harbor Ship Canal. By letter
dated February 4, 1997, the Indiana Department of Environmental Management
notified Lead Refinery that a preassessment screening of the Grand Calumet
River and the Indiana Harbor Canal conducted pursuant to Superfund had
identified releases of hazardous substances from Lead Refinery and other
PRPs that had adversely impacted natural resources. Lead Refinery is in
settlement negotiations in an effort to settle its natural resources damages.
In 1991, Lead Refinery also responded to an information request under
Superfund regarding the site in East Chicago, Indiana. In 1992, the EPA
advised Lead Refinery of its intent to list the property as a Superfund
site; however, as of March 3, 2005, the EPA had deferred such listing. In
1993, Lead Refinery entered into a Consent Order with the EPA pursuant to
Section 3008(h) of the Resource Conservation and Recovery Act. The Consent
Order covers remediation activities at the East Chicago, Indiana site and
provides for Lead Refinery to complete certain on-site interim remedial
activities and studies that extend off-site. In November 1996, the EPA
approved, with modifications, the Interim Stabilization Measures Workplan
and designated a Corrective Action Management Unit at the Lead Refinery site.
Site activities, which began in December 1996, have been substantially
concluded. Additionally, Lead Refinery is aware that the EPA is evaluating
whether further action in the area near Lead Refinery's facility should be
undertaken. Lead Refinery, without additional assistance from MRRC, lacks
the financial resources needed to complete any additional remediation
determined to be required.
Lead Refinery has been informed by the former owner and operator of a
Superfund site located in Pedricktown, New Jersey that it intends to seek
CERCLA response costs for alleged shipments of hazardous substances to the
site. Lead Refinery has executed an agreement regarding that site, which
indefinitely extends the statute of limitations. By letter dated January 26,
1996, Lead Refinery and other PRPs received from the EPA a proposed
Administrative Order on Consent to perform the remedial design for operable
Unit 1 of the Pedricktown Superfund Site. Lead Refinery determined not to
execute the Administrative Order on Consent based on its lack of ability to
finance the clean up or pay response costs incurred by EPA. Several other
PRPs, however, executed the agreement and are conducting the remedial design.
In October 2003, Lead Refinery received a settlement offer from private
settlers for $0.9 million for CERCLA contribution to past and future
response costs incurred at the NL/Taracorp Superfund site located in Granite
City, Illinois. Lead Refinery declined that offer. In February of 2004, NL
Industries, Inc. filed a contribution action against all non-settling PRPs
on the EPA's allocation list, including Lead Refinery, seeking payments of
an equitable share of clean-up costs incurred by that corporation. Lead
Refinery has not been served with the complaint and will, if necessary,
contest this action.
-8-
Other
In connection with acquisitions, the Company established environmental
reserves to fund the cost of remediation at sites currently or formerly
owned by various acquired entities. The Company, through its acquired
subsidiaries, is engaged in ongoing remediation and site characterization
studies.
Mueller Copper Tube Products, Inc.
In 1999, Mueller Copper Tube Products, Inc. (MCTP) commenced a cleanup
and remediation of soil and groundwater at its Wynne, Arkansas plant. MCTP
is currently removing trichloroethene, a cleaning solvent formerly used by
MCTP, from the soil and groundwater. On August 30, 2000, MCTP received
approval of its Final Comprehensive Investigation report and Storm Water
Drainage Investigation Report addressing the treatment of soils and
groundwater, from the Arkansas Department of Environmental Quality. The
Company established a reserve for this project in connection with the
acquisition of MCTP in 1998.
Other Business Factors
The Registrant's business is not materially dependent on patents,
trademarks, licenses, franchises, or concessions held. In addition,
expenditures for company-sponsored research and development activities were
not material during 2004, 2003, or 2002. No material portion of the
Registrant's business involves governmental contracts. Seasonality of the
Company's sales is not significant.
SEC Filings
We make available through our Internet website our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission. To retrieve any of this information, you may access
our Internet home page at www.muellerindustries.com, select Mueller
Financials, and then select SEC Filings.
-9-
ITEM 2. PROPERTIES
Information pertaining to the Registrant's major operating facilities
is included below. Except as noted, the Registrant owns all of its
principal properties. The Registrant's plants are in satisfactory condition
and are suitable for the purpose for which they were designed and are now
being used.
Approximate
Location Property Size Description
Standard Products Division
Fulton, MS 418,000 sq. ft. Copper tube mill. Facility includes
52.37 acres casting, extruding, and finishing
equipment to produce copper tubing,
including tube feed stock for the
Company's copper fittings plants
and Precision Tube factory.
Fulton, MS 103,000 sq. ft. Casting facility. Facility includes
11.9 acres casting equipment to produce copper
billets used in the adjoining copper
tube mill.
Wynne, AR 682,000 sq. ft.(1) Copper tube mill. Facility includes
39.2 acres extrusion and finishing equipment to
produce copper tubing and copper tube
line sets.
Fulton, MS 58,500 sq. ft. Packaging and bar coding facility for
15.53 acres retail channel sales.
Fulton, MS 70,000 sq. ft.(2) Copper fittings plant. High-volume
7.68 acres facility that produces copper fittings
using tube feed stock from the
Company's adjacent copper tube mill.
Covington, TN 159,500 sq. ft. Copper fittings plant. Facility
40.88 acres produces copper fittings using tube
feed stock from the Company's copper
tube mills.
Port Huron, MI 40,000 sq. ft. Formed tube plant. Produces copper
5.11 acres fittings using cold heading equipment.
Portage, MI 205,000 sq. ft. Plastic fittings plant. Produces DWV
18 acres fittings using injection molding
equipment.
Cerritos, CA 115,000 sq. ft. Plastic fittings plant. Produces DWV
5.1 acres fittings using injection molding
equipment.
-10-
Approximate
Location Property Size Description
Upper 82,000 sq. ft. Plastic fittings plant. Produces DWV
Sandusky, OH 7.52 acres fittings using injection molding
equipment.
Fort Pierce, FL 69,875 sq. ft. Plastic fittings plant. Produces
5.60 acres pressure fittings using injection
molding equipment.
Monterrey, 120,000 sq. ft. (4) Pipe nipples plant. Produces pipe nipples,
Mexico 3.4 acres cut pipe and merchant couplings.
Tijuana, 25,000 sq. ft. (4) Pipe nipples plant. Produces pipe nipples,
Mexico 0.7 acres cut pipe and merchant couplings.
Bilston, 402,500 sq. ft. Copper tube mill. Facility includes
England 14.95 acres casting, extruding, and finishing
United Kingdom equipment to produce copper tubing.
Industrial Products Division
Port Huron, MI 322,500 sq. ft. Brass rod mill. Facility includes
71.5 acres casting, extruding, and finishing
equipment to produce brass rods and
bars, in various shapes and sizes.
Port Huron, MI 127,500 sq. ft. Forgings plant. Produces brass and
aluminum forgings.
Marysville, MI 81,500 sq. ft. Aluminum and copper impacts plant.
6.72 acres Produces made-to-order parts using cold
impact processes.
Hartsville, TN 78,000 sq. ft. Refrigeration products plant.
4.51 acres Produces products used in
refrigeration applications such as
ball valves, line valves, and
compressor valves.
Carthage, TN 67,520 sq. ft. Fabrication facility. Produces precision
10.98 acres tubular components and assemblies.
Jacksboro, TN 65,066 sq. ft. Bending and fabricating facility.
11.78 acres Produces gas burners, supply tubes,
and manifolds for the gas appliance
industry.
Waynesboro, TN 57,000 sq. ft.(3) Gas valve plant. Facility produces
5.0 acres brass valves and assemblies for the
gas appliance industry.
-11-
Approximate
Location Property Size Description
North Wales, PA 174,000 sq. ft. Precision Tube factory. Facility
18.9 acres fabricates copper tubing, copper
alloy tubing, aluminum tubing, and
fabricated tubular products.
Brighton, MI 65,000 sq. ft.(4) Machining operation. Facility
machines component parts for supply
to automotive industry.
Middletown, OH 55,000 sq. ft. Fabricating facility. Produces burner
2.0 acres systems and manifolds for the gas
appliance industry.
In addition, the Company owns and/or leases other properties used as
distribution centers and corporate offices.
(1) Facility, or some portion thereof, is located on land leased from a local
municipality, with an option to purchase at nominal cost.
(2) Facility is leased under a long-term lease agreement, with an option
to purchase at nominal cost.
(3) Facility is leased from a local municipality for a nominal amount.
(4) Facility is leased under an operating lease.
ITEM 3. LEGAL PROCEEDINGS
Environmental Proceedings
Reference is made to "Environmental Matters" in Item 1 of this Report,
which is incorporated herein by reference, for a description of
environmental proceedings.
Copper Tube Antitrust Litigation
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
and arising out of conduct allegedly occurring in Europe. Two such
purported class actions are pending in the United States District Court for
the Western District of Tennessee (the Federal Actions), four are pending in
the Superior Court of the State of California, County of San Francisco (the
California Actions), and one is pending in the Circuit Court for Shelby
County, Tennessee (with the Federal Actions and the California Actions, the
Actions). The Company's wholly owned subsidiaries, WTC Holding Company, Inc.,
Deno Holding Company, Inc., and Mueller Europe Ltd., are named in all of the
Actions, and Deno Acquisition Eurl is named in all but one of the Actions.
All of the Actions, which are similar, seek declaratory 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
has been granted. The Company has not yet been required to respond to any of
the complaints in the Actions. The Company believes that the claims for relief
in the Actions are without merit and intends to defend the Actions vigorously.
-12-
Other 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 the European Commission's
action or other investigations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of March 1, 2005, the number of holders of record of Mueller's
Common Stock was approximately 1,850. On March 1, 2005, the closing price
for Mueller's Common Stock on the New York Stock Exchange was $31.55.
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
Total Maximum
Number of Number of
Shares Shares
Purchased as that May
Part of 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 (3)
September 26 -
October 30, 2004 98,856 (1) $42.125
September 26 -
October 30, 2004 225,576 (2) 42.249
October 31 -
November 27, 2004 1,837 (1) 27.775
October 31 -
November 27, 2004 16,459 (2) 29.555
(1) Shares withheld by the Company sufficient to cover the minimum
withholding taxes incurred by the exercise of certain employee
stock options.
(2) Shares tendered to the Company by employee stock option holders in
payment of the option purchase price upon exercise.
(3) Shares available to be purchased under the Company's 10 million
Share Repurchase Authorization until October 2005.
-13-
The Company declared its first dividend in 2004. For the year ended
December 25, 2004, the Company has paid a total of 40 cents per share of
Common Stock in regular ten cent quarterly cash dividends; additionally, the
Company paid a special dividend composed of $6.50 in cash per share of
Common Stock and $8.50 per share of Common Stock in the form of 6%
Subordinated Debentures due 2014 (the Special Dividend). Payment of
dividends in the future is dependent upon the Company's financial condition,
cash flows, capital requirements, earnings, and other factors.
The high, low, and closing prices of Mueller's Common Stock on the New
York Stock Exchange for each fiscal quarter of 2004 and 2003 reduced by the
difference between the closing price on October 26, 2004 and the opening
price on October 27, 2004, or $14.57 per share, to adjust for the
recapitalization by Special Dividend, were as follows:
High Low Close
2004
Fourth quarter $ 30.18 $ 25.85 $ 32.17
Third quarter 28.53 20.53 27.70
Second quarter 22.36 15.94 21.12
First quarter 21.11 15.28 18.24
2003
Fourth quarter $ 20.26 $ 10.38 $ 20.26
Third quarter 15.08 10.83 10.83
Second quarter 13.81 10.13 12.49
First quarter 13.66 8.42 10.35
-14-
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
2004 2003 2002 2001 2000
For the fiscal year:
Net sales (1) $ 1,379,056 $ 999,078 $ 952,983 $ 969,106 $ 1,157,660
Operating income (1) 112,490 49,384 85,756 105,529 145,638
Net income from continuing operations 79,416 44,221 71,177 65,423 92,985
Diluted earnings per share
from continuing operations 2.15 1.19 1.92 1.76 2.44
Cash dividends per share 6.90 (2) - - - -
At year-end:
Total assets 963,731 1,055,184 987,947 916,065 910,276
Long-term debt 310,650 (2) 11,437 14,005 46,977 100,975
(1) From continuing operations
(2) During 2004 the Company paid 40 cents per share in regular ten cent quarterly cash dividends; additionally the
Company paid a Special Dividend composed of $6.50 in cash per share and $8.50 per share in the form of 6%
Subordinated Debentures due 2014
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is contained in the caption "Financial Review" in the
"Consolidated Financial Statements" submitted as a separate section of this
Annual Report on Form 10-K commencing on page F-1.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are
contained in the caption "Financial Review" in the "Consolidated Financial
Statements" submitted as a separate section of this Annual Report on Form
10-K commencing on page F-1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements required by this item are contained in the
"Consolidated Financial Statements" submitted as a separate section of this
Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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, 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.
-16-
Management's Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Pursuant to the rules
and regulations of the Securities and Exchange Commission, internal control
over financial reporting is a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, and
effected by the Company's board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with accounting principles generally accepted in the United
States.
Due to inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Further, because of changes in
conditions, effectiveness of internal controls over financial reporting may
vary over time.
The Company acquired businesses during 2004, as discussed in Note 13 to
the Consolidated Financial Statements, Acquisitions and Investments, that
were excluded from management's assessment of internal controls. The book
value of assets of the acquired businesses at year-end was $78.4 million,
which represents eight percent of consolidated total assets at December 25,
2004. Net sales and net income of the acquired businesses represent less
than one percent of the consolidated net sales and net income of the Company
for 2004. Accordingly, these acquired businesses are not included in the
scope of this report.
Management has evaluated the effectiveness of its internal control over
financial reporting as of December 25, 2004 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. Based on such evaluation we have concluded that Company's
internal control over financial reporting is effective as of December 25,
2004.
The registered independent public accounting firm of Ernst & Young, LLP,
as auditors of the Company, has issued an attestation report on management's
assessment of the Company's internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending December 25, 2004, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
-17-
Report of Independent Registered Public Accounting Firm on Internal Control
over Financial Reporting
The Board of Directors and Shareholders of Mueller Industries, Inc.
We have audited management's assessment, included in the accompanying
"Managements Report on Internal Controls over Financial Reporting", that
Mueller Industries, Inc. (the Company) maintained effective internal control
over financial reporting as of December 25, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility is to
express an opinion on management's assessment and an opinion on the
effectiveness of the company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
-18-
As indicated in the accompanying "Management's Report on Internal
Controls over Financial Reporting", management's assessment of and
conclusion on the effectiveness of internal control over financial reporting
did not include the internal controls of businesses acquired in 2004 as
described in Note 13, Acquisitions and Investments, to the Consolidated
Financial Statements, which are included in the 2004 consolidated financial
statements of Mueller Industries, Inc. and constituted $78.4 million of
total assets, as of December 25, 2004 and $11.6 million and $0.7 million of
revenues and net income, respectively, for the year then ended. Our audit
of internal control over financial reporting of Mueller Industries, Inc.
also did not include an evaluation of the internal control over financial
reporting of those businesses acquired in 2004.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 25, 2004,
is fairly stated, in all material respects, based on the COSO criteria.
Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 25, 2004,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Mueller Industries, Inc. as of December 25, 2004 and December 27,
2003, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 25, 2004 and our report dated March 1, 2005 expressed an
unqualified opinion thereon.
/s/ERNST & YOUNG LLP
Memphis, Tennessee
March 1, 2005
-19-
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is contained under the captions
"Ownership of Common Stock by Directors and Executive Officers and
Information about Director Nominees," "Corporate Governance," "Report of the
Audit Committee of the Board of Directors," and "Section 16(a) Beneficial
Ownership Compliance Reporting" in the Company's Proxy Statement for its 2005
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 28, 2005 which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained under the caption
"Executive Compensation" in the Company's Proxy Statement for its 2005
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 28, 2005, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Equity Compensation Plan Information
The following table discloses information as adjusted for the Company's
Special Dividend regarding the securities to be issued and the securities
remaining available for issuance under the Registrant's stock-based
incentive plans as of December 25, 2004 (shares in thousands):
-20-
(a) (b) (c)
Number of securities
remaining available for future
Number of securities Weighted average issuance under equity
to be issued upon exercise exercise price of compensation plans (excluding
of outstanding options, outstanding options securities reflected in column
Plan category warrants, and rights warrants, and rights (a))
Equity compensation plans
approved by security
holders 1,446 $ 18.91 455
Equity compensation
plans not approved by
security holders 336 18.20 -
-------------- --------------
Total 1,782 18.78 455
============== ==============
-21-
On February 13, 2002 Mr. O'Hagan was granted an option to acquire
100,000 shares of Common Stock at an exercise price of $31.75 per share
(subsequent to the grant, on October 26, 2004 the option grant was modified
to equitably adjust for the Company's Special Dividend to 155,610 shares of
Common Stock at an exercise price of $20.40 per share) and on February 13,
2003 Mr. O'Hagan was granted an option to acquire 100,000 shares of Common
Stock at an exercise price of $25.10 per share (subsequent to the grant, on
October 26, 2004 the option grant was modified to equitably adjust for the
Company's Special Dividend to 155,610 shares of Common Stock at an exercise
price of $16.13 per share) (collectively, the O'Hagan Treasury Options).
Each of the O'Hagan Treasury Options has a term of ten years, subject to
earlier expiration upon termination of employment, and vests ratably over a
five-year period from the date of the grant, except that if there is a
Change in Control as defined in Mr. O'Hagan's employment agreement with the
Company (the O'Hagan Employment Agreement), all of the O'Hagan Treasury
Options will become immediately exercisable on the later to occur of (i) the
day Mr. O'Hagan notifies the Company he is terminating his employment with
the Company as a result of said change, and (ii) ten days prior to the date
Mr. O'Hagan's employment with the Company is terminated by the Company. In
addition, all outstanding unvested O'Hagan Treasury Options will immediately
vest and become exercisable if Mr. O'Hagan's employment is terminated by the
Company without Cause (as defined in the O'Hagan Employment Agreement) or by
Mr. O'Hagan for Good Reason (as defined in the O'Hagan Employment Agreement).
The O'Hagan Treasury Options may only be exercised for shares of Common
Stock held in treasury by the Company.
On June 30, 2003, the Company granted to Mr. Michael O. Fifer options
to acquire 20,000 shares of Common Stock at an exercise price of $27.06 per
share. Subsequent to the grant, on October 26, 2004 the remaining
unexercised options were modified to equitably adjust for the Company's
Special Dividend to 24,897 shares of Common Stock at an exercise price of
$17.39 per share. These options have a term of ten years, subject to
earlier expiration upon termination of employment, and vest and become
exercisable ratably over a five-year period from the date of the grant.
These options may only be exercised for shares of Common Stock held in
treasury by the Company.
Other information required by Item 12 is contained under the captions
"Principal Stockholders" and "Ownership of Common Stock by Directors and
Executive Officers and Information about Director Nominees" in the Company's
Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission on or about March 28, 2005 which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is contained under the caption
"Appointment of Auditors" in the Company's Proxy Statement for its 2005
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 28, 2005 which is incorporated herein by
reference.
-22-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements: the financial statements, notes, and report of
independent registered public accounting firm described in Item 8 of
this Annual Report on Form 10-K are contained in the "Consolidated
Financial Statements" submitted as a separate section of this Annual
Report on Form 10-K commencing on page F-1.
2. Financial Statement Schedule: the financial statement schedule
described in Item 8 of this report contained in the "Consolidated
Financial Statements" submitted as a separate section of this Annual
Report on Form 10-K commencing on page F-1.
3. Exhibits:
3.1 Certificate of Incorporation of the Registrant and all
amendments thereto. (Incorporated herein by reference to
Exhibit 3.1 of the Registrant's Annual Report on Form 10-K,
dated March 1, 2004, for the fiscal year ended
December 27, 2003).
3.2 By-laws of the Registrant, as amended and restated, effective
November 10, 1994 (Incorporated herein by reference to
Exhibit 3.2 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended
December 28, 2002).
4.1 Rights Agreement, dated as of November 10, 1994, between the
Registrant and Continental Stock Transfer and Trust Company,
as Rights Agent, which includes the Form of Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Registrant, as Exhibit A,
the Form of Rights Certificate, as Exhibit B, and the Summary
of Rights to Purchase Preferred Stock, as Exhibit C
(Incorporated herein by reference to Exhibit 4.1 of the
Registrant's Annual Report on Form 10-K, dated March 24, 2003,
for the fiscal year ended December 28, 2002).
4.2 Credit Agreement among the Registrant (as Borrower) and
Standard Federal Bank and other banking institutions and
Standard Federal Bank (as Agent) dated as of November 6, 2003
(Incorporated herein by reference to Exhibit 4.2 of the
Registrant's Annual Report on Form 10-K, dated
March 1, 2004, for the fiscal year ended December 27, 2003).
4.3 First Amendment to Credit Agreement among the Registrant (as
Borrower) and Standard Federal Bank and other banking
institutions and Standard Federal Bank (as Agent) dated as of
September 27, 2004 (Incorporated herein by reference to
Exhibit 4.1 of the Registrant's Current Report on Form 8-K,
dated September 27, 2004).
-23-
4.4 Indenture, dated as of October 26, 2004, by and between Mueller
Industries, Inc. and SunTrust Bank, as Trustee (Incorporated
herein by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K, dated October 26, 2004).
4.5 Form of 6% Subordinated Debenture due 2014 (Incorporated herein
by reference to Exhibit 4.2 of the Registrant's Current Report
on Form 8-K, dated October 26, 2004).
4.6 Certain instruments with respect to long-term debt of the
Registrant have not been filed as Exhibits to this Report
since the total amount of securities authorized under any
such instruments does not exceed 10 percent of the total
assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant agrees to furnish a copy
of each such instrument upon request of the Securities and
Exchange Commission.
10.1 Stock Option Agreement, dated December 4, 1991, by and
between the Registrant and Harvey L. Karp (Incorporated
herein by reference to Exhibit 10.4 of the Registrant's
Annual Report on Form 10-K, dated March 24, 2003, for the
fiscal year ended December 28, 2002).
10.2 Stock Option Agreement, dated March 3, 1992, by and between
the Registrant and Harvey L. Karp (Incorporated herein by
reference to Exhibit 10.5 of the Registrant's Annual Report
on Form 10-K, dated March 24, 2003, for the fiscal year ended
December 28, 2002).
10.3 Mueller Industries, Inc. 1991 Incentive Stock Option Plan
(Incorporated herein by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K, dated March 24, 2003,
for the fiscal year ended December 28, 2002).
10.4 Summary description of the Registrant's 2005 bonus plan for
certain key employees.
10.5 Amended and Restated Employment Agreement, effective as of
September 17, 1997, by and between the Registrant and
Harvey L. Karp (Incorporated herein by reference to
Exhibit 10.8 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended
December 28, 2002).
10.6 Amended and Restated Employment Agreement, effective as of
September 17, 1997, by and between the Registrant and
William D. O'Hagan (Incorporated herein by reference to
Exhibit 10.9 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended
December 28, 2002).
-24-
10.7 Amendment to Amended and Restated Employment Agreement,
effective May 12, 2000, by and between the Registrant and
William D. O'Hagan (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on
Form 10-Q, dated July 24, 2000, for the quarter ended
June 24, 2000).
10.8 Mueller Industries, Inc. 1994 Stock Option Plan (Incorporated
herein by reference to Exhibit 10.11 of the Registrant's
Annual Report on Form 10-K, dated March 24, 2003, for the
fiscal year ended December 28, 2002).
10.9 Mueller Industries, Inc. 1994 Non-Employee Director Stock
Option Plan (Incorporated herein by reference to
Exhibit 10.12 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended
December 28, 2002).
10.10 Mueller Industries, Inc. Deferred Compensation Plan,
effective December 1, 2000 (Incorporated herein by reference
to Exhibit 10.13 of the Registrant's Annual Report on
Form 10-K, dated March 26, 2001, for the fiscal year ended
December 30, 2000).
10.11 Mueller Industries, Inc. 1998 Stock Option Plan (Incorporated
herein by reference to Exhibit 10.14 of the Registrant's
Annual Report on Form 10-K, dated March 24, 2003, for the
fiscal year ended December 28, 2002).
10.12 Stock Option Agreement, dated May 7, 1997, by and between the
Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.12 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.13 Stock Option Agreement, dated October 9, 1998, by and between
the Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.13 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.14 Stock Option Agreement, dated February 13, 2002, by and
between the Registrant and William D. O'Hagan (Incorporated
herein by reference to Exhibit 10.17 of the Registrant's
Annual Report on Form 10-K, dated March 24, 2003, for the
fiscal year ended December 28, 2002).
10.15 Employment Agreement, effective October 17, 2002, by and
between the Registrant and Kent A. McKee (Incorporated herein
by reference to Exhibit 10.18 of the Registrant's Annual
Report on Form 10-K, dated March 24, 2003, for the fiscal
year ended December 28, 2002).
-25-
10.16 Stock Option Agreement, dated February 13, 2003, by and
between the Registrant and William D. O'Hagan (Incorporated
herein by reference to Exhibit 10.16 of the Registrant's
Annual Report on Form 10-K, dated March 1, 2004, for the
fiscal year ended December 27, 2003).
10.17 Nonqualified Stock Option Agreement, dated June 30, 2003, by
and between the Registrant and Michael O. Fifer (Incorporated
herein by reference to Exhibit 10.18 of the Registrant's
Annual Report on Form 10-K, dated March 1, 2004, for the
fiscal year ended December 27, 2003).
10.18 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and Harvey Karp (Incorporated herein by reference
to Exhibit 10.1 of the Registrant's Quarterly Report on
Form 10-Q, dated July 16, 2004, for the quarter ended
June 26, 2004).
10.19 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.2 of the Registrant's Quarterly
Report on Form 10-Q, dated July 16, 2004, for the quarter
ended June 26, 2004).
10.20 Amendment, dated June 21, 2004, to the Amended and Restated
Employment Agreement dated as of September 17, 1997, by and
between the Registrant and Harvey Karp (Incorporated herein
by reference to Exhibit 10.3 of the Registrant's Quarterly
Report on Form 10-Q, dated July 16, 2004, for the quarter
ended June 26, 2004).
10.21 Securities Purchase Agreement, dated December 14, 2004, among
Mueller Comercial de Mexico, S. de R.L. de C.V.,
WTC HOLDCO I, LLC, MIYAR LLC, NICNA, GmbH, and
The Seller Parties.
10.22 Inventory Purchase Agreement, dated December 14, 2004, by and
between Niples del Norte S.A. de C.V. and Mueller de Mexico
S.A. de C.V.
14.0 Code of Business Conduct and Ethics (Incorporated herein by
reference to Exhibit 14.0 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
18.0 Letter of Preferability from Ernst & Young LLP dated
February 16, 2005 regarding an accounting change.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Registered Public Accounting Firm
(Includes report on Financial Statement Schedule).
-26-
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
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.
1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
-27-
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
March 4, 2005.
MUELLER INDUSTRIES, INC.
/s/ HARVEY L. KARP
Harvey L. Karp, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
/s/HARVEY L KARP Chairman of the Board, and Director March 4, 2005
Harvey L. Karp
/s/ALEXANDER P. FEDERBUSH Director March 4, 2005
Alexander P. Federbush
/s/GENNARO J. FULVIO Director March 4, 2005
Gennaro J. Fulvio
/s/GARY S. GLADSTEIN Director March 4, 2005
Gary S. Gladstein
/s/TERRY HERMANSON Director March 4, 2005
Terry Hermanson
/s/ROBERT B. HODES Director March 4, 2005
Robert B. Hodes
/s/WILLIAM D. O'HAGAN President, Chief Executive Officer, March 4, 2005
William D. O'Hagan Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the date indicated.
Signature and Title Date
/s/ KENT A. MCKEE March 4, 2005
Kent A. McKee
Vice President and
Chief Financial Officer
(Principal Accounting Officer)
/s/ RICHARD W. CORMAN March 4, 2005
Richard W. Corman
Vice President - Controller
-28-
MUELLER INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Review F-2
Consolidated Statements of Income for the years ended December 25,
2004, December 27, 2003, and December 28, 2002 F-13
Consolidated Balance Sheets as of December 25, 2004
and December 27, 2003 F-15
Consolidated Statements of Stockholders' Equity for the years ended
December 25, 2004, December 27, 2003, and December 28, 2002 F-17
Consolidated Statements of Cash Flows for the years
ended December 25, 2004, December 27, 2003, and December 28, 2002 F-20
Notes to Consolidated Financial Statements F-22
Report of Independent Registered Public Accounting Firm F-51
FINANCIAL STATEMENT SCHEDULE
Schedule for the years ended December 25, 2004,
December 27, 2003, and December 28, 2002
Valuation and Qualifying Accounts (Schedule II) F-52
F-1
FINANCIAL REVIEW
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. The
Company also resells imported brass and plastic plumbing valves, malleable iron
fittings, steel nipples, faucets and plumbing specialty 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: (i)
Standard Products Division (SPD) and (ii) Industrial Products Division (IPD).
SPD manufactures and sells copper tube, and copper and plastic fittings and
valves. Outside of the United States, SPD manufactures 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.
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. The following are important economic indicators that impact
the Company's businesses. New housing starts in the U.S. were 2.0 million, 1.8
million, and 1.7 million in 2004, 2003, and 2002, respectively. The seasonally
adjusted annual rate of the Value of Non-Residential Construction put in place,
per the U.S. Census Bureau, was $229.2 billion in 2004, $217.3 billion in 2003,
and $216.8 billion in 2002. At December, the average 30 year fixed mortgage
rate was 5.75 percent in 2004, 5.88 percent in 2003, and 6.54 percent in 2002.
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 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.
F-2
Recapitalization through Special Dividend
In September, 2004, the Company authorized a special dividend consisting
of $6.50 in cash and $8.50 in principal amount of the Company's 6% Subordinated
Debentures due 2014 (the Debentures) for each share of Common Stock (the
Special Dividend). The Special Dividend, distributed in the fourth quarter of
2004, substantially reduced the Company's cash position by $245.6 million and
its stockholders' equity by $545.1 million, and increased its long-term debt by
$299.5 million.
Results of Operations
2004 Performance Compared with 2003
Consolidated net sales in 2004 were $1.4 billion, a 38 percent increase
over net sales of $999 million in 2003. The increase is primarily attributable
to higher raw material costs (which are passed through in the form of higher
selling prices as discussed above), and increased volume. Pounds of product
sold totaled 735 million in 2004 compared with 696 million pounds sold in 2003.
Net selling prices generally fluctuate with changes in raw material prices.
The COMEX average copper price in 2004 was approximately $1.29 per pound, or 59
percent more than the 2003 average of 81 cents. This change increased the
Company's net sales and cost of goods sold.
Cost of goods sold increased $300 million, to $1.1 billion in 2004. This
increase was attributable primarily to higher raw material costs (as discussed
above) and increased volume. Gross profit was $263 million or 19.1 percent of
net sales in 2004 compared with $183 million or 18.3 percent of net sales in
2003. The increase in gross profit was due to higher spreads in core product
lines, primarily copper tube, fittings, and brass rod.
Depreciation and amortization increased to $40.6 million in 2004 from
$39.0 million in 2003. Selling, general, and administrative expense increased
to $106.4 million in 2004; this $11.5 million increase was due to (i) higher
incentive compensation costs resulting from increased volume and profitability
of approximately $9.5 million, (ii) increased distribution cost of
approximately $2.5 million, and (iii) net reduction of other costs of $0.5
million.
During 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 increased to $4.0 million in 2004 from $1.2 million in
2003. This increase was primarily due to the issuance of the Debentures on
October 26, 2004. Other income includes (i) gains on the sale of land for
approximately $5.7 million, (ii) interest income on invested cash balances of
$2.4 million, and (iii) rents, royalties and other of $1.7 million, offset by
F-3
equity in loss of an unconsolidated subsidiary (Conbraco Industries, Inc.) of
$2.0 million, which includes a provision of $2.3 million for certain federal
income tax audit exposures of Conbraco that were assessed in 2004. If an IRS
proposed settlement is approved, a reduction of that provision may be
recognized.
The expense related to environmental remediation at certain non-operating
properties of the Company, classified as non-operating expense, totaled $1.0
million in 2004 compared with $1.2 million in 2003. The environmental expense
related to operating properties is included as a component of cost of goods
sold and was not significant for the periods presented.
Income tax expense was $35.9 million, for an effective rate of 31 percent,
for 2004; this rate is lower than the expected rate due to (i) the recognition
of a capital loss carryforward related to sales of land that had a tax basis
significantly less than the realized proceeds, (ii) recognition of foreign tax
credits, (iii) recognition of foreign net operation loss carryforwards and (iv)
a deferred income tax benefit by reducing a valuation allowance that primarily
relates to the closure of open tax years. During 2003, the Company
recognized a deferred income tax benefit, upon the closure of the open tax
year, 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.
During 2003 the Company recognized a $1.7 million gain to reflect
adjustments to estimates on disposition of Mueller Europe S.A. as no further
obligations or contingencies are expected from these discontinued operations.
The Company's employment was approximately 4,500 at the end of 2004
compared with 3,500 at the end of 2003. This increase primarily relates to
businesses acquired during 2004.
Standard Products Division
Net sales by SPD were $1.0 billion in 2004 compared with $717.6 million in
2003 for a 39.6 percent increase. Operating income was $108.3 million in 2004
compared with $54.1 million in 2003. This $54.2 million increase in operating
profit was due to higher spreads and volume in certain product lines. Of this
increase in operating income, approximately $44 million was from copper tube
and copper fittings with the remainder attributable to other product lines.
Industrial Products Division
IPD's net sales were $392 million in 2004 compared with $292 million in
2003. Operating income increased by $8.9 million to $20.6 million in 2004
compared with $11.7 million in 2003. This increase is due primarily to
improved spreads and volume in brass rod. Of this increase in operating
income, approximately $11 million is attributable to Brass Rod, Forgings,
Impacts and Micro Gauge, and the balance attributable to other product lines
offset by a $3.9 million impairment charge for Overstreet-Hughes (as discussed
above).
2003 Performance Compared with 2002
Consolidated net sales in 2003 were $999.1 million, a 4.8 percent increase
over net sales of $953.0 million in 2002. Pounds of product sold totaled 695.8
F-4
million in 2003 compared with 694.0 million pounds sold in 2002. Net selling
prices generally fluctuate with changes in raw material prices. The COMEX
average copper price in 2003 was approximately 81 cents per pound, or 13
percent more than the 2002 average of 72 cents. This change impacted the
Company's net sales and cost of goods sold, particularly in the later part of
the year as COMEX steadily climbed, ending the year at $1.04 per pound.
Cost of goods sold increased $71.1 million, to $815.8 million in 2003.
This increase was attributable primarily to higher raw material costs. Gross
profit was $183.2 million or 18.3 percent of net sales in 2003 compared with
$208.2 million or 21.8 percent of net sales in 2002. The decline in gross
profit was due to lower spreads in core product lines, primarily copper tube,
fittings, and brass rod. The quarterly gross profit trend bottomed out in the
first quarter and steadily improved throughout the year.
Depreciation and amortization increased to $39.0 million in 2003 from
$37.4 million in 2002; the increase was due to capital expenditures. Selling,
general, and administrative expense increased to $94.9 million in 2003; this
$9.9 million increase was due to increases in (i) distribution costs, related
to expansion of dedicated warehousing, of $4.3 million, (ii) health and medical
benefit plans of $1.2 million, (iii) pension costs of $3.5 million, and (iv)
additional provisions for doubtful accounts of $2.8 million that relates
primarily to two specific customer accounts that were determined to be
uncollectible, offset by a $1.9 million net reduction of other costs.
Interest expense decreased to $1.2 million in 2003 from $1.5 million in
2002. This decrease was primarily due to debt reductions. Environmental
expense related to non-operating properties totaled $1.2 million in 2003
compared with $1.6 million in 2002; environmental costs related to operating
properties is classified as cost of goods sold and was not significant in 2003
or 2002. Other income was slightly lower due to lower interest income yields
on invested cash balances.
Income tax expense declined substantially to $7.2 million, for an
effective rate of 14 percent, due to the recognition of a deferred income tax
benefit. During the third quarter of 2003, the Company recognized a deferred
income tax benefit, upon the closure of the open tax year, 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.
During 2002, the Company sold its wholly owned subsidiary, Utah Railway
Company, and initiated steps to sell or liquidate its French manufacturing
operations, Mueller Europe S.A. The Company expects no further obligations or
contingencies from these discontinued operations and, therefore, during 2003 it
recognized a $1.7 million gain to reflect adjustments to the previous estimates
on disposition.
The Company's employment was approximately 3,500 at the end of 2003
compared with 3,600 at the end of 2002.
Standard Products Division
Net sales by SPD were $718 million in 2003 compared with $679 million in
2002 for a 5.6 percent increase. Operating income was $54.1 million in 2003
F-5
compared with $79.0 million in 2002. The decline in operating profit was due
to lower spreads in certain product lines, primarily copper tube and fittings,
and increased distribution costs.
Industrial Products Division
IPD's net sales were $292 million in 2003 compared with $280 million in
2002. Operating income was $11.7 million in 2003 compared with $20.4 million
in 2002. Brass rod earnings declined on lower volume and spreads. The
division's results also declined due to poor performance of certain product
lines including Overstreet-Hughes.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance decreased to $47.4 million
at year-end. Major components of the 2004 change included $154.8 million of
cash provided by operating activities, $70.6 million of cash used in investing
activities and $292.3 million of cash used in financing activities.
Net income from continuing operations of $79.4 million in 2004 was the
primary component of cash provided by operating activities. Depreciation and
amortization of $40.6 million and income tax benefit from exercise of stock
options for $31.8 million were the primary non-cash adjustments. Major changes
in working capital included a $18.0 million increase in trade accounts
receivable due to better volumes and increased selling prices in 2004 compared
with 2003, and $26.2 million increase in inventories due to higher raw material
costs.
The major components of net cash used for investing activities during 2004
included $20.0 million used for capital expenditures and $56.9 million used for
the acquisition of Vemco ($14.6 million) and Mueller Comercial S.A. ($42.3
million).
Net cash used in financing activities totaled $292.3 million consisting of
$259.9 million for cash dividends, $6.6 million for debt repayments, $42.6
million for the acquisition of treasury stock offset by the proceeds from the
sale of treasury stock of $19.0 million. These treasury stock transactions
relate to stock option exercises; the Company made no open market purchases of
treasury stock during 2004.
The Company has a $150 million unsecured line-of-credit (Credit Facility)
which expires in November 2007. At year-end, the Company had no borrowings
against the Credit Facility. Approximately $9.0 million in letters of credit
were backed by the Credit Facility at the end of 2004. At December 25, 2004,
the Company's total debt was $316.0 million or 47 percent of its total
capitalization.
Covenants contained in the Company's financing obligations require, among
other things, the maintenance of minimum levels of tangible net worth and meet
certain minimum financial ratios. At December 25, 2004 the Company was in
compliance with all of its debt covenants.
The Company expects to invest between $20 and $25 million for capital
expenditures during 2005.
F-6
Contractual cash obligations of the Company at December 25, 2004
included the following:
(In millions)
Payments Due by Year
2006- 2008-
Total 2005 2007 2009 Thereafter
Long-term debt,
including capital
lease obligations $316.0 $ 5.3 $ 0.7 $ 0.3 $309.7
Consulting agreements 12.7 - - 2.7 10.0
Operating leases 18.9 5.8 8.1 3.8 1.2
Purchase commitments (1) 171.2 171.2 - - -
----- ----- ----- ----- -----
Total contractual
cash obligations $518.8 $182.3 $ 8.8 $ 6.8 $320.9
===== ===== ===== ===== =====
(1) Purchase commitments include $16.7 million of open fixed price
purchases of raw materials. Additionally, the Company has contractual
supply commitments, totaling $154.5 million at year-end prices, for raw
materials consumed in the ordinary course of business; these contracts
contain variable pricing based upon COMEX.
The above obligations will be satisfied with existing cash, the Credit
Facility, and cash generated by operations. Additionally, the cash flow to
Fund pension and OPEB obligations was $1.9 million in 2004 and in 2003. During
2004 and 2003, funded pension assets recovered a significant portion of market
value declines experienced in 2002. The Company has no off-balance sheet
financing arrangements except for the operating leases identified above.
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. Since the end
of the third quarter of 2003, there has been a significant increase in COMEX
copper prices. From the September 30, 2003 close through the end of 2004, the
cost has risen to approximately $1.45 per pound, or approximately 80 percent.
The Company's Board of Directors declared a regular quarterly dividend of
10 cents per share on its Common Stock during each quarter of 2004.
Additionally, the Company distributed a Special Dividend composed of $6.50 in
cash and $8.50 in principal amount of the Company's 6% Subordinated Debentures
due 2014 per share of Common Stock. 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, the Credit Facility,
and currently available cash of $47.4 million will be adequate to meet the
Company's normal future capital expenditure and operational needs. The
Company's current ratio was 2.5 to 1 at December 25, 2004.
F-7
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 December 25, 2004, the Company had repurchased approximately
2.4 million shares under this authorization.
Environmental Matters
The Company ended 2004 with total environmental reserves of approximately
$9.5 million. 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.
Market Risks
The Company is exposed to market risk from changes in raw material costs,
foreign currency exchange, 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. A
discussion of the Company's accounting for derivative instruments and hedging
activities is included in the Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements.
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. The
effective portion of 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. At year-end, the Company held open
forward contracts to purchase approximately $0.7 million of copper over the
next three months.
Futures contracts may also be used to manage price risk associated with
natural gas purchases. The effective portion of 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
F-8
fluctuations of the underlying natural gas prices. At year-end, the Company
held open hedge forward contracts to purchase approximately $1.3 million of
natural gas over the next three months.
Interest Rates
At December 25, 2004 and December 27, 2003, the fair value of the
Company's debt was estimated at $307.5 million and $15.5 million, respectively,
primarily using market yields and taking into consideration the underlying
terms of the debt. Such fair value was less than the carrying value of debt at
December 25, 2004 by $8.5 million and exceeded the carrying value at December
27, 2003 by $1.2 million. Market risk is estimated as the potential change in
fair value resulting from a hypothetical 10 percent decrease in interest rates
and amounted to $5.9 million at December 25, 2004 and $0.2 million at December
27, 2003.
The Company had $5.5 million of variable-rate debt outstanding at December
25, 2004 and none at December 27, 2003. At these borrowing levels, a
hypothetical 10 percent increase in interest rates would have had an
insignificant unfavorable impact on the Company's pretax earnings and cash
flows. The primary interest rate exposure on floating-rate debt is based on
LIBOR.
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 year-end, the Company had no open
forward contracts to exchange foreign currencies.
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. The net investment in foreign
subsidiaries translated into U.S. dollars using the year-end exchange rates was
$120.8 million at December 25, 2004 and $60.6 million at December 27, 2003.
The primary reason for the increase in 2004 is from businesses acquired during
the year. The potential loss in value of the Company's net investment in
foreign subsidiaries resulting from a hypothetical 10 percent adverse change in
quoted foreign currency exchange rates at December 25, 2004 and December 27,
2003 amounted to $12.1 million and $6.1 million, respectively. This change
would be reflected in the equity section of the Company's Consolidated Balance
Sheet.
Critical Accounting Policies and Estimates
The Company's Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the United States.
F-9
Application of these principles requires the Company to make estimates,
assumptions, and judgments that affect the amounts reported in the Consolidated
Financial Statements. Management believes the most complex and sensitive
judgments, because of their significance to the Consolidated Financial
Statements, result primarily from the need to make estimates about the effects
of matters which are inherently uncertain. The accounting policies and
estimates that are most critical to aid in understanding and evaluating the
results of operations and financial position of the Company include the
following:
Inventory Valuation
Inventories are valued at the lower of cost or market. The most
significant component of the Company's inventory is copper; the domestic copper
inventories are valued under the LIFO method. The market price of copper
cathode and scrap are subject to volatility. During periods when open market
prices decline below net book value, the Company may need to provide an
allowance to reduce the carrying value of its inventory. In addition, certain
items in inventory may be considered obsolete and, as such, the Company may
establish an allowance to reduce the carrying value of those items to their net
realizable value. Changes in these estimates related to the value of
inventory, if any, may result in a materially adverse or positive impact on the
Company's reported financial position or results of operations. The Company
recognizes the impact of any changes in estimates, assumptions, and judgments
in income in the period in which it is determined.
Deferred Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon the
occurrence of future events. The Company records a valuation allowance to
reduce its deferred tax asset to the amount it believes is more likely than not
to be realized. These valuation allowances can be impacted by changes in tax
laws, changes to statutory tax rates, and future taxable income levels and are
based on the Company's judgment, estimates, and assumptions regarding those
future events. In the event the Company were to determine that it would not be
able to realize all or a portion of the net deferred tax assets in the future,
the Company would increase the valuation allowance through a charge to income
in the period that such determination is made. Conversely, if the Company were
to determine that it would be able to realize its deferred tax assets in the
future, in excess of the net carrying amounts, the Company would decrease the
recorded valuation allowance through an increase to income in the period that
such determination is made.
Environmental Reserves
The Company recognizes an environmental liability when it is probable the
liability exists and the amount is reasonably estimable. The Company estimates
the duration and extent of its remediation obligations based upon reports of
outside consultants; internal analyses of clean-up costs, ongoing monitoring
costs, and estimated legal fees; communications with regulatory agencies; and
changes in environmental law. If the Company were to determine that its
estimates of the duration or extent of its environmental obligations were no
longer accurate, the Company would adjust its environmental liabilities
accordingly in the period that such determination is made. Estimated future
F-10
expenditures for environmental remediation are not discounted to their present
value. Accrued environmental liabilities are not reduced by potential
insurance reimbursements.
Environmental expenses that relate to ongoing operations are included as a
component of cost of goods sold. Environmental expenses related to certain
non-operating properties are classified as non-operating expense on the
consolidated statements of income.
Allowance for Doubtful Accounts
The Company provides an allowance for receivables that may not be fully
collected. In circumstances where the Company is aware of a customer's
inability to meet its financial obligations (i.e., bankruptcy filings or
substantial down-grading of credit ratings), it records a reserve for bad debts
against amounts due to reduce the net recognized receivable to the amount it
believes most likely will be collected. For all other customers, the Company
recognizes reserves for bad debts based on its historical collection
experience. If circumstances change (i.e., greater than expected defaults or an
unexpected material adverse change in a major customer's ability to meet its
financial obligations), the Company's estimates of the recoverability of
amounts due could be reduced by a material amount.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R), "Share-Based Payment", which is a revision of SFAS No. 123 and
supersedes Accounting Principals Board Opinion No. 25. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be valued at fair value on the date of grant, and to be
expensed over the applicable vesting period. Pro forma disclosure of the
income statement effects of share-based payments is no longer an alternative.
The Company is required to adopt the provisions of SFAS No. 123(R) effective as
of the beginning of the third quarter of 2005. SFAS No. 123(R) provides
alternative methods of adoption which include prospective application and a
modified retroactive application. The Company is currently evaluating the
financial impact, including the available alternatives of adoption, of SFAS No.
123(R). SFAS No. 123(R) also requires the benefits of tax deductions in excess
of recognized compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. While the Company cannot estimate what
those amounts will be in the future (because they depend on, among other
things, when employees exercise stock options), the amount of operating cash
flows recognized in 2004 for such excess tax deductions was $31.8 million.
In November 2004, the FASB issued SFAS No. 151, "Inventory Cost". This
statement amends the guidance in Accounting Research Bulletin No. 43,
Chapter 4, "Inventory Pricing", to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). This statement is effective for inventory cost incurred during
fiscal years beginning after June 15, 2005. This statement will be considered
and adopted by the Company at the appropriate future point in time. The
Company is currently assessing the impact of adopting SFAS No. 151 to its
consolidated results of operations.
F-11
Cautionary Statement Regarding Forward-Looking Information
This Annual Report contains various forward-looking statements and
includes assumptions concerning the Company's operations, future results, and
prospects. These forward-looking statements are based on current expectations
and are subject to risk and uncertainties. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary statement identifying important economic,
political, and technological factors, among others, the absence of which could
cause actual results or events to differ materially from those set forth in or
implied by the forward-looking statements and related assumptions.
Such factors include: (i) the current and projected future business
environment, including interest rates and capital and consumer spending; (ii)
the domestic housing and commercial construction industry environment; (iii)
availability and price fluctuations in commodities (including copper, natural
gas, and other raw materials, including crude oil that indirectly effects
plastic resins); (iv) competitive factors and competitor responses to the
Company's initiatives; (v) stability of government laws and regulations,
including taxes; (vi) availability of financing; and (vii) continuation of the
environment to make acquisitions, domestic and foreign, including regulatory
requirements and market values of candidates.
F-12
Mueller Industries, Inc.
Consolidated Statements of Income
Years ended December 25, 2004, December 27, 2003, and December 28, 2002
(In thousands, except per share data)
2004 2003 2002
Net sales $1,379,056 $ 999,078 $ 952,983
Cost of goods sold 1,115,612 815,849 744,781
--------- --------- ---------
Gross profit 263,444 183,229 208,202
Depreciation and amortization 40,613 38,954 37,440
Selling, general, and
administrative expense 106,400 94,891 85,006
Impairment charge 3,941 - -
--------- --------- ---------
Operating income 112,490 49,384 85,756
Interest expense (3,974) (1,168) (1,460)
Other income, net 6,842 3,220 4,171
--------- --------- ---------
Income from continuing operations
before income taxes 115,358 51,436 88,467
Income tax expense (35,942) (7,215) (17,290)
--------- --------- ---------
Income from continuing operations 79,416 44,221 71,177
Discontinued operations, net of
income taxes:
Loss from operation of
discontinued operations - (539) (886)
Gain on disposition of
discontinued operations - 1,699 7,701
--------- --------- ---------
Net income $ 79,416 $ 45,381 $ 77,992
========= ========= =========
See accompanying notes to consolidated financial statements.
F-13
Mueller Industries, Inc.
Consolidated Statements of Income (continued)
Years ended December 25, 2004, December 27, 2003, and December 28, 2002
(In thousands, except per share data)
2004 2003 2002
Weighted average shares for basic
earnings per share 35,321 34,264 33,993
Effect of dilutive stock options 1,590 2,597 3,055
--------- --------- ---------
Adjusted weighted average shares for
diluted earnings per share 36,911 36,861 37,048
========= ========= =========
Basic earnings (loss) per share:
From continuing operations $ 2.25 $ 1.29 $ 2.09
From discontinued operations - (0.02) (0.03)
From gain on disposition of
discontinued operations - 0.05 0.23
--------- --------- ---------
Basic earnings per share $ 2.25 $ 1.32 $ 2.29
========= ========= =========
Diluted earnings (loss) per share:
From continuing operations $ 2.15 $ 1.19 $ 1.92
From discontinued operations - (0.01) (0.02)
From gain on disposition of
discontinued operations - 0.05 0.21
--------- --------- ---------
Diluted earnings per share $ 2.15 $ 1.23 $ 2.11
========= ========= =========
Dividends per share $ 15.40 $ - $ -
========= ========= =========
See accompanying notes to consolidated financial statements.
F-14
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 25, 2004 and December 27, 2003
(In thousands)
2004 2003
Assets
Current assets
Cash and cash equivalents $ 47,449 $ 255,088
Accounts receivable, less allowance for
doubtful accounts of $3,925 in 2004
and $4,734 in 2003 201,396 163,006
Inventories 187,853 140,548
Current deferred income taxes 15,276 9,035
Other current assets 3,357 2,678
---------- ----------
Total current assets 455,331 570,355
Property, plant, and equipment, net 335,610 345,537
Goodwill 136,615 104,849
Other assets 36,175 34,443
---------- ----------
Total Assets $ 963,731 $ 1,055,184
========== ==========
See accompanying notes to consolidated financial statements.
F-15
Mueller Industries, Inc.
Consolidated Balance Sheets (continued)
As of December 25, 2004 and December 27, 2003
(In thousands, except share data)
2004 2003
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 5,328 $ 2,835
Accounts payable 79,723 42,081
Accrued wages and other employee costs 37,992 25,631
Other current liabilities 57,775 48,314
---------- ----------
Total current liabilities 180,818 118,861
Long-term debt, less current portion 310,650 11,437
Pension liabilities 19,611 18,077
Postretirement benefits other than pensions 13,556 13,566
Environmental reserves 9,503 9,560
Deferred income taxes 67,479 58,379
Other noncurrent liabilities 10,361 10,238
---------- ----------
Total liabilities 611,978 240,118
---------- ----------
Minority interest in subsidiaries 67 208
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 36,389,824 in 2004
and 34,276,343 in 2003 401 401
Additional paid-in capital, common 252,931 259,110
Retained earnings 175,537 655,495
Accumulated other comprehensive income (loss) 3,085 (5,586)
Treasury common stock, at cost (80,268) (94,562)
---------- ----------
Total stockholders' equity 351,686 814,858
---------- ----------
Commitments and contingencies - -
---------- ----------
Total Liabilities and Stockholders' Equity $ 963,731 $ 1,055,184
========== ==========
See accompanying notes to consolidated financial statements.
F-16
Mueller Industries, Inc.
Consolidated Statements of Stockholders' Equity
Years ended December 25, 2004, December 27, 2003, and December 28, 2002
(In thousands)
Accumulated
Common Stock Additional Other Treasury Stock
Number Paid-In Retained Comprehensive Number
of Shares Amount Capital Earnings Income (Loss) of Shares Cost Total
Balance, December 29, 2001 40,092 $ 401 $ 261,647 $ 532,122 $ (22,038) 6,625 $ (99,199) $ 672,933
Comprehensive income:
Net income - - - 77,992 - - - 77,992
Other comprehensive
income (loss):
Foreign currency translation - - - - 10,706 - - 10,706
Minimum pension liability
adjustment, net of
applicable income taxes
of $1,153 - - - - (12,747) - - (12,747)
Change in fair value of
derivatives, net of
applicable income tax
benefit of $386 - - - - (630) - - (630)
Losses reclassified into
earnings from other
comprehensive income, net
of applicable income tax
benefit of $685 - - - - 3,576 - - 3,576
--------
Comprehensive income 78,897
Issuance of shares
from exercise
stock options - - (15,951) - - (1,247) 19,155 3,204
Repurchase of common stock - - - - - 456 (14,754) (14,754)
Tax benefit related to
employee stock options - - 13,243 - - - - 13,243
------- ---- -------- -------- -------- ------ -------- --------
Balance, December 28, 2002 40,092 401 258,939 610,114 (21,133) 5,834 (94,798) 753,523
See accompanying notes to consolidated financial statements.
F-17
Mueller Industries, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Years ended December 25, 2004, December 27, 2003, and December 28, 2002
(In thousands)
Accumulated
Common Stock Additional Other Treasury Stock
Number Paid-In Retained Comprehensive Number
of Shares Amount Capital Earnings Income (Loss) of Shares Cost Total
Balance, December 28, 2002 40,092 $ 401 $ 258,939 $ 610,114 $ (21,133) 5,834 $ (94,798) $ 753,523
Comprehensive income:
Net income - - - 45,381 - - - 45,381
Other comprehensive
income (loss):
Foreign currency translation - - - - 10,941 - - 10,941
Minimum pension liability
adjustment, net of
applicable income taxes
of $3 - - - - 4,277 - - 4,277
Change in fair value of
derivatives, net of
applicable income taxes
of $156 - - - - 255 - - 255
Losses reclassified into
earnings from other
comprehensive income, net
of applicable income tax
benefit of $45 - - - - 74 - - 74
--------
Comprehensive income 60,928
Issuance of shares
from exercise
stock options - - 153 - - (19) 236 389
Repurchase of common stock - - - - - - -
Tax benefit related to
employee stock options - - 18 - - - - 18
------- ---- -------- -------- -------- ------ -------- --------
Balance, December 27, 2003 40,092 401 259,110 655,495 (5,586) 5,815 (94,562) 814,858
See accompanying notes to consolidated financial statements.
F-18
Mueller Industries, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Years ended December 25, 2004, December 27, 2003, and December 28, 2002
(In thousands)
Accumulated
Common Stock Additional Other Treasury Stock
Number Paid-In Retained Comprehensive Number
of Shares Amount Capital Earnings Income (Loss) of Shares Cost Total
Balance, December 27, 2003 40,092 $ 401 $ 259,110 $ 655,495 $ (5,586) 5,815 $ (94,562) $ 814,858
Comprehensive income:
Net income - - - 79,416 - - - 79,416
Other comprehensive
Income (loss):
Foreign currency translation - - - - 8,560 - - 8,560
Minimum pension liability
adjustment, net of
applicable income taxes
of $2 - - - - (2) - - (2)
Change in fair value of
derivatives, net of
applicable income taxes
of $134 - - - - 219 - - 219
Gains reclassified into
earnings from other
comprehensive income, net
of applicable income taxes
of $65 - - - - (106) - - (106)
--------
Comprehensive income 88,087
Dividends - - - (559,374) - - - (559,374)
Issuance of shares
from exercise
stock options - - (37,957) - - (3,242) 56,935 18,978
Repurchase of common stock - - - - - 1,129 (42,641) (42,641)
Tax benefit related to
employee stock options - - 31,778 - - - - 31,778
------- ---- -------- -------- -------- ------ -------- --------
Balance, December 25, 2004 40,092 $ 401 $ 252,931 $ 175,537 $ 3,085 3,702 $ (80,268) $ 351,686
======= ==== ======== ======== ======== ====== ======== ========
See accompanying notes to consolidated financial statements.
F-19
Mueller Industries, Inc.
Consolidated Statements of Cash Flows
Years ended December 25, 2004, December 27, 2003, and December 28, 2002
(In thousands)
2004 2003 2002
Operating activities:
Net income from continuing operations $ 79,416 $ 44,221 $ 71,177
Reconciliation of net income from
continuing operations to net cash
provided by operating activities:
Depreciation 40,316 38,531 36,979
Amortization of intangibles 297 423 461
Amortization of Subordinated
Debenture costs 26 - -
Income tax benefit from exercise
of stock options 31,778 18 13,243
Impairment charge 3,941 - -
Deferred income taxes 2,711 (287) 9,686
Provision for doubtful
accounts receivable 1,404 3,172 374
Minority interest in subsidiaries,
net of dividend paid (141) (213) 150
(Gain) loss on disposals of properties (5,729) 290 (485)
Equity in loss of
unconsolidated subsidiary 2,026 460 -
Changes in assets and liabilities,
net of businesses acquired:
Receivables (17,995) (35,129) 6,021
Inventories (26,208) 2,948 (13,744)
Other assets (2,055) 3,240 (4,154)
Current liabilities 42,913 14,620 3,683
Other liabilities 296 (54) (91)
Other, net 1,765 1,176 917
--------- --------- ---------
Net cash provided by
operating activities 154,761 73,416 124,217
--------- --------- ---------
Investing activities:
Proceeds from sale of Utah
Railway Company - - 55,403
Capital expenditures (19,980) (27,236) (23,265)
Acquisition of businesses (56,946) - (20,457)
Proceeds from sales of properties 6,334 1,412 8,165
Purchase of Conbraco Industries, Inc.
common stock - (10,806) (7,320)
Escrowed IRB proceeds - 449 2,445
--------- --------- ---------
Net cash (used in) provided by
investing activities (70,592) (36,181) 14,971
--------- --------- ---------
See accompanying notes to consolidated financial statements.
F-20
Mueller Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Years ended December 25, 2004, December 27, 2003, and December 28, 2002
(In thousands)
2004 2003 2002
Financing activities:
Repayments of long-term debt $ (6,608) $ (3,894) $ (34,119)
Dividends paid (259,882) - -
Acquisition of treasury stock (42,641) - (14,754)
Proceeds from the sale of
treasury stock 18,978 389 3,204
Subordinated Debenture issuance costs (2,187) - -
--------- --------- ---------
Net cash used in financing activities (292,340) (3,505) (45,669)
--------- --------- ---------
Effect of exchange rate changes on cash 532 3,505 719
--------- --------- ---------
(Decrease) increase in cash and
cash equivalents (207,639) 37,235 94,238
Cash provided by
discontinued operations - 252 1,501
Cash and cash equivalents at the
beginning of the year 255,088 217,601 121,862
--------- --------- ---------
Cash and cash equivalents at the
end of the year $ 47,449 $ 255,088 $ 217,601
========= ========= =========
For supplemental disclosures of cash flow information, see
Notes 1, 5, 6, 7, and 13.
See accompanying notes to consolidated financial statements.
F-21
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The principal business of Mueller Industries, Inc. is the manufacture and
sale 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; fabricated tubular
products; and gas valves and assemblies. The Company also resells imported
brass and plastic plumbing valves, malleable iron fittings, steel nipples,
faucets, and plumbing specialty products. The Company markets its products to
the HVAC, plumbing, refrigeration, hardware, and other industries. Mueller's
operations are located throughout the United States and in Canada, Mexico, and
Great Britain.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Mueller
Industries, Inc. and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The minority interest represents separate private ownership of 25 percent of
Ruby Hill Mining Company and 19 percent of Richmond-Eureka Mining Company. The
Company accounts for its minority investment in Conbraco Industries, Inc. on
the equity method.
Revenue Recognition
Revenue is recognized when title passes to the customer either when
products are shipped, provided collection is determined to be probable and no
significant obligations remain for the Company, or upon the terms of the sale.
Estimates for future rebates on certain product lines and bad debts are
recognized in the period which the revenue is recorded. The cost of shipping
product to customers is expensed as incurred as a component of cost of goods
sold.
Cash Equivalents
Temporary investments with original maturities of three months or less are
considered to be cash equivalents. These investments are stated at cost. At
December 25, 2004 and December 27, 2003, temporary investments consisted of
certificates of deposit, commercial paper, bank repurchase agreements, and U.S.
and foreign government securities totaling $46.6 million and $254.9 million,
respectively.
Allowance for Doubtful Accounts
The Company provides an allowance for receivables that may not be fully
collected. In circumstances where the Company is aware of a customer's
inability to meet its financial obligations (i.e., bankruptcy filings or
substantial down-grading of credit ratings), it records a reserve for bad debts
against amounts due to reduce the net recognized receivable to the amount it
F-22
believes most likely will be collected. For all other customers, the Company
recognizes reserves for bad debts based on its historical collection
experience. If circumstances change (i.e., greater than expected defaults or an
unexpected material adverse change in a major customer's ability to meet its
financial obligations), the Company's estimates of the recoverability of
amounts due could be reduced by a material amount.
Inventories
The Company's inventories are valued at the lower of cost or market. The
material component of its U.S. copper tube and copper fittings inventories is
valued on a last-in, first-out (LIFO) basis. Other inventories, including the
non-material components of U.S. copper tube and copper fittings, are valued on
a first-in, first-out (FIFO) basis. Inventory costs include material, labor
costs, and manufacturing overhead.
The market price of copper cathode and scrap are subject to volatility.
During periods when open market prices decline below net book value, the
Company may need to provide an allowance to reduce the carrying value of its
inventory. In addition, certain items in inventory may be considered obsolete
and, as such, the Company may establish an allowance to reduce the carrying
value of those items to their net realizable value. Changes in these estimates
related to the value of inventory, if any, may result in a materially adverse
or positive impact on the Company's reported financial position or results of
operations. The Company recognizes the impact of any changes in estimates,
assumptions, and judgments in income in the period in which it is determined.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation of
buildings, machinery, and equipment is provided on the straight-line method
over the estimated useful lives ranging from 20 to 40 years for buildings and
five to 20 years for machinery and equipment. Repairs and maintenance are
expensed as incurred.
Goodwill
Goodwill represents cost in excess of fair values assigned to the
underlying net assets of acquired businesses. Under Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets",
goodwill is subject to impairment testing which compares carrying values to
fair values and, when appropriate, the carrying value of these assets is
required to be reduced to fair value. The Company performs its annual
impairment assessment as of the first day of the fourth quarter of each fiscal
year, unless circumstances dictate more frequent assessments. For testing
purposes, the Company uses components of its reporting segments; components of
a segment having similar economic characteristics are combined. No impairment
loss resulted from the 2004 or 2003 annual tests performed under SFAS No. 142;
however, as discussed in Note 4, an impairment charge was recognized in the
first quarter of 2004. There can be no assurance that additional goodwill
impairment will not occur in the future.
Self Insurance Accruals
The Company is primarily self insured for workers' compensation claims and
benefits paid under employee health care programs. Accruals are primarily
F-23
based on estimated undiscounted cost of claims, which includes incurred-but-
not-reported claims and are classified as accrued wages and other employee
costs.
Environmental Reserves and Environmental Expenses
The Company recognizes an environmental liability when it is probable the
liability exists and the amount is reasonably estimable. The Company estimates
the duration and extent of its remediation obligations based upon reports of
outside consultants; internal analyses of clean-up costs, ongoing monitoring
costs, and estimated legal fees; communications with regulatory agencies; and
changes in environmental law. If the Company were to determine that its
estimates of the duration or extent of its environmental obligations were no
longer accurate, the Company would adjust its environmental liabilities
accordingly in the period that such determination is made. Estimated future
expenditures for environmental remediation are not discounted to their present
value. Accrued environmental liabilities are not reduced by potential
insurance reimbursements.
Environmental expenses that relate to ongoing operations are included as a
component of cost of goods sold. Environmental expenses related to certain
non-operating properties are classified as a non-operating expense on the
consolidated statements of income.
Earnings Per Share
Basic earnings per share is computed based on the average number of common
shares outstanding. Diluted earnings per share reflects the increase in average
common shares outstanding that would result from the assumed exercise of
outstanding stock options calculated using the treasury stock method.
Income Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon the
occurrence of future events. The Company records a valuation allowance to
reduce its deferred tax asset to the amount it believes is more likely than not
to be realized. These valuation allowances can be impacted by changes in tax
laws, changes to statutory tax rates, and future taxable income levels and are
based on the Company's judgment, estimates, and assumptions regarding those
future events. In the event the Company were to determine that it would not be
able to realize all or a portion of the net deferred tax assets in the future,
the Company would increase the valuation allowance through a charge to income
tax expense in the period that such determination is made. Conversely, if the
Company were to determine that it would be able to realize its deferred tax
assets in the future, in excess of the net carrying amounts, the Company would
decrease the recorded valuation allowance through a decrease to income tax
expense in the period that such determination is made.
Stock-Based Compensation
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" (APB No. 25), and related
Interpretations. No stock-based employee compensation expense is reflected in
F-24
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 SFAS No.
123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
(In thousands, except per share data)
2004 2003 2002
Net income $ 79,416 $ 45,381 $ 77,992
SFAS No. 123 compensation
expense, net of income taxes (2,114) (2,028) (2,485)
--------- --------- ---------
SFAS No. 123 pro forma
net income $ 77,302 $ 43,353 $ 75,507
========= ========= =========
Pro forma earnings per share:
Basic $ 2.19 $ 1.27 $ 2.22
Diluted $ 2.09 $ 1.18 $ 2.04
Earnings per share, as reported:
Basic $ 2.25 $ 1.32 $ 2.29
Diluted $ 2.15 $ 1.23 $ 2.11
Concentrations of Credit and Market Risk
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers comprising the Company's customer
base, and their dispersion across different geographic areas and different
industries, including HVAC, plumbing, refrigeration, hardware, automotive,
OEMs, and others.
The Company minimizes its exposure to base metal price fluctuations
through various strategies. Generally, it prices an equivalent amount of copper
raw material, under flexible pricing arrangements it maintains with its
suppliers, at the time it determines the selling price of finished products to
its customers.
Derivative Instruments and Hedging Activities
The Company has utilized forward contracts to manage the volatility
related to purchases of copper and natural gas, and certain transactions
denominated in foreign currencies. In addition, the Company has reduced its
exposure to increases in interest rates by entering into an interest rate swap
contract. These contracts have been designated as cash flow hedges. In
accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133), the Company has recorded the fair value of
these contracts in the Consolidated Balance Sheet. The related gains and
losses on the contracts are deferred in stockholders' equity as a component of
comprehensive income. With respect to the copper and natural gas contracts,
F-25
deferred gains and losses are recognized in cost of goods sold in the period in
which the related sales or consumption of the commodities are recognized.
Deferred gains and losses on foreign currency contracts are recognized in
selling, general, and administrative expense in the period in which the foreign
sales are collected. Deferred gain or loss on the interest rate swap contract
is recognized in interest expense in the period in which the related interest
payment being hedged is expensed. To the extent that the changes in the fair
value of the contracts do not perfectly offset the changes in the present value
of the hedged transactions, that ineffective portion is immediately recognized
in earnings. Gains and losses recognized by the Company related to the
ineffective portion of its hedging instruments, as well as gains and losses
related to the portion of the hedging instruments excluded from the assessment
of hedge effectiveness, were not material to the Company's Consolidated
Financial Statements. Should these contracts no longer meet hedge criteria in
accordance with SFAS No. 133, either through lack of effectiveness or because
the hedged transaction is not probable of occurring, all deferred gains and
losses related to the hedge will be immediately reclassified from accumulated
other comprehensive income into earnings.
The Company primarily executes derivative contracts with major financial
institutions. These counterparties expose the Company to credit risk in the
event of non-performance. The amount of such exposure is limited to the unpaid
portion of amounts due to the Company pursuant to terms of the derivative
instruments, if any. Although there are no collateral requirements, if a
downgrade in the credit rating of these counterparties occurs, management
believes that this exposure is mitigated by provisions in the derivative
arrangements which allow for the legal right of offset of any amounts due to
the Company from the counterparties with any amounts payable to the
counterparties by the Company. As a result, management considers the risk of
counterparty default to be minimal.
At December 25, 2004, the Company held open forward commitments to
purchase approximately $0.7 million of copper and approximately $1.3 million of
natural gas in the next three months.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts receivable,
and accounts payable approximate fair value due to the short-term maturity of
these instruments. Primarily using market yields, the fair value of the
Company's debt instruments were estimated to be $307.5 million and $15.5
million at December 25, 2004 and December 27, 2003, respectively. The fair
value of the Company's interest rate swap contract was approximately $0.7
million at December 25, 2004. This value represents the estimated amount the
Company would need to pay if such contract were terminated before maturity,
principally resulting from market interest rate decreases. The contracted
rates on committed forward contracts do not exceed the market rates for similar
term contracts at December 25, 2004. The Company estimates the fair value of
contracts by obtaining quoted market prices.
Fair value estimates are made at a specific point in time based on
relevant market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
F-26
Foreign Currency Translation
For foreign subsidiaries, the functional currency is the local currency.
Balance sheet accounts are translated at exchange rates in effect at the end of
the year and income statement accounts are translated at average exchange rates
for the year. Translation gains and losses are included in stockholders' equity
as a component of comprehensive income. Transaction gains and losses included
in the Consolidated Statements of Income were not significant.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates, assumptions, and judgments that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R), "Share-Based Payment", which is a revision of SFAS No. 123 and
supersedes APB No. 25. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expensed over the applicable vesting
period. Pro forma disclosure of the income statement effects of share-based
payments is no longer an alternative. The Company is required to adopt the
provisions of SFAS No. 123(R) effective as of the beginning of the third
quarter of 2005. SFAS No. 123(R) provides alternative methods of adoption
which include prospective application and a modified retroactive application.
The Company is currently evaluating the financial impact, including the
available alternatives of adoption, of SFAS No. 123(R). SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in 2004 for such
excess tax deductions was $31.8 million.
In November 2004, the FASB issued SFAS No. 151, "Inventory Cost". This
statement amends the guidance in Accounting Research Bulletin No. 43,
Chapter 4, "Inventory Pricing", to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). This statement is effective for inventory cost incurred during
fiscal years beginning after June 15, 2005. This statement will be considered
and adopted by the Company at the appropriate future point in time. The
Company is currently assessing the impact of adopting SFAS No. 151 to its
consolidated results of operations.
Reclassifications
Certain amounts in the prior years Consolidated Financial Statements have
been reclassified to conform to the current year presentation.
F-27
Note 2 - Inventories
(In thousands)
2004 2003
Raw material and supplies $ 34,270 $ 22,261
Work-in-process 24,201 20,395
Finished goods 129,382 97,892
---------- ----------
Inventories $ 187,853 $ 140,548
========== ==========
Inventories valued using the LIFO method totaled $36.5 million at
December 25, 2004 and $34.2 million at December 27, 2003. At December 25,
2004 and December 27, 2003 the approximate FIFO cost of such inventories was
$64.4 million and $42.0 million, respectively.
Note 3 - Property, Plant, and Equipment, Net
(In thousands)
2004 2003
Land and land improvements $ 9,431 $ 8,753
Buildings 97,679 90,279
Machinery and equipment 497,591 466,006
Construction in progress 5,479 16,976
---------- ----------
610,180 582,014
Less accumulated depreciation (274,570) (236,477)
---------- ----------
Property, plant, and equipment, net $ 335,610 $ 345,537
========== ==========
F-28
Note 4 - Goodwill
The changes in the carrying amount of goodwill were as follows:
(In thousands)
Standard Industrial
Products Products
Division Division Total
Balance at December 28, 2002 $ 94,859 $ 10,692 $ 105,551
Adjustments to the fair value of
businesses acquired during 2002 (789) 87 (702)
--------- --------- ---------
Balance at December 27, 2003 94,070 10,779 104,849
Goodwill resulting from
acquisitions during the year 33,013 - 33,013
Impairment charge - (2,279) (2,279)
Foreign currency translation adjustment 1,032 - 1,032
--------- --------- ---------
Balance at December 25, 2004 $ 128,115 $ 8,500 $ 136,615
========= ========= =========
The results of the Company's wholly owned subsidiary Overstreet-Hughes
Co., Inc. (Overstreet-Hughes) have not met expectations. Initiatives to
improve performance have not been successful. Furthermore, Overstreet-Hughes'
primary customer has announced the closure of its facility that consumes the
majority of Overstreet-Hughes' output. Consequently, during 2004, the Company
recognized a $3.9 million non-cash impairment charge related to Overstreet-
Hughes and reduced its goodwill by $2.3 million and its carrying cost in long-
lived assets by $1.6 million, its best estimate of fair value. This estimate
was determined based on a discounted cash flow method.
Note 5 - Long-Term Debt
(In thousands)
2004 2003
6% Subordinated Debentures, due 2014 $ 299,492 $ -
2001 Series IRBs with interest at
6.63%, due 2021 10,000 10,000
Other, including capitalized
lease obligations 6,486 4,272
---------- ----------
315,978 14,272
Less current portion of long-term debt (5,328) (2,835)
---------- ----------
Long-term debt $ 310,650 $ 11,437
========== ==========
F-29
On October 26, 2004, as part of a Special Dividend, the Company issued
$299.5 million in principal amount of its 6% Subordinated Debentures (the
Debentures) due November 1, 2014. Interest on the Debentures is payable semi-
annually on May 1 and November 1, commencing May 1, 2005. The Debentures may
be redeemed in whole at any time or in part from time to time at the option of
the Company at the following redemption price (expressed as a percentage of
principal amount) plus any accrued but unpaid interest to, but excluding, the
redemption date:
If redeemed during the 12-month period beginning October 26,
Year Redemption Price
2004 105%
2005 104
2006 103
2007 102
2008 101
2009 and thereafter 100
The Company has a Credit Agreement (the Agreement) with a syndicate of
banks establishing an unsecured $150 million revolving credit facility (the
Credit Facility) which matures in November 2007. 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. At December 25, 2004, the
premium was 60 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 December 25, 2004. There were no
borrowings outstanding as of December 25, 2004.
Borrowings under the Agreement require the Company, among other things, to
maintain certain minimum levels of net worth and meet certain minimum financial
ratios. At December 25, 2004 the Company was in compliance with all debt
covenants.
Aggregate annual maturities of the Company's debt are $5.3 million, $0.4
million, $0.3 million, $0.2 million, and $0.1 million for the years 2005
through 2009 respectively, and $309.7 million thereafter. Interest paid in
2004, 2003, and 2002 was $1.1 million, $1.2 million, and $1.6 million,
respectively. No interest was capitalized in 2004, 2003, or 2002.
The Company has guarantees which are letters of credit issued by the
Company generally to guarantee the payment of insurance deductibles and retiree
health benefits. 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 be required to make under its guarantees at December
25, 2004 was $9.1 million.
F-30
Note 6 - Stockholders' Equity
On October 26, 2004, the Company distributed a Special Dividend consisting
of $6.50 in cash and $8.50 in the principal amount of the Company's 6%
Subordinated Debentures due 2014 for each share of Common Stock. Additionally,
the Company paid regular quarterly cash dividends of 10 cents per share per
quarter in 2004.
The Company's shareholder rights plan expired on November 10, 2004, and
was not renewed. This plan was established on November 10, 1994; the Company
declared a dividend distribution of one Right for each outstanding share of the
Company's Common Stock. Under certain circumstances, each Right entitled the
holder to purchase one unit consisting of one-thousandth of a share of Series A
Junior Participating Preferred Stock at a purchase price of $160 per unit,
subject to adjustment.
The Company's Board of Directors has authorized the repurchase, until
October 2005, of up to 10 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 December 25, 2004, the Company had repurchased approximately
2.4 million shares under this authorization.
Components of accumulated other comprehensive income (loss) are as
follows:
(In thousands)
2004 2003
Cumulative foreign currency translation adjustment $ 16,275 $ 7,715
Minimum pension liability, net of income tax (12,842) (12,840)
Unrealized derivative losses, net of income tax (348) (461)
---------- ----------
Accumulated other comprehensive income (loss) $ 3,085 $ (5,586)
========== ==========
The change in cumulative foreign currency translation adjustment
primarily relates to the Company's investment in its U.K. subsidiaries and
fluctuations in exchange rates between the British pound sterling and the U.S.
dollar. The value of the British pound increased by approximately 8.6 percent
compared with the U.S. dollar during 2004.
F-31
Note 7 - Income Taxes
The components of income from continuing operations before income
taxes were taxed under the following jurisdictions:
(In thousands)
2004 2003 2002
Domestic $ 115,488 $ 60,937 $ 90,667
Foreign (130) (9,501) (2,200)
--------- --------- ---------
Income from continuing operations
before income taxes $ 115,358 $ 51,436 $ 88,467
========= ========= =========
Income tax expense attributable to continuing operations consists of
the following:
(In thousands)
2004 2003 2002
Current tax expense:
Federal $ 30,920 $ 4,928 $ 6,917
Foreign 642 1,744 287
State and local 1,669 830 400
--------- --------- ---------
Current tax expense 33,231 7,502 7,604
--------- --------- ---------
Deferred tax expense (benefit):
Federal 3,020 504 9,215
Foreign (182) (869) 137
State and local (127) 78 334
--------- --------- ---------
Deferred tax expense (benefit) 2,711 (287) 9,686
--------- --------- ---------
Income tax expense $ 35,942 $ 7,215 $ 17,290
========= ========= =========
U.S. income and foreign withholding taxes are provided on the earnings
of foreign subsidiaries that are expected to be remitted to the extent that
taxes on the distribution of such earnings would not be offset by foreign tax
credits.
F-32
The difference 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 is reconciled as
follows:
(In thousands)
2004 2003 2002
Expected income tax expense $ 40,375 $ 18,003 $ 30,964
State and local income tax,
net of federal benefit 1,160 618 594
Foreign income taxes (652) 220 1,330
Valuation allowance (2,605) (12,190) (14,928)
Other, net (2,336) 564 (670)
--------- --------- ---------
Income tax expense $ 35,942 $ 7,215 $ 17,290
========= ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
(In thousands)
2004 2003
Deferred tax assets:
Accounts receivable $ 1,250 $ 1,640
Inventories 1,641 1,523
Pension, OPEB, and accrued items 11,466 11,103
Other reserves 8,818 8,035
Net operating loss carryforwards 10,956 10,175
Capital loss carryforwards 445 1,780
Foreign tax credits - 2,119
Alternative minimum tax
credit carryforwards - 4,026
Other 846 32
---------- ----------
Total deferred tax assets 35,422 40,433
Less valuation allowance (12,880) (15,485)
---------- ----------
Deferred tax assets, net of
valuation allowance 22,542 24,948
---------- ----------
F-33
(In thousands)
2004 2003
Deferred tax liabilities:
Property, plant, and equipment 73,321 72,884
Other 1,424 1,408
---------- ----------
Total deferred tax liabilities 74,745 74,292
---------- ----------
Net deferred tax liability $ (52,203) $ (49,344)
========== ==========
As of December 25, 2004, the Company had utilized all recognized domestic
net operating loss carryforwards, alternative minimum tax credit carryforwards
and foreign tax credit carryforwards. As of December 25, 2004, the Company had
$1.3 million of capital loss carryforward of which $1.0 million expires in 2005
and $0.3 million expires in 2006.
As of December 25, 2004, the Company had foreign net operating loss
carryforwards (foreign NOLs), primarily from U.K. operations, available to
offset $36.5 million of foreign subsidiary income. These foreign NOLs have not
been recognized, and are available to offset foreign subsidiary income over an
indefinite period.
The reduction of the valuation allowance in 2004 was primarily the result
of recognition of a deferred income tax benefit upon the closure of open tax
years, a reduction of the estimated valuation allowance for foreign tax credit
carryforwards, and a reduction of the allowance associated with capital loss
carryforwards used to offset capital gains from the sale of non-operating
property.
During 2003, the Company recognized a deferred income tax benefit, upon
the closure of the open tax year, 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.
During 2002, the Company realized capital gains totaling approximately
$41.4 million, primarily from the sale of Utah Railway Company. Existing
capital loss carryforwards, which for financial reporting purposes were
entirely reserved by a valuation allowance, were used to offset the 2002
capital gains. The income tax benefit of approximately $14.9 million generated
by eliminating this valuation allowance was recognized in 2002 as a reduction
to income taxes provided for continuing operations in accordance with SFAS No.
109. No income tax expense was included in the operation of discontinued
operations in 2003 whereas $2.7 million was included in 2002.
Income taxes paid (refunded) were approximately $5.0 million in 2004, $0.8
million in 2003, and $(0.2) million in 2002.
The American Jobs Creation Act provides a new deduction for domestic
manufacturers. The new deduction phases into effect during the period from
2005 to 2010. The benefit from this deduction in 2005 is expected to be
immaterial.
F-34
Note 8 - Other Current Liabilities
Included in other current liabilities at year-end were accrued discounts
and allowances of $29.6 million at December 25, 2004, and $24.0 million at
December 27, 2003, and taxes payable of $13.6 million at December 25, 2004, and
$15.5 million at December 27, 2003.
Note 9 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans and
other postretirement benefit plans for certain of its employees. In 2004, the
Company changed its accounting principle by accelerating the date for actuarial
measurement of its obligation for certain pension plans from year-end to
November 30. The Company believes the one-month acceleration of the
measurement date is a preferred change as it allows time for management to
evaluate and report the actuarial pension measurements as well as evaluate
those results in funding decisions. The effect of the change on the obligation
and assets of the pension plans did not have a material cumulative effect on
pension expense or accrued benefit cost.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and the fair value of the plans' assets over the two-year
period ending December 25, 2004, and a statement of the plans' funded status as
of December 25, 2004 and December 27, 2003:
(In thousands)
Pension Benefits Other Benefits
2004 2003 2004 2003
Change in benefit
obligation:
Obligation at
beginning of year $ 132,342 $ 120,654 $ 10,756 $ 10,729
Service cost 1,972 1,766 5 5
Interest cost 7,972 7,495 649 694
Participant contributions 403 351 - -
Plan amendments 281 - - -
Actuarial loss 2,912 3,766 99 146
Benefit payments (6,116) (6,234) (709) (818)
Settlement - (67) - -
Foreign currency
translation adjustment 4,450 4,611 - -
-------- -------- -------- --------
Obligation at end of year $ 144,216 $ 132,342 $ 10,800 $ 10,756
======== ======== ======== ========
F-35
(In thousands)
Pension Benefits Other Benefits
2004 2003 2004 2003
Change in fair value
of plan assets:
Fair value of plan
assets at beginning
of year $ 114,889 $ 98,251 $ - $ -
Actual return on
plan assets 12,428 18,535 - -
Employer contributions 1,237 1,047 709 818
Participant contributions 403 351 - -
Benefit payments (6,116) (6,234) (709) (818)
Settlement - (67) - -
Foreign currency
translation adjustment 2,983 3,006 - -
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 125,824 $ 114,889 $ - $ -
======== ======== ======== ========
Funded status:
Funded (underfunded)
status at end of year $ (18,392) $ (17,453) $ (10,800) $ (10,756)
Unrecognized prior
service cost 2,570 2,664 (72) (80)
Unrecognized gain 17,729 17,765 2,774 2,817
-------- -------- -------- --------
Net amount recognized $ 1,907 $ 2,976 $ (8,098) $ (8,019)
======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with benefit obligations in excess
of plan assets were $114.2 million, $112.5 million, and $91.7 million,
respectively, as of December 25, 2004, and $104.6 million, $103.1 million, and
$84.1 million, respectively, as of December 27, 2003.
F-36
The following table provides the amounts recognized in the Consolidated
Balance Sheets as of December 25, 2004 and December 27, 2003:
(In thousands)
Pension Benefits Other Benefits
2004 2003 2004 2003
Prepaid benefit cost $ 8,664 $ 8,203 $ - $ -
Accrued benefit liability (19,611) (18,077) (8,098) (8,019)
Accumulated other
comprehensive income 12,854 12,850 - -
-------- -------- -------- --------
Net amount recognized $ 1,907 $ 2,976 $ (8,098) $ (8,019)
======== ======== ======== ========
The components of net periodic benefit cost (income) are as follows:
(In thousands)
2004 2003 2002
Pension benefits:
Service cost $ 1,972 $ 1,766 $ 1,354
Interest cost 7,972 7,495 7,407
Expected return on
plan assets (9,125) (7,724) (9,061)
Amortization of prior
service cost 373 491 856
Amortization of net loss (gain) 963 1,327 (714)
--------- --------- ---------
Net periodic benefit
cost (income) $ 2,155 $ 3,355 $ (158)
========= ========= =========
Other benefits:
Service cost $ 5 $ 5 $ 5
Interest cost 649 694 853
Amortization of prior
service cost (8) (8) (8)
Amortization of net gain 142 120 122
--------- --------- ---------
Net periodic benefit cost $ 788 $ 811 $ 972
========= ========= =========
Prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10 percent of the greater of the benefit obligation and the market-
related value of assets are amortized over the average remaining service period
of active participants.
F-37
The assumptions used in the measurement of the Company's benefit
obligations are as follows:
Pension Benefits Other Benefits
2004 2003 2004 2003
Weighted average
assumptions:
Discount rate 5.91% 6.08% 6.00% 6.25%
Expected return
on plan assets 8.06% 8.07% N/A N/A
Rate of compensation
increases 4.50% 4.25% N/A N/A
The assumptions used in the measurement of the Company's net periodic
benefit cost are as follows:
Pension Benefits Other Benefits
2004 2003 2002 2004 2003 2002
Weighted average
assumptions:
Discount rate 6.08% 6.42% 7.25% 6.25% 6.75% 6.75%
Expected return
on plan assets 8.07% 8.05% 8.10% N/A N/A N/A
Rate of compensation
increases 4.25% 4.00% 4.25% N/A N/A N/A
Only one pension plan uses the rate of compensation increase in its
benefit formula. All other pension plans are based on length of service.
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is assumed to range from 7.4 to
9.9 percent for 2004, gradually decrease to 4.5 percent for 2011, and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point would increase the
accumulated postretirement benefit obligation by $899 thousand and the service
and interest cost components of net periodic postretirement benefit costs by
$56 thousand for 2004. Decreasing the assumed health care cost trend rates by
one percentage point in each year would decrease the accumulated postretirement
benefit obligation and the service and interest cost components of net periodic
postretirement benefit costs for 2004 by $820 thousand and $52 thousand,
respectively. The impact of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 has been determined to be immaterial.
F-38
The weighted average asset allocation of the Company's pension fund
assets are as follows:
Asset Category Pension Plan Assets
2004 2003
Equity securities 71% 71%
Index funds 10 10
Debt securities 4 6
Cash and equivalents 4 2
Other 11 11
------- -------
100% 100%
======= =======
The measurement date for the majority of the plans is November 30.
The Company's pension plan obligations are long-term in nature and,
accordingly, the plan assets are invested for the long-term. The Company
believes that a diversified portfolio of equity securities (both actively
managed and index funds) and private equity funds have an acceptable risk-
return profile that, over the long-term, is better than fixed income
securities. Consequently, the pension plan assets are heavily weighted to
equity investments. Plan assets are monitored periodically. Based upon
results, investment managers and/or asset classes are redeployed when
considered necessary. Expected rates of return on plan assets were determined
based on historical market returns giving consideration to the composition of
each plan's portfolio.
The plans' assets do not include investment in securities issued by the
Company. The Company expects to contribute approximately $1.3 million to its
pension plans and $0.8 million to its other postretirement benefit plans in
2005. The Company expects future benefits to be paid as follows:
(In thousands)
Pension Other
Benefits Benefits
2005 $ 7,524 $ 821
2006 7,499 835
2007 7,587 838
2008 7,584 842
2009 7,666 840
2010-2014 41,857 3,975
------- -------
Total $ 79,717 $ 8,151
======= =======
F-39
The Company sponsors voluntary employee savings plans that qualify under
Section 401(k) of the Internal Revenue Code of 1986. Compensation expense for
the Company's matching contribution to the 401(k) plans was $2.0 million in
2004, 2003 and in 2002. The Company's match is a cash contribution.
Participants direct the investment of their account balances by allocating
among a range of asset classes including mutual funds (equity, fixed income,
and balanced funds), and money market funds. The plans do not offer direct
investment in securities issued by the Company.
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992 (the
Act) was enacted. The Act mandates a method of providing for postretirement
benefits to UMWA current and retired employees, including some retirees who
were never employed by the Company. In October 1993, beneficiaries were
assigned to the Company and the Company began its mandated contributions to the
UMWA Combined Benefit Fund, a multiemployer trust. Beginning in 1994, the
Company was required to make contributions for assigned beneficiaries under an
additional multiemployer trust created by the Act, the UMWA 1992 Benefit Plan.
The ultimate amount of the Company's liability under the Act will vary due to
factors which include, among other things, the validity, interpretation, and
regulation of the Act, its joint and several obligation, the number of valid
beneficiaries assigned, and the extent to which funding for this obligation
will be satisfied by transfers of excess assets from the 1950 UMWA pension plan
and transfers from the Abandoned Mine Reclamation Fund. Nonetheless, the
Company believes it has an adequate reserve for this liability which totaled
$6.1 million in 2004 and $6.3 million in 2003.
The Company maintains a nonqualified, deferred compensation plan, which
permits certain management employees to annually elect to defer, on a pretax
basis, a portion of their compensation. The deferred benefit to be provided is
based on the amount of compensation deferred and earnings on the deferrals.
Effective January 1, 2005, deferrals ceased. The Company has invested in
certain assets to assist in funding this plan. The fair value of these assets,
included in other assets, was $7.7 million at December 25, 2004 and $6.7
million at December 27, 2003.
The Company makes contributions to certain multiemployer defined benefit
pension plan trusts that cover union employees based on collective bargaining
agreements. Contributions by employees are not required nor are they
permitted. Pension expense under the multiemployer defined benefit pension
plans was $0.4 million for 2004, and $0.3 million for 2003, and 2002.
Note 10 - Commitments and Contingencies
The Company is subject to environmental standards imposed by federal,
state, local, and foreign environmental laws and regulations. For non-
operating properties, the Company has provided and charged to income $1.0
million in 2004, $1.2 million in 2003, and $1.6 million in 2002 for pending
environmental matters. The basis for the provision is updated information and
results of ongoing remediation and monitoring programs. Environmental reserves
total $9.5 million in 2004 and $9.6 million in 2003. These estimated future
costs, which will be funded in future years as remediation programs progress,
are not discounted to their present value and are not reduced by potential
insurance reimbursements. Management believes that the outcome of pending
environmental matters will not materially affect the financial position or
results of operations of the Company.
F-40
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 and legal claims in the future; these gain contingencies are not
recognized in the Consolidated Financial Statements.
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
and arising out of conduct allegedly occurring in Europe. Two such purported
class actions are pending in the United States District Court for the Western
District of Tennessee (the Federal Actions), four are pending in the Superior
Court of the State of California, County of San Francisco (the California
Actions), and one is pending in the Circuit Court for Shelby County, Tennessee
(with the Federal Actions and the California Actions, the Actions). Wholly
owned Company subsidiaries, WTC Holding Company, Inc., Deno Holding Company,
Inc., and Mueller Europe Ltd. are named in all of the Actions, and Deno
Acquisition Eurl is named in all but one of the Actions. All of the Actions,
which are similar, seek declaratory 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 has been granted. The
Company has not yet been required to respond to any of the complaints in the
Actions. The Company believes that the claims for relief in the Actions are
without merit and intends to defend the Actions vigorously.
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 the European Commission's action or other
investigations.
The Company leases certain facilities and equipment under operating leases
expiring on various dates through 2011. The lease payments under these
agreements aggregate to approximately $5.8 million in 2005, $4.6 million in
2006, $3.5 million in 2007, $2.7 million in 2008, $1.1 million in 2009, and
$1.2 million thereafter. Total lease expense amounted to $7.2 million in 2004,
$7.0 million in 2003, and $10.6 million in 2002.
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.
The Company (1) entered into consulting and non-compete agreements (the
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 Agreements provide for post-employment services to be
provided by Messrs. Karp and O'Hagan for a six-year period. During the first
four years of the Agreements, an annual fee equal to two-thirds of each
executive's Final Base Compensation (as defined in his agreement) will be
F-41
payable. During the final two years, the annual fee is set at one-
third of each Executive's Final Base Compensation. During the term of the
Agreements, each executive agrees not to engage in Competitive Activity (as
defined in the Agreements) and will be entitled to receive certain other
benefits from the Company. The term of Mr. O'Hagan's 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
employment with the Company for Good Reason (as defined in his current
employment agreement). The term of Mr. Karp's 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). Based upon the value of the non-compete
provisions of the Agreements, the Company will expense the value of the
Agreements over their term.
Note 11 - Other Income, Net
(In thousands)
2004 2003 2002
Rent and royalties $ 1,773 $ 2,821 $ 2,364
Interest income 2,385 2,466 3,111
Gain (Loss) on disposal of
properties, net 5,729 (290) 485
Minority interest in income
of subsidiaries (43) (152) (150)
Environmental expense (976) (1,165) (1,639)
Equity in loss of
unconsolidated subsidiary (2,026) (460) -
--------- --------- ---------
Other income, net $ 6,842 $ 3,220 $ 4,171
========= ========= =========
Note 12 -Stock Options
The Company follows APB No. 25 in accounting for its stock options. Under
APB No. 25, no compensation expense is recognized because the exercise price of
the Company's incentive stock options equals the market price of the underlying
stock on the date of grant.
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 the grant. Generally, the options vest annually in equal increments
over a five-year period beginning one year from the date of the grant. Any
unexercised options expire after not more than ten years. No options may be
granted after ten years from the date of plan adoption.
Additionally, the Company has granted stock options to key executives as
retention incentives and inducements to enter into employment agreements with
the Company. Generally, these special grants have terms and conditions similar
to those granted under the Company's other stock option plans.
F-42
The income tax benefit associated with the exercise of stock options
reduced income taxes payable, classified as other current liabilities, by $31.8
million in 2004, $18 thousand in 2003, and $13.2 million in 2002. Such
benefits are reflected as additions directly to additional paid-in capital and,
therefore, have no effect on the Company earnings.
Concurrent with the Company's recapitalization by Special Dividend,
outstanding stock options were adjusted. This equitable adjustment involved an
adjustment to the number of shares subject to each outstanding option and an
adjustment to the option price. The objective of these adjustments was to
maintain the option holders' intrinsic value following issuance of the Special
Dividend.
A summary of the Company's stock option activity and related information
follows:
(Shares in thousands)
Weighted Average
Options Exercise Price
Outstanding at December 29, 2001 4,936 $ 7.15
Granted 261 31.79
Exercised (1,255) 2.80
Expired, cancelled, or surrendered (21) 30.39
--------
Outstanding at December 28, 2002 3,921 10.06
Granted 281 25.66
Exercised (24) 21.78
Expired, cancelled, or surrendered (53) 28.92
--------
Outstanding at December 27, 2003 4,125 10.82
Granted 479 20.77
Exercised (3,247) 5.90
Expired, cancelled, or surrendered (68) 26.40
Equitable adjustment to outstanding options 493
--------
Outstanding at December 25, 2004 1,782 18.78
========
Options exercisable at:
December 28, 2002 3,410 $ 7.24
December 27, 2003 3,554 8.03
December 25, 2004 759 18.32
After the equitable adjustment, exercise prices for stock options
outstanding at December 25, 2004, ranged from $9.16 to $23.80. The weighted
average remaining life of the 1.8 million shares is 7.0 years. The weighted
average fair value per option granted was $8.98 in 2004, $10.06 in 2003, and
$12.49 in 2002.
F-43
Mr. Harvey L. Karp, Chairman of the Company's Board of Directors,
Exercised options to purchase 2.4 million shares of Company stock during 2004,
none during 2003, and 1.2 million shares during 2002. 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 exercise. These shares withheld have been classified as acquisition of
treasury stock in the Company's Consolidated Financial Statements.
As of December 25, 2004, the Company had reserved 1.4 million shares of
its Common Stock for issuance pursuant to certain stock option plans.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method. The fair value for
these options at the date of grant was estimated assuming weighted average
expected life of the options of six years, and dividend yield of 1.3 percent in
2004 and no dividend payments in 2003 and 2002. The weighted average risk free
interest rate used in the model was 2.99 percent for 2004, 3.81 percent for
2003, and 3.44 percent for 2002. The volatility factor of the expected market
value of the Company's Common Stock was 0.274 in 2004, 0.331 in 2003, and
0.344 in 2002.
The pro forma information was determined using the Black-Scholes option
valuation model. Option valuation models require highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information is included in the Summary of Significant
Accounting Policies.
Note 13 - Acquisitions and Investments
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. Total consideration paid at closing was
approximately $14.6 million.
On December 14, 2004, the Company acquired shares in seven companies and
inventory of another (collectively Mueller Comercial S.A.) for an aggregate of
$42.3 million, subject to closing adjustments, including $3.0 million for a
contingent earn-out payment held in escrow at year-end. These operations
include pipe nipple manufacturing in Mexico and import distribution businesses
which product lines include malleable iron fittings and other plumbing
specialties. The combined sales of Mueller Comercial S.A. are approximately
$60 million annually.
F-44
On September 27, 2002, the Company acquired certain assets of Colonial
Engineering, Inc.'s Fort Pierce, Florida operations. These operations
manufacture injected molded plastic pressure fittings for plumbing,
agricultural, and industrial use including a line of PVC Schedule 40 and 80 and
CPVC fittings. These operations generated sales of approximately $15 million
in 2001. The purchase price was approximately $14.1 million.
On August 21, 2002, the Company acquired 100 percent of the outstanding
stock of Overstreet-Hughes, Co., Inc. Overstreet-Hughes, located in Carthage,
Tennessee, manufactures precision tubular components and assemblies primarily
for the OEM air-conditioning market and had sales in 2001 of approximately $8
million. Total consideration paid at closing, including assumption of debt,
was approximately $6.3 million. A contingent payment of up to $2 million will
be paid if certain financial targets are achieved.
These acquisitions were accounted for using the purchase method of
accounting. Therefore, the results of operations of the acquired businesses
were included in the Company's Consolidated Financial Statements from their
respective acquisition dates. The purchase price for these acquisitions, which
was financed by available cash balances, has been allocated to the assets of
the acquired businesses based on their respective fair market values. The
purchase price of Mueller Comercial S.A. has been preliminarily allocated to
the acquired assets based on their estimated fair market value awaiting
additional information including appraisals of long-lived assets. Final
allocations to the acquired assets and liabilities assumed, as well as
resolution of the contingent earn-out will result in future adjustments to
goodwill.
The total fair value of assets acquired in 2004 was $80.9 million,
consisting primarily of receivables of $20.7 million, inventories of $18.9
million, and properties of $8.4 million. The fair value of liabilities
assumed in 2004 was $22.3 million, consisting primarily of $8.3 million of
notes payable and $14.0 million of accounts payable and other current
liabilities. The excess of the purchase price over the estimated fair value of
assets acquired and liabilities assumed of $33.0 million was allocated to
goodwill of the Standard Products Division as these acquisitions will broaden
the Company's product line in the U.K. and Mexico and should provide
opportunities to leverage our manufacturing operations. This goodwill is not
deductible for tax purposes.
During 2002, the Company acquired an equity interest in Conbraco
Industries, Inc. for $7.3 million in cash; early in 2003, the Company acquired
an additional interest for $10.8 million. Conbraco is a manufacturer of flow
control products including ball valves, backflow preventers, and plumbing and
heating products for commercial and industrial applications. The Company's
interest totaled 39 percent of Conbraco's equity at December 25, 2004. This
investment is accounted for by the equity method of accounting, and is included
in the other assets classification in the Consolidated Balance Sheets. A
provision of $2.3 million was assessed in 2004 for certain federal income tax
audit exposures of Conbraco. If an IRS proposed settlement is approved, a
reduction of that provision may be recognized.
Note 14 - Discontinued Operations
On August 28, 2002, the Company completed the sale of its wholly owned
subsidiary, Utah Railway Company. Proceeds from the sale were approximately
F-45
$55.4 million. The Company recognized a gain of $21.1 million (net of income
taxes of $11.6 million) from the sale.
In December 2002, the Company initiated a plan to sell or liquidate its
French manufacturing operations, Mueller Europe S. A. A loss of $13.4 million
was recognized to write-down this operation to its net realizable value. This
loss is net of a $15.2 million income tax benefit related to the operation's
cumulative losses previously unrecognized for tax purposes. Included in the
loss is a provision to expense the cumulative foreign currency translation
adjustment of $2.5 million, which was previously recognized as a component of
other comprehensive loss. On March 3, 2003, Mueller Europe S.A. filed a
petition for liquidation with the Commercial Court of Provins Province, France
and on March 4, 2003 the Court declared the entity to be in liquidation. The
disposition of remaining assets and obligations of Mueller Europe S.A. is under
the jurisdiction of the Court. In 2003, the Company recognized operating
losses from discontinued operations incurred by Mueller Europe S.A. for the
period the business operated.
The Company expects no further obligations or contingencies from these
discontinued operations and, therefore, during 2003 it recognized a $1.7
million gain to reflect adjustments to the previous estimates on disposition.
Operating results of both businesses, net of applicable income taxes, are
included in the Consolidated Statements of Income classified as income (loss)
from operation of discontinued operations.
Operating results of discontinued operations were as follows:
(In thousands)
2003 2002
Net sales:
Utah Railway Company $ - $ 15,394
Mueller Europe S.A. 2,323 49,767
--------- ---------
$ 2,323 $ 65,161
========= =========
Income (loss) before income taxes:
Utah Railway Company $ - $ 7,482
Mueller Europe S.A. (539) (5,682)
--------- ---------
$ (539) $ 1,800
========= =========
Net income (loss):
Utah Railway Company $ - $ 4,812
Mueller Europe S.A. (539) (5,698)
--------- ---------
$ (539) $ (886)
========= =========
F-46
Note 15 - Industry Segments
The Company's reportable segments include its Standard Products Division
(SPD) and its Industrial Products Division (IPD). These segments are classified
primarily by the markets for their products. Performance of segments is
generally evaluated by their operating income.
SPD manufactures copper tube and fittings, plastic fittings, line sets,
steel nipples, cut pipe, and merchant couplings. These products are
manufactured in the U.S., Europe, and Mexico. SPD also imports and resells
brass and plastic plumbing valves, malleable iron fittings, faucets, and
plumbing specialty products. SPD's products are sold primarily to plumbing and
air-conditioning wholesalers, hardware wholesalers and co-ops, and building
product retailers.
IPD manufactures brass rod, impact extrusions, and forgings as well as a
variety of end-products including plumbing brass; automotive components; valves
and fittings; and specialty copper, copper-alloy, and aluminum tubing. These
products are sold primarily to OEM customers.
Summarized segment and geographic information is shown in the following
tables. Geographic sales data indicates the location from which products are
shipped. Unallocated expenses include general corporate expenses, plus certain
charges or credits not included in segment activity. Certain expenses related
primarily to retiree benefits at inactive operations were formerly combined
with the operations of Utah Railway Company under a third industry segment,
Other Businesses. Following the sale of Utah Railway Company and its
classification as discontinued operations, these expenses of inactive
operations have been combined into the unallocated expenses classification. In
addition, the operations of Mueller Europe S.A. are classified as discontinued
operations and have been eliminated from the operating results of SPD.
Worldwide sales to one customer from the Standard Products Division
totaled $170.1 million in 2004, $111.0 million in 2003, and $101.0 million in
2002, which represented 12 percent in 2004 and 11 percent in 2003 and in 2002
of the Company's consolidated net sales. No other customer accounted for more
than 10 percent of consolidated net sales.
SEGMENT INFORMATION:
(In thousands)
2004 2003 2002
Net sales:
Standard Products Division $1,002,086 $ 717,606 $ 679,264
Industrial Products Division 392,645 292,008 279,591
Elimination of intersegment sales (15,675) (10,536) (5,872)
--------- --------- ---------
$1,379,056 $ 999,078 $ 952,983
========= ========= =========
F-47
(In thousands)
2004 2003 2002
Depreciation and amortization:
Standard Products Division $ 28,309 $ 26,038 $ 24,975
Industrial Products Division 11,158 11,023 10,539
General corporate 1,172 1,893 1,926
--------- --------- ---------
$ 40,639 $ 38,954 $ 37,440
========= ========= =========
Operating income:
Standard Products Division $ 108,265 $ 54,123 $ 78,964
Industrial Products Division 20,562 11,672 20,353
Unallocated expenses (16,337) (16,411) (13,561)
--------- --------- ---------
$ 112,490 $ 49,384 $ 85,756
========= ========= =========
Expenditures for long-lived assets:
Standard Products Division $ 74,536 $ 21,465 $ 27,400
Industrial Products Division 2,338 5,623 11,558
--------- --------- ---------
$ 76,874 $ 27,088 $ 38,958
========= ========= =========
Segment assets:
Standard Products Division $ 691,404 $ 594,236 $ 594,516
Industrial Products Division 179,926 159,303 171,315
General corporate 92,401 301,645 222,116
--------- --------- ---------
$ 963,731 $1,055,184 $ 987,947
========= ========= =========
GEOGRAPHIC INFORMATION:
(In thousands)
2004 2003 2002
Net sales:
United States $1,211,178 $ 895,994 $ 870,457
Foreign 167,878 103,084 82,526
--------- --------- ---------
$1,379,056 $ 999,078 $ 952,983
========= ========= =========
Long-lived assets:
United States $ 416,206 $ 437,182 $ 443,295
Foreign 92,194 47,647 44,305
--------- --------- ---------
$ 508,400 484,829 $ 487,600
========= ========= =========
F-48
Note 16 - Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2004
Net sales $ 345,959 $ 380,822 $ 322,512 $ 329,763
Gross profit (1) 64,930 77,102 59,324 62,088
Income from
continuing operations 17,960(3) 27,048 18,754(4) 15,654(5)
Net income 17,960 27,048 18,754 15,654
Basic earnings (loss)
per share:
From continuing operations 0.52 0.77 0.53 0.43
Basic earnings per share 0.52 0.77 0.53 0.43
Diluted earnings (loss)
per share:
From continuing operations 0.49 0.73 0.51 0.42
Diluted earnings per share 0.49 0.73 0.51 0.42
Dividends per share 0.10 0.10 0.10 15.10
2003
Net sales $ 232,022 $ 248,221 $ 251,053 $ 267,782
Gross profit (1) 40,107 44,760 49,093 49,269
Income from
continuing operations 4,460 8,979 19,737(2) 11,045
Loss from operations
of discontinued operations,
net of tax (539) - - -
Gain on disposition of
discontinued operations,
net of tax - - 1,699 -
Net income 3,921 8,979 21,436 11,045
Basic earnings (loss)
per share:
From continuing operations 0.13 0.26 0.58 0.32
From discontinued operations (0.02) - - -
From sale of discontinued
operations - - 0.05 -
Basic earnings per share 0.11 0.26 0.63 0.32
Diluted earnings (loss)
per share:
From continuing operations 0.12 0.24 0.53 0.30
From discontinued operations (0.01) - - -
From sale of discontinued
operations - - 0.05 -
Diluted earnings per share 0.11 0.24 0.58 0.30
(1) Gross profit is net sales less cost of goods sold, which excludes
depreciation and amortization.
(2) Third quarter of 2003 includes recognition of deferred tax benefit of
$9.3 million.
F-49
(3) First quarter of 2004 includes pre-tax recognition of $3.9 million non-
cash impairment charge, $5.2 million non-operating gain on sale of
property, and $3.3 million non-operating loss on equity of non-
consolidated subsidiary.
(4) Third quarter of 2004 includes recognition of deferred tax benefit of $2.8
million.
(5) Fourth quarter of 2004 includes pre-tax benefit of $2.8 million resulting
from changes in estimates of inventory reserves plus $1.7 million benefit
from changes in estimated health care accrual rates.
F-50
Report of Independent Registered Public Accounting Firm
The Stockholders of Mueller Industries, Inc.
We have audited the accompanying consolidated balance sheets of Mueller
Industries, Inc. as of December 25, 2004 and December 27, 2003, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 25, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mueller
Industries, Inc. at December 25, 2004 and December 27, 2003, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 25, 2004, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, in 2004,
the Company changed the measurement date for most of its pension plans from
year-end to November 30.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Mueller Industries Inc.'s internal control over financial reporting as of
December 25, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organization of the
Treadway Commission and our report dated March 1, 2005 expressed an unqualified
opinion thereon.
/S/ERNST & YOUNG LLP
Memphis, Tennessee
March 1, 2005
F-51
MUELLER INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 25, 2004, December 27, 2003, and December 28, 2002
(In thousands)
Additions
-------------------------------
Balance at Charged to Balance
beginning costs and Other at end
of year expenses additions Deductions of year
------------ ------------ ----------- ----------- -----------
2004
Allowance for doubtful accounts $ 4,734 $ 1,404 $ 200 $ 2,413 $ 3,925
Environmental reserves $ 9,560 $ 976 $ 659 (1) $ 1,692 $ 9,503
Severance and related $ 59 $ - $ - $ 46 $ 13
Other reserves (2) $ 735 $ 94 $ - $ 122 $ 707
Valuation allowance for deferred
tax assets $ 15,485 $ 1,479 $ - $ 4,084 $ 12,880
2003
Allowance for doubtful accounts $ 6,443 $ 3,172 $ - $ 4,881 $ 4,734
Environmental reserves $ 9,110 $ 1,165 $ 1,293 (1) $ 2,008 $ 9,560
Severance and related $ 13 $ 46 $ - $ - $ 59
Other reserves (2) $ 1,721 $ - $ - $ 986 $ 735
Valuation allowance for deferred
tax assets $ 33,030 $ 1,807 $ - $ 19,352 (3) $ 15,485
2002
Allowance for doubtful accounts $ 6,573 $ 374 $ - $ 504 $ 6,443
Environmental reserves $ 9,203 $ 1,739 $ 543 $ 2,375 $ 9,110
Severance and related $ 14 $ - $ - $ 1 $ 13
Other reserves (2) $ 3,306 $ - $ 200 $ 1,785 $ 1,721
Valuation allowance for deferred
tax assets $ 58,535 $ 136 $ - $ 25,641 $ 33,030
(1) Includes insurance proceeds and currency translation changes.
(2) Other reserves are included in the balance sheet captions "Other current liabilities" and "Other noncurrent liabilities".
(3) Includes a $5.4 million reclassification between "Deferred tax" and "Current taxes payable".
F-52
EXHIBIT INDEX
Exhibits Description
- -------- -----------
10.4 Summary description of the Registrant's 2005 bonus plan for
certain key employees.
10.21 Securities Purchase Agreement, dated December 14, 2004, among
Mueller Comercial de Mexico, S. de R.L. de C.V.,
WTC HOLDCO I, LLC, MIYAR LLC, NICNA, GmbH, and The Seller Parties.
10.22 Inventory Purchase Agreement, dated December 14, 2004, by and
between Niples del Norte S.A. de C.V. and
Mueller de Mexico S.A. de C.V.
18.0 Letter of Preferability from Ernst & Young LLP dated February 16,
2005 regarding an accounting change.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Registered Public Accounting Firm (Includes
report on Financial Statement Schedule).
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
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.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.