UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 1, 2005 Commission file number 1-6770 MUELLER INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 25-0790410 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8285 TOURNAMENT DRIVE, SUITE 150 MEMPHIS, TENNESSEE 38125 (Address of principal executive offices) (Zip Code) (901) 753-3200 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / / Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ The number of shares of the Registrant's common stock outstanding as of October 24, 2005, was 36,633,948. -1- MUELLER INDUSTRIES, INC. FORM 10-Q For the Period Ended October 1, 2005 INDEX Part I. Financial Information Page Item 1. Financial Statements (Unaudited) a.) Consolidated Statements of Income for the quarters and nine months ended October 1, 2005 and September 25, 2004 3 b.) Consolidated Balance Sheets as of October 1, 2005 and December 25, 2004 7 c.) Consolidated Statements of Cash Flows for the nine months ended October 1, 2005 and September 25, 2004 9 d.) Notes to Consolidated Financial Statements 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 Item 4. Controls and Procedures 25 Part II. Other Information Item 1. Legal Proceedings 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28 Item 6. Exhibits 28 Signatures 29 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Quarter Ended October 1, September 25, 2005 2004 (In thousands, except per share data) Net sales $ 434,130 $ 322,512 Cost of goods sold 360,514 263,188 ---------- ---------- Gross profit 73,616 59,324 Depreciation and amortization 10,082 10,278 Selling, general, and administrative expense 33,297 24,529 Impairment charge - - ---------- ---------- Operating income 30,237 24,517 Interest expense (4,794) (236) Other income, net 5,421 1,357 ---------- ---------- Income from continuing operations before income taxes 30,864 25,638 Current income tax expense (10,622) (5,895) Deferred income tax benefit (expense) 774 (989) ---------- ---------- Total income tax expense (9,848) (6,884) ---------- ---------- Income from continuing operations 21,016 18,754 Gain from discontinued operations, net of tax 3,324 - ---------- ---------- Net income $ 24,340 $ 18,754 ========== ========== See accompanying notes to consolidated financial statements.
-3- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (continued) (Unaudited)
For the Quarter Ended October 1, September 25, 2005 2004 (In thousands, except per share data) Weighted average shares for basic earnings per share 36,625 35,283 Effect of dilutive stock options 495 1,631 ---------- ---------- Adjusted weighted average shares for diluted earnings per share 37,120 36,914 ---------- ---------- Basic earnings per share: From continuing operations $ 0.57 $ 0.53 From discontinued operations 0.09 - ---------- ---------- Basic earnings per share $ 0.66 $ 0.53 ========== ========== Diluted earnings per share: From continuing operations $ 0.57 $ 0.51 From discontinued operations 0.09 - ---------- ---------- Diluted earnings per share $ 0.66 $ 0.51 ========== ========== Dividends per share $ 0.10 $ 0.10 ========== ========== See accompanying notes to consolidated financial statements.
-4- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (continued) (Unaudited)
For the Nine Months Ended October 1, September 25, 2005 2004 (In thousands, except per share data) Net sales $ 1,246,299 $ 1,049,293 Cost of goods sold 1,040,201 847,937 ---------- ---------- Gross profit 206,098 201,356 Depreciation and amortization 30,571 30,402 Selling, general, and administrative expense 92,788 79,410 Impairment charge - 3,941 ---------- ---------- Operating income 82,739 87,603 Interest expense (14,730) (659) Other income, net 10,188 5,161 ---------- ---------- Income from continuing operations before income taxes 78,197 92,105 Current income tax expense (26,603) (28,738) Deferred income tax benefit (expense) 1,813 395 ---------- ---------- Total income tax expense (24,790) (28,343) ---------- ---------- Income from continuing operations 53,407 63,762 Gain from discontinued operations, net of tax 3,324 - ---------- ---------- Net income $ 56,731 $ 63,762 ========== ========== See accompanying notes to consolidated financial statements.
-5- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (continued) (Unaudited)
For the Nine Months Ended October 1, September 25, 2005 2004 (In thousands, except per share data) Weighted average shares for basic earnings per share 36,576 34,973 Effect of dilutive stock options 536 1,932 ---------- ---------- Adjusted weighted average shares for diluted earnings per share 37,112 36,905 ---------- ---------- Basic earnings per share: From continuing operations $ 1.46 $ 1.82 From discontinued operations 0.09 - ---------- ---------- Basic earnings per share $ 1.55 $ 1.82 ========== ========== Diluted earnings per share: From continuing operations $ 1.44 $ 1.73 From discontinued operations 0.09 - ---------- ---------- Diluted earnings per share $ 1.53 $ 1.73 ========== ========== Dividends per share $ 0.30 $ 0.30 ========== ========== See accompanying notes to consolidated financial statements.
-6- MUELLER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
October 1, 2005 December 25, 2004 (In thousands) Assets Current assets: Cash and cash equivalents $ 108,012 $ 47,449 Accounts receivable, less allowance for doubtful accounts of $4,979 in 2005 and $3,925 in 2004 251,406 201,396 Inventories: Raw material and supplies 31,704 34,270 Work-in-process 28,503 24,201 Finished goods 122,998 129,382 ---------- ---------- Total inventories 183,205 187,853 Other current assets 19,985 18,633 ---------- ---------- Total current assets 562,608 455,331 Property, plant, and equipment, net 309,962 335,610 Goodwill 148,102 136,615 Other assets 40,814 36,175 ---------- ---------- $ 1,061,486 $ 963,731 ========== ========== See accompanying notes to consolidated financial statements.
-7- MUELLER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (continued) (Unaudited)
October 1, 2005 December 25, 2004 (In thousands, except share data) Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 887 $ 5,328 Accounts payable 117,282 79,723 Accrued wages and other employee costs 34,269 37,992 Other current liabilities 83,653 57,775 ---------- ---------- Total current liabilities 236,091 180,818 Long-term debt 312,940 310,650 Pension liabilities 18,889 19,611 Postretirement liabilities other than pensions 13,383 13,556 Environmental reserves 9,183 9,503 Deferred income taxes 64,033 67,479 Other noncurrent liabilities 10,122 10,361 ---------- ---------- Total liabilities 664,641 611,978 ---------- ---------- Minority interest in subsidiaries 74 67 Stockholders' equity: Preferred stock - shares authorized 4,985,000; none outstanding - - Series A junior participating preferred stock - $1.00 par value; shares authorized 15,000; none outstanding - - Common stock - $.01 par value; shares authorized 100,000,000; issued 40,091,502; outstanding 36,633,948 in 2005 and 36,389,824 in 2004 401 401 Additional paid-in capital, common 252,472 252,931 Retained earnings 221,285 175,537 Accumulated other comprehensive (loss) income (2,284) 3,085 Treasury common stock, at cost (75,103) (80,268) ---------- ---------- Total stockholders' equity 396,771 351,686 Commitments and contingencies (Note 2) - - ---------- ---------- $ 1,061,486 $ 963,731 ========== ========== See accompanying notes to consolidated financial statements.
-8- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended October 1, September 25, 2005 2004 (In thousands) Cash flows from operating activities Net income from continuing operations $ 53,407 $ 63,762 Reconciliation of net income from continuing operations to net cash provided by operating activities: Depreciation and amortization 30,691 30,402 Income tax benefit from exercise of stock options 529 29,252 Impairment charge - 3,941 Equity in (income) loss of unconsolidated subsidiaries (4,005) 2,376 Gain on disposal of properties (3,713) (5,156) Deferred income taxes (1,813) (395) Minority interest in subsidiaries, net of dividends paid 7 (151) Changes in assets and liabilities, net of business acquired: Receivables (49,665) (14,742) Inventories 8,703 (33,969) Other assets (2,956) (1,388) Current liabilities 50,639 18,671 Other liabilities 367 546 Other, net 960 288 ---------- ---------- Net cash provided by operating activities 83,151 93,437 ---------- ---------- Cash flows from investing activities Capital expenditures (13,425) (13,073) Proceeds from sales of properties 10,059 5,493 Acquisition of business (10,891) (14,583) ---------- ---------- Net cash used in investing activities (14,257) (22,163) ---------- ---------- See accompanying notes to consolidated financial statements.
-9- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
For the Nine Months Ended October 1, September 25, 2005 2004 (In thousands) Cash flows from financing activities Dividends paid $ (10,983) $ (10,591) Acquisition of treasury stock (168) (28,409) Proceeds from the sale of treasury stock 4,346 7,344 Repayments of long-term debt (4,355) (2,776) ---------- ---------- Net cash used in financing activities (11,160) (34,432) ---------- ---------- Effect of exchange rate changes on cash (495) (15) ---------- ---------- Increase in cash and cash equivalents 57,239 36,827 Cash provided by discontinued operations 3,324 - Cash and cash equivalents at the beginning of the period 47,449 255,088 ---------- ---------- Cash and cash equivalents at the end of the period $ 108,012 $ 291,915 ========== ========== See accompanying notes to consolidated financial statements.
-10- MUELLER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) General Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. This quarterly report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K, including the annual financial statements incorporated therein. The accompanying unaudited interim financial statements include all normal recurring adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. The nine-month period ended October 1, 2005 contained 40 weeks while the nine-month period ended September 25, 2004 contained 39 weeks. Note 1 - Earnings per Common Share and Stock-Based Compensation Basic per share amounts have been computed based on the average number of common shares outstanding. Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, computed using the treasury stock method. The Company accounts for its stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation expense is reflected in net income because the exercise price of the Company's incentive employee stock options equals the market price of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. -11-
For the Quarter Ended October 1, September 25, 2005 2004 (In thousands, except per share data) Net income $ 24,340 $ 18,754 SFAS No. 123 compensation expense, net of income taxes (593) (576) ---------- ---------- SFAS No. 123 pro forma net income $ 23,747 $ 18,178 ========== ========== Pro forma earnings per share: Basic $ 0.65 $ 0.52 Diluted $ 0.64 $ 0.49 Earnings per share, as reported: Basic $ 0.66 $ 0.53 Diluted $ 0.66 $ 0.51
For the Nine Months Ended October 1, September 25, 2005 2004 (In thousands, except per share data) Net income $ 56,731 $ 63,762 SFAS No. 123 compensation expense, net of income taxes (1,813) (1,644) ---------- ---------- SFAS No. 123 pro forma net income $ 54,918 $ 62,118 ========== ========== Pro forma earnings per share: Basic $ 1.50 $ 1.78 Diluted $ 1.48 $ 1.68 Earnings per share, as reported: Basic $ 1.55 $ 1.82 Diluted $ 1.53 $ 1.73
Note 2 - Commitments and Contingencies The Company is involved in certain litigation as either plaintiff or defendant as a result of claims that have arisen in the ordinary course of business which management believes will not have a material effect on the Company's financial condition or results of operations. -12- The Company has been named as a defendant in several purported class action complaints brought by direct and indirect purchasers alleging anticompetitive activities with respect to the sale of copper plumbing tubes in the United States. Two such purported class actions were filed in the United States District Court for the Western District of Tennessee (the Federal Actions), four were filed in the Superior Court of the State of California, County of San Francisco (the California Actions), one was filed in the Circuit Court for Shelby County, Tennessee (the Tennessee Action), and one was filed in the Superior Court of the Commonwealth of Massachusetts, County of Middlesex (the Massachusetts Action, and with the Federal Actions, the California Actions and the Tennessee Action, the Actions). Wholly owned Company subsidiaries, WTC Holding Company, Inc., Deno Holding Company, Inc., and Mueller Europe Ltd. are named in all of the Actions, and Deno Acquisition Eurl is named in two of the Actions. Deno Acquisition Eurl has not been served with the complaint in either of the Actions in which it is named, and only the Company has been served with the complaint in the Tennessee Action. All of the Actions, which are similar, seek declaratory (except for the Massachusetts Action) and monetary relief. Plaintiffs' motions to consolidate and for appointment of lead counsel in the Federal Actions and plaintiffs' motion to consolidate the California Actions have been granted. On July 6, 2005, a motion to dismiss the Federal Actions for failure to state a claim was granted as to WTC Holding Company, Inc. and Deno Holding Company, Inc. and denied as to Mueller Industries, Inc. Mueller Europe's motion to dismiss the Federal Actions for lack of personal jurisdiction and on other grounds is pending. The Company's demurrer to the complaint in the California Actions and the Company's motion to dismiss the Tennessee Action for failure to state a claim are pending. The Company has not yet been required to respond to the complaint in the Massachusetts Action. The Company subsidiaries named in the Actions have not yet been required to respond to the complaints in the California, Tennessee, and Massachusetts Actions. The Company believes that the claims for relief in the Actions are without merit and intends to defend the Actions vigorously. Guarantees, in the form of letters of credit, are issued by the Company generally to guarantee the payment of insurance deductibles, retiree health benefits, and certain operating costs of a foreign subsidiary. The terms of the Company's guarantees are generally one year but are renewable annually as required. The maximum potential amount of future payments the Company could have been required to make under its guarantees at October 1, 2005 was $10.4 million. Note 3 - Impairment Charge During the first quarter of 2004, the Company recognized a $3.9 million impairment charge related to its subsidiary, Overstreet-Hughes Co., Inc., of which $2.3 million was goodwill and the remainder was property, plant, and equipment. The results of Overstreet-Hughes, which manufactures tubular components and assemblies primarily for the original equipment manufacturer (OEM) air-conditioning market, had not met expectations. Furthermore, Overstreet-Hughes' primary customer announced the closure of its facility that consumes the majority of Overstreet-Hughes' output. Consequently, the Company reduced its carrying cost in these long-lived assets to its best estimate of fair value. This estimate was determined based on a discounted cash flow method. -13- Note 4 - Industry Segments Summarized segment information is as follows:
For the Quarter Ended October 1, September 25, 2005 2004 (In thousands) Net sales: Standard Products Division $ 322,507 $ 233,651 Industrial Products Division 114,325 92,565 Elimination of intersegment sales (2,702) (3,704) ---------- ---------- $ 434,130 $ 322,512 ========== ========== Operating income: Standard Products Division $ 30,955 $ 22,202 Industrial Products Division 5,700 6,012 Unallocated expenses (6,418) (3,697) ---------- ---------- $ 30,237 $ 24,517 ========== ==========
For the Nine Months Ended October 1, September 25, 2005 2004 (In thousands) Net sales: Standard Products Division $ 918,839 $ 762,210 Industrial Products Division 336,608 298,246 Elimination of intersegment sales (9,148) (11,163) ---------- ---------- $ 1,246,299 $ 1,049,293 ========== ========== Operating income: Standard Products Division $ 78,732 $ 84,376 Industrial Products Division 19,540 15,699 Unallocated expenses (15,533) (12,472) ---------- ---------- $ 82,739 $ 87,603 ========== ==========
Operating income for the Industrial Products Division was reduced by a $3.9 million impairment charge during the nine months ended September 25, 2004. -14- Note 5 - Comprehensive Income Comprehensive income is as follows:
For the Quarter Ended October 1, September 25, 2005 2004 (In thousands) Comprehensive income: Net income $ 24,340 $ 18,754 Other comprehensive income (loss): Cumulative translation adjustments 153 (578) Change in the fair value of derivatives 120 18 ---------- ---------- $ 24,613 $ 18,194 ========== ==========
For the Nine Months Ended October 1, September 25, 2005 2004 (In thousands) Comprehensive income: Net income $ 56,731 $ 63,762 Other comprehensive income (loss): Cumulative translation adjustments (5,581) 1,611 Change in the fair value of derivatives 212 55 ---------- ---------- $ 51,362 $ 65,428 ========== ==========
The change in cumulative foreign currency translation adjustment primarily relates to the Company's investment in its U.K., Mexican, and Canadian subsidiaries and fluctuations in exchange rates between their local currencies and the U.S. dollar. During the first nine months of 2005, the value of the British pound sterling decreased 8 percent compared to the U.S. dollar, the value of the Canadian dollar increased 6 percent compared to the U.S. dollar, and the value of the Mexican peso increased 3 percent compared to the U.S. dollar. -15- Note 6 - Employee Benefits The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for certain of its employees. The net periodic benefit cost is based on estimated values provided by independent actuaries. The components of net periodic benefit cost are as follows:
For the Quarter Ended October 1, September 25, 2005 2004 (In thousands) Pension benefits: Service cost $ 554 $ 467 Interest cost 2,062 1,913 Expected return on plan assets (2,468) (2,208) Amortization of prior service cost 93 93 Amortization of net (gain) loss (139) 227 ---------- ---------- Net periodic benefit cost $ 102 $ 492 ========== ========== Other benefits: Service cost $ 1 $ 1 Interest cost 162 174 Amortization of net loss (gain) 36 (2) Amortization of prior service cost (2) 30 ---------- ---------- Net periodic benefit cost $ 197 $ 203 ========== ==========
For the Nine Months Ended October 1, September 25, 2005 2004 (In thousands) Pension benefits: Service cost $ 1,663 $ 1,401 Interest cost 6,186 5,738 Expected return on plan assets (7,405) (6,624) Amortization of prior service cost 280 280 Amortization of net (gain) loss (418) 680 ---------- ---------- Net periodic benefit cost $ 306 $ 1,475 ========== ========== Other benefits: Service cost $ 3 $ 3 Interest cost 486 521 Amortization of net loss (gain) 108 (6) Amortization of prior service cost (6) 90 ---------- ---------- Net periodic benefit cost $ 591 $ 608 ========== ==========
-16- The Company anticipates contributions to its pension and other postretirement benefit plans for 2005 to be approximately $2.6 million and $0.8 million, respectively. During the first nine months of 2005, $1.9 million of contributions have been made to certain pension plans and $0.5 million of contributions have been made to other postretirement benefit plans. Note 7 - Acquisitions and Investments On August 15, 2005, the Company acquired 100 percent of the outstanding stock of KX Group LTD (Brassware). Brassware, located in Witton, Birmingham, England, is an import distributor of plumbing and residential heating products with annual sales of approximately $48 million to plumbers' merchants and builders' merchants in the U.K. and Irish markets. This acquisition, by Standard Products Division, will strengthen the Company's presence in the U.K. import distributor market. The cost of the acquired business, including cash of $10.9 million plus $1.9 million of notes issued, totaled $12.8 million. The acquisition was accounted for using the purchase method; therefore, the results of operations of Brassware are included in the consolidated financial statements of the Company from the acquisition date. The purchase price has been preliminarily allocated to the acquired assets based on their fair market value awaiting additional information. On December 14, 2004, the Company acquired shares in seven companies and inventory of another (collectively Mueller Comercial) for an aggregate of $42.3 million, subject to closing adjustments. These operations include pipe nipple manufacturing in Mexico and import distribution businesses which product lines include malleable iron fittings and other plumbing specialties. The combined sales of Mueller Comercial are approximately $60 million annually. This acquisition was accounted for using the purchase method of accounting. The purchase price of Mueller Comercial has been preliminarily allocated to the acquired assets based on their estimated fair market value awaiting additional information. Final allocations to the acquired assets and liabilities assumed, as well as resolution of a contingent earn-out and the ultimate resolution of closing adjustments to the purchase price, will result in future adjustments to goodwill. During the first quarter of 2004 the Company recorded a $2.3 million provision for certain federal income tax audit exposures related to the Company's equity investment Conbraco Industries, Inc. Upon resolution of these matters in the second quarter of 2005, the Company reversed the provision, which increased net income by approximately $1.5 million, or 4 cents per diluted share. -17- Note 8 - Recently Issued Accounting Standards In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), "Share-Based Payment", which is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. SFAS No. 123(R) provides alternative methods of adoption which include prospective application and a modified retroactive application. The Company is currently evaluating the financial impact, including the available alternatives of adoption, of SFAS No. 123(R). SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in the year ending December 25, 2004 for such excess tax deductions was $31.8 million. The amount of income tax benefit from exercise of stock options recognized in the first nine months of 2005 and 2004 was $0.5 million and $29.3 million, respectively. The Company is required to adopt the provisions of SFAS No. 123(R) effective as of the beginning of the first quarter of 2006. Note 9 - Environmental Reserves The Company is subject to normal environmental standards imposed by federal, state, local, and foreign environmental laws and regulations. At October 1, 2005, the Company had $9.2 million reserved for the environmental remediation, post-closure monitoring, and related obligations. The Company periodically reassesses these amounts and estimates its obligations over the foreseeable future based upon results on ongoing remediation and monitoring programs, communications with regulatory agencies, and changes in environmental law. While additional costs are possible, the Company believes that its reserve is adequate and amounts beyond that are not reasonably estimable. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Accrued environmental liabilities are not reduced by potential insurance reimbursements. Based upon information currently available, management believes that the outcome of pending environmental matters will not materially affect the overall financial position and results of operations of the Company. Note 10 - Income Taxes The Company's effective tax rate for the first nine months of 2005 was 31.7 percent compared with 30.8 percent for the same period of last year. The current period rate is less than the expected federal rate due primarily to income in foreign jurisdictions that is taxed at rates lower than the U.S. federal rate and reductions to valuation reserves, totaling approximately $2.0 million, related to the resolution of certain income tax exposures and the recognition of U.K. net operating loss carryforwards. -18- Note 11 - Discontinued Operations During the third quarter of 2005, the Company recognized a gain of approximately $5.2 million net of income tax of $1.9 million upon the settlement of a business interruption claim related to operations sold in 2002, previously classified as discontinued operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Overview Mueller Industries, Inc. is a leading manufacturer of copper tube and fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; and fabricated tubular products. The Company also resells imported brass and plastic plumbing valves, malleable iron fittings, steel nipples, faucets, and plumbing specialty products. Mueller's operations are located throughout the United States, and in Canada, Mexico, and Great Britain. The Company's businesses are managed and organized into two segments: Standard Products Division (SPD) and Industrial Products Division (IPD). SPD manufactures and sells copper tube, copper and plastic fittings, and valves. Outside of the United States, SPD manufactures and sells copper tube in Europe. SPD sells these products to wholesalers in the HVAC (heating, ventilation, and air-conditioning), plumbing, and refrigeration markets, to distributors to the manufactured housing and recreational vehicle industries, and to building material retailers. IPD manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. IPD sells its products primarily to original equipment manufacturers (OEMs), many of which are in the HVAC, plumbing, and refrigeration markets. New housing starts and commercial construction are important determinants of the Company's sales to the HVAC, refrigeration and plumbing markets because the principal end use of a significant portion of the Company's products is in the construction of single and multi-family housing and commercial buildings. Repairs and remodeling projects are also important drivers of underlying demand for these products. Profitability of certain of the Company's product lines depends upon the "spreads" between the cost of raw material and the selling prices of its completed products. The open market prices for copper cathode and scrap, for example, influence the selling price of copper tubing, a principal product manufactured by the Company. The Company attempts to minimize the effects on profitability from fluctuations in material costs by passing through these costs to its customers. The Company's earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions. -19- Earnings and profitability are also subject to market trends such as substitute products and imports. Plastic plumbing systems are the primary substitute product; these products represent an increasing share of consumption. Imports of copper tubing from Mexico have increased in recent years, although U.S. consumption is still predominantly supplied by U.S. manufacturers. Results of Operations During the third quarter of 2005, the Company's net sales were $434.1 million, which compares with net sales of $322.5 million over the same period of 2004. The increase in sales for the quarter is attributable to both higher volume and increased selling prices reflecting the higher cost of raw materials. Net sales were $1.25 billion in the first nine months of 2005 compared with $1.05 billion in the same period of 2004 also as a result of higher selling prices reflecting the higher cost of raw materials. Business acquired during the latter part of 2004 contributed approximately $25 million and $75 million to sales for the quarter and nine months ended October 1, 2005, respectively. The average price of copper was approximately 25 percent higher in the first half of 2005 compared with the same period of 2004. During the third quarter of 2005, the Company's core manufacturing businesses shipped 187 million pounds of product compared to 171 million pounds in the same quarter of 2004. The Company shipped 559 million pounds of product in the first nine months of 2005 compared with 567 million in the same period of 2004. This decrease was due primarily to lower copper tube shipments during the first half of 2005. Cost of goods sold increased from $263.2 million in the third quarter of 2004 to $360.5 million in the same period of 2005. This increase was primarily attributable to higher material costs and volume. Gross profit increased from $59.3 million to $73.6 million due primarily to higher volumes and contributions of businesses acquired in the latter half of 2004. Inventories valued using the LIFO method totaled $29.9 million at October 1, 2005 and $36.5 million at December 25, 2004. At October 1, 2005 and December 25, 2004, the approximate FIFO cost of such inventories was $67.7 million and $64.4 million, respectively. Depreciation and amortization expense was $10.1 million in the third quarter of 2005 compared with $10.3 million during the third quarter of 2004. Selling, general, and administrative expense was $33.3 million for the third quarter of 2005 compared with $24.5 million for the same period of 2004. The increase is attributable to businesses acquired in the latter half of 2004, increased professional fees, and incentive compensation. Year-to-date selling, general, and administrative expense was $92.8 million for 2005 compared with $79.4 million for the same period of 2004. The year-to-date increase is attributable to businesses acquired in the latter half of 2004. -20- During the first quarter of 2004, the Company recognized a $3.9 million impairment charge related to its subsidiary, Overstreet-Hughes Co., Inc., of which $2.3 million was goodwill and the remainder was property, plant, and equipment. The results of Overstreet-Hughes, which manufactures tubular components and assemblies primarily for the OEM air-conditioning market, had not met expectations. Furthermore, Overstreet-Hughes' primary customer announced the closure of its facility that consumes the majority of Overstreet-Hughes' output. Consequently, the Company reduced its carrying cost in these long-lived assets to its best estimate of fair value. This estimate was determined based on a discounted cash flow method. For the third quarter of 2005, operating income at SPD was $31.0 million which compares with $22.2 million in the same period of 2004. This increase is primarily attributable to increased volumes from copper tube, copper and plastic fittings, and contributions from acquired businesses. Operating income at IPD was $5.7 million in the third quarter of 2005 compared with $6.0 million in the third quarter of 2004. Profitability reductions in the brass rod business due to lower volumes were offset by improvements in other product lines. Interest expense for the third quarter of 2005 totaled $4.8 million, compared with $0.2 million for the same period of 2004. For the first nine months of 2005, interest expense was $14.7 million compared with $0.7 million for the same period of 2004. The increase in the third quarter and first nine months of 2005 is primarily attributable to the Subordinated Debentures issued as part of the Special Dividend during the fourth quarter of 2004. Other income, net was $10.2 million for the first nine months of 2005 and $5.2 million for the same period of 2004. During the third quarter of 2005 the Company completed the sale of its land and building in Cerritos, California. Operations were relocated to leased premises in Ontario, California. The transaction resulted in the recognition of a $4.0 million pre-tax gain. The proceeds from the sale were $9.3 million. During the first quarter of 2004, the Company completed the sale of certain undeveloped land that resulted in recognizing a gain of $5.2 million. The proceeds realized from sale were $5.2 million. Also during the first quarter of 2004, the Company recognized a $3.3 million loss related to its equity interest in Conbraco Industries, Inc. The loss related primarily to certain federal income tax audit exposures of Conbraco that were assessed during the first quarter of 2004. Conbraco settled these matters in the second quarter of 2005; consequently, the Company reversed a loss accrual that resulted in a $2.3 million gain. -21- On August 15, 2005, the Company acquired 100 percent of the outstanding stock of KX Group LTD (Brassware). Brassware, located in Witton, Birmingham, England, is an import distributor of plumbing and residential heating products with annual sales of approximately $48 million to plumbers' merchants and builders' merchants in the U.K. and Irish markets. This acquisition, by Standard Products Division, will strengthen the Company's presence in the U.K. import distributor market. The cost of the acquired business, including cash of $10.9 million plus $1.9 million of notes issued, totaled $12.8 million. The acquisition was accounted for using the purchase method; therefore, the results of operations of Brassware are included in the consolidated financial statements of the Company from the acquisition date. The purchase price has been preliminarily allocated to the acquired assets based on their fair market value awaiting additional information. During the third quarter of 2005, the Company recognized a gain of approximately $5.2 million net of income tax of $1.9 million upon the settlement of a business interruption claim related to operations sold in 2002, previously classified as discontinued operations. On December 14, 2004, the Company acquired shares in seven companies and inventory of another (collectively Mueller Comercial) for an aggregate of $42.3 million, subject to closing adjustments. These operations include pipe nipple manufacturing in Mexico and import distribution businesses which product lines include malleable iron fittings and other plumbing specialties. The combined sales of Mueller Comercial are approximately $60 million annually. This acquisition was accounted for using the purchase method of accounting. The purchase price of Mueller Comercial has been preliminarily allocated to the acquired assets based on their estimated fair market value awaiting additional information including appraisals of long-lived assets. Final allocations to the acquired assets and liabilities assumed, as well as resolution of a contingent earn-out and the ultimate resolution of closing adjustments to the purchase price, will result in future adjustments to goodwill. The Company's effective tax rate for the first nine months of 2005 was 31.7 percent compared with 30.8 percent for the same period of last year. The current period rate is less than the expected federal rate due primarily to income in foreign jurisdictions that is taxed at rates lower than the U.S. federal rate and reductions to valuation reserves, totaling approximately $2.0 million, related to the resolution of certain income tax exposures and the recognition of U.K. net operating loss carryforwards. The lower rate in 2004 is primarily attributable to the recognition of a capital loss carryforward in the first quarter related to the sale of land that had a tax basis significantly less than the realized proceeds. -22- Liquidity and Capital Resources Cash provided by operating activities in the first nine months of 2005 totaled $83.2 million, which is primarily attributable to net income, depreciation and amortization, and an increase in liabilities partially offset by increased receivables. Fluctuations in the cost of copper and other raw materials affect the Company's liquidity. Changes in material costs directly impact components of working capital, primarily inventories and accounts receivable. During the first nine months of 2005, the average COMEX copper price was approximately $1.57 per pound, which represents a 25 percent increase over the average price during the first nine months of 2004. This rise in the price of cathode has also resulted in sharp increases in the open market price for copper scrap and, to a lesser extent, the price of brass scrap. During the first nine months of 2005, cash used for investing activities was $14.3 million, consisting of $13.4 million for capital expenditures and $10.9 for the acquisition of Brassware reduced by $10.1 million proceeds from sales of properties. The Company also used $11.2 million for financing activities during the first nine months, consisting primarily of the payment of dividends and repayment of long-term debt, partially offset by the proceeds from stock option exercises. During the first quarter of 2004, the Chairman of the Company's Board of Directors, Mr. Harvey L. Karp, exercised options to purchase 900,000 shares of Company stock. As provided in Mr. Karp's option agreement, the Company withheld the number of shares, at their fair market value, sufficient to cover the minimum withholding taxes incurred by the exercise. These shares withheld have been classified as acquisition of treasury stock on the Company's Consolidated Statement of Cash Flows. The income tax benefit of $9.7 million from the exercise of stock options was recognized as a direct addition to additional paid-in-capital and, therefore, had no effect on the Company's earnings. The Company has a $150 million unsecured line-of-credit (Credit Facility) which expires in November 2007. At October 1, 2005, there were no outstanding borrowings under the Credit Facility. Approximately $10.3 million in letters of credit were backed by the Credit Facility at the end of the quarter. At October 1, 2005 the Company's total debt was $313.8 million or 44.2 percent of its total capitalization. Covenants contained in the Company's financing obligations require, among other things, the maintenance of minimum levels of working capital, tangible net worth, and debt service coverage ratios. At October 1, 2005, the Company was in compliance with all of its debt covenants. The Company declared and paid a regular quarterly cash dividend of ten cents per common share in the first three quarters of 2005. Payment of dividends in the future is dependent upon the Company's financial condition, cash flows, capital requirements, earnings, and other factors. On November 1, 2005, the Company will pay approximately $9.0 million in interest on its 6% Subordinated Debentures. -23- Management believes that cash provided by operations and currently available cash of $108 million will be adequate to meet the Company's normal future capital expenditures and operational needs. The Company's current ratio was 2.4 to 1 at October 1, 2005. There have been no significant changes in the Company's contractual cash obligations reported at December 25, 2004. The Company's Board of Directors has authorized the repurchase until October 2006 of up to ten million shares of the Company's common stock through open market transactions or through privately negotiated transactions. The Company has no obligation to purchase any shares and may cancel, suspend, or extend the time period for the purchase of shares at any time. Any purchases will be funded primarily through existing cash and cash from operations. The Company may hold any shares purchased in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. Through October 1, 2005, the Company has repurchased approximately 3.5 million shares under this authorization. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in raw material costs, energy costs, and foreign currency exchange. To reduce such risks, the Company may periodically use financial instruments. All hedging transactions are authorized and executed pursuant to policies and procedures. Further, the Company does not buy or sell financial instruments for trading purposes. Cost and Availability of Raw Materials and Energy Adequate supplies of raw material have historically been available to the Company from primary producers, metal brokers, and scrap dealers. Sufficient energy in the form of natural gas, fuel oils, and electricity is available to operate the Company's production facilities. While temporary shortages of raw material and fuels may occur occasionally, to date they have not materially hampered the Company's operations. Copper and brass represent the largest component of the Company's variable costs of production. The cost of these materials is subject to global market fluctuations caused by factors beyond the Company's control. Significant increases in the cost of metal, to the extent not reflected in prices for the Company's finished products, or the lack of availability could materially and adversely affect the Company's business, results of operations and financial condition. The Company occasionally enters into forward fixed-price arrangements with certain customers. The Company may utilize forward contracts to hedge risks associated with forward fixed-price arrangements. The Company may also utilize forward contracts to manage price risk associated with inventory. Gains or losses with respect to these positions are deferred in stockholders' equity as a component of comprehensive income and reflected in earnings upon the sale of inventory. Periodic value fluctuations of the contracts generally offset the value fluctuations of the underlying fixed- price transactions or inventory. During the third quarter, the Company entered into forward contracts to purchase approximately $0.3 million of copper. As of October 1, 2005, the Company held open forward contracts to purchase approximately $0.7 million of copper through December 2005. -24- Futures contracts may also be used to manage price risk associated with natural gas purchases. Gains and losses with respect to these positions are deferred in stockholders' equity as a component of comprehensive income and reflected in earnings upon consumption of natural gas. Periodic value fluctuations of the contracts generally offset the value fluctuations of the underlying natural gas prices. At October 1, 2005, the Company had no open forward contracts to purchase natural gas. The lack of availability of energy sources and the impact of rising energy prices could materially affect the Company's business, results of operations and financial condition. Foreign Currency Exchange Rates Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than an entity's functional currency. The Company and its subsidiaries generally enter into transactions denominated in their respective functional currencies. Foreign currency exposures arising from transactions denominated in currencies other than the functional currency are not material; however, the Company may utilize certain forward fixed- rate contracts to hedge such transactional exposures. Gains and losses with respect to these positions are deferred in stockholders' equity as a component of comprehensive income and reflected in earnings upon collection of receivables. At October 1, 2005, one of the Company's foreign subsidiaries had $3 million in open forward contracts to purchase U.S. dollars. The Company's primary foreign currency exposure arises from foreign- denominated revenues and profits and their translation into U.S. dollars. The primary currencies to which the Company is exposed include the Canadian dollar, the British pound sterling, the Euro, and the Mexican peso. The Company generally views as long-term its investments in foreign subsidiaries with a functional currency other than the U.S. dollar. As a result, the Company generally does not hedge these net investments. Item 4. Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective. -25- There were no changes in the Company's internal control over financial reporting during the Company's fiscal quarter ending October 1, 2005, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company has identified deficiencies in the internal controls over financial reporting of the business (currently known as Mueller Comercial) acquired by the Company in December 2004. While the Company's assessment of these internal controls and procedures is continuing, at this time the Company intends to change such controls by, among other things, (i) preparing monthly financial statements on a timely basis, (ii) implementing routine preventative and detective control procedures and (iii) implementing additional disclosure controls and procedures. In addition to these modifications, the accounting and finance staff resources were increased at these operations during the third quarter of 2005. In light of the relative size and magnitude of Mueller Comercial to the Company's consolidated financial statements, the Company does not believe that the deficiencies identified have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings Copper Tube Antitrust Litigation The Company has been named as a defendant in several purported class action complaints brought by direct and indirect purchasers alleging anticompetitive activities with respect to the sale of copper plumbing tubes in the United States. Two such purported class actions were filed in the United States District Court for the Western District of Tennessee (the Federal Actions), four were filed in the Superior Court of the State of California, County of San Francisco (the California Actions), one was filed in the Circuit Court for Shelby County, Tennessee (the Tennessee Action), and one was filed in the Superior Court of the Commonwealth of Massachusetts, County of Middlesex (the Massachusetts Action, and with the Federal Actions, the California Actions and the Tennessee Action, the Actions). Wholly owned Company subsidiaries, WTC Holding Company, Inc., Deno Holding Company, Inc., and Mueller Europe Ltd. are named in all of the Actions, and Deno Acquisition Eurl is named in two of the Actions. Deno Acquisition Eurl has not been served with the complaint in either of the Actions in which it is named, and only the Company has been served with the complaint in the Tennessee Action. All of the Actions, which are similar, seek declaratory (except for the Massachusetts Action) and monetary relief. Plaintiffs' motions to consolidate and for appointment of lead counsel in the Federal Actions and plaintiffs' motion to consolidate the California Actions have been granted. On July 6, 2005, a motion to dismiss the Federal Actions for failure to state a claim was granted as to WTC Holding Company, Inc. and Deno Holding Company, Inc. and denied as to Mueller Industries, Inc. Mueller Europe's motion to dismiss the Federal Actions for lack of personal jurisdiction and on other grounds is pending. The Company's demurrer to the complaint in the California Actions and the Company's motion to dismiss the Tennessee Action for failure to state a claim are pending. The Company has not yet been required to respond to the -26- complaint in the Massachusetts Action. The Company subsidiaries named in the Actions have not yet been required to respond to the complaints in the California, Tennessee, and Massachusetts Actions. The Company believes that the claims for relief in the Actions are without merit and intends to defend the Actions vigorously. Other Matters The Company is aware of investigations of competition in markets in which it participates, or has participated in the past, in Europe and Canada. On September 22, 2005, the European Commission issued a statement alleging infringements in Europe of competition rules by manufacturers of copper fittings including the Company and a business in England that it acquired in 1997. The Company took the lead in bringing these issues to the attention of the European Commission and has fully cooperated in the resulting investigation from its inception. The Company does not anticipate any material adverse effect on its business or financial condition as a result of the matters discussed in this paragraph. -27- Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities
(a) (b) (c) (d) Total Number of Maximum Shares Number of Purchased Shares that as Part of May yet Be Total Publicly Purchased Number of Average Announced Under the Shares Price Paid Plans or Plans or Purchased per Share Programs Programs 7,647,030(1) July 3-July 30, 2005 2,002 (2) $ 29.10 July 31-August 27, 2005 - - August 28-October 1, 2005 - - (1) Shares available to be purchased under the Company's 10 million Share Repurchase Authorization until October 2006. (2) Shares withheld by the Company sufficient to cover the minimum withholding taxes incurred by the exercise of certain employee stock options.
Item 6. Exhibits 19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for the quarter ended October 1, 2005. Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as part of this Quarterly Report on Form 10-Q. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Items 3, 4 and 5 are not applicable and have been omitted. -28- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MUELLER INDUSTRIES, INC. October 27, 2005 /s/ Kent A. McKee Date Kent A. McKee Executive Vice President and Chief Financial Officer October 27, 2005 /s/ Richard W. Corman Date Richard W. Corman Vice President - Controller -29- EXHIBIT INDEX Exhibits Description 19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for the quarter ended October 1, 2005. Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as part of this Quarterly Report on Form 10-Q. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.