1998 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 27, 1998 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.) 6799 GREAT OAKS ROAD MEMPHIS, TN 38138-2572 (Address of principal executive offices) Registrant's telephone number, including area code: (901) 753-3200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, $ 0.01 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares of the Registrant's common stock outstanding as of July 15, 1998 was 35,613,294. -1- MUELLER INDUSTRIES, INC. FORM 10-Q For the Period Ended June 27, 1998 INDEX Part I. Financial Information Page Item 1. Financial Statements (Unaudited) a.) Consolidated Statements of Income for the quarters and six-months ended June 27, 1998 and June 28, 1997......................3 b.) Consolidated Balance Sheets as of June 27, 1998 and December 27, 1997............4 c.) Consolidated Statements of Cash Flows for the six-months ended June 27, 1998 and June 28, 1997....................................6 d.) Notes to Consolidated Financial Statements...........7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................9 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders......11 Item 6. Exhibits and Reports on Form 8-K.........................12 Signatures...........................................................13 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
For the Quarter Ended For the Six-Months Ended June 27, June 28, June 27, June 28, 1998 1997 1998 1997 Net sales $225,867 $215,437 $452,519 $416,803 Cost of goods sold 173,518 172,685 348,975 328,469 ------- ------- ------- ------- Gross profit 52,349 42,752 103,544 88,334 Depreciation and amortization 5,689 4,984 11,273 9,816 Selling, general, and administrative expense 18,412 15,234 36,254 30,730 ------- ------- ------- ------- Operating income 28,248 22,534 56,017 47,788 Interest expense (1,191) (1,118) (2,543) (2,296) Environmental reserves - - (600) (2,000) Other income, net 1,981 2,166 4,704 3,196 ------- ------- ------- ------- Income before income taxes 29,038 23,582 57,578 46,688 Current income tax expense (7,709) (6,929) (16,242) (13,657) Deferred income tax expense (1,619) (314) (2,361) (934) ------- ------- ------- ------- Total income tax expense (9,328) (7,243) (18,603) (14,591) ------- ------- ------- ------- Net income $ 19,710 $ 16,339 $ 38,975 $ 32,097 ======= ======= ======= ======= Weighted average shares for basic earnings per share 35,225 35,011 35,163 34,979 Effect of dilutive stock options 4,487 4,147 4,466 4,248 ------- ------- ------- ------- Adjusted weighted average shares for diluted earnings per share 39,712 39,158 39,629 39,227 ------- ------- ------- ------- Basic earnings per share $ 0.56 $ 0.47 $ 1.11 $ 0.92 ======= ======= ======= ======= Diluted earnings per share $ 0.50 $ 0.42 $ 0.98 $ 0.82 ======= ======= ======= ======= See accompanying notes to consolidated financial statements.
-3- MUELLER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
June 27, 1998 December 27, 1997 Assets Current assets: Cash and cash equivalents $ 87,914 $ 69,978 Accounts receivable, less allowance for doubtful accounts of $3,488 in 1998 and $3,680 in 1997 136,106 128,902 Inventories: Raw material and supplies 16,871 19,960 Work-in-process 24,293 20,283 Finished goods 54,910 57,531 Gold 2,327 407 --------- --------- Total inventories 98,401 98,181 Current deferred income taxes 4,510 5,023 Other current assets 8,691 6,967 --------- --------- Total current assets 335,622 309,051 Property, plant and equipment, net 284,688 260,364 Deferred income taxes 5,831 7,837 Other assets 29,089 33,524 --------- --------- $ 655,230 $ 610,776 ========= ========= See accompanying notes to consolidated financial statements.
-4- MUELLER INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data)
June 27, 1998 December 27, 1997 Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 18,027 $ 18,980 Accounts payable 32,687 30,530 Accrued wages and other employee costs 20,215 21,095 Other current liabilities 38,390 29,952 --------- --------- Total current liabilities 109,319 100,557 Long-term debt 45,172 53,113 Pension and postretirement liabilities 14,523 14,222 Environmental reserves 9,919 10,368 Deferred income taxes 1,882 2,040 Other noncurrent liabilities 13,410 11,745 --------- --------- Total liabilities 194,225 192,045 --------- --------- Minority interest in subsidiaries 390 691 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 40,000,000; outstanding 35,613,294 in 1998 and 35,017,416 in 1997 400 200 Additional paid-in capital, common 255,040 253,928 Retained earnings (Since January 1, 1991) 236,728 197,753 Cumulative translation adjustment (4,589) (3,232) Treasury common stock, at cost (26,964) (30,609) --------- --------- Total stockholders' equity 460,615 418,040 Commitments and contingencies (Note 2) - - --------- --------- $ 655,230 $ 610,776 ========= ========= See accompanying notes to consolidated financial statements.
-5- MUELLER INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the Six-Months Ended June 27, 1998 June 28, 1997 Cash flows from operating activities Net income $ 38,975 $ 32,097 Reconciliation of net income to net cash provided by (used in) operating activities: Depreciation and amortization 11,273 9,816 Minority interest in subsidiaries (301) 244 Deferred income taxes 2,361 934 Gain on disposal of properties (1,517) (452) Changes in assets and liabilities: Receivables (7,772) (27,149) Inventories (650) (10,228) Other assets (4,463) (14,732) Current liabilities 3,115 6,848 Other liabilities 310 109 Other, net (75) (276) -------- -------- Net cash provided by (used in) operating activities 41,256 (2,789) -------- -------- Cash flows from investing activities Businesses acquired - (37,743) Capital expenditures (23,812) (16,468) Proceeds from sales of properties 1,619 1,344 Escrowed IRB proceeds 6,082 - Note receivable (4,484) - -------- -------- Net cash used in investing activities (20,595) (52,867) -------- -------- Cash flows from financing activities Repayments of long-term debt (8,894) (5,442) Proceeds from stock options exercised including related tax benefits 6,357 581 -------- -------- Net cash used in financing activities (2,537) (4,861) -------- -------- Effect of exchange rate changes on cash (188) - -------- -------- Increase (decrease) in cash and cash equivalents 17,936 (60,517) Cash and cash equivalents at the beginning of the period 69,978 96,956 -------- -------- Cash and cash equivalents at the end of the period $ 87,914 $ 36,439 ======== ======== See accompanying notes to consolidated financial statements.
-6- MUELLER INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) General Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. This quarterly report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K, including the annual financial statements incorporated therein by reference. The accompanying unaudited interim financial statements include all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Note 1 - Earnings Per Common Share Basic per share amounts have been computed based on the average number of common shares outstanding. Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, computed using the treasury stock method. Note 2 - Commitments and Contingencies The Company is subject to normal environmental standards imposed by federal, state, local, and foreign environmental laws and regulations. Based upon information currently available, management believes that the outcome of pending environmental matters will not materially affect the overall financial position and results of operations of the Company. In addition, the Company is involved in certain litigation as either plaintiff or defendant as a result of claims that arise in the ordinary course of business which management believes will not have a material effect on the Company's financial condition. Note 3 - Comprehensive Income During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). The Company adopted this Statement as of the beginning of 1998. SFAS No. 130 established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. SFAS No. 130 requires foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Total comprehensive income was $18,963,000 and $16,773,000 for the quarters ending June 27, 1998, and June 28, 1997, respectively and was $37,618,000 and $32,270,000 for the six-month periods ending June 27, 1998 and June 28, 1997, respectively. -7- Note 4 - Stockholders' Equity During the second quarter of 1998, the Company's Board of Directors declared a two-for-one stock split to be effected in the form of a 100 percent stock dividend. The record date was May 12, 1998. Presentations of share data herein, including earnings per share, have been adjusted to reflect the split for all periods presented (except for Item 4. Submission of Matters to a Vote of Security Holders). Note 5 - Acquisitions During the first half of 1997, the Company acquired the assets and certain liabilities of Precision Tube Company, Inc., the assets of Wednesbury Tube Company, and Desnoyers S.A. These acquisitions were accounted for using the purchase method. Therefore, the results of operations of the acquired businesses are included in the consolidated financial statements of the Company from the date of acquisition. The following condensed pro forma consolidated results of operations are presented as if the acquisitions had occurred at the beginning of 1997. This information combines the historical results of operations of the Company and the acquired businesses after the effects of estimated purchase accounting adjustments. The pro forma information does not purport to be indicative of the results that would have been obtained if the operations had actually been combined during the period presented. For the Six-Months Ended June 28, 1997 Net sales $ 478,286 Net income 28,056 Basic earnings per share 0.80 Diluted earnings per share 0.72 The final assessment of fair values of the assets and reserves associated with the Desnoyers S.A. acquisition was completed during the second quarter of 1998. The determination of final fair values resulted in adjustments consisting of changes from initially recorded values. These adjustments increased property, plant and equipment, and other current liabilities of approximately $12.4 million and $8.6 million respectively, and decreased other assets of approximately $3.8 million. Note 6 - Stock Option Exercise On June 15, 1998, the Company loaned $4.5 million, on a full recourse basis, to an officer. Proceeds of $1.4 million were used by the officer to exercise options on the Company's stock. That portion of the loan has been classified as a reduction of additional paid-in capital, while the remaining balance of the loan is included in other assets in the Company's consolidated financial statements. The entire loan is secured by common stock of the Company. The tax benefit associated with the exercise of these options reduced taxes payable, classified as other current liabilities, by $3.8 million. Such benefits are reflected as additions to additional paid-in capital. -8- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Overview The Company's principal business is the manufacture and sale of copper tube, brass rod, copper and plastic fittings, forgings, valves, and other products made of copper, brass, bronze, plastic and aluminum. New housing starts and commercial construction are important determinants of the Company's sales to the air-conditioning, 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. The Company's product is sold to wholesalers in the plumbing, air-conditioning and refrigeration markets and to OEMs in these and other markets. Mueller's plants are located throughout the United States and in Canada, France and Great Britain. The Company also owns a short line railroad in Utah and natural resource properties in the Western U.S. Profitability of certain of the Company's product lines depends upon the "spreads" between the cost of 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 negative effects of fluctuations in material costs by passing these costs through to its customers. "Spreads" fluctuate based upon competitive market conditions. During 1997, the Company acquired two European copper tube manufacturers. Wednesbury Tube is located in Bilston, England, and Desnoyers S.A. is located near Paris, France. These acquisitions give the Company a major manufacturing and sales presence in Europe. The Company uses the LIFO method to value the copper component of certain of its copper tube and fittings inventories in the United States. The market price of copper also indirectly affects the carrying value (FIFO basis) of the Company's brass and other metal inventories. Results of Operations Net income was $19.7 million, or 50 cents per diluted share, for the second quarter of 1998, which compares with net income of $16.3 million, or 42 cents per diluted share, for the same period of 1997. Year-to-date, net income was $39.0 million, or 98 cents per diluted share, which compares to net income of $32.1 million, or 82 cents per diluted share, for 1997. -9- During the second quarter of 1998, the Company's net sales were $225.9 million, which compares to net sales of $215.4 million, or a 4.9 percent increase over the same period of 1997. Net sales were $452.5 million in the first half of 1998 versus $416.8 million in 1997. During the second quarter of 1998, the Company's manufacturing businesses shipped 159.2 million pounds of product compared to 132.7 million pounds in the same quarter of 1997. The Company's manufacturing businesses shipped 315.3 million pounds of product in the first half of 1998, or 22.4 percent more than the same period of 1997. Pounds shipped grew by a larger percent than net sales because the average price of copper was lower in 1998 than in 1997. Second quarter and first half operating income increased primarily due to: (i) productivity improvements at the Company's North American manufacturing operations; (ii) higher sales volumes particularly at brass rod and plastics; and (iii) spread improvements primarily in domestic copper tube. Mueller's European operations, which were acquired during 1997, operated approximately at break-even for the second quarter and first half of 1998. Selling, general, and administrative expense increased primarily due to acquired businesses. Interest expense for the second quarter of 1998 totaled $1.2 million compared to $1.1 million in the same quarter of 1997. For the first six- months of 1998, interest expense was $2.5 million compared to $2.3 million for the same period of 1997. Total interest in the first half of 1998 increased due to the increase in long-term debt following the issuance of Industrial Development Revenue Bonds in the third quarter of 1997, partially offset by scheduled reductions in other long-term debt. During the first half of 1998, the Company capitalized $0.3 million of interest related to capital improvement programs compared to none in 1997. The effective tax rate of 32.1 percent in the second quarter and 32.3 percent in the first six-months of 1998 reflect the benefits of a lower federal provision relating to the recognition of net operating loss carry forwards and a lower state provision associated with incentive IRB financings. Liquidity and Capital Resources Cash provided by operating activities during the first half of 1998 totaled $41.3 million which is primarily attributable to net income and depreciation. During the first half of 1998, the Company used $20.6 million in investing activities, consisting primarily of $23.8 million in capital expenditures offset by $6.1 million proceeds from escrowed IRB funds. Cash used in investing activities was funded with existing cash balances, cash from operations, plus escrowed IRB proceeds. The Company has a $100.0 million unsecured line-of-credit agreement (the Credit Facility) which expires in May 2001, but which may be extended for successive one year periods by agreement of the parties. Borrowings under the Credit Facility bear interest, at the Company's option, at (i) prime rate less .50 percent, (ii) LIBOR plus .27 percent, or (iii) Federal Funds Rate plus .65 percent. There are no outstanding borrowings under the Credit Facility. At June 27, 1998, funds available under the Credit Facility were reduced by $3.8 million for outstanding letters of credit. At June 27, 1998, the Company's total debt was $63.2 million or 12.1 percent of its total capitalization. -10- The Company's financing obligations contain various covenants which require, among other things, the maintenance of minimum levels of working capital, tangible net worth, and debt service coverage ratios. The Company is in compliance with all debt covenants. Management believes that cash provided by operations and currently available cash of $87.9 million will be adequate to meet the Company's normal future capital expenditure and operational needs. Additionally, certain capital improvements are being funded with escrowed IRB proceeds. The Company's current ratio remains strong at 3.1 to 1. The Company has approved a $25.3 million capital improvement project at its Fulton copper tube mill to improve the utilization of scrap metal and enhance the mill's refining processes. This project is also expected to improve yield and productivity and increase casting capacity. Moreover, the project, when completed in early 1999, will allow the Fulton tube mill to use more scrap copper when market conditions warrant. Another important ongoing program is the modernization of the Company's copper fittings plant in Covington, Tennessee. Modernization of this facility, which produces a broad range of low-volume copper fittings, is estimated to require approximately $7.3 million in capital improvements and will be completed in 1999. This project, when completed, will also increase output and improve efficiency. Mueller also has programs underway to make near-term improvements at its European operations. Further, the Company is also considering various long-term capital investments for these businesses which will further improve their cost structure and productivity. Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On May 7, 1998, the Company held its Annual Meeting of Stockholders at which four proposals were voted upon: (i) election of directors; (ii) increase the number of authorized shares of common stock from 50,000,000 to 100,000,000; (iii) adoption of the Company's 1998 Stock Option Plan; and (iv) 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 Robert B. Hodes 14,893,054 101,522 Harvey L. Karp 14,863,696 130,880 Allan Mactier 14,909,822 84,754 William D. O'Hagan 14,893,028 101,548 Robert J. Pasquarelli 14,911,114 83,462 -11- The proposal to increase the number of authorized shares of common stock to 100,000,000 was approved by 14,463,461 vote in favor, 500,372 votes against, with 30,743 votes abstaining. The proposal to approve the adoption of the Company's 1998 Stock Option Plan was approved by 12,343,092 vote in favor, 2,574,114 votes against, with 77,370 votes abstaining. The proposal to approve the appointment of Ernst & Young LLP as the Company's auditors was ratified by 14,959,992 votes in favor, 14,131 votes against, and 20,453 votes abstaining. There were no broker non-votes pertaining to these proposals. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 19.1 Mueller Industries, Inc.'s Quarterly Report to Stockholders for the quarter ended June 27, 1998. Such report is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as part of this Quarterly Report on Form 10-Q. (b) During the quarter ended June 27, 1998, the Registrant filed no Current Reports on Form 8-K. Items 1, 2, 3 and 5 are not applicable and have been omitted. -12- 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 23, 1998. MUELLER INDUSTRIES, INC. /S/ EARL W. BUNKERS Earl W. Bunkers, Executive Vice President and Chief Financial Officer /S/ KENT A. MCKEE Kent A. McKee Vice President Business Development/Investor Relations /S/ RICHARD W. CORMAN Richard W. Corman Director of Corporate Accounting -13- EXHIBIT INDEX Exhibits Description 19.1 Quarterly Report to Stockholders 27.1 Financial Data Schedule for the period ended June 27, 1998 (EDGAR filing only) 27.2 Restated Financial Data Schedule for the period ended March 28, 1998 (EDGAR filing only) 27.3 Restated Financial Data Schedule for the period ended December 27, 1997 (EDGAR filing only) 27.4 Restated Financial Data Schedule for the period ended September 27, 1997 (EDGAR filing only) 27.5 Restated Financial Data Schedule for the period ended June 28, 1997 (EDGAR filing only) 27.6 Restated Financial Data Schedule for the period ended March 29, 1997 (EDGAR filing only) 27.7 Restated Financial Data Schedule for the period ended December 28, 1996 (EDGAR filing only) 27.8 Restated Financial Data Schedule for the period ended December 30, 1995 (EDGAR filing only) 27.9 Restated Financial Data Schedule for the period ended December 31, 1994 (EDGAR filing only) -14-