UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ X ] No [ ]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [ X ]
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (Check one): Large accelerated filer [ X ]
Accelerated filer [ ] Non-accelerated filer [ ]
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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 aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the Registrant's most recently
completed second fiscal quarter was $950,530,457.
The number of shares of the Registrant's common stock outstanding as of
March 6, 2006 was 36,849,308 excluding 3,242,194 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into this
Report: Registrant's Definitive Proxy Statement for the 2006 Annual Meeting
of Stockholders, scheduled to be mailed on or about March 20, 2006 (Part III).
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MUELLER INDUSTRIES, INC.
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As used in this report, the terms "Company", "Mueller", and "Registrant" mean
Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole,
unless the context indicates otherwise.
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TABLE OF CONTENTS
Page
Part I
Item 1. Business 4
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 14
Item 2. Properties 14
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 18
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 18
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
Item 9A. Controls and Procedures 22
Item 9B. Other Information 27
Part III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 27
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accounting Fees and Services 30
Part IV
Item 15. Exhibits, Financial Statement Schedules 30
Signatures 36
Index to Consolidated Financial Statements F-1
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PART I
ITEM 1. BUSINESS
Introduction
The Company is a leading manufacturer of copper, brass, plastic, and
aluminum products. The range of these products is broad: copper tube and
fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and
valves; refrigeration valves and fittings; and fabricated tubular products.
The Company also resells imported brass and plastic plumbing valves,
malleable iron fittings, steel nipples, faucets and plumbing specialty
products. Mueller's operations are located throughout the United States,
and in Canada, Mexico, Great Britain, and China.
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the Original Equipment
Manufacturers (OEM) segment. Prior to 2005, the Company disclosed its
reportable segments as Standard Products and Industrial Products.
Additional operating segments have been recognized following an internal
reorganization in 2005. For disclosure purposes, as permitted under SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information",
certain operating segments are aggregated into reportable segments. The
Plumbing & Refrigeration segment is composed of the Standard Products
Division (SPD), the Trading Group, and European Operations. The OEM segment
is composed of the Industrial Products Division (IPD) and Engineered
Products Division (EPD). These reportable segments are described in more
detail below. SPD manufactures and sells copper tube, copper and plastic
fittings, and valves in North America. European Operations manufactures
copper tube in Europe, which is sold in Europe and the Middle East;
activities also include import distribution. The Trading Group sources
products for import distribution in North America. The Plumbing &
Refrigeration segment sells products to wholesalers in the HVAC (heating,
ventilation, and air-conditioning), plumbing, and refrigeration markets, to
distributors to the manufactured housing and recreational vehicle industries,
and to building material retailers. The OEM segment manufactures and sells
brass and copper alloy rod, bar, and shapes; aluminum and brass forgings;
aluminum and copper impact extrusions; refrigeration valves and fittings;
fabricated tubular products; and gas valves and assemblies. The OEM segment
sells its products primarily to original equipment manufacturers, many of
which are in the HVAC, plumbing, and refrigeration markets. The majority of
the Company's manufacturing facilities operated at moderate levels during
2005, 2004 and 2003.
During 2002, the Company sold its wholly owned subsidiary, Utah Railway
Company. Certain expenses related primarily to retiree benefits at inactive
operations were formerly combined with the operations of Utah Railway
Company under a third industry segment, Other Businesses. Following the
sale of Utah Railway Company and its classification as discontinued
operations, these expenses of inactive operations have been combined into
the unallocated expenses classification.
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Information concerning segments and geographic information appears
under "Note 15 - Industry Segments" in the Notes to Consolidated Financial
Statements for the year ended December 31, 2005 in Item 8 of this Report,
which is incorporated herein by reference.
The Company is a Delaware corporation incorporated on October 3, 1990.
Plumbing & Refrigeration Segment
Mueller's Plumbing & Refrigeration segment includes the Standard
Products Division (SPD) which manufactures a broad line of copper tube, in
sizes ranging from 1/8 inch to 8 inch diameter, and which are sold in
various straight lengths and coils. Mueller is a market leader in the air-
conditioning and refrigeration service tube markets. Additionally, Mueller
supplies a variety of water tube in straight lengths and coils used for
plumbing applications in virtually every type of construction project. SPD
also manufactures copper and plastic fittings and related components for the
plumbing and heating industry that are used in water distribution systems,
heating systems, air-conditioning, and refrigeration applications, and
drainage, waste, and vent systems. A major portion of SPD's products are
ultimately used in the domestic residential and commercial construction
markets.
Through its Trading Group, the Plumbing & Refrigeration segment
fabricates steel pipe nipples and resells imported brass and plastic
plumbing valves, malleable iron fittings, faucets, and plumbing specialty
products to plumbing wholesalers, distributors to the manufactured housing
and recreational vehicle industries and building materials retailers.
On August 15, 2005, the Company acquired 100 percent of the outstanding
stock of KX Group LTD (Brassware). Brassware, located in Whitton,
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 Ireland.
On December 14, 2004, the Company acquired shares in seven companies
and inventory of another (collectively, Mueller Comercial S.A.). These
operations, with annual sales of approximately $60 million, include pipe
nipple manufacturing in Mexico and import distribution businesses which
product lines include malleable iron fittings and other plumbing specialties.
Additionally, on August 27, 2004, the Company acquired 100 percent of
the outstanding stock of Vemco Brasscapri Limited (Vemco). Vemco, located
in Wellington, Somerset, England, is an import distributor of plumbing
products with annual sales of approximately $26 million to plumbers'
merchants and builders' merchants throughout the U.K. and Ireland.
On September 27, 2002, the Company acquired certain assets of Colonial
Engineering, Inc.'s Fort Pierce, Florida operations. These operations
manufacture injected molded plastic pressure fittings for plumbing,
agricultural, and industrial use including a line of PVC Schedule 40 and 80
and CPVC fittings.
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In December 2002, the Company initiated a plan to sell or liquidate its
French manufacturing operations, Mueller Europe S.A. On March 3, 2003,
Mueller Europe S.A. filed a petition for liquidation with the Commercial
Court of Provins Province, France and, on March 4, 2003, the Court declared
the entity to be in liquidation. The disposition of remaining assets and
obligations of Mueller Europe S.A. is under the jurisdiction of the Court.
In 2003, the Company recognized operating losses from discontinued
operations incurred by Mueller Europe S.A. for the period the business
operated.
The Plumbing & Refrigeration segment markets primarily through its own
sales and distribution organization, which maintains sales offices and
distribution centers throughout the United States and in Canada, Mexico, and
Europe. Additionally, products are sold and marketed through a network of
agents, which, when combined with the Company's sales organization, provide
the Company broad geographic market representation.
These businesses are highly competitive. The principal methods of
competition for Mueller's products are customer service, availability, and
price. The total amount of order backlog for the Plumbing & Refrigeration
segment as of December 31, 2005 was not significant.
The Company competes with various companies, depending on the product
line. In the U.S. copper tubing business, the domestic competition includes
Cerro Flow Products, Inc., Cambridge-Lee Industries (Reading Tube
Corporation), Wolverine Tube, Inc., and Howell Metal Company (a subsidiary
of Commercial Metals Company), as well as many actual and potential foreign
competitors. In the European copper tubing business, Mueller competes with
at least eight European-based manufacturers of copper tubing as well as
other foreign-based manufacturers. In the copper fittings market,
competitors include Elkhart Products Company, a subsidiary of Aalberts
Industries N.V., and NIBCO, Inc., as well as several foreign manufacturers.
Additionally, the Company's copper tube and fittings businesses compete with
a large number of manufacturers of substitute products made from other
metals and plastic. The plastic fittings competitors include NIBCO, Inc.,
Charlotte Pipe & Foundry, and other companies. Management believes that no
single competitor offers such a wide-ranging product line as Mueller and
that this is a competitive advantage in some markets.
OEM Segment
Mueller's OEM segment includes the Industrial Products Division (IPD),
which manufactures brass rod, nonferrous forgings, and impact extrusions
that are sold primarily to OEMs in the plumbing, refrigeration, fluid power,
and automotive industries, as well as to other manufacturers and
distributors. The Company's Port Huron, Michigan mill extrudes brass,
bronze, and copper alloy rod in sizes ranging from 3/8 inches to 4 inches in
diameter. These alloys are used in applications that require a high degree
of machinability, wear and corrosion resistance, as well as electrical
conductivity. IPD also manufactures brass and aluminum forgings, which are
used in a wide variety of products, including automotive components, brass
fittings, industrial machinery, valve bodies, gear blanks, and computer
hardware. IPD also serves the automotive, military ordnance, aerospace, and
general manufacturing industries with cold-formed aluminum and copper impact
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extrusions. Typical applications for impacts are high strength ordnance,
high-conductivity electrical components, builders' hardware, hydraulic
systems, automotive parts, and other uses where toughness must be combined
with varying complexities of design and finish. Additionally IPD
manufactures shaped and formed tube, produced to tight tolerances, for
baseboard heating, appliances, and medical instruments. The OEM segment
also includes the Engineered Products Division (EPD), which manufactures and
fabricates valves and custom OEM products for refrigeration and air-
conditioning applications. The total amount of order backlog for the OEM
segment as of December 31, 2005 was not significant.
In December 2005, two subsidiaries of the Company received a business
license from a Chinese industry and commerce authority, establishing a joint
venture with Jiangsu Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang
Industries Ltd. The joint venture, in which the Company holds a 50.5 percent
interest, produces inner groove and smooth tube in level-wound coils,
pancake coils, and straight lengths, primarily to serve the Chinese domestic
OEM air-conditioning market as well as to complement the Company's U.S.
product line. The joint venture is located primarily in Jintan City,
Jiangsu Province, China and is expected to produce approximately 80 million
pounds of product in 2006 and approximately 110 million pounds of product in
2007. The joint venture entity is named Jiangsu Mueller-Xingrong Copper
Industries Limited.
On August 21, 2002, the Company acquired 100 percent of the outstanding
stock of Overstreet-Hughes, Co., Inc. Overstreet-Hughes, located in
Carthage, Tennessee, manufactures precision tubular components and
assemblies primarily for the OEM air-conditioning market.
During 2000, the Company completed two acquisitions: (i) Micro Gauge,
Inc. and a related business, Microgauge Machining, Inc., a specialized
machining operation, and (ii) Propipe Technologies, Inc., a fabricator of
gas train manifold systems.
IPD and EPD primarily sell directly to OEM customers. Competitors,
primarily in the brass rod market, include Cerro Metal Products Company,
Inc., Chase Industries, Inc., a subsidiary of Olin Corporation, Extruded
Metals Inc., and others both domestic and foreign. Outside of North America,
IPD and EPD sell products through various channels.
Labor Relations
At December 31, 2005, the Company employed approximately 4,800
employees, of which approximately 2,300 were represented by various unions.
The union contracts that cover employees at the Company's Port Huron,
Michigan facilities expire April 1, 2007, and the union contract that covers
employees at the Company's Wynne, Arkansas facility expires December 1, 2009.
In February 2005, the union contract that covers employees at the Company's
Fulton, Mississippi facility was extended though August 1, 2007. The union
contract at the Company's facility in North Wales, Pennsylvania expires on
July 28, 2006, and the union contract at the Company's facility in
Waynesboro, Tennessee expires on November 4, 2006. The union contracts at
the Company's U.K. and Mexico operations are renewed annually. The Company
expects to renew these contacts without material disruption of its operations.
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As of December 31, 2005, approximately 21 percent of the Company's
employees were covered by collective bargaining or similar agreements that
will expire during 2006.
On June 25, 2004, employees at the Company's operations in Brighton,
Michigan voted to seek representation through collective bargaining. The
union's year-long presumption of majority status has expired. The Company
has good-faith doubt that the union continues to represent a majority of the
employees but has not tested the union's standing. No bargaining has
occurred since September 2005, and the union has not requested bargaining.
Raw Material and Energy Availability
The major portion of Mueller's base metal requirements (primarily
copper) is normally obtained through short-term supply contracts with
competitive pricing provisions (for cathode) and the open market (for scrap).
Other raw materials used in the production of brass, including brass scrap,
zinc, tin, and lead, are obtained from zinc and lead producers, open-market
dealers, and customers with brass process scrap. Raw materials used in the
fabrication of aluminum and plastic products are purchased in the open
market from major producers.
Adequate supplies of raw material have historically been available to
the Company from primary producers, metal brokers, and scrap dealers.
Sufficient energy in the form of natural gas, fuel oils, and electricity is
available to operate the Company's production facilities. While temporary
shortages of raw material and fuels may occur occasionally, to date they
have not materially hampered the Company's operations.
During 2005 and 2004, an increasing demand for copper and copper alloy
from China had an effect on the global distribution of such commodities.
The increased demand for copper (cathode and scrap) and copper alloy
products from the export market caused a tightening in the domestic raw
materials market. Mueller's copper tube facilities can accommodate both
refined copper and copper scrap as the primary feedstock. The Company has
commitments from refined copper producers for a portion of its metal
requirements for 2006. Adequate quantities of copper are currently
available. While the Company will continue to react to market developments,
resultant pricing volatility or supply disruptions, if any, could
nonetheless adversely affect the Company.
Environmental Matters
Compliance with environmental laws and regulations is a matter of high
priority for the Company. Mueller's provision for environmental compliance
related to non-operating properties was $0.6 million in 2005, $1.0 million
in 2004, and $1.2 million in 2003. Environmental costs related to operating
properties is classified as cost of goods sold and is not significant.
Other than as discussed below, the Company is not involved in any Superfund
sites other than as one of numerous potentially responsible parties (PRPs)
in which cases management believes that any obligation would be
insignificant. Except as discussed below, the Company does not anticipate
that it will need to make material expenditures for such compliance
activities during the remainder of the 2006 fiscal year, or for the next two
fiscal years.
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Mining Remedial Recovery Company
Mining Remedial Recovery Company (MRRC), a wholly owned subsidiary, was
formed for the purpose of managing the remediation of certain properties and
the appropriate disposition thereof. These properties and related
obligations were transferred to MRRC as part of a court-ordered bankruptcy
reorganization in 1990. MRRC was the owner of property at a Superfund site
in Midvale, Utah, but the Company's obligation to contribute to remediation
was resolved by a settlement with the Government in 1990. This property was
sold during 2004.
Mammoth Mine Site
MRRC owns certain inactive mines in Shasta County, California. MRRC has
continued a program, begun in the late 1980s, of sealing mine portals with
concrete plugs in mine adits which were discharging water. The sealing
program has achieved a reduction in the metal load in discharges from these
adits; however, additional reductions are required pursuant to an order
issued by the California Regional Water Quality Control Board (QCB). In
response to a 1996 Order issued by the QCB, MRRC completed a feasibility
study in 1997 describing measures designed to mitigate the effects of acid
rock drainage. In December 1998, the QCB modified the 1996 order extending
MRRC's time to comply with water quality standards. In September 2002, the
QCB adopted a new order requiring MRRC to adopt Best Management Practices
(BMP) to control discharges of acid mine drainage. The new order extends
the time to comply with water quality standards until September 2007. MRRC
has agreed to implement BMP to reduce or prevent the discharge of acid mine
drainage until such point as compliance with the order is achieved or,
through the Use Attainability Analysis process, the designated beneficial
uses of the respective watercourses are modified, allowing for the adoption
of alternative receiving water limits. At this site, MRRC spent
approximately $0.3 million in 2005, and estimates it will spend between
approximately $0.3 and $0.8 million annually over the next ten years.
Future expenditures beyond a ten-year horizon are not reasonably estimable
or foreseeable.
U.S.S. Lead
In 1991, U.S.S. Lead Refinery, Inc., a wholly owned subsidiary (Lead
Refinery), responded to an information request from the EPA under Superfund
for information on whether Lead Refinery arranged for the disposal of
hazardous substances in the vicinity of the Grand Calumet River/Indiana
Harbor Ship Canal. By letter dated February 4, 1997, the Indiana Department
of Environmental Management notified Lead Refinery that a pre-assessment
screening of the Grand Calumet River and the Indiana Harbor Canal conducted
pursuant to Superfund had identified releases of hazardous substances from
Lead Refinery and other PRPs that had adversely impacted natural resources.
Lead Refinery is in settlement negotiations in an effort to settle its
natural resources damages.
In 1991, Lead Refinery also responded to an information request under
Superfund regarding a site in East Chicago, Indiana. In 1992, the EPA
advised Lead Refinery of its intent to list the property as a Superfund
site; however, to date, the EPA had deferred such listing. In 1993, Lead
Refinery entered into a Consent Order with the EPA pursuant to Section
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3008(h) of the Resource Conservation and Recovery Act. The Consent Order
covers remediation activities at the East Chicago, Indiana site and provides
for Lead Refinery to complete certain on-site interim remedial activities
and studies that extend off-site. In November 1996, the EPA approved, with
modifications, the Interim Stabilization Measures Work plan and designated a
Corrective Action Management Unit at the Lead Refinery site. Site
activities, which began in December 1996, have been substantially concluded.
Additionally, Lead Refinery is aware that the EPA is evaluating whether
further action in the area near Lead Refinery's facility should be
undertaken. Lead Refinery, without additional assistance from MRRC, lacks
the financial resources needed to complete any additional remediation that
may be required.
Lead Refinery has been informed by the former owner and operator of a
Superfund site located in Pedricktown, New Jersey that it intends to seek
CERCLA response costs for alleged shipments of hazardous substances to the
site. Lead Refinery has executed an agreement regarding that site, which
indefinitely extends the statute of limitations. By letter dated January 26,
1996, Lead Refinery and other PRPs received from the EPA a proposed
Administrative Order on Consent to perform the remedial design for operable
Unit 1 of the Pedricktown Superfund Site. Lead Refinery determined not to
execute the Administrative Order on Consent based on its lack of ability to
finance the clean up or pay response costs incurred by the EPA. Several
other PRPs, however, executed the agreement and are conducting the remedial
design.
In October 2003, Lead Refinery received a settlement offer from private
settlers of $0.9 million for CERCLA contribution to past and future response
costs incurred at the NL/Taracorp Superfund site located in Granite City,
Illinois. Lead Refinery declined that offer. In February of 2004, NL
Industries, Inc. filed a contribution action against all non-settling PRPs
on the EPA's allocation list, including Lead Refinery, seeking payments of
an equitable share of clean-up costs incurred by that corporation. Lead
Refinery has not been served with a complaint and will, if necessary,
contest this action.
Other
In connection with acquisitions, the Company established environmental
reserves to fund the cost of remediation at sites currently or formerly
owned by various acquired entities. The Company, through its acquired
subsidiaries, is engaged in ongoing remediation and site characterization
studies.
Mueller Copper Tube Products, Inc.
In 1999, Mueller Copper Tube Products, Inc. (MCTP) commenced a cleanup
and remediation of soil and groundwater at its Wynne, Arkansas plant. MCTP
is currently removing trichloroethylene, a cleaning solvent formerly used by
MCTP, from the soil and groundwater. On August 30, 2000, MCTP received
approval of its Final Comprehensive Investigation report and Storm Water
Drainage Investigation Report addressing the treatment of soils and
groundwater, from the Arkansas Department of Environmental Quality. The
Company established a reserve for this project in connection with the
acquisition of MCTP in 1998.
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Other Business Factors
The Registrant's business is not materially dependent on patents,
trademarks, licenses, franchises, or concessions held. In addition,
expenditures for company-sponsored research and development activities were
not material during 2005, 2004, or 2003. No material portion of the
Registrant's business involves governmental contracts. Seasonality of the
Company's sales is not significant.
SEC Filings
We make available through our internet website our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission (SEC). To retrieve any of this information, you may
access our internet home page at www.muellerindustries.com, select Mueller
Financials, and then select SEC Filings.
Reports filed with the SEC may also be viewed or obtained at the SEC
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
Information on the operation of the SEC Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website
that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC; the
website address is www.sec.gov.
ITEM 1A. RISK FACTORS
The Company is exposed to risk as it operates its businesses. To
provide a framework to understand the operating environment of the Company,
we are providing a brief explanation of the more significant risks
associated with our businesses. Although we have tried to identify and
discuss key risk factors, others could emerge in the future. These risk
factors should be considered carefully when evaluating the Company and its
businesses.
Increases in energy costs and the cost and availability of raw materials
used in our products could impact our cost of goods sold and our
distribution expenses, which could have a material adverse impact on our
operating margins.
Both the costs of raw materials used in our manufactured products
(copper, brass, zinc, aluminum, and PVC and ABS resins) and energy costs
(natural gas and fuel) have been rising during the last several years, which
has resulted in increased production and distribution costs. While we
typically attempt to pass increased costs through to our customers or to
modify or adapt our activities to mitigate the impact of these increases, we
may not be able to do so successfully. Failure to fully pass these
increases to our customers or to modify or adapt our activities to mitigate
the impact could have a material adverse impact on our operating margins.
Additionally, if we are for any reason unable to obtain raw materials or
energy, our ability to manufacture our finished goods would be impacted
which could have a material adverse impact on our operating margins.
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The departure of key personnel could disrupt our business.
We depend on the continued efforts of our senior management. The loss
of key personnel, or the inability to hire and retain qualified executives,
could negatively impact our ability to manage our business.
Economic conditions in the housing and commercial construction industries as
well as changes in interest rates could have a material adverse impact on
our business, financial condition and results of operations.
Our businesses are sensitive to changes in general economic conditions,
including, in particular, conditions in the housing and commercial
construction industries. Prices for our products are affected by overall
supply and demand in the market for our products and for our competitors'
products. In particular, market prices of building products historically
have been volatile and cyclical, and we may be unable to control the timing
and amount of pricing changes for our products. Prolonged periods of weak
demand or excess supply in any of our businesses could negatively affect our
revenues and margins and could result in a material adverse impact on our
business, financial condition and results of operations.
The markets that we serve, including, in particular, the housing and
commercial construction industries, are significantly affected by movements
in interest rates. Significantly higher interest rates could have a
material adverse effect on our business, financial condition and results of
operations. Our businesses are also affected by a variety of other factors
beyond our control, including, but not limited to, employment levels,
foreign currency rates, unforeseen inflationary pressures and consumer
confidence. Since we operate in a variety of geographic areas, our
businesses are subject to the economic conditions in each such area.
General economic downturns or localized downturns in the regions where we
have operations could have a material adverse effect on our business,
financial condition and results of operations.
Competitive conditions including the impact of imports and substitute
products could have a material adverse effect on our margins and
profitability.
The markets we serve are competitive across all product lines. Some
consolidation of customers has occurred and may continue, which could shift
buying power to customers. In some cases, customers have moved production
to low-cost countries such as China, or sourced components from there, which
has reduced demand in North America for some of the products we produce.
These conditions could have a material adverse impact on our ability to
maintain margins and profitability. The potential threat of imports and
substitute products is based upon many factors including raw material prices,
distribution costs, foreign exchange rates and production costs.
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Our exposure to exchange rate fluctuations on cross border transactions and
the translation of local currency results into U.S. dollars could have an
adverse impact on our results of operations or financial position.
We conduct our business through subsidiaries in several different
countries, and fluctuations in currency exchange rates could have a
significant impact on the reported results of our operations, which are
presented in U.S. dollars. A significant and growing portion of our
products are manufactured in, or acquired from suppliers located in, lower
cost regions. Cross border transactions, both with external parties and
intercompany relationships, result in increased exposure to foreign exchange
fluctuations. The strengthening of certain currencies such as the Euro and
U.S. dollar could expose our U.S. based businesses to competitive threats
from lower cost producers in other countries such as China. Lastly, our
sales are translated into U.S. dollars for reporting purposes. The
strengthening of the U.S. dollar could result in unfavorable translation
effects when the results of foreign operations are translated into U.S.
dollars. Accordingly, significant changes in exchange rates, particularly
the Euro, Pound Sterling, Mexican Peso and the Chinese Renminbi, could have
an adverse impact on our results of operations or financial position.
We are subject to claims, litigation and regulatory proceedings that could
have a material adverse effect on us.
We are, from to time, involved in various claims, litigation matters
and regulatory proceedings. These matters may include, among other things,
contract disputes, personal injury claims, environmental claims or
proceedings, other tort claims, employment and tax matters and other
litigation including class actions that arise in the ordinary course of our
business. Although we intend to defend these matters vigorously, we cannot
predict with certainty the outcome or effect of any claim or other
litigation matter, and there can be no assurance as to the ultimate outcome
of any litigation or regulatory proceeding. Litigation and regulatory
proceedings may have a material adverse effect on us because of potential
adverse outcomes, defense costs, the diversion of our management's resources,
availability of insurance coverage and other factors.
A strike or other work stoppage, or our inability to renew collective
bargaining agreements on favorable terms, could impact our cost structure
and our ability to operate our facilities and produce our products, which
could have a adverse effect on our results of operations.
As of December 31, 2005, approximately 48% of our 4,800 employees were
covered by collective bargaining or similar agreements. If we are unable to
negotiate acceptable new agreements with the unions representing our
employees upon expiration of existing contracts, we could experience strikes
or other work stoppages. Strikes or other work stoppages, could cause a
significant disruption of operations at our facilities which could have an
adverse impact on us. New or renewal agreements with unions representing
our employees could call for higher wages or benefits paid to union members,
which would increase our operating costs and could adversely affect our
-13-
profitability. Higher costs and/or limitations on our ability to operate
our facilities and produce our products resulting from increased labor costs,
strikes or other work stoppages could have an adverse effect on our results
of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Information pertaining to the Registrant's major operating facilities
is included below. Except as noted, the Registrant owns all of its
principal properties. The Registrant's plants are in satisfactory condition
and are suitable for the purpose for which they were designed and are now
being used.
Approximate
Location Property Size Description
Plumbing & Refrigeration Segment
Fulton, MS 418,000 sq. ft. Copper tube mill. Facility includes
52.37 acres casting, extruding, and finishing
equipment to produce copper tubing,
including tube feedstock for the
Company's copper fittings plants
and Precision Tube factory.
Fulton, MS 103,000 sq. ft. Casting facility. Facility includes
11.9 acres casting equipment to produce copper
billets used in the adjoining copper
tube mill.
Wynne, AR 682,000 sq. ft.(1) Copper tube mill. Facility includes
39.2 acres extrusion and finishing equipment to
produce copper tubing and copper tube
line sets.
Fulton, MS 58,500 sq. ft. Packaging and bar coding facility for
15.53 acres retail channel sales.
Fulton, MS 70,000 sq. ft.(2) Copper fittings plant. High-volume
7.68 acres facility that produces copper fittings
using tube feedstock from the
Company's adjacent copper tube mill.
Covington, TN 159,500 sq. ft. Copper fittings plant. Facility
40.88 acres produces copper fittings using tube
feedstock from the Company's copper
tube mills.
-14-
Approximate
Location Property Size Description
Port Huron, MI 40,000 sq. ft. Formed tube plant. Produces copper
5.11 acres fittings using cold heading equipment.
Portage, MI 205,000 sq. ft. Plastic fittings plant. Produces DWV
18 acres fittings using injection molding
equipment.
Ontario, CA 211,000 sq. ft.(3) Plastic fittings plant. Produces DWV
10 acres fittings using injection molding
equipment.
Upper 82,000 sq. ft. Plastic fittings plant. Produces DWV
Sandusky, OH 7.52 acres fittings using injection molding
equipment.
Fort Pierce, FL 69,875 sq. ft. Plastic fittings plant. Produces
5.60 acres pressure fittings using injection
molding equipment.
Monterrey, 120,000 sq. ft. (3) Pipe nipples plant. Produces pipe nipples,
Mexico 3.4 acres cut pipe and merchant couplings.
Tijuana, 25,000 sq. ft. (3) Pipe nipples plant. Produces pipe nipples,
Mexico 0.7 acres cut pipe and merchant couplings.
Bilston, 402,500 sq. ft. Copper tube mill. Facility includes
England 14.95 acres casting, extruding, and finishing
United Kingdom equipment to produce copper tubing.
OEM Segment
Port Huron, MI 322,500 sq. ft. Brass rod mill. Facility includes
71.5 acres casting, extruding, and finishing
equipment to produce brass rods and
bars, in various shapes and sizes.
Port Huron, MI 127,500 sq. ft. Forgings plant. Produces brass and
aluminum forgings.
Marysville, MI 81,500 sq. ft. Aluminum and copper impacts plant.
6.72 acres Produces made-to-order parts using cold
impact processes.
Hartsville, TN 78,000 sq. ft. Refrigeration products plant.
4.51 acres Produces products used in
refrigeration applications such as
ball valves, line valves, and
compressor valves.
Carthage, TN 67,520 sq. ft. Fabrication facility. Produces precision
10.98 acres tubular components and assemblies.
-15-
Approximate
Location Property Size Description
Jacksboro, TN 65,066 sq. ft. Bending and fabricating facility.
11.78 acres Produces gas burners, supply tubes,
and manifolds for the gas appliance
industry.
Waynesboro, TN 57,000 sq. ft.(4) Gas valve plant. Facility produces
5.0 acres brass valves and assemblies for the
gas appliance industry.
North Wales, PA 174,000 sq. ft. Precision Tube factory. Facility
18.9 acres fabricates copper tubing, copper
alloy tubing, aluminum tubing, and
fabricated tubular products.
Brighton, MI 65,000 sq. ft.(3) Machining operation. Facility
machines component parts for supply
to automotive industry.
Middletown, OH 55,000 sq. ft. Fabricating facility. Produces burner
2.0 acres systems and manifolds for the gas
appliance industry.
Jintan City, 322,580 sq. ft.(5) Copper tube mill. Facility includes
Jiangsu Province 33.0 acres casting, and finishing equipment
China to produce engineered copper tube
primarily for OEMs.
In addition, the Company owns and/or leases other properties used as
distribution centers and corporate offices.
(1) Facility, or some portion thereof, is located on land leased from a local
municipality, with an option to purchase at nominal cost.
(2) Facility is leased under a long-term lease agreement, with an option
to purchase at nominal cost.
(3) Facility is leased under an operating lease.
(4) Facility is leased from a local municipality for a nominal amount.
(5) Facility is located on land that is under a long-term land use rights
agreement.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain litigation as a result of claims that
arose in the ordinary course of business, which management believes will not
have a material adverse effect on the Company's financial position or results
of operations. Additionally, the Company may realize the benefit of certain
insurance, tax, and legal claims and litigation in the future; these gain
contingencies are not recognized in the Consolidated Financial Statements.
Environmental Proceedings
Reference is made to "Environmental Matters" in Item 1 of this Report,
which is incorporated herein by reference, for a description of environmental
proceedings.
-16-
Copper Tube Antitrust Litigation
Beginning in September 2004, 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. The claims in the California and
Massachusetts Actions against WTC Holding Company, Inc. and Deno Holding
Company, Inc. have been dismissed without prejudice. 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. Plaintiffs' motion for reconsideration of the July 6, 2005
order dismissing the claims in the Federal Actions against WTC Holding
Company, Inc. and Deno Holding Company, Inc. is pending. 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. Mueller
Europe has 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.
Copper Price Manipulation Litigation
Two of the Company's subsidiaries, Mueller Copper Tube Products Inc. and
Mueller Copper Tube Company Inc., brought a lawsuit (the Price Manipulation
Action) against J.P. Morgan Chase & Co. and Morgan Guaranty Trust Company of
New York (collectively "Morgan") to recover damages the Company believes it
suffered on first purchases of copper cathode resulting from an alleged
conspiracy to manipulate the price of copper cathode by Morgan (and certain
of its predecessors and affiliates) and others in violation of the federal
antitrust laws. The lawsuit was filed on June 12, 2003, in the U.S. District
Court for the Western District of Wisconsin. The Company's lawsuit was
consolidated with those of certain other first purchasers of copper cathode
and rod under the name "In re Copper Antitrust Litigation". Although the Price
Manipulation Action was dismissed by the district court on March 2, 2004, as
-17-
barred by the statute of limitations, the U.S. Court of Appeals for the
Seventh Circuit, on February 6, 2006, reversed the district court's decision
in part and remanded the Price Manipulation Action for further proceedings in
the district court. Although the Company is unable to predict the likely
outcome of the Price Manipulation Action at this time, the Company is
prosecuting the case vigorously, and intends to continue to do so in the
future.
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 adopted a statement alleging
infringements in Europe of competition rules by manufacturers of copper
fittings and related companies, including the Company, WTC Holding Company,
Inc., and Mueller Europe Ltd., for activities undertaken in Europe. 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 under "Other Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
As of March 6, 2006, the number of holders of record of Mueller's Common
Stock was approximately 1,800. On March 6, 2006, the closing price for
Mueller's Common Stock on the New York Stock Exchange was $33.17.
Issuer Purchases of Equity Securities
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 December 31, 2005, the Company had repurchased approximately
2.4 million shares under this authorization. Below is a summary of the
Company's stock repurchases for the period ended December 31, 2005.
-18-
(a) (b) (c) (d)
Total Maximum
Number of Number of
Shares Shares
Purchased as That May
Part of Yet Be
Total Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Purchased per Share Programs Programs
7,647,030 (1)
October 2 -
October 29, 2005 - $ -
October 30 -
November 26, 2005 - -
November 27 -
December 31, 2005 14,207 (2) 26.93
(1) Shares available to be purchased under the Company's 10 million share
repurchase authorization until October 2006. This repurchase plan was
announced on October 27, 2005.
(2) Shares tendered to the Company by employee stock option holders in
payment of the option purchase price upon exercise.
The Company's Board of Directors declared a regular quarterly dividend
of 10 cents per share on its common stock for each fiscal quarter of 2005
and 2004. During 2004, the Company also paid a special dividend composed of
$6.50 in cash and $8.50 in principal amount of its 6% Subordinated
Debentures due 2014 per common share. Payment of dividends in the future is
dependent upon the Company's financial condition, cash flows, capital
requirements, earnings, and other factors.
-19-
The high, low, and closing prices of Mueller's Common Stock on the New
York Stock Exchange for each fiscal quarter of 2005 and 2004 were as
follows:
High Low Close
2005
Fourth quarter $ 28.42 $ 24.41 $ 27.42
Third quarter 29.99 25.35 27.77
Second quarter 28.39 24.75 27.24
First quarter 32.74 27.13 27.97
2004 (1)
Fourth quarter $ 32.67 $ 21.42 $ 32.17
Third quarter 28.53 20.53 27.70
Second quarter 22.36 15.94 21.12
First quarter 21.11 15.28 18.24
(1) Information prior to October 26, 2004 was reduced by the difference
between the closing price on October 26, 2004 and the opening price on
October 27, 2004, or $14.57 per share, to adjust for the recapitalization by
Special Dividend.
-20-
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
2005 2004 2003 2002 2001
For the fiscal year:(3)
Net sales $ 1,729,923 $ 1,379,056 $ 999,078 $ 952,983 $ 969,106
Operating income 131,758 112,490 49,384 85,756 105,529
Net income from continuing operations 89,218 (2) 79,416 (2) 44,221 71,177 65,423
Diluted earnings per share
from continuing operations 2.40 2.15 1.19 1.92 1.76
Cash dividends per share 0.40 6.90 (1) - - -
At year-end:(3)
Total assets 1,104,638 963,731 1,055,184 987,947 916,065
Long-term debt 312,070 310,650 (1) 11,437 14,005 46,977
<FN>
(1) During 2004 the Company paid 40 cents per share in regular ten cent
quarterly cash dividends; additionally the Company paid a Special
Dividend composed of $6.50 in cash per share and $8.50 per share in the
form of 6% Subordinated Debentures due 2014
(2) Includes interest expense on 6% Subordinated Debentures following
distribution in the fourth quarter of 2004
(3) Includes activity of acquired businesses from the following purchase
dates: (i) Brassware, August 15, 2005, (ii) Mueller Comercial S.A.,
December 14, 2004, (iii) Vemco, August 27, 2004, (iv) Overstreet-Hughes,
August 21, 2002, and (v) certain assets of Colonial Engineering,
September 27, 2002
-21-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is contained in the caption "Financial Review" in the
"Consolidated Financial Statements" submitted as a separate section of this
Annual Report on Form 10-K commencing on page F-1.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are
contained in the caption "Financial Review" in the "Consolidated Financial
Statements" submitted as a separate section of this Annual Report on Form
10-K commencing on page F-1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements required by this item are contained in the
"Consolidated Financial Statements" submitted as a separate section of this
Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure information required to be disclosed in Company reports filed under
the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures are designed to provide reasonable
assurance that information required to be disclosed in Company reports filed
under the Exchange Act is accumulated and communicated to management,
including the Company's Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
The Company's management, 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 pursuant
to Rule 13a-15(b) of the Exchange Act as of December 31, 2005. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, because of the material weakness in internal
controls related to the accounting for income taxes as described below, the
Company's disclosure controls and procedures were not effective as of
December 31, 2005.
-22-
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) under the Securities Exchange Act of 1934. Pursuant to the
rules and regulations of the Securities and Exchange Commission, internal
control over financial reporting is a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers, and effected by the Company's board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally
accepted in the United States. Due to inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Further, because of changes in conditions, effectiveness of internal control
over financial reporting may vary over time.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's internal control over financial reporting as
of December 31, 2005 based on the control criteria established in a report
entitled "Internal Control-Integrated Framework", issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on such
evaluation management has determined that a material weakness related to the
accounting for income taxes existed as of December 31, 2005.
As defined by the Public Company Accounting Oversight Board's Auditing
Standard No. 2, a material weakness in internal control is a significant
deficiency, or combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the financial
statements would not be prevented or detected on a timely basis by the
Company. The principal factors contributing to the material weakness in
accounting for income taxes were (1) inadequate staffing and technical
expertise within the Company's tax department, (2) ineffective review and
approval practices, (3) inadequate processes to effectively reconcile income
tax accounts, and (4) inadequate application of the provisions of SFAS No.
109 to tax planning strategies. These deficiencies resulted in adjustments
to correct the Company's accounting for income taxes which were recorded
prior to the issuance of the Consolidated Financial Statements as of and for
the year ended December 31, 2005. These deficiencies, in the aggregate,
were determined to be a material weakness. As a result of the
aforementioned material weakness, management has concluded that the
Company's internal control over financial reporting was not effective as of
December 31, 2005. Management has also determined that the existence of the
material weakness did not result in a material misstatement of the financial
results reported for prior annual or interim periods.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005, has been audited
by Ernst & Young LLP, an independent registered public accounting firm. Their
report below expresses an unqualified opinion on management's assessment and
an adverse opinion on the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005, due to the material
weakness in internal controls related to the accounting for income taxes.
-23-
Remediation of Material Weakness
Management is in the process of implementing additional procedures to
enhance the controls surrounding accounting for income taxes. Specifically,
management will undertake the following actions intended to address the
identified control weakness:
* Evaluate current staffing resources;
* Require additional education and training in prevailing accounting
standards that govern income tax reporting for personnel involved
in the preparation and review of income tax reporting matters;
* Engage third-party experts to conduct an independent review and
evaluation of the Company's process of accounting for and
reporting of income taxes; and
* Implement a standardized reporting system related to income tax
reporting matters that will facilitate timely information
gathering and analysis for all business units.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending December 31, 2005, that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. However, the Company
plans to implement changes in internal control over financial reporting to
correct the material weakness related to the accounting for income taxes.
-24-
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mueller Industries, Inc.
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting,
that Mueller Industries, Inc. (the Company) did not maintain effective
internal control over financial reporting as of December 31, 2005, because
of the effect of the material weakness identified in management's assessment
based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and
an opinion on the effectiveness of the Company's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
-25-
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has been identified
and included in management's assessment.
As of December 31, 2005, the Company did not maintain effective
controls over the accounting for income taxes including income taxes payable,
deferred income tax assets and liabilities and the related income tax
provision. Specifically, there was (1) inadequate staffing and technical
expertise within the Company's tax department, (2) ineffective review and
approval practices, (3) inadequate processes to effectively reconcile income
tax accounts, and (4) inadequate controls over the proper application of the
provisions of SFAS No. 109 to tax planning strategies. These deficiencies
resulted in adjustments to the consolidated financial statements for the
year ended December 31, 2005, to correct income taxes payable, deferred
income tax assets and liabilities and the related income tax provision.
These deficiencies, in the aggregate, were determined to be a material
weakness. Additionally, this material weakness, if not remediated, could
result in a misstatement of income taxes payable, deferred income tax assets
and liabilities and the related income tax provision that would result in a
material misstatement to annual or interim financial statements that would
not be prevented or detected.
This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the December 31,
2005 consolidated financial statements, and this report does not affect our
report dated March 10, 2006 on those financial statements.
In our opinion, management's assessment that the Company did not
maintain effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on the COSO
control criteria. Also, in our opinion, because of the effect of the
material weakness described above on the achievement of the objectives of
the control criteria, the Company has not maintained effective internal
control over financial reporting as of December 31, 2005, based on the COSO
control criteria.
/s/ Ernst & Young LLP
Memphis, Tennessee
March 10, 2006
-26-
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is contained under the captions
"Ownership of Common Stock by Directors and Executive Officers and
Information about Director Nominees," "Corporate Governance," "Report of the
Audit Committee of the Board of Directors," and "Section 16(a) Beneficial
Ownership Compliance Reporting" in the Company's Proxy Statement for its
2006 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or about March 20, 2006, which is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is contained under the caption
"Executive Compensation" in the Company's Proxy Statement for its 2006
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 20, 2006, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table discloses information as adjusted for the Company's
Special Dividend regarding the securities to be issued and the securities
remaining available for issuance under the Registrant's stock-based incentive
plans as of December 31, 2005 (shares in thousands):
-27-
(a) (b) (c)
Number of securities
remaining available for future
Number of securities Weighted average issuance under equity
to be issued upon exercise exercise price of compensation plans (excluding
of outstanding options, outstanding options securities reflected in column
Plan category warrants, and rights warrants, and rights (a))
Equity compensation plans
approved by security
holders 1,576 $ 22.19 41
Equity compensation
plans not approved by
security holders 336 18.20 -
-------------- --------------
Total 1,912 21.49 41
============== ==============
-28-
On February 13, 2002 Mr. O'Hagan was granted an option to acquire
100,000 shares of Common Stock at an exercise price of $31.75 per share
(subsequent to the grant, on October 26, 2004 the option grant was modified
to equitably adjust for the Company's Special Dividend to 155,610 shares of
Common Stock at an exercise price of $20.40 per share) and on February 13,
2003 Mr. O'Hagan was granted an option to acquire 100,000 shares of Common
Stock at an exercise price of $25.10 per share (subsequent to the grant, on
October 26, 2004 the option grant was modified to equitably adjust for the
Company's Special Dividend to 155,610 shares of Common Stock at an exercise
price of $16.13 per share) (collectively, the O'Hagan Treasury Options).
Each of the O'Hagan Treasury Options has a term of ten years, subject to
earlier expiration upon termination of employment, and vests ratably over a
five-year period from the date of the grant, except that if there is a
Change in Control as defined in Mr. O'Hagan's employment agreement with the
Company (the O'Hagan Employment Agreement), all of the O'Hagan Treasury
Options will become immediately exercisable on the later to occur of (i) the
day Mr. O'Hagan notifies the Company he is terminating his employment with
the Company as a result of said change, and (ii) ten days prior to the date
Mr. O'Hagan's employment with the Company is terminated by the Company. In
addition, all outstanding unvested O'Hagan Treasury Options will immediately
vest and become exercisable if Mr. O'Hagan's employment is terminated by the
Company without Cause (as defined in the O'Hagan Employment Agreement) or by
Mr. O'Hagan for Good Reason (as defined in the O'Hagan Employment Agreement).
The O'Hagan Treasury Options may only be exercised for shares of Common
Stock held in treasury by the Company.
On June 30, 2003, the Company granted to Mr. Michael O. Fifer options
to acquire 20,000 shares of Common Stock at an exercise price of $27.06 per
share. Subsequent to the grant, on October 26, 2004 the remaining
unexercised options were modified to equitably adjust for the Company's
Special Dividend to 24,897 shares of Common Stock at an exercise price of
$17.39 per share. These options have a term of ten years, subject to
earlier expiration upon termination of employment, and vest and become
exercisable ratably over a five-year period from the date of the grant.
These options may only be exercised for shares of Common Stock held in
treasury by the Company.
Other information required by Item 12 is contained under the captions
"Principal Stockholders" and "Ownership of Common Stock by Directors and
Executive Officers and Information about Director Nominees" in the Company's
Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission on or about March 20, 2006, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is contained under the caption
"Appointment of Auditors" in the Company's Proxy Statement for its 2006
Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or about March 20, 2006, which is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements: the financial statements, notes, and report of
independent registered public accounting firm described in Item 8 of
this Annual Report on Form 10-K are contained in the "Consolidated
Financial Statements" submitted as a separate section of this Annual
Report on Form 10-K commencing on page F-1.
2. Financial Statement Schedule: the financial statement schedule
described in Item 8 of this report contained in the "Consolidated
Financial Statements" submitted as a separate section of this Annual
Report on Form 10-K commencing on page F-1.
3. Exhibits:
3.1 Certificate of Incorporation of the Registrant and all
amendments thereto. (Incorporated herein by reference to
Exhibit 3.1 of the Registrant's Annual Report on Form 10-K,
dated March 1, 2004, for the fiscal year ended December 27,
2003).
3.2 By-laws of the Registrant, as amended and restated, effective
November 10, 1994 (Incorporated herein by reference to
Exhibit 3.2 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended December 28,
2002).
4.1 Indenture, dated as of October 26, 2004, by and between
Mueller Industries, Inc, and SunTrust Bank, as trustee
(Incorporated herein by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K, dated October 26,
2004).
4.2 Form of 6% Subordinated Debenture due 2014 (Incorporated
herein by reference to Exhibit 4.2 of the Registrant's
Current Report on Form 8-K, dated October 26, 2004).
-30-
4.3 Certain instruments with respect to long-term debt of the
Registrant have not been filed as Exhibits to this Report
since the total amount of securities authorized under any
such instruments does not exceed 10 percent of the total
assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant agrees to furnish a copy
of each such instrument upon request of the Securities and
Exchange Commission.
10.1 Stock Option Agreement, dated December 4, 1991, by and
between the Registrant and Harvey L. Karp (Incorporated
herein by reference to Exhibit 10.4 of the Registrant's
Annual Report on Form 10-K, dated March 24, 2003, for the
fiscal year ended December 28, 2002).
10.2 Stock Option Agreement, dated March 3, 1992, by and between
the Registrant and Harvey L. Karp (Incorporated herein by
reference to Exhibit 10.5 of the Registrant's Annual Report
on Form 10-K, dated March 24, 2003, for the fiscal year ended
December 28, 2002).
10.3 Mueller Industries, Inc. 1991 Incentive Stock Option Plan, as
amended (Incorporated herein by reference to Exhibit 10.6 of
the Registrant's Annual Report on Form 10-K, dated
March 24, 2003, for the fiscal year ended December 28, 2002
and Exhibit 99.2 of the Registrant's Current Report on
Form 8-K, dated August 31, 2004).
10.4 Summary description of the Registrant's 2006 bonus plan for
certain key employees.
10.5 Amended and Restated Employment Agreement, effective as of
September 17, 1997, by and between the Registrant and Harvey
L. Karp (Incorporated herein by reference to Exhibit 10.8 of
the Registrant's Annual Report on Form 10-K, dated March 24,
2003, for the fiscal year ended December 28, 2002).
10.6 Amended and Restated Employment Agreement, effective as of
September 17, 1997, by and between the Registrant and William
D. O'Hagan (Incorporated herein by reference to Exhibit 10.9
of the Registrant's Annual Report on Form 10-K, dated March
24, 2003, for the fiscal year ended December 28, 2002).
10.7 Amendment to Amended and Restated Employment Agreement,
effective May 12, 2000, by and between the Registrant and
William D. O'Hagan (Incorporated herein by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on
Form 10-Q, dated July 24, 2000, for the quarter ended
June 24, 2000).
-31-
10.8 Mueller Industries, Inc. 1994 Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 10.11 of the
Registrant's Annual Report on Form 10-K, dated March 24, 2003,
for the fiscal year ended December 28, 2002 and Exhibit 99.3
of the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.9 Mueller Industries, Inc. 1994 Non-Employee Director Stock
Option Plan, as amended (Incorporated herein by reference to
Exhibit 10.12 of the Registrant's Annual Report on Form 10-K,
dated March 24, 2003, for the fiscal year ended
December 28, 2002 and Exhibit 99.6 of the Registrant's Current
Report on Form 8-K, dated August 31, 2004).
10.10 Mueller Industries, Inc. Deferred Compensation Plan,
effective December 1, 2000 (Incorporated herein by reference
to Exhibit 10.13 of the Registrant's Annual Report on Form
10-K, dated March 26, 2001, for the fiscal year ended
December 30, 2000).
10.11 Mueller Industries, Inc. 1998 Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K, dated March 24, 2003,
for the fiscal year ended December 28, 2002 and Exhibit 99.4
of the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.12 Stock Option Agreement, dated May 7, 1997, by and between the
Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.12 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.13 Stock Option Agreement, dated October 9, 1998, by and between
the Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.13 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
10.14 Stock Option Agreement, dated February 13, 2002, by and
between the Registrant and William D. O'Hagan (Incorporated
herein by reference to Exhibit 10.17 of the Registrant's
Annual Report on Form 10-K, dated March 24, 2003, for the
fiscal year ended December 28, 2002).
10.15 Employment Agreement, effective October 17, 2002, by and
between the Registrant and Kent A. McKee (Incorporated herein
by reference to Exhibit 10.18 of the Registrant's Annual
Report on Form 10-K, dated March 24, 2003, for the fiscal
year ended December 28, 2002).
10.16 Stock Option Agreement, dated February 13, 2003, by and
between the Registrant and William D. O'Hagan (Incorporated
herein by reference to Exhibit 10.16 of the Registrant's
Annual Report on Form 10-K, dated March 1, 2004, for the
fiscal year ended December 27, 2003).
-32-
10.17 Nonqualified Stock Option Agreement, dated June 30, 2003, by
and between the Registrant and Michael O. Fifer, as amended
(Incorporated herein by reference to Exhibit 10.18 of the
Registrant's Annual Report on Form 10-K, dated March 1, 2004,
for the fiscal year ended December 27, 2003 and Exhibit 99.7
of the Registrant's Current Report on Form 8-K, dated
August 31, 2004).
10.18 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and Harvey Karp (Incorporated herein by reference
to Exhibit 10.1 of the Registrant's Quarterly Report on Form
10-Q, dated July 16, 2004, for the quarter ended June 26,
2004).
10.19 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and William D. O' Hagan (Incorporated herein by
reference to Exhibit 10.2 of the Registrant's Quarterly
Report on Form 10-Q, dated July 16, 2004, for the quarter
ended June 26, 2004).
10.20 Amendment, dated June 21, 2004, to the Amended and Restated
Employment Agreement dated as of September 17, 1997, by and
between the Registrant and Harvey Karp (Incorporated herein
by reference to Exhibit 10.3 of the Registrant's Quarterly
Report on Form 10-Q, dated July 16, 2004, for the quarter
ended June 26, 2004).
10.21 Securities Purchase Agreement, dated December 14, 2004, among
Mueller Comercial de Mexico, S. de R.L. de C.V., WTC HOLDCO I,
LLC, MIYAR LLC, NICNA, GmbH, and The Seller Parties
(Incorporated herein by reference to Exhibit 10.21 of the
Registrant's Annual Report on Form 10-K, dated March 4, 2005,
for the fiscal year ended December 25, 2004).
10.22 Inventory Purchase Agreement, dated December 14, 2004, by and
between Niples del Norte S.A. de C.V. and Mueller de Mexico
S.A. de C.V (Incorporated herein by reference to Exhibit
10.22 of the Registrant's Annual Report on Form 10-K, dated
March 4, 2005, for the fiscal year ended December 25, 2004).
10.23 Credit Agreement among the Registrant (as Borrower) and
Standard Federal Bank and other banking institutions and
Standard Federal Bank (as Agent) dated as of November 6, 2003
(Incorporated herein by reference to Exhibit 4.2 of the
Registrant's Annual Report on Form 10-K, dated March 1, 2004,
for the fiscal year ended December 27, 2003).
-33-
10.24 First Amendment to Credit Agreement among the Registrant (as
Borrower) and Standard Federal Bank and other banking
institutions and Standard Federal Bank (as Agent) dated as of
September 27, 2004 (Incorporated herein by reference to
Exhibit 4.1 of the Registrant's Current Report on Form 8-K,
dated September 27, 2004).
10.25 Second Amendment to the Amended and Restated Employment
Agreement dated as of September 17, 1997, by and between the
Registrant and Harvey Karp (Incorporated herein by reference
to Exhibit 10.2 of the Registrant's Current Report on Form 8-
K, dated May 5, 2005).
10.26 Second Amendment to the Amended and Restated Employment
Agreement dated as of September 17, 1997, by and between the
Registrant and William D. O'Hagan (Incorporated herein by
reference to Exhibit 10.3 of the Registrant's Current Report
on Form 8-K, dated May 5, 2005).
10.27 Mueller Industries, Inc. Annual Bonus Plan (Incorporated
herein by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K, dated May 5, 2005).
10.28 Equity Joint Venture Agreement, among Mueller Streamline
China, LLC, Mueller Streamline Holding, S.L., Jiangsu
Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang Industries Ltd.
(Incorporated herein by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K, dated December 5,
2005).
10.29 Amendment to the Mueller Industries, Inc. Deferred
Compensation Plan, dated December 15, 2005.
10.30 Mueller Industries, Inc. 2002 Stock Option Plan, as amended
(Incorporated herein by reference to Exhibit 99.5 of the
Registrant's Current Report on Form 8-K, dated August 31, 2004
and Exhibit 10.3 of the Registrant's Current Report on
Form 8-K, dated December 27, 2005).
14.0 Code of Business Conduct and Ethics (Incorporated herein by
reference to Exhibit 14.0 of the Registrant's Annual Report
on Form 10-K, dated March 1, 2004, for the fiscal year ended
December 27, 2003).
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Registered Public Accounting Firm
(Includes report on Financial Statement Schedule).
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
-34-
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act
of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
-35-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 15, 2006.
MUELLER INDUSTRIES, INC.
/s/ HARVEY L. KARP
Harvey L. Karp, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
/s/HARVEY L KARP Chairman of the Board, and Director March 15, 2006
Harvey L. Karp
/s/ALEXANDER P. FEDERBUSH Director March 15, 2006
Alexander P. Federbush
/s/GENNARO J. FULVIO Director March 15, 2006
Gennaro J. Fulvio
/s/GARY S. GLADSTEIN Director March 15, 2006
Gary S. Gladstein
/s/TERRY HERMANSON Director March 15, 2006
Terry Hermanson
/s/ROBERT B. HODES Director March 15, 2006
Robert B. Hodes
/s/WILLIAM D. O'HAGAN President, Chief Executive Officer March 15, 2006
William D. O'Hagan (Principal Executive Officer),
Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the date indicated.
Signature and Title Date
/s/ KENT A. MCKEE March 15, 2006
Kent A. McKee
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ RICHARD W. CORMAN March 15, 2006
Richard W. Corman
Vice President - Controller
-36-
MUELLER INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Review F-2
Consolidated Statements of Income for the years
ended December 31, 2005, December 25, 2004, and December 27, 2003 F-15
Consolidated Balance Sheets
as of December 31, 2005 and December 25, 2004 F-17
Consolidated Statements of Cash Flows for the years
ended December 31, 2005, December 25, 2004, and December 27, 2003 F-19
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2005, December 25, 2004, and December 27, 2003 F-21
Notes to Consolidated Financial Statements F-23
Report of Independent Registered Public Accounting Firm F-52
FINANCIAL STATEMENT SCHEDULE
Schedule for the years ended December 31, 2005, December 25, 2004,
and December 27, 2003
Valuation and Qualifying Accounts (Schedule II) F-53
F-1
FINANCIAL REVIEW
OVERVIEW
The Company is a leading manufacturer of copper, brass, plastic, and
aluminum products. The range of these products is broad: copper tube and
fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic 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, Great Britain, and China.
The Company's businesses are aggregated into two reportable segments:
the Plumbing & Refrigeration segment and the OEM segment. Prior to 2005, the
Company disclosed its reportable segments as Standard Products and Industrial
Products. Additional operating segments have been recognized following an
internal reorganization in 2005. For disclosure purposes, as permitted under
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information", certain operating segments are aggregated into reportable
segments. The Plumbing & Refrigeration segment is composed of the Standard
Products Division (SPD), the Trading Group, and European Operations. The OEM
segment is composed of the Industrial Products Division (IPD) and Engineered
Products Division (EPD). These reportable segments are described in more
detail below. SPD manufactures and sells copper tube, copper and plastic
fittings, and valves in North America. European Operations manufactures
copper tube in Europe, which is sold in Europe and the Middle East;
activities also include import distribution. The Trading Group sources
products for import distribution in North America. The Plumbing &
Refrigeration segment sells products to wholesalers in the HVAC (heating,
ventilation, and air-conditioning), plumbing, and refrigeration markets, to
distributors to the manufactured housing and recreational vehicle industries,
and to building material retailers. The OEM segment manufactures and sells
brass and copper alloy rod, bar, and shapes; aluminum and brass forgings;
aluminum and copper impact extrusions; refrigeration valves and fittings;
fabricated tubular products; and gas valves and assemblies. The OEM segment
sells its products primarily to original equipment manufacturers (OEMs), many
of which are in the HVAC, plumbing, and refrigeration markets. The majority
of the Company's manufacturing facilities operated at moderate levels during
2005, 2004 and 2003.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration, and plumbing
markets because the principal end use of a significant portion of the
Company's products is in the construction of single and multi-family housing
and commercial buildings. Repairs and remodeling projects are also important
drivers of underlying demand for these products. The following are important
economic indicators that impact the Company's businesses. New housing starts
in the U.S. were 1.9 million, 2.0 million, and 1.8 million in 2005, 2004, and
2003, respectively. The seasonally adjusted annual rate of the Value of
Private Non-Residential Construction put in place, per the U.S. Census Bureau,
was $255.4 billion in 2005, $229.2 billion in 2004, and $217.3 billion in
2003. At December, the average 30 year fixed mortgage rate was 6.27 percent
in 2005, 5.75 percent in 2004, and 5.88 percent in 2003.
F-2
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.
The year ended December 31, 2005, contained 53 weeks while the years
ended December 25, 2004 and December 27, 2003, contained 52 weeks.
Recapitalization through Special Dividend
In September 2004, the Company authorized a special dividend consisting
of $6.50 in cash and $8.50 in principal amount of the Company's 6%
Subordinated Debentures due 2014 (the Debentures) for each share of Common
Stock (the Special Dividend). The Special Dividend, distributed in the
fourth quarter of 2004, substantially reduced the Company's cash position by
$245.6 million and its stockholders' equity by $545.1 million, and increased
its long-term debt by $299.5 million.
RESULTS OF OPERATIONS
2005 Performance Compared with 2004
Consolidated net sales in 2005 were $1.7 billion, a 25 percent increase
over net sales of $1.4 billion in 2004. The increase is primarily
attributable to higher raw material costs (which are passed through in the
form of higher selling prices as discussed above), and acquired businesses,
which accounted for approximately $106.3 million. Net selling prices
generally fluctuate with changes in raw material prices. The COMEX average
copper price in 2005 was approximately $1.68 per pound, or approximately 30
percent higher than the 2004 average of $1.29. This change increased the
Company's net sales and cost of goods sold.
Cost of goods sold increased $314 million, to $1.4 billion in 2005.
This increase was attributable primarily to higher raw material costs (as
discussed above) and acquired businesses. Gross profit was $300 million or
17.3 percent of net sales in 2005 compared with $263 million or 19.1 percent
of net sales in 2004. The increase in gross profit was due to (i) higher
spreads in core product lines, primarily copper tube and fittings, (ii)
acquired businesses and (iii) $1.3 million (or 2 cents per diluted share)
resulting from the liquidation of LIFO inventory layers.
F-3
Depreciation and amortization of $40.7 million in 2005 compares with
$40.6 million in 2004. Selling, general, and administrative expenses
increased to $127.4 million in 2005; this $21.0 million increase was due to
(i) incremental costs of approximately $14.3 million attributed to acquired
businesses, (ii) increased professional fees of approximately $3.3 million,
(iii) increased distribution costs of approximately $1.3 million, and (iv)
net increase of other costs of approximately $2.1 million.
Interest expense increased to $19.6 million in 2005 from $4.0 million in
2004. This increase was primarily due to the issuance of the Debentures on
October 26, 2004.
Other income includes (i) gains on the sale of land and buildings for
approximately $3.7 million, (ii) interest income on invested cash balances of
$2.3 million, (iii) rents, royalties and other, net of $1.5 million, and (iv)
equity in earnings of an unconsolidated subsidiary (Conbraco Industries,
Inc.) of $4.5 million.
The expense related to environmental remediation at certain non-
operating properties of the Company, included in other income, net, totaled
$0.6 million in 2005 compared with $1.0 million in 2004. The environmental
expense related to operating properties is included as a component of cost of
goods sold and was not significant for the periods presented.
Income tax expense was $35.0 million, for an effective rate of 28.2
percent, for 2005; this rate is lower than the expected rate due to (i) tax
planning strategy and structure related to a business acquired in Mexico in
2004, (ii) an adjustment that reduced 2005 income tax expense by
approximately $2.9 million, or 8 cents per diluted share, to correct
estimated taxes provided for in prior years, and (iii) recognition of the tax
benefit of a foreign net operating loss carryforward in the U.K. that was
previously reserved. Management has concluded that the $2.9 million
adjustment is immaterial to the consolidated results of operations and
financial condition for the current year as well as the prior affected years.
Income from discontinued operations consists of business interruption
insurance proceeds, net of tax, related to operations sold in 2002.
The Company's employment was approximately 4,800 at the end of 2005
compared with 4,500 at the end of 2004.
Plumbing & Refrigeration Segment
Net sales by Plumbing & Refrigeration were $1.3 billion in 2005 compared
with $1.0 billion in 2004 for a 30 percent increase. Operating income was
$125.5 million in 2005 compared with $108.3 million in 2004. The increase in
net sales is due primarily to higher raw material costs, which are reflected
in higher selling prices. This $17.2 million increase in operating profit
was due to (i) higher spreads and volume in certain product lines, (ii) $1.3
million (or 2 cents per diluted share) resulting from the liquidation of LIFO
inventory layers, and (iii) operating income from acquired businesses in
Mexico and the U.K.
F-4
OEM Segment
OEM's net sales were $460 million in 2005 compared with $392 million in
2004. Operating income increased by $6.4 million to $27.0 million in 2005
compared with $20.6 million in 2004. During 2005, the OEM Segment posted
improved results in all product areas with the exception of Brass Rod. Brass
rod consumption in the U.S. has steadily declined over the past five years,
due to the outsourcing of many manufactured products. Brass Rod continues to
be a solidly profitable business, although management anticipates difficult
economic conditions to continue into the foreseeable future.
2004 Performance Compared with 2003
Consolidated net sales in 2004 were $1.4 billion, a 38 percent increase
over net sales of $999 million in 2003. The increase is primarily
attributable to higher raw material costs (which are passed through in the
form of higher selling prices as discussed above), and increased volume.
Net selling prices generally fluctuate with changes in raw material prices.
The COMEX average copper price in 2004 was approximately $1.29 per pound, or
59 percent more than the 2003 average of 81 cents. This change increased
the Company's net sales and cost of goods sold.
Cost of goods sold increased $300 million, to $1.1 billion in 2004.
This increase was attributable primarily to higher raw material costs (as
discussed above) and increased volume. Gross profit was $263 million or 19.1
percent of net sales in 2004 compared with $183 million or 18.3 percent of
net sales in 2003. The increase in gross profit was due to higher spreads in
core product lines, primarily copper tube, fittings, and brass rod.
Depreciation and amortization increased to $40.6 million in 2004 from
$39.0 million in 2003. Selling, general, and administrative expense
increased to $106.4 million in 2004; this $11.5 million increase was due to
(i) higher incentive compensation costs resulting from increased volume and
profitability of approximately $9.5 million, (ii) increased distribution cost
of approximately $2.5 million, and (iii) net reduction of other costs of $0.5
million.
During 2004, the Company recognized a $3.9 million impairment charge
related to its subsidiary, Overstreet-Hughes Co., Inc., of which $2.3 million
was goodwill and the remainder, was property, plant, and equipment. The
results of Overstreet-Hughes, a component of IPD, which manufactures tubular
components and assemblies primarily for the OEM air-conditioning market, have
not met expectations. The Company has reduced its carrying cost in these
long-lived assets to its best estimate of fair value. This estimate was
determined based on a discounted cash flow method.
Interest expense increased to $4.0 million in 2004 from $1.2 million in
2003. This increase was primarily due to the issuance of the Debentures on
October 26, 2004. Other income includes (i) gains on the sale of land for
approximately $5.7 million, (ii) interest income on invested cash balances of
$2.4 million, and (iii) rents, royalties and other of $1.7 million, offset by
equity in loss of an unconsolidated subsidiary (Conbraco Industries, Inc.) of
$2.0 million, which includes a provision of $2.3 million for certain federal
income tax audit exposures of Conbraco that were assessed in 2004. Conbraco
F-5
settled these tax matters during the second quarter of 2005; consequently,
the Company reversed a loss accrual that resulted in a $2.3 million gain in
2005.
The expense related to environmental remediation at certain non-
operating properties of the Company, included in other income, net, totaled
$1.0 million in 2004 compared with $1.2 million in 2003. The environmental
expense related to operating properties is included as a component of cost of
goods sold and was not significant for the periods presented.
Income tax expense was $35.9 million, for an effective rate of 31
percent, for 2004; this rate is lower than the expected rate due to (i) the
recognition of a capital loss carryforward related to sales of land that had
a tax basis significantly less than the realized proceeds, (ii) recognition
of foreign tax credits, (iii) recognition of foreign net operating loss
carryforwards, and (iv) a deferred income tax benefit from reducing a
valuation allowance that primarily relates to the closure of open tax years.
During 2003, the Company recognized a deferred income tax benefit, upon the
closure of the open tax year, by reducing a valuation allowance of $9.3
million related to an operating loss resulting from the 1999 sale of a
subsidiary. Realization of the tax benefit occurred during the year of sale.
During 2003, the Company recognized a $1.7 million gain to reflect
adjustments to estimates on disposition of Mueller Europe S.A. as no further
obligations or contingencies are expected from these discontinued operations.
The Company's employment was approximately 4,500 at the end of 2004
compared with 3,500 at the end of 2003. This increase primarily relates to
businesses acquired during 2004.
Plumbing & Refrigeration Segment
Net sales by Plumbing & Refrigeration were $1.0 billion in 2004 compared
with $717.6 million in 2003 for a 39.6 percent increase. Operating income
was $108.3 million in 2004 compared with $54.1 million in 2003. This $54.2
million increase in operating profit was due to higher spreads and volume in
certain product lines. Of this increase in operating income, approximately
$44 million was from copper tube and copper fittings with the remainder
attributable to other product lines.
OEM Segment
OEM's net sales were $392 million in 2004 compared with $292 million in
2003. Operating income increased by $8.9 million to $20.6 million in 2004
compared with $11.7 million in 2003. This increase is due primarily to
improved spreads and volume in brass rod. Of this increase in operating
income, approximately $11 million is attributable to Brass Rod, Forgings,
Impacts and Micro Gauge, and the balance attributable to other product lines
offset by a $3.9 million impairment charge for Overstreet-Hughes (as
discussed above).
F-6
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance increased to $129.7
million at year-end from $47.5 million at December 25, 2004. Major
components of the 2005 change included $106.1 million of cash provided by
operating activities, $15.3 million of cash used in investing activities and
$11.5 million of cash used in financing activities.
Net income from continuing operations of $89.2 million in 2005 was the
primary component of cash provided by operating activities. Depreciation and
amortization of $40.9 million was the primary non-cash adjustment. Major
changes in working capital included a $55.6 million increase in trade
accounts receivable due to better volumes and increased selling prices in
2005 compared with 2004, and $61.7 million increase in current liabilities
due to (i) a $44.5 million increase in trade accounts payable due to higher
raw material costs, (ii) a $9.9 million increase in accrued discounts and
allowances due to higher volumes, (iii) a $10.0 million increase in income
taxes payable, and (iv) a net reduction of other liabilities of $2.7 million.
Operating cash flow provided by discontinued operations consists of business
interruption insurance proceeds, net of tax, related to operations sold in
2002.
The major components of net cash used for investing activities during
2005 included $18.4 million used for capital expenditures and $10.6 million
used for the acquisition of Brassware reduced by $3.7 million of purchase
price adjustments related to acquisitions completed in the prior year.
Net cash used in financing activities totaled $11.5 million in 2005,
consisting of $14.6 million for cash dividends and $1.1 million for debt
repayments, offset by the proceeds from the sale of treasury stock of $4.8
million. These treasury stock transactions relate to stock option exercises;
the Company made no open market purchases of treasury stock during 2005.
The Company has a $150 million unsecured line-of-credit (Credit
Facility) which expires in November 2007. At year-end, the Company had no
borrowings against the Credit Facility. Approximately $12.7 million in
letters of credit were backed by the Credit Facility at the end of 2005. As
of December 31, 2005, the Company's total debt was $316.2 million or 43
percent of its total capitalization.
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of tangible net worth
and meet certain minimum financial ratios. As of December 31, 2005, the
Company was in compliance with all of its debt covenants.
The Company expects to invest between $25 and $30 million for capital
expenditures during 2006.
F-7
Contractual cash obligations of the Company as of December 31, 2005
included the following:
(In millions)
Payments Due by Year
2007- 2009-
Total 2006 2008 2010 Thereafter
Long-term debt,
including capital
lease obligations $316.2 $ 4.1 $ 2.3 $ 0.2 $309.6
Interest on fixed-
rate debt 163.8 18.6 37.3 36.0 71.9
Consulting Agreements (1) 13.3 - 1.3 2.7 9.3
Operating leases 23.5 7.1 9.1 3.5 3.8
Investment in China
joint venture (2) 12.4 12.4 - - -
Purchase commitments (3) 406.6 406.6 - - -
----- ----- ----- ----- -----
Total contractual
cash obligations $935.8 $448.8 $ 50.0 $ 42.4 $394.6
===== ===== ===== ===== =====
(1) See Note 10 to Consolidated Financial Statements.
(2) See Note 13 to Consolidated Financial Statements.
(3) Purchase commitments include $79.3 million of open fixed price
purchases of raw materials. Additionally, the Company has contractual
supply commitments, totaling $327.3 million at year-end prices, for raw
materials consumed in the ordinary course of business; these contracts
contain variable pricing based upon COMEX.
The above obligations will be satisfied with existing cash, the Credit
Facility, and cash generated by operations. Additionally, the cash flow to
fund pension and OPEB obligations was $2.6 million in 2005 and $1.9 million
in 2004. During 2005 and 2004, funded pension assets recovered a significant
portion of market value declines experienced in 2002. The Company expects to
contribute approximately $2.4 million to its pension plans and $0.9 million
to its other postretirement benefit plans in 2006. The Company has no off-
balance sheet financing arrangements except for the operating leases
identified above.
Fluctuations in the cost of copper and other raw materials affect the
Company's liquidity. Changes in material costs directly impact components of
working capital, primarily inventories and accounts receivable. Since the
end of the third quarter of 2003, there has been a significant increase in
COMEX copper prices. From the September 30, 2003 close through the end of
2004, the cost had risen to approximately $1.45 per pound, or approximately
80 percent. COMEX copper continued to increase through the end of 2005 when
it closed at $2.16 per pound.
F-8
The Company's Board of Directors declared a regular quarterly dividend
of 10 cents per share on its Common Stock during each quarter of 2005 and
2004. Additionally, the Company distributed a Special Dividend composed of
$6.50 in cash and $8.50 in principal amount of the Company's 6% Subordinated
Debentures due 2014 per share of Common Stock. Payment of dividends in the
future is dependent upon the Company's financial condition, cash flows,
capital requirements, earnings, and other factors.
Management believes that cash provided by operations, the Credit
Facility, and currently available cash of $129.7 million will be adequate to
meet the Company's normal future capital expenditure and operational needs.
The Company's current ratio (current assets divided by current liabilities)
was 2.4 to 1 as of December 31, 2005.
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 December 31, 2005, the Company had
repurchased approximately 2.4 million shares under this authorization.
Environmental Matters
The Company ended 2005 with total environmental reserves of
approximately $9.1 million. Based upon information currently available,
management believes that the outcome of pending environmental matters will
not materially affect the overall financial position and results of
operations of the Company.
MARKET RISKS
The Company is exposed to market risk from changes in raw material costs,
foreign currency exchange, and energy costs. To reduce such risks, the
Company may periodically use financial instruments. All hedging transactions
are authorized and executed pursuant to policies and procedures. Further,
the Company does not buy or sell financial instruments for trading purposes.
A discussion of the Company's accounting for derivative instruments and
hedging activities is included in the Summary of Significant Accounting
Policies in the Notes to Consolidated Financial Statements.
Cost and Availability of Raw Materials and Energy
Copper and brass represent the largest component of the Company's
variable costs of production. The cost of these materials is subject to
global market fluctuations caused by factors beyond the Company's control.
Significant increases in the cost of metal, to the extent not reflected in
prices for the Company's finished products, or the lack of availability could
materially and adversely affect the Company's business, results of operations
and financial condition.
F-9
The Company occasionally enters into forward fixed-price arrangements
with certain customers. The Company may utilize forward contracts to hedge
risks associated with forward fixed-price arrangements. The Company may also
utilize forward contracts to manage price risk associated with inventory.
The effective portion of gains or losses with respect to these positions are
deferred in stockholders' equity as a component of comprehensive income and
reflected in earnings upon the sale of inventory. Periodic value
fluctuations of the contracts generally offset the value fluctuations of the
underlying fixed-price transactions or inventory. At year-end, the Company
held open forward contracts to purchase approximately $2.1 million of copper
over the next seven months.
Futures contracts may also be used to manage price risk associated with
natural gas purchases. The effective portion of gains and losses with
respect to these positions are deferred in stockholders' equity as a
component of comprehensive income and reflected in earnings upon consumption
of natural gas. Periodic value fluctuations of the contracts generally
offset the value fluctuations of the underlying natural gas prices. At year-
end, the Company held no open hedge forward contracts to purchase natural gas.
Interest Rates
At December 31, 2005 and December 25, 2004, the fair value of the
Company's debt was estimated at $298.1 million and $307.5 million,
respectively, primarily using market yields and taking into consideration the
underlying terms of the debt. Such fair value was less than the carrying
value of debt at December 31, 2005 by $18.1 million and exceeded the carrying
value at December 25, 2004 by $8.5 million. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 10 percent
decrease in interest rates and amounted to $4.1 million at December 31, 2005
and $5.9 million at December 25, 2004.
The Company had variable-rate debt outstanding of $5.5 million at
December 31, 2005 and December 25, 2004. At these borrowing levels, a
hypothetical 10 percent increase in interest rates would have had an
insignificant unfavorable impact on the Company's pretax earnings and cash
flows. The primary interest rate exposure on floating-rate debt is based on
LIBOR.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other than
an entity's functional currency. The Company and its subsidiaries generally
enter into transactions denominated in their respective functional currencies.
Foreign currency exposures arising from transactions denominated in
currencies other than the functional currency are not material; however, the
Company may utilize certain forward fixed-rate contracts to hedge such
transactional exposures. Gains and losses with respect to these positions
are deferred in stockholders' equity as a component of comprehensive income
and reflected in earnings upon collection of receivables. At year-end, the
Company had no open forward contracts to exchange foreign currencies.
F-10
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.
Additionally, with the investment in Jiangsu Mueller-Xingrong Copper
Industries Limited, the Company is exposed to the Chinese renminbi. The
Company generally views as long-term its investments in foreign subsidiaries
with a functional currency other than the U.S. dollar. As a result, the
Company generally does not hedge these net investments. The net investment
in foreign subsidiaries translated into U.S. dollars using the year-end
exchange rates was $143.3 million at December 31, 2005 and $120.8 million at
December 25, 2004. The primary reason for the increase in 2005 is from
businesses acquired during the year. The potential loss in value of the
Company's net investment in foreign subsidiaries resulting from a
hypothetical 10 percent adverse change in quoted foreign currency exchange
rates at December 31, 2005 and December 25, 2004 amounted to $14.3 million
and $12.1 million, respectively. This change would be reflected in the
currency translation component of accumulated other comprehensive income in
the equity section of the Company's Consolidated Balance Sheet, unless the
foreign subsidiaries are sold or otherwise disposed.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the United States.
Application of these principles requires the Company to make estimates,
assumptions, and judgments that affect the amounts reported in the
Consolidated Financial Statements. Management believes the most complex and
sensitive judgments, because of their significance to the Consolidated
Financial Statements, result primarily from the need to make estimates about
the effects of matters, which are inherently uncertain. The accounting
policies and estimates that are most critical to aid in understanding and
evaluating the results of operations and financial position of the Company
include the following:
Inventory Valuation
Inventories are valued at the lower of cost or market. A significant
component of the Company's inventory is copper; the domestic copper
inventories are valued under the LIFO method, which represent approximately
17.0 percent of total inventories. The market price of copper cathode and
scrap are subject to volatility. During periods when open market prices
decline below net book value, the Company may need to provide an allowance to
reduce the carrying value of its inventory. In addition, certain items in
inventory may be considered obsolete and, as such, the Company may establish
an allowance to reduce the carrying value of those items to their net
realizable value. Changes in these estimates related to the value of
inventory, if any, may result in a materially adverse or positive impact on
the Company's reported financial position or results of operations. The
Company recognizes the impact of any changes in estimates, assumptions, and
judgments in income in the period in which it is determined.
F-11
Deferred Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon
the occurrence of future events. The Company records valuation allowances to
reduce its deferred tax assets to the amount it believes is more likely than
not to be realized. These valuation allowances can be impacted by changes in
tax laws, changes to statutory tax rates, and future taxable income levels
and are based on the Company's judgment, estimates, and assumptions regarding
those future events. In the event the Company were to determine that it
would not be able to realize all or a portion of the net deferred tax assets
in the future, the Company would increase the valuation allowance through a
charge to income in the period that such determination is made. Conversely,
if the Company were to determine that it would be able to realize its
deferred tax assets in the future, in excess of the net carrying amounts, the
Company would decrease the recorded valuation allowance through an increase
to income in the period that such determination is made.
Environmental Reserves
The Company recognizes an environmental liability when it is probable
the liability exists and the amount is reasonably estimable. The Company
estimates the duration and extent of its remediation obligations based upon
reports of outside consultants; internal analyses of clean-up costs, ongoing
monitoring costs, and estimated legal fees; communications with regulatory
agencies; and changes in environmental law. If the Company were to determine
that its estimates of the duration or extent of its environmental obligations
were no longer accurate, the Company would adjust its environmental
liabilities accordingly in the period that such determination is made.
Estimated future expenditures for environmental remediation are not
discounted to their present value. Accrued environmental liabilities are not
reduced by potential insurance reimbursements.
Environmental expenses that relate to ongoing operations are included as
a component of cost of goods sold. Environmental expenses related to certain
non-operating properties are included in other income, net on the
Consolidated Statements of Income.
Allowance for Doubtful Accounts
The Company provides an allowance for receivables that may not be fully
collected. In circumstances where the Company is aware of a customer's
inability to meet its financial obligations (e.g., bankruptcy filings or
substantial down-grading of credit ratings), it records a reserve for bad
debts against amounts due to reduce the net recognized receivable to the
amount it believes most likely will be collected. For all other customers,
the Company recognizes reserves for bad debts based on its historical
collection experience. If circumstances change (e.g., greater than expected
defaults or an unexpected material change in a major customer's ability to
meet its financial obligations), the Company's estimate of the recoverability
of amounts due could be changed by a material amount.
F-12
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
supercedes 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 expects it will adopt the provisions of
SFAS No. 123(R) using the modified prospective transition method. Under this
application, the Company will be required to record compensation expense for
all awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
The impact of adoption of SFAS No. 123(R) cannot be predicted at this time
because it will depend on, among other things, levels of share-based payments
granted in the future and the market value of the Company's common stock.
However, had the Company adopted SFAS No. 123(R) in prior periods, the impact
of that standard would have approximated the impact of SFAS No. 123 as
illustrated in the pro-forma disclosure of net income and earnings per share
in the Notes to the Consolidated Financial Statements. 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 years ended December 31, 2005 and December 25, 2004 for
such excess tax deductions was $1.0 million and $31.8 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.
In November 2004, the FASB issued SFAS No. 151, "Inventory Cost". This
statement amends the guidance in Accounting Research Bulletin No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
This statement is effective for inventory cost incurred during fiscal years
beginning after June 15, 2005. This statement will be considered and adopted
by the Company effective January 1, 2006. The impact of adopting SFAS No.
151 will not be material to the Company's consolidated results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report contains various forward-looking statements and
includes assumptions concerning the Company's operations, future results, and
prospects. These forward-looking statements are based on current
expectations and are subject to risk and uncertainties. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995, the Company provides the following cautionary statement identifying
important economic, political, and technological factors, among others, the
absence of which could cause actual results or events to differ materially
from those set forth in or implied by the forward-looking statements and
related assumptions.
F-13
Such factors include: (i) the current and projected future business
environment, including interest rates and capital and consumer spending; (ii)
the domestic housing and commercial construction industry environment; (iii)
availability and price fluctuations in commodities (including copper, natural
gas, and other raw materials, including crude oil that indirectly effects
plastic resins); (iv) competitive factors and competitor responses to the
Company's initiatives; (v) stability of government laws and regulations,
including taxes; (vi) availability of financing; and (vii) continuation of
the environment to make acquisitions, domestic and foreign, including
regulatory requirements and market values of candidates.
F-14
Mueller Industries, Inc.
Consolidated Statements of Income
Years Ended December 31, 2005, December 25, 2004, and December 27, 2003
(In thousands, except per share data)
2005 2004 2003
Net sales $1,729,923 $1,379,056 $ 999,078
Cost of goods sold 1,430,075 1,115,612 815,849
--------- --------- ---------
Gross profit 299,848 263,444 183,229
Depreciation and amortization 40,696 40,613 38,954
Selling, general, and
administrative expense 127,394 106,400 94,891
Impairment charge - 3,941 -
--------- --------- ---------
Operating income 131,758 112,490 49,384
Interest expense (19,550) (3,974) (1,168)
Other income, net 11,997 6,842 3,220
--------- --------- ---------
Income from continuing operations
before income taxes 124,205 115,358 51,436
Income tax expense (34,987) (35,942) (7,215)
--------- --------- ---------
Income from continuing operations 89,218 79,416 44,221
Income from discontinued operations,
net of income taxes 3,324 - 1,160
--------- --------- ---------
Net income $ 92,542 $ 79,416 $ 45,381
========= ========= =========
See accompanying notes to consolidated financial statements.
F-15
Mueller Industries, Inc.
Consolidated Statements of Income (continued)
Years Ended December 31, 2005, December 25, 2004, and December 27, 2003
(In thousands, except per share data)
2005 2004 2003
Weighted average shares for basic
earnings per share 36,590 35,321 34,264
Effect of dilutive stock options 513 1,590 2,597
--------- --------- ---------
Adjusted weighted average shares for
diluted earnings per share 37,103 36,911 36,861
========= ========= =========
Basic earnings per share:
From continuing operations $ 2.44 $ 2.25 $ 1.29
From discontinued operations 0.09 - 0.03
--------- --------- ---------
Basic earnings per share $ 2.53 $ 2.25 $ 1.32
========= ========= =========
Diluted earnings per share:
From continuing operations $ 2.40 $ 2.15 $ 1.19
From discontinued operations 0.09 - 0.04
--------- --------- ---------
Diluted earnings per share $ 2.49 $ 2.15 $ 1.23
========= ========= =========
Dividends per share $ 0.40 $ 15.40 $ -
========= ========= =========
See accompanying notes to consolidated financial statements.
F-16
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 31, 2005 and December 25, 2004
(In thousands)
2005 2004
Assets
Current assets
Cash and cash equivalents $ 129,685 $ 47,449
Accounts receivable, less allowance for
doubtful accounts of $5,778 in 2005
and $3,925 in 2004 248,395 196,762
Inventories 196,987 187,853
Current deferred income taxes 19,900 15,276
Other current assets 17,019 7,991
---------- ----------
Total current assets 611,986 455,331
Property, plant, and equipment, net 307,046 335,610
Goodwill 152,171 136,615
Other assets 33,435 36,175
---------- ----------
Total Assets $ 1,104,638 $ 963,731
========== ==========
See accompanying notes to consolidated financial statements.
F-17
Mueller Industries, Inc.
Consolidated Balance Sheets (continued)
As of December 31, 2005 and December 25, 2004
(In thousands, except share data)
2005 2004
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 4,120 $ 5,328
Accounts payable 124,216 79,723
Accrued wages and other employee costs 38,095 37,992
Other current liabilities 84,961 57,775
---------- ----------
Total current liabilities 251,392 180,818
Long-term debt, less current portion 312,070 310,650
Pension liabilities 21,721 19,611
Postretirement benefits other than pensions 13,515 13,556
Environmental reserves 9,073 9,503
Deferred income taxes 63,944 67,479
Other noncurrent liabilities 3,078 10,361
---------- ----------
Total liabilities 674,793 611,978
---------- ----------
Minority interest in subsidiaries 6,937 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 36,643,590 in 2005
and 36,389,824 in 2004 401 401
Additional paid-in capital, common 252,889 252,931
Retained earnings 253,433 175,537
Accumulated other comprehensive (loss) income (8,848) 3,085
Treasury common stock, at cost (74,967) (80,268)
---------- ----------
Total stockholders' equity 422,908 351,686
---------- ----------
Commitments and contingencies - -
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,104,638 $ 963,731
========== ==========
See accompanying notes to consolidated financial statements.
F-18
Mueller Industries, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, December 25, 2004, and December 27, 2003
(In thousands)
2005 2004 2003
Operating activities:
Income from continuing operations $ 89,218 $ 79,416 $ 44,221
Reconciliation of income from
continuing operations to net cash
provided by operating activities:
Depreciation 40,398 40,316 38,531
Amortization of intangibles 298 297 423
Amortization of Subordinated
Debenture costs 162 26 -
Income tax benefit from exercise
of stock options 991 31,778 18
Impairment charge - 3,941 -
Deferred income taxes (9,556) 2,711 (287)
Provision for doubtful
accounts receivable 1,911 1,404 3,172
Minority interest in subsidiaries,
net of dividend paid 9 (141) (213)
(Gain) loss on disposals of properties (3,665) (5,729) 290
Equity in (earnings) loss of
unconsolidated subsidiary (4,480) 2,026 460
Changes in assets and liabilities,
net of businesses acquired:
Receivables (55,577) (17,995) (35,129)
Inventories (5,979) (26,208) 2,948
Other assets (2,870) (2,055) 3,240
Current liabilities 61,741 42,913 14,620
Other liabilities (5,894) 296 (54)
Other, net (590) 1,765 1,176
--------- --------- ---------
Net cash provided by
operating activities 106,117 154,761 73,416
--------- --------- ---------
Investing activities:
Capital expenditures (18,449) (19,980) (27,236)
Acquisition of businesses, net
of cash received (6,937) (56,946) -
Proceeds from sales of properties 10,112 6,334 1,412
Purchase of Conbraco Industries, Inc.
common stock - - (10,806)
Escrowed IRB proceeds - - 449
--------- --------- ---------
Net cash used in
investing activities (15,274) (70,592) (36,181)
--------- --------- ---------
See accompanying notes to consolidated financial statements.
F-19
Mueller Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 2005, December 25, 2004, and December 27, 2003
(In thousands)
2005 2004 2003
Financing activities:
Repayments of long-term debt $ (1,091) $ (6,608) $ (3,894)
Dividends paid (14,646) (259,882) -
Acquisition of treasury stock (551) (42,641) -
Proceeds from the sale of
treasury stock 4,819 18,978 389
Subordinated Debenture issuance costs - (2,187) -
--------- --------- ---------
Net cash used in financing activities (11,469) (292,340) (3,505)
--------- --------- ---------
Effect of exchange rate changes on cash (462) 532 3,505
Net cash provided by operating
activities of discontinued operations 3,324 - 252
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents 82,236 (207,639) 37,487
Cash and cash equivalents at the
beginning of the year 47,449 255,088 217,601
--------- --------- ---------
Cash and cash equivalents at the
end of the year $ 129,685 $ 47,449 $ 255,088
========= ========= =========
For supplemental disclosures of cash flow information, see
Notes 1, 5, 6, 7, and 13.
See accompanying notes to consolidated financial statements.
F-20
Mueller Industries, Inc.
Consolidated Statements Stockholders' Equity
Years Ended December 31, 2005, December 25, 2004, and December 27, 2003
(In thousands)
2005 2004 2003
Shares Amount Shares Amount Shares Amount
Common stock:
Balance at beginning of year 40,092 $ 401 40,092 $ 401 40,092 $ 401
------- --------- ------- --------- ------ ---------
Balance at end of year 40,092 $ 401 40,092 $ 401 40,092 $ 401
======= ========= ======= ========= ====== =========
Additional paid-in capital:
Balance at beginning of year $ 252,931 $ 259,110 $ 258,939
Issuance of shares under
incentive stock option plan (1,033) (37,957) 153
Tax benefit related to employee
stock options 991 31,778 18
--------- --------- ---------
Balance at end of year $ 252,889 $ 252,931 $ 259,110
========= ========= =========
Retained earnings:
Balance at beginning of year $ 175,537 $ 655,495 $ 610,114
Net income 92,542 79,416 45,381
Dividends (14,646) (559,374) -
--------- --------- ---------
Balance at end of year $ 253,433 $ 175,537 $ 655,495
========= ========= =========
Accumulated other comprehensive
(loss) income:
Foreign currency translation $ (10,122) $ 8,560 $ 10,941
Minimum pension liability adjustment,
net of applicable income tax (expense)
benefit of $339, $(2), $(3) (2,141) (2) 4,277
Change in fair value of derivatives,
net of applicable income tax expense
of $(201), $(134), $(156) 330 219 255
Losses reclassified into earnings
from other comprehensive income,
net of applicable income tax (expense)
benefit of $0, $65, $(45) - (106) 74
--------- --------- ---------
Total other comprehensive (loss) income (11,933) 8,671 15,547
Balance at beginning of year 3,085 (5,586) (21,133)
--------- --------- ---------
Balance at end of year $ (8,848) $ 3,085 $ (5,586)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-21
Mueller Industries, Inc.
Consolidated Statements Stockholders' Equity (continued)
Years Ended December 31, 2005, December 25, 2004, and December 27, 2003
(In thousands)
2005 2004 2003
Shares Amount Shares Amount Shares Amount
Treasury stock:
Balance at beginning of year 3,702 $ (80,268) 5,815 $ (94,562) 5,834 $ (94,798)
Issuance of shares under
incentive stock option plan (283) 5,852 (3,242) 56,935 (19) 236
Repurchase of common stock 29 (551) 1,129 (42,641) - -
------- --------- ------- --------- ------ ---------
Balance at end of year 3,448 $ (74,967) 3,702 $ (80,268) 5,815 $ (94,562)
======= ========= ======= ========= ====== =========
Total comprehensive income:
Net income $ 92,542 $ 79,416 $ 45,381
Other comprehensive (loss) income (11,933) 8,671 15,547
--------- --------- ---------
Total comprehensive income $ 80,609 $ 88,087 $ 60,928
========= ========= =========
See accompanying notes to consolidated financial statements.
F-22
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The principal business of Mueller Industries, Inc. is the manufacture
and sale of copper tube and fittings; brass and copper alloy rod, bar, and
shapes; aluminum and brass forgings; aluminum and copper impact extrusions;
plastic fittings and valves; refrigeration valves and fittings; fabricated
tubular products; and gas valves and assemblies. The Company also resells
imported brass and plastic plumbing valves, malleable iron fittings, steel
nipples, faucets, and plumbing specialty products. The Company markets its
products to the HVAC, plumbing, refrigeration, hardware, and other industries.
Mueller's operations are located throughout the United States and in Canada,
Mexico, Great Britain, and China.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Mueller
Industries, Inc. and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The minority interest represents a separate private ownership of 49.5 percent
of Jiangsu Mueller - Xingrong Copper Industries Limited, 25 percent of Ruby
Hill Mining Company, and 19 percent of Richmond-Eureka Mining Company. The
Company accounts for its minority investment in Conbraco Industries, Inc. on
the equity method.
Revenue Recognition
Revenue is recognized when title passes to the customer either when
products are shipped, provided collection is determined to be probable and no
significant obligations remain for the Company, or upon the terms of the sale.
Estimates for future rebates on certain product lines and bad debts are
recognized in the period which the revenue is recorded. The cost of shipping
product to customers is expensed as incurred as a component of cost of goods
sold.
Cash Equivalents
Temporary investments with original maturities of three months or less
are considered to be cash equivalents. These investments are stated at cost.
At December 31, 2005 and December 25, 2004, temporary investments consisted
of certificates of deposit, commercial paper, bank repurchase agreements, and
U.S. and foreign government securities totaling $123.7 million and $46.6
million, respectively.
F-23
Allowance for Doubtful Accounts
The Company provides an allowance for receivables that may not be fully
collected. In circumstances where the Company is aware of a customer's
inability to meet its financial obligations (e.g., bankruptcy filings or
substantial down-grading of credit ratings), it records a reserve for bad
debts against amounts due to reduce the net recognized receivable to the
amount it believes most likely will be collected. For all other customers,
the Company recognizes reserves for bad debts based on its historical
collection experience. If circumstances change (e.g., greater than expected
defaults or an unexpected material change in a major customer's ability to
meet its financial obligations), the Company's estimate of the recoverability
of amounts due could be changed by a material amount.
Inventories
The Company's inventories are valued at the lower of cost or market.
The material component of its U.S. copper tube and copper fittings
inventories is valued on a last-in, first-out (LIFO) basis. Other
inventories, including the non-material components of U.S. copper tube and
copper fittings, are valued on a first-in, first-out (FIFO) basis. Inventory
costs include material, labor costs, and manufacturing overhead.
The market price of copper cathode and scrap are subject to volatility.
During periods when open market prices decline below net book value, the
Company may need to provide an allowance to reduce the carrying value of its
inventory. In addition, certain items in inventory may be considered
obsolete and, as such, the Company may establish an allowance to reduce the
carrying value of those items to their net realizable value. Changes in
these estimates related to the value of inventory, if any, may result in a
materially adverse or positive impact on the Company's reported financial
position or results of operations. The Company recognizes the impact of any
changes in estimates, assumptions, and judgments in income in the period in
which it is determined.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation of
buildings, machinery, and equipment is provided on the straight-line method
over the estimated useful lives ranging from 20 to 40 years for buildings and
five to 20 years for machinery and equipment. Leasehold improvements are
amortized over the lesser of their useful life or the remaining lease term.
Repairs and maintenance are expensed as incurred.
Goodwill
Goodwill represents cost in excess of fair values assigned to the
underlying net assets of acquired businesses. Under Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets",
goodwill is subject to impairment testing which compares carrying values to
fair values and, when appropriate, the carrying value of these assets is
required to be reduced to fair value. The Company performs its annual
impairment assessment as of the first day of the fourth quarter of each
fiscal year, unless circumstances dictate more frequent assessments. For
testing purposes, the Company uses components of its reporting segments;
components of a segment having similar economic characteristics are combined.
F-24
No impairment loss resulted from the 2005 or 2004 annual tests performed
under SFAS No. 142; however, as discussed in Note 4, an impairment charge was
recognized in the first quarter of 2004. There can be no assurance that
additional goodwill impairment will not occur in the future.
Self Insurance Accruals
The Company is primarily self insured for workers' compensation claims
and benefits paid under employee health care programs. Accruals are
primarily based on estimated undiscounted cost of claims, which includes
incurred-but-not-reported claims and are classified as accrued wages and
other employee costs.
Environmental Reserves and Environmental Expenses
The Company recognizes an environmental liability when it is probable
the liability exists and the amount is reasonably estimable. The Company
estimates the duration and extent of its remediation obligations based upon
reports of outside consultants; internal analyses of clean-up costs, ongoing
monitoring costs, and estimated legal fees; communications with regulatory
agencies; and changes in environmental law. If the Company were to determine
that its estimates of the duration or extent of its environmental obligations
were no longer accurate, the Company would adjust its environmental
liabilities accordingly in the period that such determination is made.
Estimated future expenditures for environmental remediation are not
discounted to their present value. Accrued environmental liabilities are not
reduced by potential insurance reimbursements.
Environmental expenses that relate to ongoing operations are included as
a component of cost of goods sold. Environmental expenses related to certain
non-operating properties are included in other income, net on the
Consolidated Statements of Income.
Earnings Per Share
Basic earnings per share is computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the increase
in average common shares outstanding that would result from the assumed
exercise of outstanding stock options calculated using the treasury stock
method. Approximately 417 thousand stock options were excluded from the
computation of diluted earnings per share at December 31, 2005 as the
options' exercise price was higher than the average market price of the
Company's stock.
Income Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon
the occurrence of future events. The Company records valuation allowances to
reduce its deferred tax assets to the amount it believes is more likely than
not to be realized. These valuation allowances can be impacted by changes in
tax laws, changes to statutory tax rates, and future taxable income levels
and are based on the Company's judgment, estimates, and assumptions regarding
those future events. In the event the Company were to determine that it
F-25
would not be able to realize all or a portion of the net deferred tax assets
in the future, the Company would increase the valuation allowance through a
charge to income tax expense in the period that such determination is made.
Conversely, if the Company were to determine that it would be able to realize
its deferred tax assets in the future, in excess of the net carrying amounts,
the Company would decrease the recorded valuation allowance through a
decrease to income tax expense in the period that such determination is made.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
Interpretations. No stock-based employee compensation expense is reflected
in net income because the exercise price of the Company's incentive employee
stock options equals the market price of the underlying stock on the date of
grant. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation.
(In thousands, except per share data)
2005 2004 2003
Net income $ 92,542 $ 79,416 $ 45,381
SFAS No. 123 compensation
expense, net of income taxes (2,360) (2,114) (2,028)
--------- --------- ---------
SFAS No. 123 pro forma
net income $ 90,182 $ 77,302 $ 43,353
========= ========= =========
Pro forma earnings per share:
Basic $ 2.46 $ 2.19 $ 1.27
Diluted $ 2.41 $ 2.09 $ 1.18
Earnings per share, as reported:
Basic $ 2.53 $ 2.25 $ 1.32
Diluted $ 2.49 $ 2.15 $ 1.23
Concentrations of Credit and Market Risk
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different geographic areas and
different industries, including HVAC, plumbing, refrigeration, hardware,
automotive, OEMs, and others.
The Company minimizes its exposure to base metal price fluctuations
through various strategies. Generally, it prices an equivalent amount of
copper raw material, under flexible pricing arrangements it maintains with
its suppliers, at the time it determines the selling price of finished
products to its customers.
F-26
Derivative Instruments and Hedging Activities
The Company has utilized forward contracts to manage the volatility
related to purchases of copper and natural gas, and certain transactions
denominated in foreign currencies. In addition, the Company has reduced its
exposure to increases in interest rates by entering into an interest rate
swap contract. These contracts have been designated as cash flow hedges. In
accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", the Company has recorded the fair value of these
contracts in the Consolidated Balance Sheet. The related gains and losses on
the contracts are deferred in stockholders' equity as a component of
comprehensive income. With respect to the copper and natural gas contracts,
deferred gains and losses are recognized in cost of goods sold in the period
in which the related sales or consumption of the commodities are recognized.
Deferred gains and losses on foreign currency contracts are recognized in net
sales in the period in which the foreign sales are collected. Deferred gain
or loss on the interest rate swap contract is recognized in interest expense
in the period in which the related interest payment being hedged is expensed.
To the extent that the changes in the fair value of the contracts do not
perfectly offset the changes in the present value of the hedged transactions,
that ineffective portion is immediately recognized in earnings. Gains and
losses recognized by the Company related to the ineffective portion of its
hedging instruments, as well as gains and losses related to the portion of
the hedging instruments excluded from the assessment of hedge effectiveness,
were not material to the Company's Consolidated Financial Statements. Should
these contracts no longer meet hedge criteria in accordance with SFAS No. 133,
either through lack of effectiveness or because the hedged transaction is not
probable of occurring, all deferred gains and losses related to the hedge
will be immediately reclassified from accumulated other comprehensive income
into earnings.
The Company primarily executes derivative contracts with major financial
institutions. These counterparties expose the Company to credit risk in the
event of non-performance. The amount of such exposure is limited to the fair
value of the contract plus the unpaid portion of amounts due to the Company
pursuant to terms of the derivative instruments, if any. Although there are
no collateral requirements, if a downgrade in the credit rating of these
counterparties occurs, management believes that this exposure is mitigated by
provisions in the derivative arrangements which allow for the legal right of
offset of any amounts due to the Company from the counterparties with any
amounts payable to the counterparties by the Company. As a result,
management considers the risk of counterparty default to be minimal.
At December 31, 2005, the Company held open forward commitments to
purchase approximately $2.1 million of copper in the next seven months.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts receivable,
and accounts payable approximate fair value due to the short-term maturity of
these instruments. Primarily using market yields, the fair value of the
Company's debt instruments were estimated to be $298.0 million and $307.5
million at December 31, 2005 and December 25, 2004, respectively. The fair
value of the Company's interest rate swap contract was approximately $0.2
million at December 31, 2005 and approximately $0.7 million at
December 25, 2004.
F-27
This value represents the estimated amount the Company would need to
pay if the contract was terminated before maturity, principally resulting
from market interest rate decreases. The fair value of committed forward
contracts to purchase copper was $2.3 million at December 31, 2005. The
Company estimates the fair value of contracts by obtaining quoted market
prices.
Fair value estimates are made at a specific point in time based on
relevant market information about the financial instrument. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Foreign Currency Translation
For foreign subsidiaries, the functional currency is the local currency.
Balance sheet accounts are translated at exchange rates in effect at the end
of the year and income statement accounts are translated at average exchange
rates for the year. Translation gains and losses are included in
stockholders' equity as a component of comprehensive income. Transaction
gains and losses included in the Consolidated Statements of Income were not
significant.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates, assumptions, and judgments that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board issued SFAS
No. 123(R), "Share-Based Payment", which is a revision of SFAS No. 123 and
supercedes 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 expects it will adopt the provisions of
SFAS No. 123(R) using the modified prospective transition method. Under this
application, the Company will be required to record compensation expense for
all awards granted after the date of adoption and for the unvested portion of
previously granted awards that remain outstanding at the date of adoption.
The impact of adoption of SFAS No. 123(R) cannot be predicted at this time
because it will depend on, among other things, levels of share-based payments
granted in the future and the market value of the Company's common stock.
However, had the Company adopted SFAS No. 123(R) in prior periods, the impact
of that standard would have approximated the impact of SFAS No. 123 as
illustrated in the above pro-forma disclosure of net income and earnings per
share. 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
F-28
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 years ended December 31,
2005 and December 25, 2004 for such excess tax deductions was $1.0 million
and $31.8 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.
In November 2004, the FASB issued SFAS No. 151, "Inventory Cost". This
statement amends the guidance in Accounting Research Bulletin No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
This statement is effective for inventory cost incurred during fiscal years
beginning after June 15, 2005. This statement will be considered and adopted
by the Company effective January 1, 2006. The impact of adopting SFAS No.
151 will not be material to the Company's consolidated results of operations.
Reclassifications
Certain amounts in the prior years Consolidated Financial Statements
have been reclassified to conform to the current year presentation.
General
The year ended December 31, 2005, contained 53 weeks while the years
ended December 25, 2004 and December 27, 2003, contained 52 weeks.
Note 2 - Inventories
(In thousands)
2005 2004
Raw material and supplies $ 42,268 $ 34,270
Work-in-process 24,610 24,201
Finished goods 130,109 129,382
---------- ----------
Inventories $ 196,987 $ 187,853
========== ==========
Inventories valued using the LIFO method totaled $33.5 million at
December 31, 2005 and $36.5 million at December 25, 2004. At December 31,
2005 and December 25, 2004, the approximate FIFO cost of such inventories was
$87.8 million and $64.4 million respectively. During 2005 inventory
quantities valued using the LIFO method declined which resulted in
liquidation of LIFO inventory layers. The effect of liquidation of LIFO
layers decreased cost of sales by approximately $1.3 million, or
approximately 2 cents per diluted share.
F-29
Note 3 - Property, Plant, and Equipment, Net
(In thousands)
2005 2004
Land and land improvements $ 11,881 $ 9,431
Buildings 93,013 97,679
Machinery and equipment 504,075 497,591
Construction in progress 7,098 5,479
---------- ----------
616,067 610,180
Less accumulated depreciation (309,021) (274,570)
---------- ----------
Property, plant, and equipment, net $ 307,046 $ 335,610
========== ==========
Note 4 - Goodwill
The changes in the carrying amount of goodwill were as follows:
(In thousands)
Plumbing &
Refrigeration OEM
Segment Segment Total
Balance at December 27, 2003 $ 94,070 $ 10,779 $ 104,849
Goodwill resulting from
acquisitions during the year 33,013 - 33,013
Impairment charge - (2,279) (2,279)
Foreign currency translation adjustment 1,032 - 1,032
--------- --------- ---------
Balance at December 25, 2004 128,115 8,500 136,615
Goodwill resulting from
acquisitions during the year 11,174 - 11,174
Adjustments to the fair value of
businesses acquired during 2004 1,589 - 1,589
Contingent earn-out payments 3,000 353 3,353
Foreign currency translation adjustment (560) - (560)
--------- --------- ---------
Balance at December 31, 2005 $ 143,318 $ 8,853 $ 152,171
========= ========= =========
The results of the Company's wholly owned subsidiary Overstreet-Hughes
Co., Inc. (Overstreet-Hughes) have not met expectations. During 2004, the
Company recognized a $3.9 million non-cash impairment charge related to
Overstreet-Hughes and reduced its goodwill by $2.3 million and its carrying
cost in long-lived assets by $1.6 million, its best estimate of fair value.
This estimate was determined based on a discounted cash flow method.
F-30
Note 5 - Long-Term Debt
(In thousands)
2005 2004
6% Subordinated Debentures, due 2014 $ 299,492 $ 299,492
2001 Series IRBs with interest at
6.63%, due 2021 10,000 10,000
Other, including capitalized
lease obligations 6,698 6,486
---------- ----------
316,190 315,978
Less current portion of long-term debt (4,120) (5,328)
---------- ----------
Long-term debt $ 312,070 $ 310,650
========== ==========
On October 26, 2004, as part of a Special Dividend, the Company issued
$299.5 million in principal amount of its 6% Subordinated Debentures (the
Debentures) due November 1, 2014. Interest on the Debentures is payable
semi-annually on May 1 and November 1. The Company may repurchase the
Debentures through open market transactions or through privately negotiated
transactions. The Debentures may be redeemed in whole at any time or in part
from time to time at the option of the Company at the following redemption
price (expressed as a percentage of principal amount) plus any accrued but
unpaid interest to, but excluding, the redemption date:
If redeemed during the 12-month period beginning October 26,
Year Redemption Price
2005 104%
2006 103
2007 102
2008 101
2009 and thereafter 100
The Company has a Credit Agreement (the Agreement) with a syndicate of
banks establishing an unsecured $150 million revolving credit facility (the
Credit Facility) which matures in November 2007. Borrowings under the Credit
Facility bear interest, at the Company's option, at (i) LIBOR plus a variable
premium or (ii) the greater of Prime or the Federal Funds rate plus .5
percent. LIBOR advances may be based upon the one, two, three, or six-month
LIBOR. The variable premium over LIBOR is based on certain financial ratios,
and can range from 37.5 to 67.5 basis points. At December 31, 2005, the
premium was 47.5 basis points. Additionally, a facility fee is payable
quarterly on the total commitment and varies from 12.5 to 20.0 basis points
F-31
based upon the Company's capitalization ratio. Availability of funds under
the Credit Facility is reduced by the amount of certain outstanding letters
of credit, which are used to secure the Company's payment of insurance
deductibles and retiree health benefits, totaling approximately $12.7 million
at December 31, 2005. Terms of the letters of credit are generally one year
but are renewable annually as required. There were no borrowings outstanding
as of December 31, 2005.
Borrowings under the Agreement require the Company, among other things,
to maintain certain minimum levels of net worth and meet certain minimum
financial ratios. At December 31, 2005, the Company was in compliance with
all debt covenants.
Aggregate annual maturities of the Company's debt are $4.1 million, $2.1
million, $0.2 million, $0.1 million, and $0.1 million for the years 2006
through 2010 respectively, and $309.6 million thereafter. Interest paid in
2005, 2004, and 2003 was $19.0 million, $1.1 million, and $1.2 million
respectively. No interest was capitalized in 2005, 2004, or 2003.
Note 6 - Stockholders' Equity
On October 26, 2004, the Company distributed a Special Dividend
consisting of $6.50 in cash and $8.50 in principal amount of the Company's 6%
Subordinated Debentures due 2014 for each share of Common Stock.
Additionally, the Company paid regular quarterly cash dividends of 10 cents
per share per quarter in 2005 and 2004.
The Company's Board of Directors has authorized the repurchase, until
October 2006, of up to 10 million shares of the Company's Common Stock
through open market transactions or through privately negotiated transactions.
The Company has no obligation to purchase any shares and may cancel, suspend,
or extend the time period for the purchase of shares at any time. Any
purchases will be funded primarily through existing cash and cash from
operations. The Company may hold any shares purchased in treasury or use a
portion of the repurchased shares for employee benefit plans, as well as for
other corporate purposes. Through December 31, 2005, the Company had
repurchased approximately 2.4 million shares under this authorization.
Components of accumulated other comprehensive (loss) income are as
follows:
(In thousands)
2005 2004
Cumulative foreign currency translation adjustment $ 6,154 $ 16,275
Minimum pension liability, net of income tax (14,984) (12,842)
Unrealized derivative losses, net of income tax (18) (348)
---------- ----------
Accumulated other comprehensive (loss) income $ (8,848) $ 3,085
========== ==========
F-32
During 2004, the change in cumulative foreign currency translation
adjustment primarily relates to the Company's investment in its U.K.
subsidiaries and fluctuations in exchange rates between the British pound
sterling and the U.S. dollar. The value of the British pound increased by
approximately 8.6 percent against the U.S. dollar.
During 2005, the reduction in cumulative foreign currency translation
adjustment relates to the decrease in value of British pound sterling of
approximately 10.4 percent plus the tax effect of certain inter-company
transactions of approximately $1.7 million, partially offset by the increase
in value of the Mexican peso of approximately 3.7 percent.
Note 7 - Income Taxes
The components of income from continuing operations before income
taxes were taxed under the following jurisdictions:
(In thousands)
2005 2004 2003
Domestic $ 114,735 $ 110,913 $ 58,927
Foreign 9,470 4,445 (7,491)
--------- --------- ---------
Income from continuing operations
before income taxes $ 124,205 $ 115,358 $ 51,436
========= ========= =========
Income tax expense attributable to continuing operations consists of the
following:
(In thousands)
2005 2004 2003
Current tax expense:
Federal $ 42,811 $ 30,920 $ 4,928
Foreign 499 642 1,744
State and local 1,233 1,669 830
--------- --------- ---------
Current tax expense 44,543 33,231 7,502
--------- --------- ---------
Deferred tax expense (benefit):
Federal (7,570) 3,020 504
Foreign (280) (182) (869)
State and local (1,706) (127) 78
--------- --------- ---------
Deferred tax expense (benefit) (9,556) 2,711 (287)
--------- --------- ---------
Income tax expense $ 34,987 $ 35,942 $ 7,215
========= ========= =========
F-33
No provision is made for U.S. income taxes applicable to undistributed
earnings of foreign subsidiaries that are indefinitely reinvested in foreign
operations. It is not practicable to compute the potential deferred tax
liability associated with these undistributed foreign earnings.
The difference between the reported income tax expense and a tax
determined by applying the applicable U.S. federal statutory income tax rate
to income from continuing operations before income taxes is reconciled as
follows:
(In thousands)
2005 2004 2003
Expected income tax expense $ 43,471 $ 40,375 $ 18,003
State and local income tax,
net of federal benefit 316 1,160 618
Adjustment for change in estimate
of state deferred tax liability (1,129) - -
Foreign income taxes (975) (652) 220
Valuation allowance (1,962) (2,605) (12,190)
Adjustment for correction of prior
year tax provision (2,862) - -
U.S. manufacturers deduction (1,015) - -
Other, net (857) (2,336) 564
--------- --------- ---------
Income tax expense $ 34,987 $ 35,942 $ 7,215
========= ========= =========
The adjustment of $2.9 million, or 8 cents per diluted share, to correct
the prior year income tax provision is immaterial to the results of
operations and financial condition for 2005 as well as the prior affected
years.
F-34
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
(In thousands)
2005 2004
Deferred tax assets:
Accounts receivable $ 1,864 $ 1,250
Inventories 7,267 1,641
Pension, OPEB, and accrued items 11,769 11,466
Other reserves 5,762 8,818
Net operating loss carryforwards 6,876 10,956
Capital loss carryforwards - 445
Other 653 846
---------- ----------
Total deferred tax assets 34,191 35,422
Less valuation allowance (3,612) (12,880)
---------- ----------
Deferred tax assets, net of
valuation allowance 30,579 22,542
---------- ----------
Deferred tax liabilities:
Property, plant, and equipment 70,724 73,321
Other 3,899 1,424
---------- ----------
Total deferred tax liabilities 74,623 74,745
---------- ----------
Net deferred tax liability $ (44,044) $ (52,203)
========== ==========
As of December 31, 2005, the Company had utilized all recognized
domestic net operating loss carryforwards and alternative minimum tax credit
carryforwards. As of December 31, 2005, the Company had foreign net
operating loss carryforwards (foreign NOL's) and interest carryforwards from
U.K. operations available to offset $22.9 million of foreign subsidiary
income of which $10 million has not been recognized. These carryforwards are
available to offset foreign subsidiary income over an indefinite period.
Tax expense in 2005 was reduced by $2.5 million due to the reduction in
valuation allowance associated with tax benefits related primarily to the net
operating loss carryforward in the U.K. The remaining reduction of the
valuation allowance is primarily due to reclassifications resulting from
filing amended returns in the U.K.
The reduction of the valuation allowance in 2004, was primarily the
result of recognition of a deferred income tax benefit upon the closure of
open tax years, a reduction of the estimated valuation allowance for foreign
tax credit carryforwards, and a reduction of the allowance associated with
capital loss carryforwards used to offset capital gains from the sale of non-
operating property.
F-35
During 2003, the Company recognized a deferred income tax benefit, upon
closure of the open tax year, by reducing a valuation allowance of $9.3
million related to an operating loss resulting from the 1999 sale of a
subsidiary. Realization of the tax benefit occurred during the year of sale.
Income taxes paid were approximately $34.5 million in 2005, $5.0 million
in 2004, and $0.8 million in 2003.
The Internal Revenue Service is examining the Company's federal income
tax returns for years 2004, 2003, and 2002. The results of the examination
are not expected to have a material effect on the Consolidated Financial
Statements.
Note 8 - Other Current Liabilities
Included in other current liabilities were accrued discounts and
allowances of $39.5 million at December 31, 2005 and $29.6 million at
December 25, 2004, and taxes payable of $23.6 million at December 31, 2005
and $13.6 million at December 25, 2004.
Note 9 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. In 2004,
the Company changed its accounting principle by accelerating the date for
actuarial measurement of its obligation for certain pension plans from year-
end to November 30. The Company believes the one-month acceleration of the
measurement date is a preferred change as it allows time for management to
evaluate and report the actuarial pension measurements as well as evaluate
those results in funding decisions. The effect of the change on the
obligation and assets of the pension plans did not have a material cumulative
effect on pension expense or accrued benefit cost.
F-36
The following tables provide a reconciliation of the changes in the
plans' benefit obligations and the fair value of the plans' assets over the
two-year period ending December 31, 2005, and a statement of the plans'
funded status as of December 31, 2005 and December 25, 2004:
(In thousands)
Pension Benefits Other Benefits
2005 2004 2005 2004
Change in benefit
obligation:
Obligation at
beginning of year $ 144,216 $ 132,342 $ 10,800 $ 10,756
Service cost 2,150 1,972 7 5
Interest cost 8,095 7,972 632 649
Participant contributions 493 403 - -
Plan amendments - 281 200 -
Actuarial loss 8,589 2,912 658 99
Benefit payments (7,141) (6,116) (698) (709)
Settlement (68) - - -
Foreign currency
translation adjustment (6,561) 4,450 - -
-------- -------- -------- --------
Obligation at end of year $ 149,773 $ 144,216 $ 11,599 $ 10,800
======== ======== ======== ========
Change in fair value
of plan assets:
Fair value of plan
assets at beginning
of year $ 125,824 $ 114,889 $ - $ -
Actual return on
plan assets 17,704 12,428 - -
Employer contributions 1,924 1,237 698 709
Participant contributions 493 403 - -
Benefit payments (7,141) (6,116) (698) (709)
Settlement (68) - - -
Foreign currency
translation adjustment (4,442) 2,983 - -
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 134,294 $ 125,824 $ - $ -
======== ======== ======== ========
Funded status:
Funded (underfunded)
status at end of year $ (15,479) $ (18,392) $ (11,599) $ (10,800)
Unrecognized prior
service cost 2,198 2,570 120 (72)
Unrecognized gain 15,756 17,729 3,302 2,774
-------- -------- -------- --------
Net amount recognized $ 2,475 $ 1,907 $ (8,177) $ (8,098)
======== ======== ======== ========
F-37
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with benefit obligations in
excess of plan assets were $65.7 million, $64.3 million, and $45.3 million,
respectively, as of December 31, 2005, and $114.2 million, $112.5 million,
and $93.7 million, respectively, as of December 25, 2004. The Company
sponsors one pension plan in the U.K. which comprises 42 percent of the above
benefit obligation and 32 percent of the plan assets as of December 31, 2005.
The following table provides the amounts recognized in the Consolidated
Balance Sheets as of December 31, 2005 and December 25, 2004:
(In thousands)
Pension Benefits Other Benefits
2005 2004 2005 2004
Prepaid benefit cost $ 8,555 $ 8,664 $ - $ -
Accrued benefit liability (21,414) (19,611) (8,177) (8,098)
Accumulated other
comprehensive income 15,334 12,854 - -
-------- -------- -------- --------
Net amount recognized $ 2,475 $ 1,907 $ (8,177) $ (8,098)
======== ======== ======== ========
The components of net periodic benefit cost are as follows:
(In thousands)
2005 2004 2003
Pension benefits:
Service cost $ 2,150 $ 1,972 $ 1,766
Interest cost 8,095 7,972 7,495
Expected return on
plan assets (9,711) (9,125) (7,724)
Amortization of prior
service cost 372 373 491
Amortization of net loss 919 963 1,327
Effect of special events 25 - -
--------- --------- ---------
Net periodic benefit cost $ 1,850 $ 2,155 $ 3,355
========= ========= =========
Other benefits:
Service cost $ 7 $ 5 $ 5
Interest cost 632 649 694
Amortization of prior
service cost 8 (8) (8)
Amortization of net loss 130 142 120
--------- --------- ---------
Net periodic benefit cost $ 777 $ 788 $ 811
========= ========= =========
F-38
Prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10 percent of the greater of the benefit obligation and the market-
related value of assets are amortized over the average remaining service
period of active participants.
The assumptions used in the measurement of the Company's benefit
obligations are as follows:
Pension Benefits Other Benefits
2005 2004 2005 2004
Weighted average
assumptions:
Discount rate 5.59% 5.91% 6.00% 6.00%
Expected return
on plan assets 7.94% 8.06% N/A N/A
Rate of compensation
increases 4.00% 4.50% N/A N/A
The assumptions used in the measurement of the Company's net periodic benefit
cost are as follows:
Pension Benefits Other Benefits
2005 2004 2003 2005 2004 2003
Weighted average
assumptions:
Discount rate 5.91% 6.08% 6.42% 6.00% 6.25% 6.75%
Expected return
on plan assets 8.06% 8.07% 8.05% N/A N/A N/A
Rate of compensation
increases 4.50% 4.25% 4.00% N/A N/A N/A
Only one pension plan uses the rate of compensation increase in its
benefit formula. All other pension plans are based on length of service.
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is assumed to range from 7.0 to
9.1 percent for 2005, gradually decrease to 4.5 percent for 2011, and remain
at that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point would increase
the accumulated postretirement benefit obligation by $963 thousand and the
service and interest cost components of net periodic postretirement benefit
costs by $54 thousand for 2005. Decreasing the assumed health care cost
trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation and the service and interest
cost components of net periodic postretirement benefit costs for 2005 by $879
thousand and $49 thousand, respectively.
F-39
The weighted average asset allocation of the Company's pension fund
assets are as follows:
Asset Category Pension Plan Assets
2005 2004
Equity securities 65% 71%
Index funds 15 10
Debt securities 6 4
Cash and equivalents 3 4
Other 11 11
------- -------
100% 100%
======= =======
The measurement date for the majority of the plans is November 30.
The Company's pension plan obligations are long-term in nature and,
accordingly, the plan assets are invested for the long-term. The Company
believes that a diversified portfolio of equity securities (both actively
managed and index funds) and private equity funds have an acceptable risk-
return profile that, over the long-term, is better than fixed income
securities. Consequently, the pension plan assets are heavily weighted to
equity investments. Plan assets are monitored periodically. Based upon
results, investment managers and/or asset classes are redeployed when
considered necessary. Expected rates of return on plan assets were
determined based on historical market returns giving consideration to the
composition of each plan's portfolio.
The plans' assets do not include investment in securities issued by the
Company. The Company expects to contribute approximately $2.4 million to its
pension plans and $0.9 million to its other postretirement benefit plans in
2006. The Company expects future benefits to be paid from the plans as
follows:
(In thousands)
Pension Other
Benefits Benefits
2006 $ 7,931 $ 853
2007 7,700 855
2008 7,854 859
2009 7,910 857
2010 7,831 854
2011-2015 42,699 3,918
------- -------
Total $ 81,925 $ 8,196
======= =======
F-40
The Company sponsors voluntary employee savings plans that qualify under
Section 401(k) of the Internal Revenue Code of 1986. Compensation expense
for the Company's matching contribution to the 401(k) plans was $2.2 million
in 2005 and $2.0 million in 2004 and 2003. The Company's match is a cash
contribution. Participants direct the investment of their account balances
by allocating among a range of asset classes including mutual funds (equity,
fixed income, and balanced funds), and money market funds. The plans do not
offer direct investment in securities issued by the Company.
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992
(the Act) was enacted. The Act mandates a method of providing for
postretirement benefits to UMWA current and retired employees, including some
retirees who were never employed by the Company. In October 1993,
beneficiaries were assigned to the Company and the Company began its mandated
contributions to the UMWA Combined Benefit Fund, a multiemployer trust.
Beginning in 1994, the Company was required to make contributions for
assigned beneficiaries under an additional multiemployer trust created by the
Act, the UMWA 1992 Benefit Plan. The ultimate amount of the Company's
liability under the Act will vary due to factors which include, among other
things, the validity, interpretation, and regulation of the Act, its joint
and several obligation, the number of valid beneficiaries assigned, and the
extent to which funding for this obligation will be satisfied by transfers of
excess assets from the 1950 UMWA pension plan and transfers from the
Abandoned Mine Reclamation Fund. Nonetheless, the Company believes it has an
adequate reserve for this liability, which totaled $6.1 million in 2005 and
in 2004.
The Company maintains a nonqualified deferred compensation plan which,
prior to 2005, permitted certain management employees to annually elect to
defer, on a pretax basis, a portion of their compensation. The deferred
benefit to be provided is based on the amount of compensation deferred and
earnings on the deferrals. During 2005, deferrals ceased and the majority of
the participants elected to withdraw from the plan. The Company has invested
in certain assets to assist in funding this plan. The fair value of these
assets, included in other assets, was $0.9 million at December 31, 2005 and
$7.7 million at December 25, 2004.
The Company makes contributions to certain multiemployer defined benefit
pension plan trusts that cover union employees based on collective bargaining
agreements. Contributions by employees are not required nor are they
permitted. Pension expense under the multiemployer defined benefit pension
plans was $0.7 million for 2005, $0.4 million for 2004, and $0.3 million for
2003.
F-41
Note 10 - Commitments and Contingencies
The Company is subject to environmental standards imposed by federal,
state, local, and foreign environmental laws and regulations. For non-
operating properties, the Company has provided and charged to income $0.6
million in 2005, $1.0 million in 2004, and $1.2 million in 2003 for pending
environmental matters. The basis for the provision is updated information
and results of ongoing remediation and monitoring programs. Environmental
reserves total $9.1 million in 2005 and $9.5 million in 2004. These
estimated future costs, which will be funded in future years as remediation
programs progress, are not discounted to their present value, and are not
reduced by potential insurance reimbursements. Management believes that the
outcome of pending environmental matters will not materially affect the
financial position or results of operations of the Company.
The Company is involved in certain litigation as a result of claims that
arose in the ordinary course of business, which management believes will not
have a material adverse effect on the Company's financial position or results
of operations. Additionally, the Company may realize the benefit of certain
insurance, tax, and legal claims and litigation in the future; these gain
contingencies are not recognized in the Consolidated Financial Statements.
Beginning in September 2004, 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. The claims in the California and
Massachusetts Actions against WTC Holding Company, Inc. and Deno Holding
Company, Inc. have been dismissed without prejudice. 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. Plaintiffs' motion for reconsideration of the July 6, 2005
order dismissing the claims in the Federal Actions against WTC Holding
Company, Inc. and Deno Holding Company, Inc. is pending. 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. Mueller
F-42
Europe has 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.
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 adopted a statement alleging
infringements in Europe of competition rules by manufacturers of copper
fittings and related companies, including the Company, WTC Holding Company,
Inc., and Mueller Europe Ltd., for activities undertaken in Europe. 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 these matters.
The Company leases certain facilities and equipment under operating
leases expiring on various dates through 2011. The lease payments under
these agreements aggregate to approximately $7.1 million in 2006, $5.4
million in 2007, $3.7 million in 2008, $1.9 million in 2009, and $1.6 million
in 2010, and $3.8 million thereafter. Total lease expense amounted to $7.9
million in 2005, $7.2 million in 2004, and $7.0 million in 2003.
The Company has assessed its risk and provided estimated accruals for
various potential tax matters in a number of jurisdictions. The ultimate
amount of the liabilities, if any, may vary, however, the Company believes it
has adequate reserves for its assessed risk.
During 2004, the Company (1) entered into consulting and non-compete
agreements (the Consulting Agreements) with Harvey L. Karp, Chairman of the
Board, and William D. O'Hagan, Chief Executive Officer, and (2) amended Mr.
Karp's employment agreement with the Company. The amendment to Mr. Karp's
employment agreement eliminates the three-year rolling term of the agreement
and imposes a fixed term ending on December 31, 2007. The Consulting
Agreements provide for post-employment services to be provided by Messrs.
Karp and O'Hagan for a six-year period. During the first four years of the
Consulting Agreements, an annual fee equal to two-thirds of each executive's
Final Base Compensation (as defined in his agreement) will be payable.
During the final two years, the annual fee is set at one-third of each
Executive's Final Base Compensation. During the term of the Consulting
Agreements, each executive agrees not to engage in Competitive Activity (as
defined in the Consulting Agreements) and will be entitled to receive certain
other benefits from the Company. The term of Mr. O'Hagan's Consulting
Agreement will commence upon Mr. O'Hagan's termination of employment by the
Company without Cause (as defined in his current employment agreement) or his
voluntary resignation from employment with the Company for Good Reason (as
defined in his current employment agreement). The term of Mr. Karp's
Consulting Agreement will commence on the earlier of January 1, 2008 (the day
following the end of his fixed employment term) or his termination of
employment by the Company without Cause (as defined in his employment
agreement) or his voluntary resignation for Good Reason (as defined in his
employment agreement). Based upon the value of the non-compete provisions of
the Consulting Agreements, the Company will expense the value of the
Consulting Agreements over their term.
F-43
Note 11 - Other Income, Net
(In thousands)
2005 2004 2003
Rent and royalties $ 2,111 $ 1,773 $ 2,821
Interest income 2,306 2,385 2,466
Gain (Loss) on disposal of
properties, net 3,665 5,729 (290)
Minority interest in income
of subsidiaries (9) (43) (152)
Environmental expense (556) (976) (1,165)
Equity in earnings (loss) of
unconsolidated subsidiary 4,480 (2,026) (460)
--------- --------- ---------
Other income, net $ 11,997 $ 6,842 $ 3,220
========= ========= =========
Note 12 - Stock Options
The Company follows APB No. 25 in accounting for its stock options.
Under APB No. 25, no compensation expense is recognized because the exercise
price of the Company's incentive stock options equals the market price of the
underlying stock on the date of grant.
Under existing plans, the Company may grant options to purchase shares
of Common Stock at prices not less than the fair market value of the stock on
the date of the grant. Generally, the options vest annually in equal
increments over a five-year period beginning one year from the date of the
grant. Any unexercised options expire after not more than ten years. No
options may be granted after ten years from the date of plan adoption. At
December 31, 2005, there were approximately 41,000 shares available for
future grants under existing plans.
Additionally, the Company has granted stock options to key executives as
retention incentives and inducements to enter into employment agreements with
the Company. Generally, these special grants have terms and conditions
similar to those granted under the Company's other stock option plans.
The income tax benefit associated with the exercise of stock options
reduced income taxes payable, classified as other current liabilities, by
$1.0 million in 2005, $31.8 million in 2004, and $18 thousand in 2003. Such
benefits are reflected as additions directly to additional paid-in capital
and, therefore, have no effect on the Company's earnings.
Concurrent with the Company's recapitalization by Special Dividend in
2004, outstanding stock options were adjusted. This equitable adjustment
involved an adjustment to the number of shares subject to each outstanding
option and an adjustment to the option price. The objective of these
adjustments was to maintain the option holders' intrinsic value following
issuance of the Special Dividend.
F-44
A summary of the Company's stock option activity and related information
follows:
(Shares in thousands)
Weighted Average
Options Exercise Price
Outstanding at December 28, 2002 3,921 $ 10.06
Granted 281 25.66
Exercised (24) 21.78
Expired, cancelled, or surrendered (53) 28.92
--------
Outstanding at December 27, 2003 4,125 10.82
Granted 479 20.77
Exercised (3,247) 5.90
Expired, cancelled, or surrendered (68) 26.40
Equitable adjustment to outstanding options 493
--------
Outstanding at December 25, 2004 1,782 18.78
Granted 460 30.02
Exercised (283) 18.04
Expired, cancelled, or surrendered (47) 24.45
--------
Outstanding at December 31, 2005 1,912 21.49
========
Options exercisable at:
December 27, 2003 3,554 $ 8.03
December 25, 2004 759 18.32
December 31, 2005 774 18.71
Information about options outstanding at December 31, 2005 is as follows:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Range of Remaining Exercise Number Exercise
Exercise Number Contractual Price Exercisable Price
Price Outstanding Life
$11.97 - $18.70 596 5.8 $16.11 370 $15.89
20.40 - 31.22 1,316 7.5 23.92 404 21.29
Mr. Harvey L. Karp, Chairman of the Company's Board of Directors,
exercised options to purchase 2.4 million shares of Company stock during 2004.
As provided in Mr. Karp's option agreement, the Company withheld the number
of shares, at their fair market value, sufficient to cover the minimum
withholding taxes incurred by the exercise. These shares withheld have been
classified as acquisition of treasury stock in the Company's Consolidated
Financial Statements.
F-45
As of December 31, 2005, the Company had reserved 1.1 million shares of
its Common Stock for issuance pursuant to certain stock option plans.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method. The fair value
for these options at the date of grant was estimated assuming a weighted
average expected life of the options of six years, and dividend yield of 1.3
percent in 2005, 1.3 percent in 2004, and no dividend payments in 2003. `
The weighted average risk free interest rate used in the model was 4.45
percent for 2005, 2.99 percent for 2004, and 3.81 percent for 2003. The
weighted average volatility factor of the expected market value of the
Company's Common Stock was 0.249 in 2005, 0.274 in 2004, and 0.331 in 2003.
The pro forma information was determined using the Black-Scholes option
valuation model. Option valuation models require highly subjective
assumptions including the expected stock price volatility. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting periods. The Company's pro forma
information is included in the Summary of Significant Accounting Policies.
Note 13 - Acquisitions and Investments
In December 2005, two subsidiaries of the Company received a business
license from a Chinese industry and commerce authority, establishing a joint
venture with Jiangsu Xingrong Hi-Tech Co., Ltd. and Jiangsu Baiyang
Industries Ltd. The joint venture, in which the Company holds a 50.5 percent
interest, produces inner groove and smooth tube in level-wound coils, pancake
coils, and straight lengths, primarily to serve the Chinese domestic OEM air-
conditioning market as well as to complement the Company's U.S. product line.
The joint venture is located primarily in Jintan City, Jiangsu Province,
China. The joint venture entity is named Jiangsu Mueller-Xingrong Copper
Industries Limited. On December 21, 2005, the Company contributed $7.0
million of its initial planned cash investment of $19.4 million. The results
of operations of this joint venture will be reported in the OEM Segment and
included in the Company's Consolidated Financial Statements from January 1,
2006.
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 Ireland. The cost of the acquired
business, including cash of $10.6 million plus $1.8 million of notes issued,
totaled $12.4 million. The total estimated fair value of assets acquired was
approximately $17.6 million, consisting primarily of receivables of $8.4
million, inventory of $6.4 million and property and equipment of $1.5 million.
The total estimated fair value of liabilities assumed was approximately $16.4
million, consisting primarily of notes payable of $8.3 million and trade
payables and other current liabilities of $8.1 million. The excess of the
purchase price over the estimated fair value of assets acquired and
liabilities assumed of $11.2 million was allocated to goodwill of the
Plumbing & Refrigeration Segment as this acquisition will broaden the
Company's product line in the U.K.
F-46
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. 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.
On August 27, 2004, the Company acquired 100 percent of the outstanding
stock of Vemco Brasscapri Limited (Vemco). Vemco, located in Wellington,
Somerset, England, is an import distributor of plumbing products with annual
sales of approximately $26 million to plumbers' merchants and builders'
merchants throughout the U. K. Total consideration paid at closing was
approximately $14.6 million.
These acquisitions were accounted for using the purchase method of
accounting. Therefore, the results of operations of the acquired businesses
were included in the Company's Consolidated Financial Statements from their
respective acquisition dates. The purchase price for these acquisitions,
which was financed by available cash balances, has been allocated to the
assets of the acquired businesses based on their respective fair market
values. At December 25, 2004, the purchase price of Mueller Comercial S.A.
had been preliminarily allocated to the acquired assets based on their
estimated fair market value and was finalized in 2005.
The total fair value of assets acquired in 2004 was $80.9 million,
consisting primarily of receivables of $20.7 million, inventories of $18.9
million, and properties of $8.4 million. The fair value of liabilities
assumed in 2004 was $22.3 million, consisting primarily of $8.3 million of
notes payable and $14.0 million of accounts payable and other current
liabilities. The excess of the purchase price over the estimated fair value
of assets acquired and liabilities assumed of $33.0 million was allocated to
goodwill of the Plumbing & Refrigeration Segment as these acquisitions will
broaden the Company's product line in the U.K. and Mexico and should provide
opportunities to leverage our manufacturing operations. The Mueller
Comercial purchase price allocation was finalized in 2005. The impact of the
final allocation was a reduction in the fair value of the net assets acquired
of $1.3 million, primarily from a reduction in the fair value of property,
plant and equipment based on an appraisal of the long-lived assets as well as
certain purchase price adjustments refunded by the Seller. The net result of
these adjustments to the preliminary purchase price allocation was to
increase goodwill related to Mueller Comercial by approximately $4.3 million.
Goodwill is not deductible for tax purposes.
During 2002, the Company acquired an equity interest in Conbraco
Industries, Inc. for $7.3 million in cash; early in 2003, the Company
acquired an additional interest for $10.8 million. Conbraco is a
manufacturer of flow control products including ball valves, backflow
preventers, and plumbing and heating products for commercial and industrial
applications. The Company's interest totaled approximately 38 percent of
Conbraco's equity at December 31, 2005. This investment is accounted for by
the equity method of accounting, and is included in the other assets
classification in the Consolidated Balance Sheets. A provision of $2.3
million was recognized in 2004 for certain federal income tax audit exposures
F-47
of Conbraco. Conbraco settled these tax matters during 2005; consequently,
the Company reversed the loss accrual that resulted in a $2.3 million gain in
2005.
Note 14 - Discontinued Operations
During 2002, the Company completed the sale of its wholly owned
subsidiary, Utah Railway Company and initiated a plan to sell or liquidate
its French manufacturing operations, Mueller Europe S. A. In 2003, the
Company recognized a $.5 million operating loss from discontinued operations
plus a $1.7 million gain to reflect adjustments to the previous estimates on
disposition. During 2005, the Company recognized a gain of $5.2 million less
income tax of $1.9 million upon the settlement of a business interruption
claim related to operations sold in 2002. In 2005, the Company has
classified the cash flows attributable to discontinued operations as
operating cash flows provided by discontinued operations.
Note 15 - Industry Segments
The Company's reportable segments are Plumbing & Refrigeration and OEM.
Prior to 2005, the Company disclosed its reportable segments as Standard
Products and Industrial Products. Additional operating segments have been
recognized following an internal reorganization in 2005. For disclosure
purposes, as permitted under SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", certain operating segments are aggregated
into reportable segments. The Plumbing & Refrigeration segment is composed
of Standard Products (SPD), European Operations, and the Trading Group. The
OEM segment is composed of Industrial Products (IPD) and Engineered Products
(EPD). These segments are classified primarily by the markets for their
products. Performance of segments is generally evaluated by their operating
income.
SPD manufactures copper tube and fittings, plastic fittings, and line
sets. These products are manufactured in the U.S. Outside the U.S., the
Company's European Operations manufacture copper tube, which is sold in
Europe and the Middle East. The Trading Group imports and resells brass and
plastic plumbing valves, malleable iron fittings, faucets, and plumbing
specialty products; it also fabricates steel nipples, cut pipe, and merchant
couplings. The European Operations consist of copper tube manufacturing and
the import distribution of fittings, valves, and plumbing specialties
primarily in the U.K. and Ireland. The Plumbing & Refrigeration segment's
products are sold primarily to plumbing, refrigeration, and air-conditioning
wholesalers, hardware wholesalers and co-ops, and building product retailers.
IPD manufactures brass rod, impact extrusions, and forgings as well as a
variety of end products including plumbing brass; automotive components;
valves and fittings; and specialty copper, copper-alloy, and aluminum tubing.
EPD manufactures and fabricates valves and assemblies for the refrigeration,
air-conditioning, gas appliance, and barbecue grill markets. These products
are sold primarily to OEM customers.
F-48
Summarized segment and geographic information is shown in the following
tables. Geographic sales data indicates the location from which products are
shipped. Unallocated expenses include general corporate expenses, plus
certain charges or credits not included in segment activity. Certain
expenses related primarily to retiree benefits at inactive operations were
formerly combined with the operations of Utah Railway Company under a third
industry segment, Other Businesses. Following the sale of Utah Railway
Company and its classification as discontinued operations, these expenses of
inactive operations have been combined into the unallocated expenses
classification. In addition, the operations of Mueller Europe S.A. are
classified as discontinued operations and have been eliminated from the
operating results of the Plumbing & Refrigeration Segment.
Worldwide sales to one customer in the Plumbing & Refrigeration segment
totaled $264.2 million in 2005, $170.1 million in 2004, and $111.0 million in
2003 which represented 15 percent in 2005, 12 percent in 2004 and 11 percent
in 2003 of the Company's consolidated net sales. No other customer accounted
for more than 10 percent of consolidated net sales.
SEGMENT INFORMATION:
(In thousands)
2005 2004 2003
Net sales:
Plumbing & Refrigeration $1,281,688 $1,002,086 $ 717,606
OEM 460,301 392,645 292,008
Elimination of intersegment sales (12,066) (15,675) (10,536)
--------- --------- ---------
$1,729,923 $1,379,056 $ 999,078
========= ========= =========
Depreciation and amortization:
Plumbing & Refrigeration $ 29,393 $ 28,309 $ 26,038
OEM 10,225 11,158 11,023
General corporate 1,240 1,172 1,893
--------- --------- ---------
$ 40,858 $ 40,639 $ 38,954
========= ========= =========
Operating income:
Plumbing & Refrigeration $ 125,502 $ 108,265 $ 54,123
OEM 26,985 20,562 11,672
Unallocated expenses (20,729) (16,337) (16,411)
--------- --------- ---------
$ 131,758 $ 112,490 $ 49,384
========= ========= =========
Expenditures for long-lived assets:
Plumbing & Refrigeration $ 20,727 $ 74,536 $ 21,465
OEM 4,915 2,338 5,623
--------- --------- ---------
$ 25,642 $ 76,874 $ 27,088
========= ========= =========
F-49
SEGMENT INFORMATION (continued):
(In thousands)
2005 2004 2003
Segment assets:
Plumbing & Refrigeration $ 718,484 $ 691,404 $ 594,236
OEM 197,697 179,926 159,303
General corporate 188,457 92,401 301,645
--------- --------- ---------
$1,104,638 $ 963,731 $1,055,184
========= ========= =========
GEOGRAPHIC INFORMATION:
(In thousands)
2005 2004 2003
Net sales:
United States $1,477,942 $1,211,178 $ 895,994
United Kingdom 204,020 144,784 83,787
Other 47,961 23,094 19,297
--------- --------- ---------
$1,729,923 $1,379,056 $ 999,078
========= ========= =========
Long-lived assets:
United States $ 392,097 $ 416,206 $ 437,182
United Kingdom 63,221 61,463 46,936
Other 37,334 30,731 711
--------- --------- ---------
$ 492,652 508,400 $ 484,829
========= ========= =========
F-50
Note 16 - Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2005
Net sales $ 401,663 $ 410,506 $ 434,130 $ 483,624
Gross profit (1) 67,639 64,843 73,616 93,750(2)
Income from
continuing operations (7) 15,208 17,183 21,016 35,811(3)
Income from discontinued
operations, net of tax - - 3,324 -
Net income 15,208 17,183 24,340 35,811
Basic earnings per share:
From continuing operations 0.42 0.47 0.57 0.98
From discontinued operations - - 0.09 -
Basic earnings per share 0.42 0.47 0.66 0.98
Diluted earnings per share:
From continuing operations 0.41 0.46 0.57 0.97
From discontinued operations - - 0.09 -
Diluted earnings per share 0.41 0.46 0.66 0.97
Dividends per share 0.10 0.10 0.10 0.10
2004
Net sales $ 345,959 $ 380,822 $ 322,512 $ 329,763
Gross profit (1) 64,930 77,102 59,324 62,088
Income from
continuing operations (7) 17,960 (4) 27,048 18,754(5) 15,654 (6)
Net income 17,960 27,048 18,754 15,654
Basic earnings per share:
From continuing operations 0.52 0.77 0.53 0.43
From discontinued operations - - - -
Basic earnings per share: 0.52 0.77 0.53 0.43
Diluted earnings per share:
From continuing operations 0.49 0.73 0.51 0.42
From discontinued operations - - - -
Diluted earnings per share 0.49 0.73 0.51 0.42
Dividends per share 0.10 0.10 0.10 15.10
(1) Gross profit is net sales less cost of goods sold, which excludes
depreciation and amortization.
(2) Fourth quarter of 2005 includes liquidation of LIFO inventories of
$1.3 million.
(3) Fourth quarter of 2005 includes a benefit of $2.9 million to correct prior
year income tax provisions, a benefit of $1.1 million resulting from a
change in estimate on deferred state taxes, and a $1.4 million benefit
from utilization of foreign NOL's previously reserved.
(4) First quarter of 2004 includes pre-tax recognition of $3.9 million non-cash
impairment charge, $5.2 million non-operating gain on sale of property, and
$3.3 million non-operating loss on equity of non-consolidated subsidiary.
(5) Third quarter of 2004 includes recognition of deferred tax benefit of $2.8
million.
(6) Fourth quarter of 2004 includes pre-tax benefit of $2.8 million resulting
from changes in estimates of inventory reserves plus $1.7 million benefit
from changes in estimated health care accrual rates.
(7) Includes interest expense on 6% Subordinated Debentures following dis-
tribution in the fourth quarter of 2004.
F-51
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Mueller Industries, Inc.
We have audited the accompanying consolidated balance sheets of Mueller
Industries, Inc. as of December 31, 2005 and December 25, 2004, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Mueller Industries, Inc. at December 31, 2005 and December 25, 2004, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, in 2004,
the Company changed the measurement date for most of its pension plans from
year-end to November 30.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Mueller Industries, Inc.'s internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organization of
the Treadway Commission and our report dated March 10, 2006 expressed an
unqualified opinion on management's annual assessment and an adverse opinion
on the effectiveness of internal control over financial reporting.
/s/ Ernst & Young LLP
Memphis, Tennessee
March 10, 2006
F-52
MUELLER INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2005, December 25, 2004, and December 27, 2003
(In thousands)
Additions
-------------------------------
Balance at Charged to Balance
beginning costs and Other at end
of year expenses additions Deductions of year
------------ ------------ ----------- ----------- -----------
2005
Allowance for doubtful accounts $ 3,925 $ 1,911 $ 165 $ 223 $ 5,778
Environmental reserves $ 9,503 $ 556 $ (215)(1) $ 771 $ 9,073
Valuation allowance for deferred
tax assets $ 12,880 $ 602 $ - $ 9,870 $ 3,612
2004
Allowance for doubtful accounts $ 4,734 $ 1,404 $ 200 $ 2,413 $ 3,925
Environmental reserves $ 9,560 $ 976 $ 659 (1) $ 1,692 $ 9,503
Valuation allowance for deferred
tax assets $ 15,485 $ 1,479 $ - $ 4,084 $ 12,880
2003
Allowance for doubtful accounts $ 6,443 $ 3,172 $ - $ 4,881 $ 4,734
Environmental reserves $ 9,110 $ 1,165 $ 1,293 (1) $ 2,008 $ 9,560
Valuation allowance for deferred
tax assets $ 33,030 $ 1,807 $ - $ 19,352 (2) $ 15,485
<FN>
(1) Includes currency translation changes in 2005, 2004, and 2003 and
insurance proceeds in 2004 and 2003.
(2) Includes a $5.4 million reclassification between "Deferred tax" and "Current taxes payable".
F-53
EXHIBIT INDEX
Exhibits Description
- -------- -----------
10.4 Summary description of the Registrant's 2006 bonus plan for
certain key employees.
10.29 Amendment to the Mueller Industries, Inc. Deferred
Compensation Plan, dated December 15, 2005.
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Registered Public Accounting Firm (Includes
report on Financial Statement Schedule).
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.