UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 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) (Zip Code)
(901) 753-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes / / No /X/
The number of shares of the Registrant's common stock outstanding as of
October 24, 2005, was 36,633,948.
-1-
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Period Ended October 1, 2005
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Consolidated Statements of Income
for the quarters and nine months ended
October 1, 2005 and September 25, 2004 3
b.) Consolidated Balance Sheets
as of October 1, 2005 and December 25, 2004 7
c.) Consolidated Statements of Cash Flows
for the nine months ended October 1, 2005
and September 25, 2004 9
d.) Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
Item 4. Controls and Procedures 25
Part II. Other Information
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 28
Item 6. Exhibits 28
Signatures 29
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
October 1, September 25,
2005 2004
(In thousands, except per share data)
Net sales $ 434,130 $ 322,512
Cost of goods sold 360,514 263,188
---------- ----------
Gross profit 73,616 59,324
Depreciation and amortization 10,082 10,278
Selling, general, and
administrative expense 33,297 24,529
Impairment charge - -
---------- ----------
Operating income 30,237 24,517
Interest expense (4,794) (236)
Other income, net 5,421 1,357
---------- ----------
Income from continuing operations
before income taxes 30,864 25,638
Current income tax expense (10,622) (5,895)
Deferred income tax benefit (expense) 774 (989)
---------- ----------
Total income tax expense (9,848) (6,884)
---------- ----------
Income from continuing operations 21,016 18,754
Gain from discontinued operations,
net of tax 3,324 -
---------- ----------
Net income $ 24,340 $ 18,754
========== ==========
See accompanying notes to consolidated financial statements.
-3-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
October 1, September 25,
2005 2004
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 36,625 35,283
Effect of dilutive stock options 495 1,631
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,120 36,914
---------- ----------
Basic earnings per share:
From continuing operations $ 0.57 $ 0.53
From discontinued operations 0.09 -
---------- ----------
Basic earnings per share $ 0.66 $ 0.53
========== ==========
Diluted earnings per share:
From continuing operations $ 0.57 $ 0.51
From discontinued operations 0.09 -
---------- ----------
Diluted earnings per share $ 0.66 $ 0.51
========== ==========
Dividends per share $ 0.10 $ 0.10
========== ==========
See accompanying notes to consolidated financial statements.
-4-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Nine Months Ended
October 1, September 25,
2005 2004
(In thousands, except per share data)
Net sales $ 1,246,299 $ 1,049,293
Cost of goods sold 1,040,201 847,937
---------- ----------
Gross profit 206,098 201,356
Depreciation and amortization 30,571 30,402
Selling, general, and
administrative expense 92,788 79,410
Impairment charge - 3,941
---------- ----------
Operating income 82,739 87,603
Interest expense (14,730) (659)
Other income, net 10,188 5,161
---------- ----------
Income from continuing operations
before income taxes 78,197 92,105
Current income tax expense (26,603) (28,738)
Deferred income tax benefit (expense) 1,813 395
---------- ----------
Total income tax expense (24,790) (28,343)
---------- ----------
Income from continuing operations 53,407 63,762
Gain from discontinued operations,
net of tax 3,324 -
---------- ----------
Net income $ 56,731 $ 63,762
========== ==========
See accompanying notes to consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Nine Months Ended
October 1, September 25,
2005 2004
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 36,576 34,973
Effect of dilutive stock options 536 1,932
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 37,112 36,905
---------- ----------
Basic earnings per share:
From continuing operations $ 1.46 $ 1.82
From discontinued operations 0.09 -
---------- ----------
Basic earnings per share $ 1.55 $ 1.82
========== ==========
Diluted earnings per share:
From continuing operations $ 1.44 $ 1.73
From discontinued operations 0.09 -
---------- ----------
Diluted earnings per share $ 1.53 $ 1.73
========== ==========
Dividends per share $ 0.30 $ 0.30
========== ==========
See accompanying notes to consolidated financial statements.
-6-
MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 1, 2005 December 25, 2004
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 108,012 $ 47,449
Accounts receivable, less allowance
for doubtful accounts of $4,979 in
2005 and $3,925 in 2004 251,406 201,396
Inventories:
Raw material and supplies 31,704 34,270
Work-in-process 28,503 24,201
Finished goods 122,998 129,382
---------- ----------
Total inventories 183,205 187,853
Other current assets 19,985 18,633
---------- ----------
Total current assets 562,608 455,331
Property, plant, and equipment, net 309,962 335,610
Goodwill 148,102 136,615
Other assets 40,814 36,175
---------- ----------
$ 1,061,486 $ 963,731
========== ==========
See accompanying notes to consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
October 1, 2005 December 25, 2004
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 887 $ 5,328
Accounts payable 117,282 79,723
Accrued wages and other employee costs 34,269 37,992
Other current liabilities 83,653 57,775
---------- ----------
Total current liabilities 236,091 180,818
Long-term debt 312,940 310,650
Pension liabilities 18,889 19,611
Postretirement liabilities other
than pensions 13,383 13,556
Environmental reserves 9,183 9,503
Deferred income taxes 64,033 67,479
Other noncurrent liabilities 10,122 10,361
---------- ----------
Total liabilities 664,641 611,978
---------- ----------
Minority interest in subsidiaries 74 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 36,633,948
in 2005 and 36,389,824 in 2004 401 401
Additional paid-in capital, common 252,472 252,931
Retained earnings 221,285 175,537
Accumulated other comprehensive
(loss) income (2,284) 3,085
Treasury common stock, at cost (75,103) (80,268)
---------- ----------
Total stockholders' equity 396,771 351,686
Commitments and contingencies (Note 2) - -
---------- ----------
$ 1,061,486 $ 963,731
========== ==========
See accompanying notes to consolidated financial statements.
-8-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
October 1, September 25,
2005 2004
(In thousands)
Cash flows from operating activities
Net income from continuing operations $ 53,407 $ 63,762
Reconciliation of net income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 30,691 30,402
Income tax benefit from exercise
of stock options 529 29,252
Impairment charge - 3,941
Equity in (income) loss of
unconsolidated subsidiaries (4,005) 2,376
Gain on disposal of properties (3,713) (5,156)
Deferred income taxes (1,813) (395)
Minority interest in subsidiaries,
net of dividends paid 7 (151)
Changes in assets and liabilities,
net of business acquired:
Receivables (49,665) (14,742)
Inventories 8,703 (33,969)
Other assets (2,956) (1,388)
Current liabilities 50,639 18,671
Other liabilities 367 546
Other, net 960 288
---------- ----------
Net cash provided by operating activities 83,151 93,437
---------- ----------
Cash flows from investing activities
Capital expenditures (13,425) (13,073)
Proceeds from sales of properties 10,059 5,493
Acquisition of business (10,891) (14,583)
---------- ----------
Net cash used in investing activities (14,257) (22,163)
---------- ----------
See accompanying notes to consolidated financial statements.
-9-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Nine Months Ended
October 1, September 25,
2005 2004
(In thousands)
Cash flows from financing activities
Dividends paid $ (10,983) $ (10,591)
Acquisition of treasury stock (168) (28,409)
Proceeds from the sale of
treasury stock 4,346 7,344
Repayments of long-term debt (4,355) (2,776)
---------- ----------
Net cash used in financing activities (11,160) (34,432)
---------- ----------
Effect of exchange rate changes on cash (495) (15)
---------- ----------
Increase in cash and cash equivalents 57,239 36,827
Cash provided by discontinued operations 3,324 -
Cash and cash equivalents at the
beginning of the period 47,449 255,088
---------- ----------
Cash and cash equivalents at the
end of the period $ 108,012 $ 291,915
========== ==========
See accompanying notes to consolidated financial statements.
-10-
MUELLER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. Results of operations for the interim periods presented are not
necessarily indicative of results which may be expected for any other
interim period or for the year as a whole. This quarterly report on Form
10-Q should be read in conjunction with the Company's Annual Report on Form
10-K, including the annual financial statements incorporated therein.
The accompanying unaudited interim financial statements include all
normal recurring adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods
presented. The nine-month period ended October 1, 2005 contained 40 weeks
while the nine-month period ended September 25, 2004 contained 39 weeks.
Note 1 - Earnings per Common Share and Stock-Based Compensation
Basic per share amounts have been computed based on the average
number of common shares outstanding. Diluted per share amounts reflect the
increase in average common shares outstanding that would result from the
assumed exercise of outstanding stock options, computed using the treasury
stock method.
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.
-11-
For the Quarter Ended
October 1, September 25,
2005 2004
(In thousands, except per share data)
Net income $ 24,340 $ 18,754
SFAS No. 123 compensation
expense, net of income taxes (593) (576)
---------- ----------
SFAS No. 123 pro forma
net income $ 23,747 $ 18,178
========== ==========
Pro forma earnings per share:
Basic $ 0.65 $ 0.52
Diluted $ 0.64 $ 0.49
Earnings per share, as reported:
Basic $ 0.66 $ 0.53
Diluted $ 0.66 $ 0.51
For the Nine Months Ended
October 1, September 25,
2005 2004
(In thousands, except per share data)
Net income $ 56,731 $ 63,762
SFAS No. 123 compensation
expense, net of income taxes (1,813) (1,644)
---------- ----------
SFAS No. 123 pro forma
net income $ 54,918 $ 62,118
========== ==========
Pro forma earnings per share:
Basic $ 1.50 $ 1.78
Diluted $ 1.48 $ 1.68
Earnings per share, as reported:
Basic $ 1.55 $ 1.82
Diluted $ 1.53 $ 1.73
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.
-12-
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 two of the Actions. Deno
Acquisition Eurl has not been served with the complaint in either of the
Actions in which it is named, and only the Company has been served with the
complaint in the Tennessee Action. 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. On July 6, 2005, a motion to dismiss the
Federal Actions for failure to state a claim was granted as to WTC Holding
Company, Inc. and Deno Holding Company, Inc. and denied as to Mueller
Industries, Inc. Mueller Europe's motion to dismiss the Federal Actions
for lack of personal jurisdiction and on other grounds is pending. The
Company's demurrer to the complaint in the California Actions and the
Company's motion to dismiss the Tennessee Action for failure to state a
claim are pending. The Company has not yet been required to respond to the
complaint in the Massachusetts Action. The Company subsidiaries named in
the Actions have not yet been required to respond to the complaints in the
California, Tennessee, and Massachusetts 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 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 October 1, 2005 was $10.4 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.
-13-
Note 4 - Industry Segments
Summarized segment information is as follows:
For the Quarter Ended
October 1, September 25,
2005 2004
(In thousands)
Net sales:
Standard Products Division $ 322,507 $ 233,651
Industrial Products Division 114,325 92,565
Elimination of intersegment sales (2,702) (3,704)
---------- ----------
$ 434,130 $ 322,512
========== ==========
Operating income:
Standard Products Division $ 30,955 $ 22,202
Industrial Products Division 5,700 6,012
Unallocated expenses (6,418) (3,697)
---------- ----------
$ 30,237 $ 24,517
========== ==========
For the Nine Months Ended
October 1, September 25,
2005 2004
(In thousands)
Net sales:
Standard Products Division $ 918,839 $ 762,210
Industrial Products Division 336,608 298,246
Elimination of intersegment sales (9,148) (11,163)
---------- ----------
$ 1,246,299 $ 1,049,293
========== ==========
Operating income:
Standard Products Division $ 78,732 $ 84,376
Industrial Products Division 19,540 15,699
Unallocated expenses (15,533) (12,472)
---------- ----------
$ 82,739 $ 87,603
========== ==========
Operating income for the Industrial Products Division was reduced by
a $3.9 million impairment charge during the nine months ended September 25,
2004.
-14-
Note 5 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
October 1, September 25,
2005 2004
(In thousands)
Comprehensive income:
Net income $ 24,340 $ 18,754
Other comprehensive income (loss):
Cumulative translation adjustments 153 (578)
Change in the fair value
of derivatives 120 18
---------- ----------
$ 24,613 $ 18,194
========== ==========
For the Nine Months Ended
October 1, September 25,
2005 2004
(In thousands)
Comprehensive income:
Net income $ 56,731 $ 63,762
Other comprehensive income (loss):
Cumulative translation adjustments (5,581) 1,611
Change in the fair value
of derivatives 212 55
---------- ----------
$ 51,362 $ 65,428
========== ==========
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 nine months of
2005, the value of the British pound sterling decreased 8 percent compared
to the U.S. dollar, the value of the Canadian dollar increased 6 percent
compared to the U.S. dollar, and the value of the Mexican peso increased 3
percent compared to the U.S. dollar.
-15-
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
October 1, September 25,
2005 2004
(In thousands)
Pension benefits:
Service cost $ 554 $ 467
Interest cost 2,062 1,913
Expected return on plan assets (2,468) (2,208)
Amortization of prior service cost 93 93
Amortization of net (gain) loss (139) 227
---------- ----------
Net periodic benefit cost $ 102 $ 492
========== ==========
Other benefits:
Service cost $ 1 $ 1
Interest cost 162 174
Amortization of net loss (gain) 36 (2)
Amortization of prior service cost (2) 30
---------- ----------
Net periodic benefit cost $ 197 $ 203
========== ==========
For the Nine Months Ended
October 1, September 25,
2005 2004
(In thousands)
Pension benefits:
Service cost $ 1,663 $ 1,401
Interest cost 6,186 5,738
Expected return on plan assets (7,405) (6,624)
Amortization of prior service cost 280 280
Amortization of net (gain) loss (418) 680
---------- ----------
Net periodic benefit cost $ 306 $ 1,475
========== ==========
Other benefits:
Service cost $ 3 $ 3
Interest cost 486 521
Amortization of net loss (gain) 108 (6)
Amortization of prior service cost (6) 90
---------- ----------
Net periodic benefit cost $ 591 $ 608
========== ==========
-16-
The Company anticipates contributions to its pension and other
postretirement benefit plans for 2005 to be approximately $2.6 million and
$0.8 million, respectively. During the first nine months of 2005, $1.9
million of contributions have been made to certain pension plans and $0.5
million of contributions have been made to other postretirement benefit
plans.
Note 7 - Acquisitions and Investments
On August 15, 2005, the Company acquired 100 percent of the
outstanding stock of KX Group LTD (Brassware). Brassware, located in
Witton, Birmingham, England, is an import distributor of plumbing and
residential heating products with annual sales of approximately $48 million
to plumbers' merchants and builders' merchants in the U.K. and Irish
markets. This acquisition, by Standard Products Division, will strengthen
the Company's presence in the U.K. import distributor market. The cost of
the acquired business, including cash of $10.9 million plus $1.9 million of
notes issued, totaled $12.8 million. The acquisition was accounted for
using the purchase method; therefore, the results of operations of
Brassware are included in the consolidated financial statements of the
Company from the acquisition date. The purchase price has been
preliminarily allocated to the acquired assets based on their fair market
value awaiting additional information.
On December 14, 2004, the Company acquired shares in seven companies
and inventory of another (collectively Mueller Comercial) for an aggregate
of $42.3 million, subject to closing adjustments. 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 are
approximately $60 million annually.
This acquisition was accounted for using the purchase method of
accounting. The purchase price of Mueller Comercial has been preliminarily
allocated to the acquired assets based on their estimated fair market value
awaiting additional information. Final allocations to the acquired assets
and liabilities assumed, as well as resolution of a contingent earn-out and
the ultimate resolution of closing adjustments to the purchase price, will
result in future adjustments to goodwill.
During the first quarter of 2004 the Company recorded a $2.3 million
provision for certain federal income tax audit exposures related to the
Company's equity investment Conbraco Industries, Inc. Upon resolution of
these matters in the second quarter of 2005, the Company reversed the
provision, which increased net income by approximately $1.5 million, or 4
cents per diluted share.
-17-
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 nine months
of 2005 and 2004 was $0.5 million and $29.3 million, respectively. The
Company is required to adopt the provisions of SFAS No. 123(R) effective as
of 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
October 1, 2005, the Company had $9.2 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.
Note 10 - Income Taxes
The Company's effective tax rate for the first nine months of 2005
was 31.7 percent compared with 30.8 percent for the same period 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 reductions to valuation reserves, totaling
approximately $2.0 million, related to the resolution of certain income tax
exposures and the recognition of U.K. net operating loss carryforwards.
-18-
Note 11 - Discontinued Operations
During the third quarter of 2005, the Company recognized a gain of
approximately $5.2 million net of income tax of $1.9 million upon the
settlement of a business interruption claim related to operations sold in
2002, previously classified as discontinued operations.
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.
-19-
Earnings and profitability are also subject to market trends such as
substitute products and imports. Plastic plumbing systems are the primary
substitute product; these products represent an increasing share of
consumption. Imports of copper tubing from Mexico have increased in recent
years, although U.S. consumption is still predominantly supplied by U.S.
manufacturers.
Results of Operations
During the third quarter of 2005, the Company's net sales were $434.1
million, which compares with net sales of $322.5 million over the same
period of 2004. The increase in sales for the quarter is attributable to
both higher volume and increased selling prices reflecting the higher cost
of raw materials. Net sales were $1.25 billion in the first nine months of
2005 compared with $1.05 billion in the same period of 2004 also as a
result of higher selling prices reflecting the higher cost of raw
materials. Business acquired during the latter part of 2004 contributed
approximately $25 million and $75 million to sales for the quarter and
nine months ended October 1, 2005, respectively. The average price of
copper was approximately 25 percent higher in the first half of 2005
compared with the same period of 2004. During the third quarter of 2005,
the Company's core manufacturing businesses shipped 187 million pounds of
product compared to 171 million pounds in the same quarter of 2004. The
Company shipped 559 million pounds of product in the first nine months of
2005 compared with 567 million in the same period of 2004. This decrease
was due primarily to lower copper tube shipments during the first half of
2005.
Cost of goods sold increased from $263.2 million in the third quarter
of 2004 to $360.5 million in the same period of 2005. This increase was
primarily attributable to higher material costs and volume. Gross profit
increased from $59.3 million to $73.6 million due primarily to higher
volumes and contributions of businesses acquired in the latter half of
2004. Inventories valued using the LIFO method totaled $29.9 million at
October 1, 2005 and $36.5 million at December 25, 2004. At October 1, 2005
and December 25, 2004, the approximate FIFO cost of such inventories was
$67.7 million and $64.4 million, respectively.
Depreciation and amortization expense was $10.1 million in the third
quarter of 2005 compared with $10.3 million during the third quarter of
2004. Selling, general, and administrative expense was $33.3 million for
the third quarter of 2005 compared with $24.5 million for the same period
of 2004. The increase is attributable to businesses acquired in the latter
half of 2004, increased professional fees, and incentive compensation.
Year-to-date selling, general, and administrative expense was $92.8 million
for 2005 compared with $79.4 million for the same period of 2004. The
year-to-date increase is attributable to businesses acquired in the latter
half of 2004.
-20-
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 third quarter of 2005, operating income at SPD was $31.0
million which compares with $22.2 million in the same period of 2004. This
increase is primarily attributable to increased volumes from copper tube,
copper and plastic fittings, and contributions from acquired businesses.
Operating income at IPD was $5.7 million in the third quarter of 2005
compared with $6.0 million in the third quarter of 2004. Profitability
reductions in the brass rod business due to lower volumes were offset by
improvements in other product lines.
Interest expense for the third quarter of 2005 totaled $4.8 million,
compared with $0.2 million for the same period of 2004. For the first nine
months of 2005, interest expense was $14.7 million compared with $0.7
million for the same period of 2004. The increase in the third quarter and
first nine months of 2005 is primarily attributable to the Subordinated
Debentures issued as part of the Special Dividend during the fourth quarter
of 2004.
Other income, net was $10.2 million for the first nine months of 2005 and
$5.2 million for the same period of 2004. During the third quarter of 2005
the Company completed the sale of its land and building in Cerritos,
California. Operations were relocated to leased premises in Ontario,
California. The transaction resulted in the recognition of a $4.0 million
pre-tax gain. The proceeds from the sale were $9.3 million. 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. Conbraco settled these matters in the
second quarter of 2005; consequently, the Company reversed a loss accrual
that resulted in a $2.3 million gain.
-21-
On August 15, 2005, the Company acquired 100 percent of the
outstanding stock of KX Group LTD (Brassware). Brassware, located in
Witton, Birmingham, England, is an import distributor of plumbing and
residential heating products with annual sales of approximately $48 million
to plumbers' merchants and builders' merchants in the U.K. and Irish
markets. This acquisition, by Standard Products Division, will strengthen
the Company's presence in the U.K. import distributor market. The cost of
the acquired business, including cash of $10.9 million plus $1.9 million of
notes issued, totaled $12.8 million. The acquisition was accounted for
using the purchase method; therefore, the results of operations of
Brassware are included in the consolidated financial statements of the
Company from the acquisition date. The purchase price has been
preliminarily allocated to the acquired assets based on their fair market
value awaiting additional information.
During the third quarter of 2005, the Company recognized a gain of
approximately $5.2 million net of income tax of $1.9 million upon the
settlement of a business interruption claim related to operations sold in
2002, previously classified as discontinued operations.
On December 14, 2004, the Company acquired shares in seven companies
and inventory of another (collectively Mueller Comercial) for an aggregate
of $42.3 million, subject to closing adjustments. 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 are approximately $60
million annually. This acquisition was accounted for using the purchase
method of accounting. The purchase price of Mueller Comercial 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 a contingent earn-out and the
ultimate resolution of closing adjustments to the purchase price, will
result in future adjustments to goodwill.
The Company's effective tax rate for the first nine months of 2005 was
31.7 percent compared with 30.8 percent for the same period 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 reductions to valuation reserves, totaling approximately
$2.0 million, related to the resolution of certain income tax exposures and
the recognition of U.K. net operating loss carryforwards. The lower rate
in 2004 is primarily attributable to the recognition of a capital loss
carryforward in the first quarter related to the sale of land that had a
tax basis significantly less than the realized proceeds.
-22-
Liquidity and Capital Resources
Cash provided by operating activities in the first nine months of
2005 totaled $83.2 million, which is primarily attributable to net income,
depreciation and amortization, and an increase in liabilities partially
offset by increased receivables. 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 nine months of 2005, the average
COMEX copper price was approximately $1.57 per pound, which represents a 25
percent increase over the average price during the first nine months 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 nine months of 2005, cash used for investing
activities was $14.3 million, consisting of $13.4 million for capital
expenditures and $10.9 for the acquisition of Brassware reduced by
$10.1 million proceeds from sales of properties. The Company also used
$11.2 million for financing activities during the first nine months,
consisting primarily of the payment of dividends and repayment 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 October 1, 2005, there were
no outstanding borrowings under the Credit Facility. Approximately $10.3
million in letters of credit were backed by the Credit Facility at the end
of the quarter. At October 1, 2005 the Company's total debt was $313.8
million or 44.2 percent of its total capitalization.
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of working capital,
tangible net worth, and debt service coverage ratios. At October 1, 2005,
the Company was in compliance with all of its debt covenants.
The Company declared and paid a regular quarterly cash dividend of
ten cents per common share in the first three quarters of 2005. Payment of
dividends in the future is dependent upon the Company's financial
condition, cash flows, capital requirements, earnings, and other factors.
On November 1, 2005, the Company will pay approximately $9.0 million in
interest on its 6% Subordinated Debentures.
-23-
Management believes that cash provided by operations and currently
available cash of $108 million 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 October 1, 2005. There have been no
significant changes in the Company's contractual cash obligations reported
at December 25, 2004.
The Company's Board of Directors has authorized the repurchase until
October 2006 of up to ten million shares of the Company's common stock
through open market transactions or through privately negotiated
transactions. The Company has no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at
any time. Any purchases will be funded primarily through existing cash and
cash from operations. The Company may hold any shares purchased in
treasury or use a portion of the repurchased shares for employee benefit
plans, as well as for other corporate purposes. Through October 1, 2005,
the Company has repurchased approximately 3.5 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
Adequate supplies of raw material have historically been available to
the Company from primary producers, metal brokers, and scrap dealers.
Sufficient energy in the form of natural gas, fuel oils, and electricity is
available to operate the Company's production facilities. While temporary
shortages of raw material and fuels may occur occasionally, to date they
have not materially hampered the Company's operations.
Copper and brass represent the largest component of the Company's
variable costs of production. The cost of these materials is subject to
global market fluctuations caused by factors beyond the Company's control.
Significant increases in the cost of metal, to the extent not reflected in
prices for the Company's finished products, or the lack of availability
could materially and adversely affect the Company's business, results of
operations and financial condition.
The Company occasionally enters into forward fixed-price arrangements
with certain customers. The Company may utilize forward contracts to hedge
risks associated with forward fixed-price arrangements. The Company may
also utilize forward contracts to manage price risk associated with
inventory. Gains or losses with respect to these positions are deferred in
stockholders' equity as a component of comprehensive income and reflected
in earnings upon the sale of inventory. Periodic value fluctuations of the
contracts generally offset the value fluctuations of the underlying fixed-
price transactions or inventory. During the third quarter, the Company
entered into forward contracts to purchase approximately $0.3 million of
copper. As of October 1, 2005, the Company held open forward contracts to
purchase approximately $0.7 million of copper through December 2005.
-24-
Futures contracts may also be used to manage price risk associated
with natural gas purchases. Gains and losses with respect to these
positions are deferred in stockholders' equity as a component of
comprehensive income and reflected in earnings upon consumption of natural
gas. Periodic value fluctuations of the contracts generally offset the
value fluctuations of the underlying natural gas prices. At October 1,
2005, the Company had no open forward contracts to purchase natural gas.
The lack of availability of energy sources and the impact of rising energy
prices could materially affect the Company's business, results of
operations and financial condition.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other
than an entity's functional currency. The Company and its subsidiaries
generally enter into transactions denominated in their respective
functional currencies. Foreign currency exposures arising from
transactions denominated in currencies other than the functional currency
are not material; however, the Company may utilize certain forward fixed-
rate contracts to hedge such transactional exposures. Gains and losses
with respect to these positions are deferred in stockholders' equity as a
component of comprehensive income and reflected in earnings upon collection
of receivables. At October 1, 2005, one of the Company's foreign
subsidiaries had $3 million in open forward contracts to purchase U.S.
dollars.
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars.
The primary currencies to which the Company is exposed include the Canadian
dollar, the British pound sterling, the Euro, and the Mexican peso. 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.
-25-
There were no changes in the Company's internal control over
financial reporting during the Company's fiscal quarter ending October 1,
2005, that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
The Company has identified deficiencies in the internal controls over
financial reporting of the business (currently known as Mueller Comercial)
acquired by the Company in December 2004. While the Company's assessment
of these internal controls and procedures is continuing, at this time the
Company intends to change such controls by, among other things, (i)
preparing monthly financial statements on a timely basis, (ii) implementing
routine preventative and detective control procedures and (iii)
implementing additional disclosure controls and procedures. In addition
to these modifications, the accounting and finance staff resources were
increased at these operations during the third quarter of 2005. In light
of the relative size and magnitude of Mueller Comercial to the Company's
consolidated financial statements, the Company does not believe that the
deficiencies identified have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 two of the Actions. Deno
Acquisition Eurl has not been served with the complaint in either of the
Actions in which it is named, and only the Company has been served with the
complaint in the Tennessee Action. 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. On July 6, 2005, a motion to dismiss the
Federal Actions for failure to state a claim was granted as to WTC Holding
Company, Inc. and Deno Holding Company, Inc. and denied as to Mueller
Industries, Inc. Mueller Europe's motion to dismiss the Federal Actions
for lack of personal jurisdiction and on other grounds is pending. The
Company's demurrer to the complaint in the California Actions and the
Company's motion to dismiss the Tennessee Action for failure to state a
claim are pending. The Company has not yet been required to respond to the
-26-
complaint in the Massachusetts Action. The Company subsidiaries named in
the Actions have not yet been required to respond to the complaints in the
California, Tennessee, and Massachusetts 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. On September 22, 2005, the European Commission issued a statement
alleging infringements in Europe of competition rules by manufacturers of
copper fittings including the Company and a business in England that it
acquired in 1997. The Company took the lead in bringing these issues to
the attention of the European Commission and has fully cooperated in the
resulting investigation from its inception. The Company does not
anticipate any material adverse effect on its business or financial
condition as a result of the matters discussed in this paragraph.
-27-
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(1)
July 3-July 30, 2005 2,002 (2) $ 29.10
July 31-August 27, 2005 - -
August 28-October 1, 2005 - -
(1) Shares available to be purchased under the Company's 10 million Share
Repurchase Authorization until October 2006.
(2) Shares withheld by the Company sufficient to cover the minimum
withholding taxes incurred by the exercise of certain employee stock
options.
Item 6. Exhibits
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for
the quarter ended October 1, 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.
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.
-28-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MUELLER INDUSTRIES, INC.
October 27, 2005 /s/ Kent A. McKee
Date Kent A. McKee
Executive Vice President and
Chief Financial Officer
October 27, 2005 /s/ Richard W. Corman
Date Richard W. Corman
Vice President - Controller
-29-
EXHIBIT INDEX
Exhibits Description
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders
for the quarter ended October 1, 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.