UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended June 26, 2004 Commission file number 1-6770
MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 25-0790410
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8285 TOURNAMENT DRIVE, SUITE 150
MEMPHIS, TENNESSEE 38125
(Address of principal executive offices) (Zip Code)
(901) 753-3200
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /
The number of shares of the Registrant's common stock outstanding as of
July 15, 2004, was 34,987,467.
-1-
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Period Ended June 26, 2004
INDEX
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
a.) Consolidated Statements of Income
for the quarters and six months ended
June 26, 2004 and June 28, 2003 3
b.) Consolidated Balance Sheets
as of June 26, 2004 and December 27, 2003 7
c.) Consolidated Statements of Cash Flows
for the six months ended June 26, 2004
and June 28, 2003 9
d.) Notes to Consolidated Financial Statements 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4. Controls and Procedures 22
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended
June 26, 2004 June 28, 2003
(In thousands, except per share data)
Net sales $ 380,822 $ 248,221
Cost of goods sold 303,720 203,461
---------- ----------
Gross profit 77,102 44,760
Depreciation and amortization 10,159 9,722
Selling, general, and
administrative expense 28,199 23,575
Impairment charge - -
---------- ----------
Operating income 38,744 11,463
Interest expense (199) (292)
Environmental expense (269) (257)
Other income, net 1,449 2,182
---------- ----------
Income from continuing operations
before income taxes 39,725 13,096
Current income tax expense (14,169) (870)
Deferred income tax benefit (expense) 1,492 (3,247)
---------- ----------
Total income tax expense (12,677) (4,117)
---------- ----------
Income from continuing operations 27,048 8,979
Loss from operation of
discontinued operations, net
of income taxes - -
---------- ----------
Net income $ 27,048 $ 8,979
========== ==========
See accompanying notes to consolidated financial statements.
-3-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Quarter Ended
June 26, 2004 June 28, 2003
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 34,978 34,263
Effect of dilutive stock options 1,914 2,540
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 36,892 36,803
---------- ----------
Basic earnings (loss) per share:
From continuing operations $ 0.77 $ 0.26
From discontinued operations - -
---------- ----------
Basic earnings per share $ 0.77 $ 0.26
========== ==========
Diluted earnings (loss) per share:
From continuing operations $ 0.73 $ 0.24
From discontinued operations - -
---------- ----------
Diluted earnings per share $ 0.73 $ 0.24
========== ==========
Dividends per share $ 0.10 $ -
========== ==========
See accompanying notes to consolidated financial statements.
-4-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Six Months Ended
June 26, 2004 June 28, 2003
(In thousands, except per share data)
Net sales $ 726,781 $ 480,243
Cost of goods sold 584,749 395,376
---------- ----------
Gross profit 142,032 84,867
Depreciation and amortization 20,124 19,462
Selling, general, and
administrative expense 54,881 46,871
Impairment charge 3,941 -
---------- ----------
Operating income 63,086 18,534
Interest expense (423) (603)
Environmental expense (438) (464)
Other income, net 4,242 2,739
---------- ----------
Income from continuing operations
before income taxes 66,467 20,206
Current income tax expense (22,843) (2,737)
Deferred income tax benefit (expense) 1,384 (4,030)
---------- ----------
Total income tax expense (21,459) (6,767)
---------- ----------
Income from continuing operations 45,008 13,439
Loss from operation of
discontinued operations, net
of income taxes - (539)
---------- ----------
Net income $ 45,008 $ 12,900
========== ==========
See accompanying notes to consolidated financial statements.
-5-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(Unaudited)
For the Six Months Ended
June 26, 2004 June 28, 2003
(In thousands, except per share data)
Weighted average shares
for basic earnings per share 34,818 34,260
Effect of dilutive stock options 2,082 2,527
---------- ----------
Adjusted weighted average shares
for diluted earnings per share 36,900 36,787
---------- ----------
Basic earnings (loss) per share:
From continuing operations $ 1.29 $ 0.40
From discontinued operations - (0.02)
---------- ----------
Basic earnings per share $ 1.29 $ 0.38
========== ==========
Diluted earnings (loss) per share:
From continuing operations $ 1.22 $ 0.36
From discontinued operations - (0.01)
---------- ----------
Diluted earnings per share $ 1.22 $ 0.35
========== ==========
Dividends per share $ 0.20 $ -
========== ==========
See accompanying notes to consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 26, 2004 December 27, 2003
(In thousands)
Assets
Current assets:
Cash and cash equivalents $ 263,687 $ 255,088
Accounts receivable, less allowance
for doubtful accounts of $3,947 in
2004 and $4,734 in 2003 223,111 163,006
Inventories:
Raw material and supplies 39,201 22,261
Work-in-process 28,493 20,395
Finished goods 103,991 97,892
---------- ----------
Total inventories 171,685 140,548
Other current assets 15,293 11,713
---------- ----------
Total current assets 673,776 570,355
Property, plant, and equipment, net 334,093 345,537
Goodwill, net 102,570 104,849
Other assets 32,063 34,443
---------- ----------
$ 1,142,502 $ 1,055,184
========== ==========
See accompanying notes to consolidated financial statements.
-7-
MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
June 26, 2004 December 27, 2003
(In thousands, except share data)
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,085 $ 2,835
Accounts payable 63,856 42,081
Accrued wages and other employee costs 33,757 25,631
Other current liabilities 55,219 42,959
---------- ----------
Total current liabilities 153,917 113,506
Long-term debt 11,334 11,437
Pension and postretirement liabilities 32,508 31,643
Environmental reserves 9,822 9,560
Deferred income taxes 65,894 63,734
Other noncurrent liabilities 10,211 10,238
---------- ----------
Total liabilities 283,686 240,118
---------- ----------
Minority interest in subsidiaries 24 208
Stockholders' equity:
Preferred stock - shares authorized
4,985,000; none outstanding - -
Series A junior participating
preferred stock - $1.00 par value;
shares authorized 15,000;
none outstanding - -
Common stock - $.01 par value; shares
authorized 100,000,000; issued
40,091,502; outstanding 34,978,567
in 2004 and 34,276,343 in 2003 401 401
Additional paid-in capital, common 255,738 259,110
Retained earnings 693,512 655,495
Accumulated other comprehensive loss (3,360) (5,586)
Treasury common stock, at cost (87,499) (94,562)
---------- ----------
Total stockholders' equity 858,792 814,858
Commitments and contingencies (Note 2) - -
---------- ----------
$ 1,142,502 $ 1,055,184
========== ==========
See accompanying notes to consolidated financial statements.
-8-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 26, 2004 June 28, 2003
(In thousands)
Cash flows from operating activities
Net income from continuing operations $ 45,008 $ 13,439
Reconciliation of net income from
continuing operations to net cash
provided by operating activities:
Depreciation and amortization 20,124 19,462
Income tax benefit from exercise
of stock options 9,685 -
Impairment charge 3,941 -
Equity in loss of unconsolidated
subsidiaries 2,740 404
(Gain) loss on disposal
of properties (5,143) 193
Deferred income taxes (1,384) 4,030
Minority interest in subsidiaries,
net of dividends paid (184) (173)
Changes in assets and liabilities:
Receivables (59,453) (30,341)
Inventories (30,774) 3,073
Current liabilities 41,983 3,293
Other assets (801) 1,314
Other liabilities 634 (505)
Other, net 474 (52)
---------- ----------
Net cash provided by operating activities 26,850 14,137
---------- ----------
Cash flows from investing activities
Capital expenditures (8,807) (15,982)
Proceeds from sales of properties 5,481 210
Purchase of Conbraco Industries, Inc.
common stock - (10,806)
Escrowed IRB proceeds - 449
---------- ----------
Net cash used in investing activities (3,326) (26,129)
---------- ----------
See accompanying notes to consolidated financial statements.
-9-
MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
For the Six Months Ended
June 26, 2004 June 28, 2003
(In thousands)
Cash flows from financing activities
Dividends paid $ (6,991) $ -
Acquisition of treasury stock (9,320) -
Proceeds from the sale of
treasury stock 3,326 244
Repayments of long-term debt (1,853) (2,045)
---------- ----------
Net cash used in financing activities (14,838) (1,801)
---------- ----------
Effect of exchange rate changes on cash (87) 3,294
---------- ----------
Increase (decrease) in cash
and cash equivalents 8,599 (10,499)
Cash provided by discontinued operations - 252
Cash and cash equivalents at the
beginning of the period 255,088 217,601
---------- ----------
Cash and cash equivalents at the
end of the period $ 263,687 $ 207,354
========== ==========
See accompanying notes to consolidated financial statements.
-10-
MUELLER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with United States 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.
The accompanying unaudited interim financial statements include all
adjustments which are, in the opinion of management, necessary to present 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 have arisen in the ordinary
course of business which management believes will not have a material effect on
the Company's financial condition or results of operations.
The Company has guarantees which are letters of credit issued by the
Company generally to guarantee the payment of insurance deductibles, retiree
health benefits, and certain operating costs of a foreign subsidiary. The
terms of the Company's guarantees are generally one year but are renewable
annually as required. The maximum potential amount of future payments the
Company could have been required to make under these guarantees at June 26,
2004 was $9.1 million.
During the second quarter, the Company (1) entered into 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
consulting services to be provided by Messrs. Karp and O'Hagan for a six-year
period. During the first four years of the consulting period, an annual
consulting fee equal to two-thirds of each executive's Final Base Compensation
will be payable for the consulting services. During the final two years of the
consulting period, the annual consulting fee is set at one-third of each
-11-
Executive's Final Base Compensation. Final Base Compensation is defined, in
each case, as the lesser of (1) the executive's highest annual cash
compensation (consisting of base salary and annual bonus) during the last three
years of his employment with the Company, or (2) two million dollars. Each
executive can terminate his consulting agreement with or without Good Reason
(as defined in his consulting agreement) upon thirty days' advance written
notice and the Company may terminate either consulting agreement with or
without Cause (as defined in such consulting agreement) upon thirty days'
advance written notice. If an executive terminates his consulting relationship
for Good Reason or the Company terminates the consulting relationship without
Cause, such executive will be entitled to receive the remaining amounts due
under his consulting agreement, as if such agreement had continued through the
remainder of the six-year term, in a lump sum, discounted for early lump sum
payment at the Federal Funds rate. During the consulting period, each
executive agrees not to engage in Competitive Activity (as defined in his
consulting agreement) 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).
Note 3 - Impairment Charge
During the first quarter of 2004, the Company recognized a $3.9 million
impairment charge related to its subsidiary, Overstreet-Hughes Co., Inc., of
which $2.3 million was goodwill and the remainder was property, plant, and
equipment. The results of Overstreet-Hughes, a component of the Industrial
Products Division, which manufactures tubular components and assemblies
primarily for the original equipment manufacturer (OEM) air-conditioning
market, have not met expectations. Initiatives to improve performance have not
been successful. Furthermore, Overstreet-Hughes' primary customer has
announced the closure of its facility that consumes the majority of Overstreet-
Hughes' output. Consequently, 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.
-12-
Note 4 - Industry Segments
Summarized segment information is as follows:
For the Quarter Ended
June 26, 2004 June 28, 2003
(In thousands)
Net sales:
Standard Products Division $ 278,902 $ 178,939
Industrial Products Division 105,903 71,585
Elimination of intersegment sales (3,983) (2,303)
---------- ----------
$ 380,822 $ 248,221
========== ==========
Operating income:
Standard Products Division $ 37,184 $ 11,877
Industrial Products Division 6,334 3,597
Unallocated expenses (4,774) (4,011)
---------- ----------
$ 38,744 $ 11,463
========== ==========
For the Six Months Ended
June 26, 2004 June 28, 2003
(In thousands)
Net sales:
Standard Products Division $ 528,559 $ 338,319
Industrial Products Division 205,681 146,532
Elimination of intersegment sales (7,459) (4,608)
---------- ----------
$ 726,781 $ 480,243
========== ==========
Operating income:
Standard Products Division $ 62,174 $ 18,958
Industrial Products Division 9,687 7,648
Unallocated expenses (8,775) (8,072)
---------- ----------
$ 63,086 $ 18,534
========== ==========
-13-
Note 5 - Comprehensive Income
Comprehensive income is as follows:
For the Quarter Ended
June 26, 2004 June 28, 2003
(In thousands)
Comprehensive income:
Net income $ 27,048 $ 8,979
Other comprehensive income (loss):
Cumulative translation adjustments 228 4,797
Change in the fair value
of derivatives 182 (153)
---------- ----------
$ 27,458 $ 13,623
========== ==========
For the Six Months Ended
June 26, 2004 June 28, 2003
(In thousands)
Comprehensive income:
Net income $ 45,008 $ 12,900
Other comprehensive income (loss):
Cumulative translation adjustments 2,189 5,148
Change in the fair value
of derivatives 37 (126)
---------- ----------
$ 47,234 $ 17,922
========== ==========
-14-
Note 6 - 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," and related Interpretations.
No stock-based employee compensation expense is reflected in net income
because the exercise price of the Company's incentive employee stock options
equals the market price of the underlying stock on the date of grant. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123), to stock-based employee compensation.
For the Quarter Ended
June 26, 2004 June 28, 2003
(In thousands, except per share data)
Net income $ 27,048 $ 8,979
SFAS No. 123 compensation
expense, net of income taxes (439) (455)
---------- ----------
SFAS No. 123 pro forma
net income $ 26,609 $ 8,524
========== ==========
Pro forma earnings per share:
Basic $ 0.76 $ 0.25
Diluted $ 0.72 $ 0.23
Earnings per share, as reported:
Basic $ 0.77 $ 0.26
Diluted $ 0.73 $ 0.24
For the Six Months Ended
June 26, 2004 June 28, 2003
(In thousands, except per share data)
Net income $ 45,008 $ 12,900
SFAS No. 123 compensation
expense, net of income taxes (842) (898)
---------- ----------
SFAS No. 123 pro forma
net income $ 44,166 $ 12,002
========== ==========
Pro forma earnings per share:
Basic $ 1.27 $ 0.35
Diluted $ 1.20 $ 0.33
Earnings per share, as reported:
Basic $ 1.29 $ 0.38
Diluted $ 1.22 $ 0.35
-15-
Note 7 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans and
other postretirement benefit plans for certain of its employees. The net
periodic benefit cost is based on estimated values provided by independent
actuaries. The components of net periodic benefit cost are as follows:
For the Quarter Ended
June 26, 2004 June 28, 2003
(In thousands)
Pension benefits:
Service cost $ 450 $ 365
Interest cost 1,896 1,899
Expected return on plan assets (2,297) (2,006)
Amortization of prior service cost 99 123
Amortization of net loss 213 114
---------- ----------
Net periodic benefit cost $ 361 $ 495
========== ==========
Other benefits:
Service cost $ 1 $ 1
Interest cost 174 213
Expected return on plan assets (2) (2)
Amortization of prior service cost 30 31
---------- ----------
Net periodic benefit cost $ 203 $ 243
========== ==========
For the Six Months Ended
June 26, 2004 June 28, 2003
(In thousands)
Pension benefits:
Service cost $ 934 $ 730
Interest cost 3,825 3,798
Expected return on plan assets (4,416) (4,012)
Amortization of prior service cost 187 246
Amortization of net loss 454 228
---------- ----------
Net periodic benefit cost $ 984 $ 990
========== ==========
Other benefits:
Service cost $ 2 $ 2
Interest cost 348 426
Expected return on plan assets (4) (4)
Amortization of prior service cost 60 62
---------- ----------
Net periodic benefit cost $ 406 $ 486
========== ==========
-16-
The Company previously disclosed in its financial statements for the year
ended December 27, 2003, that it expected to contribute between $1.0 million
and $1.5 million to its pension plans and approximately $1.0 million to its
other postretirement benefit plans in 2004. Contributions have been made to
certain pension plans of $0.2 million during the second quarter of 2004, and
$0.5 million in the first half of 2004; contributions have been made to other
postretirement benefit plans of $0.2 million in the second quarter of 2004 ,
and $0.4 million in the first half of 2004. The impact, if any, of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 has not
been determined, and as such, has not been recognized in the Consolidated
Financial Statements as of June 26, 2004.
Note 8 - Income Taxes
The differences 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 for the second quarter
and first half of 2004 include certain valuation allowance adjustments. Upon
completion of the prior year's federal tax return during the second quarter,
the Company recognized a reduction in the estimated valuation allowance for
foreign tax credit carryforwards by approximately $1.3 million. During the
first quarter, certain property sales resulted in capital gains allowing the
Company to recognize a reduction of the valuation allowance associated with
capital loss carryforwards by approximately $0.9 million.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Overview
Mueller Industries, Inc. is a leading manufacturer of copper tube and
fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and valves;
refrigeration valves and fittings; and fabricated tubular products. Mueller's
operations are located throughout the United States, and in Canada, Mexico, and
Great Britain.
The Company's businesses are managed and organized into two segments:
Standard Products Division (SPD) and Industrial Products Division (IPD). SPD
manufactures and sells copper tube, copper and plastic fittings, and valves.
Outside of the United States, SPD manufactures and sells copper tube in Europe.
SPD sells these products to wholesalers in the HVAC (heating, ventilation, and
air-conditioning), plumbing, and refrigeration markets, to distributors to the
manufactured housing and recreational vehicle industries, and to building
material retailers. IPD manufactures and sells brass and copper alloy rod,
bar, and shapes; aluminum and brass forgings; aluminum and copper impact
extrusions; refrigeration valves and fittings; fabricated tubular products; and
gas valves and assemblies. IPD sells its products primarily to original
equipment manufacturers (OEMs), many of which are in the HVAC, plumbing, and
refrigeration markets.
New housing starts and commercial construction are important determinants
of the Company's sales to the HVAC, refrigeration and plumbing markets because
the principal end use of a significant portion of the Company's products is in
the construction of single and multi-family housing and commercial buildings.
Repairs and remodeling projects are also important drivers of underlying demand
for these products.
-17-
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.
The Company's earnings and cash flow are dependent upon these spreads that
fluctuate based upon market conditions.
Earnings and profitability are also subject to market trends such as
substitute products and imports. Plastic plumbing systems are the primary
substitute product; these products represent an increasing share of
consumption. Imports of copper tubing from Mexico have increased in recent
years, although U.S. consumption is still predominantly supplied by U.S.
manufacturers.
Results of Operations
Net income was $27.0 million, or 73 cents per diluted share, for the
second quarter of 2004, compared with net income of $9.0 million, or 24 cents
per diluted share, for the same period of 2003. Year-to-date, net income was
$45.0 million, or $1.22 per diluted share, compared with net income of $12.9
million, or 35 cents per diluted share, for the same period of 2003.
During the second quarter of 2004, the Company's net sales were $380.8
million, which compares with net sales of $248.2 million over the same period
of 2003. Net sales were $726.8 million in the first half of 2004 compared with
$480.2 million in the same period of 2003. The increase in net sales is
attributable to higher selling prices and shipment volumes. The average price
of copper was approximately 60 percent higher in the first half of 2004
compared with the same period of 2003. During the second quarter of 2004, the
Company's manufacturing businesses shipped 198.5 million pounds of product
compared to 175.5 million pounds in the same quarter of 2003. The Company
shipped 396.1 million pounds of product in the first half of 2004 compared with
342.1 million in the same period of 2003. This increase was broad based
including improvements in most product lines.
Cost of goods sold increased from $203.5 million in the second quarter of
2003 to $303.7 million in the same period of 2004. This increase was primarily
attributable to higher material costs partially offset by reductions in per
unit conversion costs. Gross profit increased to $77.1 million from $44.8
million due primarily to the strength of copper tube volume and spread
improvement. Inventories valued using the LIFO method totaled $46.9 million at
June 26, 2004 and $34.2 million at December 27, 2003. At June 26, 2004 and
December 27, 2003, the approximate FIFO cost of such inventories was $70.4
million and $42.0 million, respectively.
Selling, general, and administrative expense increased to $28.2 million in
the second quarter of 2004 from $23.6 million in the second quarter of 2003.
This increase is due primarily to higher sales and distribution costs related
to higher net sales.
In the first quarter of 2004, the Company recognized a $3.9 million
impairment charge related to its subsidiary, Overstreet-Hughes Co., Inc., of
which $2.3 million was goodwill and the remainder was property, plant, and
equipment. The results of Overstreet-Hughes, a component of IPD, which
manufactures tubular components and assemblies primarily for the OEM air-
conditioning market, have not met expectations. Initiatives to improve
-18-
performance have not been successful. Furthermore, Overstreet-Hughes' primary
customer has announced the closure of its facility that consumes the majority
of Overstreet-Hughes' output. Consequently, 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 for the second quarter of 2004 totaled $0.2 million,
compared with $0.3 million for the same period of 2003. For the first six
months of 2004, interest expense was $0.4 million compared with $0.6 million
for the same period of 2003. Total interest in the second quarter and first
half of 2004 decreased due to debt reductions.
Other income, net was $4.2 million in the first half of 2004 which, in
addition to interest income, included a gain on the sale of land and a
recognized loss on investment. During the first quarter of 2004, the Company
completed the sale of certain undeveloped land that resulted in recognizing a
gain of $5.2 million. The proceeds realized from sale were $5.2 million. Also
during the first quarter of 2004, the Company recognized a $3.3 million loss
related to its equity interest in Conbraco Industries, Inc. The loss relates
primarily to certain federal income tax audit exposures of Conbraco that were
assessed during the first quarter of 2004; during the second quarter of 2004,
the Internal Revenue Service proposed a settlement offer that Conbraco agreed
to which, if approved, would result in a reduction of the loss recognized for
this matter. During the second quarter, the Company recognized $0.5 million of
income representing its share in the earnings of the operations of Conbraco for
that period.
The Company's effective income tax rate for the first half of 2004 was
32.3 percent compared with 33.5 percent for the same period of last year. The
lower rate in the first half of 2004 is primarily attributable to the
recognition of a capital loss carryforward related to the sale of land that had
a tax basis significantly less than the realized proceeds and recognition of
foreign tax credit carryforwards.
In 2003, the Company's Consolidated Statement of Income reflected an
operating loss from discontinued operations. This loss was incurred by Mueller
Europe S.A. for the period the business operated during the first quarter of
2003.
Liquidity and Capital Resources
Cash provided by operating activities in the first half of 2004 totaled
$26.9 million, which is primarily attributable to net income from continuing
operations, depreciation and amortization, the income tax benefit from the
exercise of stock options, and an increase in liabilities partially offset by
increased receivables and increased inventories. Fluctuations in the cost of
copper and other raw materials affect the Company's liquidity. Changes in
material costs directly impact components of working capital, primarily
inventories and accounts receivable. During the first half of 2004, the
average COMEX copper price was approximately $1.23 per pound, which represents
a 60 percent increase over the average price during the first half of 2003.
This rise in the price of cathode has also resulted in sharp increases in the
open market price for copper scrap and, to a lesser extent, the price of brass
scrap.
During the first half of 2004, cash used for investing activities was $3.3
million, consisting primarily of $8.8 million for capital expenditures reduced
by $5.5 million proceeds from sales of properties. The Company also used $14.8
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the acquisition of treasury stock and payment of dividends, partially offset by
the proceeds from stock option exercises.
During the first quarter of 2004, the Chairman of the Company's Board of
Directors, Mr. Harvey L. Karp, exercised options to purchase 900,000 shares of
Company stock. As provided in Mr. Karp's option agreement, the Company
withheld the number of shares, at their fair market value, sufficient to cover
the minimum withholding taxes incurred by the exercise. These shares withheld
have been classified as acquisition of treasury stock on the Company's
Consolidated Statement of Cash Flows. The income tax benefit of $9.7 million
from the exercise of stock options was recognized as a direct addition to
additional paid-in-capital and, therefore, had no effect on the Company's
earnings.
The Company has a $150 million unsecured line-of-credit (Credit Facility)
which expires in November 2006. At June 26, 2004, there were no outstanding
borrowings under the Credit Facility. Approximately $9.0 million in letters
of credit were backed by the Credit Facility at the end of the quarter. At
June 26, 2004 the Company's total debt was $12.4 million or 1.4 percent of its
total capitalization.
Covenants contained in the Company's financing obligations require, among
other things, the maintenance of minimum levels of working capital, tangible
net worth, and debt service coverage ratios. At June 26, 2004, the Company was
in compliance with all of its debt covenants.
The Company declared and paid a regular quarterly cash dividend of ten
cents per common share in the first and second quarters of 2004. Cash
dividends paid aggregated $3.5 million in the first quarter of 2004 and $3.5
million in the second quarter of 2004. 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 and currently
available cash of $263.7 million will be adequate to meet the Company's normal
future capital expenditures and operational needs. The Company's current ratio
was 4.4 to 1 at June 26, 2004.
There have been no material changes to the contractual obligations
discussed in the Company's December 27, 2003 Form 10-K, except for (1)
consulting agreements with Harvey L. Karp, Chairman of the Board, and William
D. O'Hagan, Chief Executive Officer, and (2) an amendment to 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 consulting services to be provided by Messrs. Karp and O'Hagan
for a six-year period. During the first four years of the consulting period,
an annual consulting fee equal to two-thirds of each executive's Final Base
Compensation will be payable for the consulting services. During the final two
years of the consulting period, the annual consulting fee is set at one-third
of each Executive's Final Base Compensation. Final Base Compensation is
defined, in each case, as the lesser of (1) the executive's highest annual cash
compensation (consisting of base salary and annual bonus) during the last three
years of his employment with the Company, or (2) two million dollars. Each
executive can terminate his consulting agreement with or without Good Reason
(as defined in his consulting agreement) upon thirty days' advance written
notice and the Company may terminate either consulting agreement with or
without Cause (as defined in such consulting agreement) upon thirty days'
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advance written notice. If an executive terminates his consulting relationship
for Good Reason or the Company terminates the consulting relationship without
Cause, such executive will be entitled to receive the remaining amounts due
under his consulting agreement, as if such agreement had continued through the
remainder of the six-year term, in a lump sum, discounted for early lump sum
payment at the Federal Funds rate. During the consulting period, each
executive agrees not to engage in Competitive Activity (as defined in his
consulting agreement) 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).
The Company's Board of Directors has authorized the repurchase until
October 2004 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 June 26, 2004, the Company has repurchased approximately 2.4
million shares under this authorization.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange, raw material costs, 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.
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 June 26, 2004, the Company had an
open forward contract to exchange foreign currency totaling approximately $3.6
million.
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars. The
primary currencies to which the Company is exposed include the Canadian dollar,
the British pound sterling, the Euro, and the Mexican peso. The Company
generally views as long-term its investments in foreign subsidiaries with a
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functional currency other than the U.S. dollar. As a result, the Company
generally does not hedge these net investments.
Cost and Availability of Raw Materials and Energy
Copper and brass represent the largest component of the Company's variable
costs of production. The cost of these materials is subject to global market
fluctuations caused by factors beyond the Company's control. Significant
increases in the cost of metal, to the extent not reflected in prices for the
Company's finished products, or the lack of availability could materially and
adversely affect the Company's business, results of operations and financial
condition.
The Company occasionally enters into forward fixed-price arrangements with
certain customers. The Company may utilize forward contracts to hedge risks
associated with forward fixed-price arrangements. The Company may also utilize
forward contracts to manage price risk associated with inventory. Gains or
losses with respect to these positions are deferred in stockholders' equity as
a component of comprehensive income and reflected in earnings upon the sale of
inventory. Periodic value fluctuations of the contracts generally offset the
value fluctuations of the underlying fixed-price transactions or inventory.
During the second quarter, the Company entered into forward contracts to
purchase approximately $0.7 million of copper. As of June 26, 2004, the
Company held open forward contracts to purchase approximately $1.8 million of
copper through December 2004.
Futures contracts may also be used to manage price risk associated with
natural gas purchases. Gains and losses with respect to these positions are
deferred in stockholders' equity as a component of comprehensive income and
reflected in earnings upon consumption of natural gas. Periodic value
fluctuations of the contracts generally offset the value fluctuations of the
underlying natural gas prices. At June 26, 2004, the Company had no open
forward contracts to purchase natural gas.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures designed to
ensure information required to be disclosed in Company reports filed under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures are designed to provide reasonable assurance that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
The Company's management, under the supervision and with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this report. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective.
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal quarter ending June 26, 2004, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 29, 2004, the Company held its Annual Meeting of Stockholders at
which two proposals were voted upon: (i) the election of directors and (ii)
the approval of the appointment of auditors. The following persons were duly
elected to serve, subject to the Company's Bylaws, as Directors of the Company
until the next Annual Meeting, or until election and qualification of their
successors:
Votes in Favor Votes Withheld
Gennaro J. Fulvio 23,342,491 8,970,237
Gary S. Gladstein 23,343,517 8,969,211
Terry Hermanson 23,342,647 8,970,081
Robert B. Hodes 18,902,865 13,409,863
Harvey L. Karp 22,898,565 9,414,163
William D. O'Hagan 23,130,046 9,182,682
The proposal to approve the appointment of Ernst & Young LLP as the
Company's auditors was ratified by 31,364,288 votes in favor, 934,734 votes
against, and 13,706 votes abstaining.
There were no broker non-votes pertaining to these proposals.
Item 5. Other Information
Competition Matters
The Company is aware of investigations of competition in markets in which
it participates, or has participated in the past, in Europe, Canada, and the
United States. On October 21, 2003, the Company was informed that the
investigations of which it was aware in the United States have been closed. On
September 1, 2003, the European Commission released a statement alleging
infringements in Europe of competition rules by manufacturers of copper tubes
including the Company and businesses in France and England, which it acquired
in 1997. The Company took the lead in bringing these issues to the attention
of the European Commission and has fully cooperated in the resulting
investigation from its inception. The Company does not anticipate any material
adverse effect on its business or financial condition as a result of the
European Commission's action or other investigations.
Commerce Department Petition
On April 7, 2004, two metals-industry groups filed a petition with the
Commerce Department to restrict exports of copper scrap and copper-alloy scrap.
The Commerce Department has 105 days to determine whether to impose temporary
monitoring and export controls and 45 more days to publish final regulations
and effect any possible relief. The Company is unable to estimate the extent,
if any, that the filing of this petition will affect near-term availability of
scrap or the likelihood that meaningful relief will be obtained.
Labor Relations Update
The Company's labor contracts with certain bargaining unit employees at
its Port Huron and Marysville, Michigan operations expired on April 1, 2004.
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Bargaining unit employees continued working under an extension of the expired
contracts. A three-year contract, effective as of April 2, 2004, was ratified
on May 7, 2004.
On June 25, 2004, employees at the Company's operations in Brighton,
Michigan voted to seek representation through collective bargaining.
Approximately 160 employees will be represented.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and Harvey Karp.
10.2 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and William D. O'Hagan.
10.3 Amendment, dated June 21, 2004, to the Amended and Restated
Employment Agreement dated as of September 17, 1997, dated June
21, 2004, by and between the Registrant and Harvey Karp.
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for
the quarter ended June 26, 2004. Such report is being
furnished for the information of the Securities and Exchange
Commission only and is not to be deemed filed as part of this
Quarterly Report on Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) During the quarter ended June 26, 2004, the Registrant filed the
following Current Reports on Form 8-K:
April 13, 2004: Item 7. Financial Statements and Exhibits. Item 12.
Results of Operations and Financial Condition. First Quarter Earnings
Release.
April 30, 2004: Item 5. Other Events and Regulation FD Disclosure.
Item 7. Financial Statements and Exhibits. Press Release:
Declaration of a Dividend.
Items 1, 2, and 3 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on July
16, 2004.
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
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EXHIBIT INDEX
Exhibits Description
10.1 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and Harvey Karp.
10.2 Consulting Agreement, dated June 21, 2004, by and between the
Registrant and William D. O'Hagan.
10.3 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.
19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for
the quarter ended June 26, 2004. Such report is being furnished
for the information of the Securities and Exchange Commission
only and is not to be deemed filed as part of this Quarterly
Report on Form 10-Q.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.