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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended April 2, 2005 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
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
The number of shares of the Registrant's common stock outstanding as of
April 21, 2005, was 36,597,160.
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MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Period Ended April 2, 2005
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Consolidated Statements of Income
for the quarters ended
April 2, 2005 and March 27, 2004 3
b.) Consolidated Balance Sheets
as of April 2, 2005 and December 25, 2004 5
c.) Consolidated Statements of Cash Flows
for the quarters ended April 2, 2005
and March 27, 2004 7
d.) Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4. Controls and Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 21
Item 6. Exhibits 21
Signatures 23
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
April 2, 2005 March 27, 2004
(In thousands, except per share data)
Net sales $ 401,663 $ 345,959
Cost of goods sold 334,024 281,029
---------- ----------
Gross profit 67,639 64,930
Depreciation and amortization 10,078 9,965
Selling, general, and
administrative expense 30,355 26,682
Impairment charge - 3,941
---------- ----------
Operating income 27,206 24,342
Interest expense (5,184) (224)
Other income, net 794 2,624
---------- ----------
Income before income taxes 22,816 26,742
Current income tax expense (8,436) (8,674)
Deferred income tax benefit (expense) 828 (108)
---------- ----------
Total income tax expense (7,608) (8,782)
---------- ----------
Net income $ 15,208 $ 17,960
========== ==========
See accompanying notes to consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
April 2, 2005 March 27, 2004
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 36,505 34,658
Effect of dilutive stock options 646 2,250
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,151 36,908
---------- ----------
Basic earnings per share $ 0.42 $ 0.52
========== ==========
Diluted earnings per share $ 0.41 $ 0.49
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
April 2, 2005 December 25, 2004
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 69,720 $ 47,449
Accounts receivable, less allowance
for doubtful accounts of $3,796 in
2005 and $3,925 in 2004 219,838 201,396
Inventories:
Raw material and supplies 40,085 34,270
Work-in-process 24,343 24,201
Finished goods 129,149 129,382
---------- ----------
Total inventories 193,577 187,853
Other current assets 18,977 18,633
---------- ----------
Total current assets 502,112 455,331
Property, plant, and equipment, net 329,043 335,610
Goodwill 136,549 136,615
Other assets 38,399 36,175
---------- ----------
$ 1,006,103 $ 963,731
========== ==========
See accompanying notes to consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
April 2, 2005 December 25, 2004
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,346 $ 5,328
Accounts payable 115,872 79,723
Accrued wages and other employee costs 24,181 37,992
Other current liabilities 68,792 57,775
---------- ----------
Total current liabilities 211,191 180,818
Long-term debt 310,595 310,650
Pension liabilities 19,669 19,611
Postretirement liabilities other
than pensions 13,445 13,556
Environmental reserves 9,435 9,503
Deferred income taxes 66,367 67,479
Other noncurrent liabilities 10,141 10,361
---------- ----------
Total liabilities 640,843 611,978
---------- ----------
Minority interest in subsidiaries 67 67
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 36,597,160
in 2005 and 36,389,824 in 2004 401 401
Additional paid-in capital, common 252,689 252,931
Retained earnings 187,086 175,537
Accumulated other comprehensive income 904 3,085
Treasury common stock, at cost (75,887) (80,268)
---------- ----------
Total stockholders' equity 365,193 351,686
---------- ----------
Commitments and contingencies (Note 2) - -
---------- ----------
$ 1,006,103 $ 963,731
========== ==========
See accompanying notes to consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Quarter Ended
April 2, 2005 March 27, 2004
(In thousands)
Cash flows from operating activities
Net income $ 15,208 $ 17,960
Reconciliation of net income
to net cash provided
by (used in) operating activities:
Depreciation and amortization 10,118 9,965
Income tax benefit from exercise
of stock options 529 9,685
Impairment charge - 3,941
Equity in (earnings) loss of
unconsolidated subsidiaries (266) 3,272
Deferred income taxes (828) 108
Loss (gain) on disposal
of properties 94 (5,142)
Changes in assets and liabilities:
Receivables (19,189) (70,032)
Inventories (6,393) (9,714)
Other assets (3,130) (6,149)
Current liabilities 33,973 8,248
Other liabilities 282 997
Other, net (211) 483
---------- ----------
Net cash provided by (used in)
operating activities 30,187 (36,378)
---------- ----------
Cash flows from investing activities
Capital expenditures (4,814) (5,063)
Proceeds from sales of properties 25 5,173
---------- ----------
Net cash (used in) provided by
investing activities (4,789) 110
---------- ----------
See accompanying notes to consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Quarter Ended
April 2, 2005 March 27, 2004
(In thousands)
Cash flows from financing activities
Acquisition of treasury stock $ (168) $ (9,320)
Dividends paid (3,659) (3,493)
Repayments of long-term debt (2,972) (926)
Proceeds from the sale of
treasury stock 3,778 3,259
---------- ----------
Net cash used in financing activities (3,021) (10,480)
---------- ----------
Effect of exchange rate changes on cash (106) (8)
---------- ----------
Increase (decrease) in cash
and cash equivalents 22,271 (46,756)
Cash and cash equivalents at the
beginning of the period 47,449 255,088
---------- ----------
Cash and cash equivalents at the
end of the period $ 69,720 $ 208,332
========== ==========
See accompanying notes to consolidated financial statements.
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MUELLER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted.
Results of operations for the interim periods presented are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole. This quarterly report on Form 10-Q should be read in
conjunction with the Company's Annual Report on Form 10-K, including the annual
financial statements incorporated therein.
The accompanying unaudited interim financial statements include all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. The first quarter
of 2005 was a 14-week quarter while the first quarter of 2004 was a 13-week
quarter.
Note 1 - Earnings Per Common Share and Stock-Based Compensation
Basic per share amounts have been computed based on the average number of
common shares outstanding. Diluted per share amounts reflect the increase in
average common shares outstanding that would result from the assumed exercise
of outstanding stock options, computed using the treasury stock method.
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based employee compensation expense is reflected in
net income because the exercise price of the Company's incentive employee stock
options equals the market price of the underlying stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
-9-
For the Quarter Ended
April 2, 2005 March 27, 2004
(In thousands, except per share data)
Net income $ 15,208 $ 17,960
SFAS No. 123 pro forma compensation
expense, net of income taxes (534) (419)
---------- ----------
SFAS No. 123 pro forma
net income $ 14,674 $ 17,541
========== ==========
Pro forma earnings per share:
Basic $ 0.40 $ 0.51
Diluted $ 0.39 $ 0.48
Earnings per share, as reported:
Basic $ 0.42 $ 0.52
Diluted $ 0.41 $ 0.49
Note 2 - Commitments and Contingencies
The Company is involved in certain litigation as either plaintiff or
defendant as a result of claims that have arisen in the ordinary course of
business which management believes will not have a material effect on the
Company's financial condition or results of operations.
The Company has been named as a defendant in several purported class
action complaints brought by direct and indirect purchasers alleging
anticompetitive activities with respect to the sale of copper plumbing tubes in
the United States. Two such purported class actions were filed in the United
States District Court for the Western District of Tennessee (the Federal
Actions), four were filed in the Superior Court of the State of California,
County of San Francisco (the California Actions), one was filed in the Circuit
Court for Shelby County, Tennessee (the Tennessee Action), and one was filed in
the Superior Court of the Commonwealth of Massachusetts, County of Middlesex
(the Massachusetts Action, and with the Federal Actions, the California Actions
and the Tennessee Action, the 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
(except for the Massachusetts Action) and monetary relief. Plaintiffs' motions
to consolidate and for appointment of lead counsel in the Federal Actions and
plaintiffs' motion to consolidate the California Actions have been granted.
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.
Guarantees, in the form of letters of credit, are issued by the
Company generally to guarantee the payment of insurance deductibles, retiree
health benefits, and certain operating costs of a foreign subsidiary. The
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terms of the Company's guarantees are generally one year but are renewable
annually as required. The maximum potential amount of future payments the
Company could have been required to make under its guarantees at April 2, 2005
was $9.1 million.
Note 3 - Impairment Charge
During the first quarter of 2004, the Company recognized a $3.9 million
impairment charge related to its subsidiary, Overstreet-Hughes Co., Inc., of
which $2.3 million was goodwill and the remainder was property, plant, and
equipment. The results of Overstreet-Hughes, which manufactures tubular
components and assemblies primarily for the original equipment manufacturer
(OEM) air-conditioning market, had not met expectations. Furthermore,
Overstreet-Hughes' primary customer announced the closure of its facility
that consumes the majority of Overstreet-Hughes' output. Consequently, the
Company reduced its carrying cost in these long-lived assets to its best
estimate of fair value. This estimate was determined based on a discounted
cash flow method.
Note 4 - Industry Segments
Summarized segment information is as follows:
For the Quarter Ended
April 2, 2005 March 27, 2004
(In thousands)
Net sales:
Standard Products Division $ 293,897 $ 249,657
Industrial Products Division 111,325 99,778
Elimination of intersegment sales (3,559) (3,476)
---------- ----------
$ 401,663 $ 345,959
========== ==========
Operating income:
Standard Products Division $ 24,627 $ 24,990
Industrial Products Division 6,534 3,353
Unallocated expenses (3,955) (4,001)
---------- ----------
$ 27,206 $ 24,342
========== ==========
Operating income for the Industrial Products Division was reduced by a
$3.9 million impairment charge for the quarter ended March 27, 2004.
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Note 5 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
April 2, 2005 March 27, 2004
(In thousands)
Comprehensive income:
Net income $ 15,208 $ 17,960
Other comprehensive income (loss):
Cumulative translation adjustments (2,308) 1,961
Change in the fair value
of derivatives 128 (145)
---------- ----------
$ 13,028 $ 19,776
========== ==========
The change in cumulative foreign currency translation adjustment primarily
relates to the Company's investment in its U.K., Mexican, and Canadian
subsidiaries and fluctuations in exchange rates between their local currencies
and the U.S. dollar. During the first quarter of 2005, the value of the
British pound sterling decreased 2.1 percent compared to the U.S. dollar, the
value of the Canadian dollar increased 1.4 percent compared to the U.S. dollar,
and the value of the Mexican peso decreased 0.5 percent compared to the U.S.
dollar.
-12-
Note 6 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. The net
periodic benefit cost is based on estimated values provided by independent
actuaries. The components of net periodic benefit cost are as follows:
For the Quarter Ended
April 2, 2005 March 27, 2004
(In thousands)
Pension benefits:
Service cost $ 554 $ 484
Interest cost 2,063 1,929
Expected return on plan assets (2,324) (2,119)
Amortization of prior service cost 89 88
Amortization of net (gain) loss (120) 241
---------- ----------
Net periodic benefit cost $ 262 $ 623
========== ==========
Other benefits:
Service cost $ 1 $ 1
Interest cost 162 174
Expected return on plan assets (2) (2)
Amortization of prior service cost 36 30
---------- ----------
Net periodic benefit cost $ 197 $ 203
========== ==========
The Company previously disclosed in its financial statements for the year
ended December 25, 2004, that it expected to contribute approximately $1.3
million to its pension plans and approximately $0.8 million to its other
postretirement benefit plans in 2005. The Company now anticipates
contributions to its pension plans for the year to be approximately $2.2
million. During the first quarter of 2005, $0.2 million of contributions have
been made to certain pension plans and $0.2 million of contributions have been
made to other postretirement benefit plans.
Note 7 - Acquisitions and Investments
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. 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.
This acquisition was accounted for using the purchase method of
accounting. The purchase price of Mueller Comercial S.A. has been
preliminarily allocated to the acquired assets based on their estimated fair
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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.
Note 8 - Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board 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. 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 the year ending December 25, 2004 for such excess tax
deductions was $31.8 million. The amount of income tax benefit from exercise
of stock options recognized in the first quarter of 2005 and 2004 was $0.5
million and $9.7 million, respectively. The Company previously reported that
it is required to adopt the provisions of SFAS No. 123(R) effective as of the
beginning of the third quarter of 2005; however, on April 14, 2005, the
Securities and Exchange Commission adopted a new rule, which deferred the
required adoption date for the Company to the beginning of the first quarter of
2006.
Note 9 - Environmental Reserves
The Company is subject to normal environmental standards imposed by
federal, state, local, and foreign environmental laws and regulations. At
April 2, 2005, the Company had $9.4 million reserved for the environmental
remediation, post-closure monitoring, and related obligations. The Company
periodically reassesses these amounts and estimates its obligations over the
foreseeable future based upon results on ongoing remediation and monitoring
programs, communications with regulatory agencies, and changes in environmental
law. While additional costs are possible, the Company believes that its
reserve is adequate and amounts beyond that are not reasonably estimable.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Accrued environmental liabilities are not
reduced by potential insurance reimbursements. Based upon information
currently available, management believes that the outcome of pending
environmental matters will not materially affect the overall financial position
and results of operations of the Company.
-14-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Overview
Mueller Industries, Inc. is a leading manufacturer of copper tube and
fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and valves;
refrigeration valves and fittings; and fabricated tubular products. 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 and sells copper tube in Europe.
SPD sells these products to wholesalers in the HVAC (heating, ventilation, and
air-conditioning), plumbing, and refrigeration markets, to distributors to the
manufactured housing and recreational vehicle industries, and to building
material retailers. IPD manufactures and sells brass and copper alloy rod,
bar, and shapes; aluminum and brass forgings; aluminum and copper impact
extrusions; refrigeration valves and fittings; fabricated tubular products; and
gas valves and assemblies. IPD sells its products primarily to original
equipment manufacturers (OEMs), many of which are in the HVAC, plumbing, and
refrigeration markets.
New housing starts and commercial construction are important determinants
of the Company's sales to the HVAC, refrigeration and plumbing markets because
the principal end use of a significant portion of the Company's products is in
the construction of single and multi-family housing and commercial buildings.
Repairs and remodeling projects are also important drivers of underlying demand
for these products.
Profitability of certain of the Company's product lines depends upon the
"spreads" between the cost of raw material and the selling prices of its
completed products. The open market prices for copper cathode and scrap, for
example, influence the selling price of copper tubing, a principal product
manufactured by the Company. The Company attempts to minimize the effects on
profitability from fluctuations in material costs by passing through these
costs to its customers. The Company's earnings and cash flow are dependent
upon these spreads that fluctuate based upon market conditions.
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.
Results of Operations
During the first quarter of 2005, the Company's net sales were $401.7
million compared with net sales of $346.0 million over the same period of 2004.
This increase was due to higher selling prices in certain product lines and net
sales from acquired businesses of approximately $23 million (Vemco and Mueller
-15-
Comercial S.A.), somewhat offset by lower shipment volumes of copper tube and
brass rod. Pounds shipped totaled 189.4 million in the current period compared
with shipments of 197.6 million in the first quarter of 2004.
Cost of goods sold increased to $334.0 million in the first quarter of
2005 from $281.0 million in the same period of 2004. This increase was
attributable to increases in raw material costs, primarily copper, and acquired
businesses. The COMEX average copper price in the first quarter of 2005 was
approximately $1.47 per pound compared with $1.23 per pound for the first
quarter of 2004. Inventories valued using the LIFO method totaled $33.2
million at April 2, 2005 and $36.5 million at December 25, 2004. At April 2,
2005 and December 25, 2004, the approximate FIFO cost of such inventories was
$63.2 million and $64.4 million, respectively.
Depreciation and amortization expense was $10.1 million in the first
quarter of 2005 compared with $10.0 million during the first quarter of 2004.
Selling, general, and administrative expense was $30.4 million for the first
quarter of 2005 compared with $26.7 million for the same period of 2004; this
increase relates primarily to acquired businesses.
During the first quarter of 2004, the Company recognized a $3.9 million
impairment charge related to its subsidiary, Overstreet-Hughes Co., Inc., of
which $2.3 million was goodwill and the remainder was property, plant, and
equipment. The results of Overstreet-Hughes, which manufactures tubular
components and assemblies primarily for the OEM air-conditioning market, had
not met expectations. Furthermore, Overstreet-Hughes' primary customer
announced the closure of its facility that consumes the majority of Overstreet-
Hughes' output. Consequently, the Company 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.
For the first quarter of 2005, operating income at SPD was $24.6 million,
slightly lower than the same period of 2004. The decrease is primarily
attributable to reduced profitability in copper tube which was impacted by
lower volumes and narrowed spreads, partially offset by improvements in copper
and plastic fittings results, and contributions of acquired businesses.
Operating income at IPD was $6.5 million in the first quarter of 2005
compared with $3.4 million in the first quarter of 2004, which was reduced by a
$3.9 million impairment charged discussed above. The results at the brass rod
business decreased on lower volumes and spreads.
Interest expense in the first quarter of 2005 totaled $5.2 million, which
was $5.0 million more than the first quarter of 2004. This increase is
primarily attributable to the Subordinated Debentures issued as part of the
Special Dividend during the fourth quarter of 2004. No interest was
capitalized during the first quarter of 2005 or during the first quarter of
2004.
Other income, net was $0.8 million in the first quarter of 2005 and $2.6
million in the first quarter of 2004. During the first quarter of 2004, the
Company completed the sale of certain undeveloped land that resulted in
recognizing a gain of $5.2 million. The proceeds realized from sale were $5.2
million. Also during the first quarter of 2004, the Company recognized a $3.3
million loss related to its equity interest in Conbraco Industries, Inc. The
loss related primarily to certain federal income tax audit exposures of
Conbraco that were assessed during the first quarter of 2004.
-16-
The Company's effective income tax rate for the first quarter of 2005 was
33.3 percent compared with 32.8 percent for the first quarter of last year.
The current period rate is less than the expected federal rate due primarily to
income in foreign jurisdictions that is taxed at rates lower than the U.S.
federal rate and use of previously unrecognized U.K. net operating loss
carryforwards. The lower rate in the first quarter of 2004 is primarily
attributable to the recognition of a capital loss carryforward related to the
sale of land that had a tax basis significantly less than the realized
proceeds.
Liquidity and Capital Resources
Cash provided by operating activities in the first quarter of 2005 totaled
$30.2 million, which is primarily attributable to net income, depreciation and
amortization, and an increase in trade accounts payable partially offset by
increased receivables and increased inventories. Fluctuations in the cost of
copper and other raw materials affect the Company's liquidity. Changes in
material costs directly impact components of working capital, primarily
inventories and accounts receivable. During the first quarter of 2005, the
average COMEX copper price was approximately $1.47 per pound, which represents
a 19 percent increase over the average price during the first quarter of 2004.
This rise in the price of cathode has also resulted in sharp increases in the
open market price for copper scrap and, to a lesser extent, the price of brass
scrap.
During the first quarter of 2005, cash used in investing activities was
$4.8 million, consisting primarily of capital expenditures. The Company also
used $3.0 million for financing activities during the quarter, consisting
primarily of the payment of dividends and repayments of long-term debt,
partially offset by the proceeds from stock option exercises.
During the first quarter of 2004, the Chairman of the Company's Board of
Directors, Mr. Harvey L. Karp, exercised options to purchase 900,000 shares of
Company stock. 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 on the Company's
Consolidated Statement of Cash Flows. The income tax benefit of $9.7 million
from the exercise of stock options was recognized as a direct addition to
additional paid-in-capital and, therefore, had no effect on the Company's
earnings.
The Company has a $150 million unsecured line-of-credit (Credit Facility)
which expires in November 2007. At April 2, 2005, there were no outstanding
borrowings under the Credit Facility. Approximately $9.0 million in letters
of credit were backed by the Credit Facility at the end of the first quarter.
At April 2, 2005 the Company's total debt was $312.9 million or 46 percent of
its total capitalization.
Covenants contained in the Company's financing obligations require, among
other things, the Company to maintain minimum levels of tangible net worth and
to meet certain minimum financial ratios. At April 2, 2005, the Company was in
compliance with all of its debt covenants.
During the first quarter of 2005, the Company's Board of Directors
declared a regular quarterly dividend of ten cents per share on its common
stock. Payment of dividends in the future is dependent upon the Company's
-17-
financial condition, cash flows, capital requirements, earnings, and other
factors. On May 1, 2005, the Company will begin making semi-annual interest
payments on its 6% Subordinated Debentures of approximately $9.2 million.
Management believes that cash provided by operations, currently available
cash of $69.7 million, and the Credit Facility will be adequate to meet the
Company's normal future capital expenditures and operational needs. The
Company's current ratio was 2.4 to 1 at April 2, 2005. There have been no
material changes to the contractual obligations discussed in the Company's
December 25, 2004 Form 10-K.
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 April 2, 2005, the Company has repurchased approximately 2.4
million shares under this authorization.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in raw material costs,
energy costs, and foreign currency exchange. To reduce such risks, the Company
may periodically use financial instruments. All hedging transactions are
authorized and executed pursuant to policies and procedures. Further, the
Company does not buy or sell financial instruments for trading purposes.
Cost and Availability of Raw Materials and Energy
Copper and brass represent the largest component of the Company's variable
costs of production. The cost of these materials is subject to global market
fluctuations caused by factors beyond the Company's control. Significant
increases in the cost of metal, to the extent not reflected in prices for the
Company's finished products, or the lack of availability could materially and
adversely affect the Company's business, results of operations and financial
condition.
The Company occasionally enters into forward fixed-price arrangements with
certain customers. The Company may utilize forward contracts to hedge risks
associated with forward fixed-price arrangements. The Company may also utilize
forward contracts to manage price risk associated with inventory. Gains or
losses with respect to these positions are deferred in stockholders' equity as
a component of comprehensive income and reflected in earnings upon the sale of
inventory. Periodic value fluctuations of the contracts generally offset the
value fluctuations of the underlying fixed-price transactions or inventory.
During the first quarter, the Company entered into forward contracts to
purchase approximately $0.5 million of copper. As of April 2, 2005, the
Company held open forward contracts to purchase approximately $0.6 million of
copper through December 2005.
Futures contracts may also be used to manage price risk associated with
natural gas purchases. Gains and losses with respect to these positions are
deferred in stockholders' equity as a component of comprehensive income and
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reflected in earnings upon consumption of natural gas. Periodic value
fluctuations of the contracts generally offset the value fluctuations of the
underlying natural gas prices. At April 2, 2005, the Company had no open
forward contracts to purchase natural gas.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other than
an entity's functional currency. The Company and its subsidiaries generally
enter into transactions denominated in their respective functional currencies.
Foreign currency exposures arising from transactions denominated in currencies
other than the functional currency are not material; however, the Company may
utilize certain forward fixed-rate contracts to hedge such transactional
exposures. Gains and losses with respect to these positions are deferred in
stockholders' equity as a component of comprehensive income and reflected in
earnings upon collection of receivables. At April 2, 2005, the Company had no
open forward contract to exchange foreign currency.
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars. The
primary currencies to which the Company is exposed include the Canadian dollar,
the British pound sterling, the Euro, and the Mexican peso. The Company
generally views as long-term its investments in foreign subsidiaries with a
functional currency other than the U.S. dollar. As a result, the Company
generally does not hedge these net investments.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure information required to be disclosed in Company reports filed under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures are designed to provide reasonable assurance that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
The Company's management, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this report. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective.
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending April 2, 2005, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal 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 in
the United States. Two such purported class actions were filed in the United
States District Court for the Western District of Tennessee (the Federal
Actions), four were filed in the Superior Court of the State of California,
County of San Francisco (the California Actions), one was filed in the Circuit
Court for Shelby County, Tennessee (the Tennessee Action), and one was filed in
the Superior Court of the Commonwealth of Massachusetts, County of Middlesex
(the Massachusetts Action, and with the Federal Actions, the California Actions
and the Tennessee Action, the 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
(except for the Massachusetts Action) and monetary relief. Plaintiffs' motions
to consolidate and for appointment of lead counsel in the Federal Actions and
plaintiffs' motion to consolidate the California Actions have been granted.
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.
Other Matters
The Company is aware of investigations of competition in markets in which
it participates, or has participated in the past, in Europe and Canada. The
Company has not been fined as a result of any such investigations and does not
anticipate any material adverse effect on its business or financial condition
as a result of those other investigations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
Total
Number of Maximum
Shares Number of
Purchased Shares that
as Part of May yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Purchased per Share Programs Programs
7,647,030(3)
December 26, 2004 -
January 29, 2005 5,041(1) $ 30.660
January 30 -
February 26, 2005 6,800(2) 31.740
February 27 -
April 2, 2005 444(1) 29.585
(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.
Item 6. Exhibits
19.1 Mueller Industries, Inc.'s Quarterly Report to
Stockholders for the quarter ended April 2, 2005.
Such report is being furnished for the information of
the Securities and Exchange Commission only and is not
to be deemed filed as part of this Quarterly Report on
Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Items 3, 4, and 5 are not applicable and have been omitted.
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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 April
25, 2005.
MUELLER INDUSTRIES, INC.
/s/ Kent A. McKee
Kent A. McKee
Vice President and
Chief Financial Officer
/s/ Richard W. Corman
Richard W. Corman
Vice President - Controller
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EXHIBIT INDEX
Exhibits Description
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders
for the quarter ended April 2, 2005. Such report is being
furnished for the information of the Securities and
Exchange Commission only and is not to be deemed filed as
part of this Quarterly Report on Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.