2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended September 29, 2001 Commission file number 1-6770 MUELLER INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 25-0790410 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8285 TOURNAMENT DRIVE, SUITE 150 MEMPHIS, TENNESSEE 38125 (Address of principal executive offices) Registrant's telephone number, including area code: (901) 753-3200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, $ 0.01 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares of the Registrant's common stock outstanding as of October 31, 2001, was 33,440,632. -1- MUELLER INDUSTRIES, INC. FORM 10-Q For the Period Ended September 29, 2001 INDEX Part I. Financial Information Page Item 1. Financial Statements (Unaudited) a.) Consolidated Statements of Income for the quarters and nine months ended September 29, 2001 and September 23, 2000 3 b.) Consolidated Balance Sheets as of September 29, 2001 and December 30, 2000 5 c.) Consolidated Statements of Cash Flows for the nine months ended September 29, 2001 and September 23, 2000 7 d.) Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure of Market Risk 15 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
For the Quarter Ended September 29, 2001 September 23, 2000 Net sales $ 253,438 $ 304,017 Cost of goods sold 190,809 242,101 ---------- ---------- Gross profit 62,629 61,916 Depreciation and amortization 10,683 9,238 Selling, general, and administrative expense 21,073 22,437 ---------- ---------- Operating income 30,873 30,241 Interest expense (660) (2,207) Environmental reserves (1,349) - Other income, net 1,755 2,554 ---------- ---------- Income before income taxes 30,619 30,588 Current income tax expense (7,010) (8,739) Deferred income tax expense (4,608) (2,542) ---------- ---------- Total income tax expense (11,618) (11,281) ---------- ---------- Net income $ 19,001 $ 19,307 ========== ========== Weighted average shares for basic earnings per share 33,424 34,439 Effect of dilutive stock options 3,874 3,836 ---------- ---------- Adjusted weighted average shares for diluted earnings per share 37,298 38,275 ---------- ---------- Basic earnings per share $ 0.57 $ 0.56 ========== ========== Diluted earnings per share $ 0.51 $ 0.50 ========== ========== See accompanying notes to consolidated financial statements.
-3- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
For the Nine Months Ended September 29, 2001 September 23, 2000 Net sales $ 816,037 $ 950,847 Cost of goods sold 628,015 732,305 ---------- ---------- Gross profit 188,022 218,542 Depreciation and amortization 31,715 27,519 Selling, general, and administrative expense 66,390 71,547 ---------- ---------- Operating income 89,917 119,476 Interest expense (2,764) (7,130) Environmental reserves (2,966) - Other income, net 4,890 7,509 ---------- ---------- Income before income taxes 89,077 119,855 Current income tax expense (24,928) (38,605) Deferred income tax expense (8,904) (5,615) ---------- ---------- Total income tax expense (33,832) (44,220) ---------- ---------- Net income $ 55,245 $ 75,635 ========== ========== Weighted average shares for basic earnings per share 33,396 34,582 Effect of dilutive stock options 3,841 3,867 ---------- ---------- Adjusted weighted average shares for diluted earnings per share 37,237 38,449 ---------- ---------- Basic earnings per share $ 1.65 $ 2.19 ========== ========== Diluted earnings per share $ 1.48 $ 1.97 ========== ========== See accompanying notes to consolidated financial statements.
-4- MUELLER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
September 29, 2001 December 30, 2000 Assets Current assets: Cash and cash equivalents $ 133,520 $ 100,268 Accounts receivable, less allowance for doubtful accounts of $5,759 in 2001 and $5,612 in 2000 156,393 152,157 Inventories: Raw material and supplies 28,662 25,111 Work-in-process 19,177 19,941 Finished goods 80,316 97,273 ---------- ---------- Total inventories 128,155 142,325 Current deferred income taxes 3,891 - Other current assets 9,804 10,421 ---------- ---------- Total current assets 431,763 405,171 Property, plant, and equipment, net 381,428 379,885 Goodwill, net 99,355 102,673 Other assets 26,809 22,547 ---------- ---------- $ 939,355 $ 910,276 ========== ========== See accompanying notes to consolidated financial statements.
-5- MUELLER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data)
September 29, 2001 December 30, 2000 Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 4,120 $ 5,909 Accounts payable 42,436 43,733 Accrued wages and other employee costs 21,471 26,994 Other current liabilities 69,069 41,213 ---------- ---------- Total current liabilities 137,096 117,849 Long-term debt 47,884 100,975 Pension and postretirement liabilities 18,691 19,320 Environmental reserves 9,068 9,862 Deferred income taxes 48,056 39,362 Other noncurrent liabilities 10,693 8,506 ---------- ---------- Total liabilities 271,488 295,874 ---------- ---------- Minority interest in subsidiaries 297 297 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 33,425,554 in 2001 and 33,358,061 in 2000 401 401 Additional paid-in capital, common 261,278 260,979 Retained earnings 520,412 465,167 Accumulated other comprehensive income (loss) (14,761) (11,826) Treasury common stock, at cost (99,760) (100,616) ---------- ---------- Total stockholders' equity 667,570 614,105 Commitments and contingencies (Note 2) - - ---------- ---------- $ 939,355 $ 910,276 ========== ========== See accompanying notes to consolidated financial statements.
-6- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the Nine Months Ended September 29, 2001 September 23, 2000 Cash flows from operating activities Net income $ 55,245 $ 75,635 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 31,715 27,519 Minority interest in subsidiaries - (57) Deferred income taxes 8,904 5,615 Gain on disposal of properties (243) (4) Income tax benefit from exercise of stock options 252 1,402 Changes in assets and liabilities: Receivables (4,801) (16,371) Inventories 13,981 (6,125) Other assets (5,881) (5,570) Current liabilities 21,298 (1,425) Other liabilities 1,992 (55) Other, net (2,597) 184 ---------- ---------- Net cash provided by operating activities 119,865 80,748 ---------- ---------- Cash flows from investing activities Capital expenditures (32,660) (38,349) Businesses acquired - (15,245) Proceeds from sales of properties 2,476 222 Escrowed IRB proceeds (1,891) - ---------- ---------- Net cash used in investing activities (32,075) (53,372) ---------- ---------- Cash flows from financing activities Acquisition of treasury stock - (24,878) Repayments of long-term debt (64,879) (18,475) Proceeds from stock options exercised 902 2,591 Proceeds from issuance of long-term debt 10,000 - ---------- ---------- Net cash used in financing activities (53,977) (40,762) ---------- ---------- Effect of exchange rate changes on cash (561) (924) ---------- ----------
-7- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) (In thousands)
For the Nine Months Ended September 29, 2001 September 23, 2000 Increase (decrease) in cash and cash equivalents 33,252 (14,310) Cash and cash equivalents at the beginning of the period 100,268 149,454 ---------- ---------- Cash and cash equivalents at the end of the period $ 133,520 $ 135,144 ========== ========== See accompanying notes to consolidated financial statements.
-8- MUELLER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) General Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. This quarterly report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K, including the annual financial statements incorporated therein by reference. The accompanying unaudited interim financial statements include all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Note 1 - Earnings Per Common Share Basic per share amounts have been computed based on the average number of common shares outstanding. Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, computed using the treasury stock method. Note 2 - Commitments and Contingencies The Company is subject to normal environmental standards imposed by federal, state, local, and foreign environmental laws and regulations. Based upon information currently available, management believes that the outcome of pending environmental matters will not materially affect the overall financial position and results of operations of the Company. In addition, the Company is involved in certain litigation as either plaintiff or defendant as a result of claims that arise in the ordinary course of business which management believes will not have a material effect on the Company's financial condition. Note 3 - Reclassifications Certain prior period amounts have been reclassified to conform with the current period's presentation. During 2001, the Company began classifying the cost of shipping its products to customers as a component of cost of goods sold resulting from the adoption of Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". Previously, the Company classified these costs as a reduction of net sales. This change required a restatement of net sales and cost of goods sold amounts for all periods presented and did not have a significant effect on the net sales, cost of goods sold, and gross profit of the Company. -9- Note 4 - Comprehensive Income Comprehensive income for the Company consists of net income and other comprehensive income. Total comprehensive income was $23,627,000 and $15,811,000 for the quarters ending September 29, 2001, and September 23, 2000, respectively and was $52,311,000 and $68,518,000 for the nine-month periods ending September 29, 2001, and September 23, 2000, respectively. Included in "Accumulated other comprehensive income (loss)" were cumulative changes in the fair value of certain derivative financial instruments which qualify for hedge accounting totaling $2.8 million at September 29, 2001, and none at December 30, 2000. Note 5 - Industry Segments Summarized segment information is as follows: (In thousands)
For the Quarter Ended September 29, 2001 September 23, 2000 Net sales: Standard Products Division $ 188,345 $ 226,342 Industrial Products Division 60,745 72,735 Other Businesses 5,870 5,833 Elimination of intersegment sales (1,522) (893) ---------- ---------- $ 253,438 $ 304,017 ========== ========== Operating income: Standard Products Division $ 29,743 $ 26,612 Industrial Products Division 3,225 5,334 Other Businesses 497 725 Unallocated expenses (2,592) (2,430) ---------- ---------- $ 30,873 $ 30,241 ========== ==========
-10- (In thousands)
For the Nine Months Ended September 29, 2001 September 23, 2000 Net sales: Standard Products Division $ 606,397 $ 701,456 Industrial Products Division 195,206 231,526 Other Businesses 17,638 19,940 Elimination of intersegment sales (3,204) (2,075) ---------- ---------- $ 816,037 $ 950,847 ========== ========== Operating income: Standard Products Division $ 86,132 $ 102,174 Industrial Products Division 12,525 23,423 Other Businesses 2,286 3,588 Unallocated expenses (11,026) (9,709) ---------- ---------- $ 89,917 $ 119,476 ========== ==========
Note 6 - Adoption of a New Accounting Standard Effective at the beginning of fiscal 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS No. 138), which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting SFAS No. 133 and SFAS No. 138 as of the beginning of fiscal 2001 was not material to the Company's consolidated financial statements. The Company occasionally uses financial instruments, including forward contracts and interest rate swap contracts, to manage its exposures to movements in foreign exchange rates, commodity prices, and interest rates. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk and variability to the Company. The Company does not hold or issue derivative financial instruments for trading purposes. During the first nine months of 2001, the Company utilized foreign currency forward contracts to offset the effect of exchange rate fluctuations on certain foreign sales and the collection of the receivables related to these sales. These foreign sales were primarily denominated in the Euro, British pound sterling, and Swedish krona. In addition, the Company used copper and natural gas forward contracts to manage the volatility related to certain copper and natural gas purchases. The Company also entered into interest rate swaps that effectively fix the interest payments of certain floating rate debt instruments. At September 29, 2001, -11- the Company had interest rate swap contracts outstanding with a notional principal amount of $10 million, which expire in 2008. These derivative financial instruments are accounted for as cash flow hedges. The fair value of these contracts and instruments at September 29, 2001 and changes in their fair values during the third quarter and first nine months of 2001 were not material to the consolidated financial statements of the Company. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. SFAS No. 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead be reviewed for impairment and written-down to fair value when impairment is indicated. SFAS No. 141 is effective immediately, while SFAS No. 142 will be effective at the start of fiscal 2002. The Company is currently reviewing the impact of adopting these Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General 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. Mueller's plants are located throughout the United States, and in Canada, France, and Great Britain. The Company also owns a short line railroad in Utah. The Company's businesses are managed and organized into three segments: (i) Standard Products Division (SPD); (ii) Industrial Products Division (IPD); and (iii) Other Businesses. SPD manufactures and sells copper tube, copper and plastic fittings, and valves. Outside of the United States, SPD manufactures copper tube in Europe and copper fittings in Canada. SPD sells these products to wholesalers in the HVAC (heating, ventilation, and air- conditioning), plumbing, and refrigeration markets, and to distributors to the manufactured housing and recreational vehicle industries. IPD manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. IPD sells its products primarily to original equipment manufacturers (OEMs), many of which are in the HVAC, plumbing, and refrigeration markets. Other Businesses is composed primarily of Utah Railway Company. SPD and IPD account for more than 98 percent of consolidated net sales and more than 86 percent of consolidated total assets. -12- 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. Profitability of certain of the Company's product lines depends upon the "spreads" between the cost of raw material and the selling prices of its completed products. The open market prices for copper cathode and scrap, for example, influence the selling price of copper tubing, a principal product manufactured by the Company. The Company attempts to minimize the effects of fluctuations in material costs by passing through these costs to its customers. Spreads fluctuate based upon market conditions. Results of Operations Net income was $19.0 million, or 51 cents per diluted share, for the third quarter of 2001, compared with net income of $19.3 million, or 50 cents per diluted share, for the same period of 2000. Weighted average shares outstanding plus assumed conversions used to compute diluted earnings per share were 37.3 million during the third quarter of 2001 versus 38.3 million for the third quarter last year. Year-to-date, net income was $55.2 million, or $1.48 per diluted share, compared with net income of $75.6 million, or $1.97 per diluted share, for 2000. During the third quarter of 2001, the Company's net sales were $253.4 million, which compares with net sales of $304.0 million, or a 16.6 percent decrease over the same period of 2000. Net sales were $816.0 million in the first nine months of 2001 compared with $950.8 million in 2000. The average price of copper was approximately 10 percent lower in the first nine months of 2001 compared with the same period of 2000, which contributed to the decrease in net sales. During the third quarter of 2001, the Company's manufacturing businesses shipped 173.6 million pounds of product compared to 193.3 million pounds in the same quarter of 2000. The Company shipped 535.8 million pounds of product in the first nine months of 2001 compared with 602.8 million in the same period of 2000. This decline in volume reflects the overall slowdown in the economy. Cost of goods sold decreased from $242.1 million in the third quarter of 2000 to $190.8 million in the same period of 2001. Selling, general, and administrative expense also decreased from $22.4 million in 2000 to $21.1 million in the third quarter of 2001. The decreases in these operating costs are attributable to the decline in volume experienced in the third quarter. Depreciation and amortization increased to $10.7 million in the third quarter of 2001 compared with $9.2 million in 2000. Production efficiencies at certain manufacturing locations contributed to the increase in third quarter gross profit. Operating income was partially offset by losses at our European operations. -13- Interest expense for the third quarter of 2001 totaled $0.7 million compared with $2.2 million in the same quarter of 2000. For the first nine months of 2001, interest expense was $2.8 million compared with $7.1 million for the same period of 2000. The Company capitalized $1.4 million and $0.9 million of interest related to capital improvement programs in the first three quarters of 2001 and 2000, respectively. Total interest in the third quarter and first nine months of 2001 decreased due to rate reductions following the restructuring of the Company's bank credit facility late in 2000, combined with lower funded balances. The Company's effective income tax rate for the first nine months of 2001 was 38.0 percent compared with 36.9 percent for the same period of last year. Liquidity and Capital Resources Cash provided by operating activities during the first nine months of 2001 totaled $119.9 million, which is primarily attributable to net income, depreciation and amortization, decreased inventories, and increased current liabilities. During the first nine months of 2001, the Company used $32.1 million in investing activities, consisting primarily of capital expenditures. The Company also used $54.0 million for financing activities during the nine-month period consisting primarily of $64.9 million for repayments of long-term debt, offset by $10.0 million of proceeds from the issuance of Industrial Revenue Bonds (IRB). Existing cash balances, cash from operations, and IRB proceeds were used to fund the year-to-date investing and financing activities. On October 18, 1999, the Company's Board of Directors authorized the repurchase of up to four million shares of the Company's common stock from time-to-time through open market transactions or through privately negotiated transactions. During 2000, this authorization was expanded to purchase up to 10 million shares. During the third quarter, the authorization was extended through October 2002. The Company will have no obligation to purchase any shares and may cancel, suspend, or extend the time period for the purchase of shares at any time. The purchases will be funded primarily through existing cash and cash from operations. The Company may hold such shares in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. Through September 29, 2001, the Company has repurchased approximately 2.3 million shares under this authorization. There were no shares repurchased during the first three quarters of 2001. The Company has an unsecured $200 million revolving credit facility (the Credit Facility), which matures in November 2003. Borrowings under the Credit Facility bear interest, at the Company's option, at (i) LIBOR plus a variable premium or (ii) the larger of Prime or the Federal Funds rate plus .50 percent. LIBOR advances may be based upon the one, two, three, or six- month LIBOR. The variable premium over LIBOR is based on certain financial ratios and can range from 25 to 40 basis points. At September 29, 2001, the premium was 25 basis points. Additionally, a facility fee is payable quarterly on the total commitment and varies from 12.5 to 22.5 basis points based upon the Company's capitalization ratios. When funded debt is 50 percent or more of the commitment, a utilization fee is payable quarterly on the average loan balance outstanding and varies from 0 to 20 basis points -14- based upon the capitalization ratio. Availability of funds under the Credit Facility is reduced by the amount of certain outstanding letters of credit, which totaled approximately $6.5 million at September 29, 2001. At September 29, 2001, the Company's total debt was $52.0 million or 7.2 percent of its total capitalization. The Company's financing obligations contain various covenants which require, among other things, the maintenance of minimum levels of working capital, tangible net worth, and debt service coverage ratios. The Company is in compliance with all debt covenants. The Company expects to invest approximately $50 million for capital improvements and additions in 2001, the majority of which relate to projects approved and initiated during the previous year. The modernization of the Company's European copper tube operations is nearing completion. This investment, totaling approximately $40 million, will upgrade the casting, extrusion, and drawing processes. The Company expects to recognize certain benefits of cost reductions and productivity improvements during the remainder of 2001. On February 13, 2001, the Company, through a wholly owned subsidiary, issued $10 million of 2001 Series IRBs. The Company entered into an interest rate swap agreement, which fixes the interest rate at 6.63 percent for seven years. Subsequent to the seven-year period, the rate will convert to LIBOR plus .90 percent. The IRBs call for quarterly interest payments from June 1, 2001 to March 1, 2021 and for quarterly principal payments of $250 thousand plus interest from June 1, 2011 to March 1, 2021. Proceeds from these 2001 Series IRBs are being used to fund a new extrusion press in the Company's tube mill in Fulton, Mississippi. Management believes that cash provided by operations and currently available cash of $133.5 million will be adequate to meet the Company's normal future capital expenditure and operational needs. The Company's current ratio is 3.1 to 1 at September 29, 2001. Item 3. Quantitative and Qualitative Disclosure of Market Risk Quantitative and qualitative disclosures about market risk are incorporated herein by reference to Part II, Item 7A, of the Company's Report on Form 10-K for the year ended December 30, 2000. -15- Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for the quarter ended September 29, 2001. Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as part of this Quarterly Report on Form 10-Q. (b) During the quarter ended September 29, 2001, the Registrant filed no Current Reports on Form 8-K. Items 1, 2, 3, 4, and 5 are not applicable and have been omitted. -16- 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 November 2, 2001. MUELLER INDUSTRIES, INC. /s/ KENT A. MCKEE Kent A. McKee Vice President and Chief Financial Officer /s/ RICHARD W. CORMAN Richard W. Corman Corporate Controller -17- EXHIBIT INDEX Exhibits Description Page 19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for the quarter ended September 29, 2001. Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as part of this Quarterly Report on Form 10-Q.