MUELLER INDUSTRIES, INC. 2000 ANNUAL REPORT Looking Ahead Mueller Industries, Inc. (NYSE:MLI) is America's 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. Ranked among the top 50 of all North American metals companies, Mueller's operations are located throughout the United States and in Mexico, Canada, France, and the United Kingdom. The Company also owns a short line railroad in Utah. One commentator recently had this to say about Mueller: "Following a long period of heavy reinvestment, current management has clearly established Mueller as the industry's low-cost producer. Management is capitalizing on its strengths to increase customer service and has become a key supplier to virtually all major distributors." CONTENTS Financial Highlights 2 Letter to Stockholders, Customers, and Employees 4 Ten-Year Review 8 Standard Products Division 11 Industrial Products Division 12 Company Overview 13 Financial Review 15 Corporate Information 54 -1- MUELLER INDUSTRIES, INC. Financial Highlights (Dollars in thousands, except per share data)
2000 1999 1998 1997 1996 Summary of Operations Net sales $ 1,206,168 $ 1,168,744 $ 929,391 $ 888,997 $ 718,312 Product shipments (in millions of pounds) 785.9 815.2 644.6 545.3 447.0 Net income $ 92,690 $ 99,279 $ 75,445 $ 69,770 $ 61,173 Diluted earnings per share $ 2.43 $ 2.51 $ 1.90 $ 1.78 $ 1.57 Significant Year-End Data Cash and cash equivalents $ 100,268 $ 149,454 $ 80,568 $ 69,978 $ 96,956 Ratio of current assets to current liabilities 3.4 to 1 2.9 to 1 2.7 to 1 3.1 to 1 3.5 to 1 Long-term debt (including current portion) $ 106,884 $ 149,870 $ 194,549 $ 72,093 $ 59,650 Debt as a percent of total capitalization 14.8% 20.8% 27.9% 14.7% 14.6% Stockholders' equity $ 614,105 $ 569,430 $ 502,122 $ 418,040 $ 348,082 Book value per share $ 18.41 $ 16.31 $ 14.02 $ 11.94 $ 9.98 Capital expenditures $ 63,458 $ 40,115 $ 55,440 $ 36,865 $ 18,868
-2- In The Year 2000: * "American Metal Market" magazine ranked Mueller number one among all North American metals companies for return on assets. * Mueller posted its ninth consecutive year of increased operating income, and set a new Company record for pretax earnings. * The Company reduced its long-term debt by 29 percent from 1999 levels, and restructured its bank credit facility to reduce its borrowing rate on funded debt by 85 basis points. * Mueller's debt-to-total capitalization improved more than 25 percent, dropping from 20.8 percent in 1999 to 14.8 percent. For additional information, see the Ten-Year Review on page 8. Industry Accolades The year 2000 was a year of accolades for Mueller Industries, Inc. For the first time in its history, the firm moved into the ranks of the "Fortune" 1000. It was chosen by "Forbes" magazine for its "Platinum 400", a list of, as "Forbes" puts it, "exceptional big corporations that pass a stringent set of hurdles measuring both long and short-term growth and profitability." Mueller was also recognized by "CFO" magazine as one of the top four firms in the metals industry for tax efficiency, and ranked number one in return on assets in the industry trade journal "American Metal Market". In light of all these accomplishments, it was no surprise when, in early 2001, Mueller President and CEO Bill O'Hagan was named "Copper Man of the Year" by the Copper Club, an international industry association. -3- LETTER TO STOCKHOLDERS, CUSTOMERS, AND EMPLOYEES Mueller achieved many important goals in the year 2000, which will result in opportunities for growth and profit enhancement in the years ahead. Net sales totaled $1.21 billion in 2000, up from $1.17 billion in 1999. Net income was $92.7 million in 2000 compared with $99.3 million in 1999. Net income in 2000 was affected by a significant rise in the tax rate applicable to Mueller's earnings, from 31.9 percent in 1999 to 36.9 percent in 2000. The tax rate increase was due primarily to having recognized the majority of various historical tax benefits in prior years. Income before income taxes increased in 2000 to $146.9 million compared with $145.7 million in 1999. The year 2000 began strongly, and in the first two quarters, Mueller achieved record results in virtually every category: net sales, operating income, net income, and earnings per share. In the second half of the year business slowed, reflecting the reduced momentum in the economy as a whole. An added factor in the latter half of the year was the increase in raw material and energy costs, which affected our margins. Nonetheless, Mueller set a record for operating income and pretax earnings in 2000, and enjoyed a solid and productive year. U.S. Copper Tube Business Had an Excellent Year Our major initiative in 2000 was to complete a capital improvement program at our copper tube mill in Wynne, Arkansas. This program, budgeted at $24 million, had the objective of reducing the mill's conversion costs to a world-class level, by installing state-of-the-art extrusion and finishing equipment. We are pleased to report that the program was completed on time and under budget. Our new copper refining and casting facility located in Fulton, Mississippi operated very well during the year. This facility gives Mueller the flexibility of using the most economical mix of copper scrap and copper cathode. During the year the price differential between scrap and cathode was a favorable factor in reducing the impact of higher metal costs. Overall, our U.S. copper tube business had a strong year as demand for tube remained high and margins were satisfactory. Also, Mueller's copper tube line sets business had an outstanding year with record sales and profits. Fittings Business Had A Solid Year Our copper and plastic fittings business in 2000 fell shy of the results achieved in 1999. Pounds of product sold and shipped declined slightly and profit margins also declined, more so in plastic than in copper fittings. -4- Good progress was made in upgrading our distribution systems and integrating our supporting information systems. Also, we made substantial investments to improve our cold-header operations, including the installation of a new copper rod upcaster. In 2001, we expect to make additional investments in the fittings business to further reduce costs and improve efficiencies. We believe our fittings manufacturing operations are currently among the best in the world. European Modernization Plan to be Completed in 2001 Mueller's European copper tube business operated at a loss in 2000, although the loss decreased from the prior year. Obviously, we are not satisfied with these results and have taken initiatives to improve this situation. In 2000, Mueller launched a $40 million capital program to significantly reduce conversion costs at our Bilston, England copper tube facility. The program includes increasing casting capacity, and installing a new extrusion press (similar to the presses used in our U.S. tube operations) and drawing equipment. We expect to complete this project by the end of 2001. The benefits from this program should commence soon thereafter. We are confident that the European copper tube market will be a rewarding venue for Mueller when our conversion costs are reduced to planned levels. Highlights of Industrial Products Industrial products operating earnings increased about 2 percent in 2000 compared with 1999. Sales increased 4.2 percent due to the acquisition of two small companies. In our principal industrial products business, brass rod, competitive pressures increased as the year progressed. This adversely affected margins. Much the same can be said of our other businesses in the industrial sector. Nonetheless, the Industrial Products Division achieved the best earnings result in its history. During the year, we made substantial progress in the installation of a new horizontal continuous caster in our Port Huron, Michigan brass rod plant. Additional improvements will be made to drawing equipment and similar processes in 2001. In addition, a new automated lube system was added to our aluminum impacts plant in Marysville, Michigan. These investments continue to drive down our manufacturing costs. Other Developments B&K, our subsidiary that imports and distributes residential and commercial plumbing products, had a challenging year in 2000. Customer service was affected by the introduction of a new information system, and profit margins generally declined from the levels of a year ago. We believe these factors are now behind us and look forward to B&K making progress in 2001. Utah Railway's operating income increased by 10 percent in 2000, but the closure of a large customer's coal mine late in the year reduced fourth quarter earnings. We are endeavoring to secure replacement business. -5- Stock Repurchase Program Since Mueller's stock repurchase program commenced in October 1999, the company has acquired 2.3 million shares at an average price of $26.98 per share. The Board of Directors has authorized the repurchase of a total of 10 million shares, subject to management's discretion. There is no assurance that additional shares will be repurchased since such decisions are based on competing alternate uses of available funds. Mueller's Financial Position is Strong We have always placed a high priority on maintaining a strong balance sheet. A strong balance sheet is our best defense and it is our best offense. We ended 2000 with $100.3 million in cash and a low 14.8 percent debt- to-total capitalization ratio. Our current ratio is an excellent 3.4 to 1. Cash flow continues to be strong and we are capable of funding our capital improvement programs and our share buy-back program from internal sources. Moreover, toward year-end Mueller restructured and increased its bank credit facility to $200 million. By doing so, we reduced our borrowing rate on funded debt by 85 basis points. The terms of this credit facility are comparable to a single A credit rating which reflects the underlying strength of our financial position. Business Outlook for 2001 The economic indicators for the housing and construction market are more difficult to assess today than at any time in the past 10 years. The single most important indicator, interest rates, has recently declined and it is likely that the Federal Reserve Bank will continue to ease interest rates. Thirty-year mortgage rates have also declined from a high of 8.7 percent in May 2000, to less than 7.0 percent recently. This should provide a strong stimulus to the housing market as it makes purchasing a home more affordable. In addition, the supply of unsold new homes is at a near record low. On the other hand, the growth rate of the U.S. economy has clearly slowed and there is ample evidence of cutbacks in manufacturing and retail activity. Consumer confidence has declined. And imports have been attracted by the strength of the U.S. dollar. So far, we see only a modest drop in demand for housing, but we are alert to the changing economic circumstances and are prepared financially and operationally to make adjustments, as needed. That being said, we are cautiously optimistic about 2001. Even an economic slowdown has its benefits in terms of added opportunities to find fairly priced acquisitions and to fine tune our operations. We believe that Mueller will emerge from any economic slowdown stronger than ever before. -6- In Closing, A Word of Thanks This past summer, Robert J. Pasquarelli resigned as a director, and accepted the position of Vice President and General Manager of our European operations. We thank him for his 10 years of service as a director, and we are excited that he has joined our management team. We believe his 30 years of experience in the metals industry will be of great value to our company. Mr. Gary S. Gladstein, a CPA with broad experience in financial markets, was appointed a director in June 2000. Mr. Gladstein has also been appointed Chairman of Mueller's Audit Committee. He previously served as a director from 1990 to 1994. Mueller is also fortunate to have attracted and retained employees who are talented, dedicated, and enthusiastic. Our successes are due to their efforts. Sincerely, /S/HARVEY L. KARP Harvey L. Karp Chairman of the Board /S/WILLIAM D. O'HAGAN William D. O'Hagan President and Chief Executive Officer March 16, 2001 [PHOTO] Harvey L. Karp, Chairman of the Board, and William D. O'Hagan, President and Chief Executive Officer -7- MUELLER INDUSTRIES, INC. Ten-Year Review Selected Financial Data (Dollars in thousands, except per share data)
5-YEAR COMPOUND GROWTH 2000 1999 1998 1997 1996 INCOME STATEMENT DATA Net sales $ 1,206,168 $ 1,168,744 $ 929,391 $ 888,997 $ 718,312 Cost of goods sold 925,311 886,531 720,293 704,801 554,570 ---------- ---------- -------- -------- -------- Gross profit 16.8% 280,857 282,213 209,098 184,196 163,742 Depreciation and amortization 37,457 36,986 24,899 20,998 18,472 Selling, general, and administrative expense 94,754 97,301 75,390 63,489 54,808 ---------- ---------- -------- -------- -------- Operating income 18.4% 148,646 147,926 108,809 99,709 90,462 Interest expense (9,287) (11,681) (5,839) (4,968) (5,346) Environmental reserves (2,049) - (2,133) (3,100) (2,045) Other income, net 9,603 9,464 8,503 9,180 5,341 ---------- ---------- -------- -------- -------- Income before income taxes 17.9% 146,913 145,709 109,340 100,821 88,412 Income tax expense (54,223) (46,430) (33,895) (31,051) (27,239) ---------- ---------- -------- -------- -------- Net income 15.7% $ 92,690 $ 99,279 $ 75,445 $ 69,770 $ 61,173 ========== ========== ======== ======== ======== Adjusted weighted average shares (000) 38,096 39,605 39,644 39,250 38,993 Diluted earnings per share $ 2.43 $ 2.51 $ 1.90 $ 1.78 $ 1.57 ========== ========== ======== ======== ======== BALANCE SHEET DATA Cash and cash equivalents $ 100,268 $ 149,454 $ 80,568 $ 69,978 $ 96,956 Current assets 405,171 440,746 382,324 309,051 274,712 Working capital 287,322 287,685 239,750 208,494 195,756 Total assets 910,276 904,080 874,694 610,776 509,357 Current liabilities 117,849 153,061 142,574 100,557 78,956 Debt 106,884 149,870 194,549 72,093 59,650 Stockholders' equity 614,105 569,430 502,122 418,040 348,082 SELECTED OPERATING DATA Cash provided by operations 16.6% $ 118,474 $ 164,755 $ 102,681 $ 52,930 $ 78,700 Capital expenditures $ 63,458 $ 40,115 $ 55,440 $ 36,865 $ 18,868 Number of employees 4,291 4,356 4,788 3,378 2,339 Current ratio 3.4 to 1 2.9 to 1 2.7 to 1 3.1 to 1 3.5 to 1 Return on average equity 15.7% 18.5% 16.4% 18.2% 19.3% Debt to total capitalization 14.8% 20.8% 27.9% 14.7% 14.6% Outstanding shares (000) 33,358 34,919 35,808 35,017 34,870 Book value per share $ 18.41 $ 16.31 $ 14.02 $ 11.94 $ 9.98 ========== ========== ======== ======== ========
-8 MUELLER INDUSTRIES, INC. Ten-Year Review (continued) Selected Financial Data (Dollars in thousands, except per share data)
1995 1994 1993 1992 1991 INCOME STATEMENT DATA Net sales $ 678,838 $ 550,003 $ 501,885 $ 517,339 $ 441,431 Cost of goods sold 549,884 448,467 403,775 429,707 388,863 -------- -------- -------- -------- -------- Gross profit 128,954 101,536 98,110 87,632 52,568 Depreciation and amortization 15,452 12,689 14,160 12,505 13,294 Selling, general, and administrative expense 49,491 44,895 45,923 45,809 40,912 -------- -------- -------- -------- -------- Operating income 64,011 43,952 38,027 29,318 (1,638) Interest expense (4,168) (6,718) (5,759) (5,694) (6,114) Environmental reserves (1,421) (2,914) (1,060) - (2,700) Other income, net 6,127 6,504 2,235 675 (39,283) -------- -------- -------- -------- -------- Income before income taxes 64,549 40,824 33,443 24,299 (49,735) Income tax expense (19,726) (12,898) (12,307) (7,633) 5,994 -------- -------- -------- -------- -------- Net income $ 44,823 $ 27,926 $ 21,136 $ 16,666 $ (43,741) ======== ======== ======== ======== ======== Adjusted weighted average shares (000) 38,298 39,560 41,772 40,220 38,984 Diluted earnings per share $ 1.17 $ 0.71 $ 0.51 $ 0.41 $ (1.12) ======== ======== ======== ======== ======== BALANCE SHEET DATA Cash and cash equivalents $ 48,357 $ 34,492 $ 77,336 $ 44,459 $ 7,541 Current assets 211,038 183,551 194,411 182,381 152,108 Working capital 143,154 116,330 146,981 120,855 62,625 Total assets 450,835 430,755 369,743 372,547 334,786 Current liabilities 67,884 67,221 47,430 61,526 89,483 Debt 75,902 94,736 62,711 69,477 67,410 Stockholders' equity 285,875 241,948 222,114 204,421 152,609 SELECTED OPERATING DATA Cash provided by operations $ 54,968 $ 21,963 $ 50,987 $ 38,714 $ 5,618 Capital expenditures $ 40,980 $ 48,152 $ 11,083 $ 10,952 $ 11,825 Number of employees 2,274 2,256 2,010 2,055 2,452 Current ratio 3.1 to 1 2.7 to 1 4.1 to 1 3.0 to 1 1.7 to 1 Return on average equity 17.0% 12.0% 9.9% 9.3% N/A Debt to total capitalization 21.0% 28.1% 22.0% 25.4% 30.6% Outstanding shares (000) 34,699 34,796 38,333 40,000 40,000 Book value per share $ 8.24 $ 6.95 $ 5.79 $ 05.11 $ 3.82 ======== ======== ======== ======== ========
-9 [GRAPH] Net Sales ($ millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Net Sales $441 $517 $502 $550 $679 $718 $889 $929 $1,169 $1,206
[GRAPH] Net Income ($ millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Net Income $(44) $17 $21 $28 $45 $61 $70 $75 $99 $93
[GRAPH] Total Assets ($ millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Total Assets $335 $373 $370 $431 $451 $509 $611 $875 $904 $910
[GRAPH] Stockholders' Equity ($ millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Stockholders' Equity $153 $204 $222 $242 $286 $348 $418 $502 $569 $614
[GRAPH] Debt-to-Total Capitalization
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Debt-to-Total Capitalization 30.6% 25.4% 22.0%2 28.1% 21.0% 14.6% 14.7% 27.9% 20.8% 14.8%
-10- STANDARD PRODUCTS DIVISION Appropriate for a year that began a new decade, a new century, and a new millennium, the year 2000 was one that pointed toward the future at Mueller Industries. And nowhere in the Company was that focus more evident than in Mueller's Standard Products Division. Net sales for the division advanced nearly 3 percent over 1999, and 41 percent ahead of net sales two years ago. Sharply higher raw materials costs in the second half of the year, including increased copper and plastic resin costs, coupled with higher energy costs, put pressure on operating margins. However, the division's operating income dipped less than 1 percent compared to the record year it posted in 1999, and still reflected a 55 percent increase over operating income two years before. Copper Tube Mill Modernized More importantly, during the year the Company made significant capital investments in certain operations of the Standard Products Division, assuring its ability to remain competitive and continue to grow its share of the copper tube, copper fittings, and plastic fittings markets both in the United States and abroad. At Mueller's Wynne, Arkansas copper tube mill, some $22 million was invested in 2000 to update the extrusion, drawing, and finishing equipment employed at the mill. This project, finished on time and under budget last year, was designed to improve productivity and reduce staffing costs, as well as improve the mill's conversion costs and yield. Already the mill has reduced staff by 20 percent, and is achieving production which formerly took six to seven days in only five days. Additional benefits are expected from the Wynne mill as it completes the transition to the new equipment and processes. Moving Forward in Europe In Europe, where Mueller is seeking to replicate its domestic success in plant modernization and cost reduction, the Company launched its most ambitious capital program yet. Some $40 million is being invested in Mueller's copper tube mill in Bilston, England. The Bilston project includes the installation of new casting, extrusion, and drawing equipment, and poses the challenge of operating the existing production lines while installing the new equipment. Former Mueller director, now Vice President and General Manager of European Operations, Bob Pasquarelli is directing that effort, and focusing his team on building a state-of-the-art manufacturing infrastructure from which Mueller can better penetrate the European markets. -11- INDUSTRIAL PRODUCTS DIVISION There's an ancient proverb that says a journey of a thousand miles must begin with a single step. Mueller's Industrial Products Division launched its voyage into the new century with small advances in net sales and earnings. Net sales increased 4 percent over 1999, and operating income was up 2 percent over the previous year. However, the division simultaneously initiated a number of significant steps during the year, each designed to enhance its agility in moving forward in the future. Acquisitions Expand Product Line In the first half of the year, Mueller made two acquisitions to add depth and breadth to the Industrial Products Division. Micro Gauge, Inc. and its related business, Microgauge Machining, Inc., with sales in the $13-14 million range, were acquired for just over $9 million. Micro Gauge specializes in the manufacture of high volume automotive parts, and complements Mueller's impact extrusion line. By acquiring Micro Gauge, Mueller brought in-house the specialty machining capabilities that it had previously outsourced to Micro Gauge. The second acquisition was Propipe Technologies, Inc., a fabricator of gas train manifold systems, which was purchased for approximately $6 million. With 1999 sales in the $7-8 million range, Propipe's products augment and extend Mueller's Lincoln Brass product line, and are used by such well-known customers as Frigidaire, Trane, and Lennox. Both the Micro Gauge and Propipe acquisitions were fully assimilated in the 2000 fiscal year. Capital Investments Enhance Productivity Capital investments in the Industrial Products Division last year were not limited to acquisitions. A major move forward began at the Port Huron, Michigan brass rod mill, where Mueller initiated the installation of a new horizontal continuous caster. This $10 million investment replaces higher cost technology and is expected to increase casting capacity, improve yield, and reduce conversion costs. Also, an automated lube line was added at the division's Marysville, Michigan plant at a cost of approximately $2 million. This addition, which lubricates parts before they are formed, has significantly improved production in Mueller's impact extrusion operation, producing, in one shift, output comparable to that of three shifts prior to installation. So, in its relentless quest to drive down manufacturing costs, and maximize its service to its customers by extending its product lines, upgrading distribution systems and rationalizing production, Mueller made meaningful strides in 2000. The century may have only begun, but Mueller is looking far ahead, to an even more productive future. -12- COMPANY OVERVIEW Standard Products Division U.S. Copper Tube PLANTS: Fulton, Mississippi Wynne, Arkansas Clinton, Tennessee PRODUCTS AND APPLICATIONS Water tube, in straight lengths and coils for plumbing and construction Dehydrated coils and nitrogen-charged straight lengths for refrigeration and air-conditioning Industrial tube, in straight lengths and level-wound coils, for fittings, redraw, etc. Line sets for controlling the flow of refrigerant gases CUSTOMERS Plumbing wholesalers, home centers, and hardware wholesalers and co-ops Air-conditioning and refrigeration wholesalers and OEMs Mueller's copper fitting plants and OEMs Wholesalers and OEMs Copper Fittings PLANTS Fulton, Mississippi Covington, Tennessee Port Huron, Michigan Strathroy, Ontario, Canada PRODUCTS AND APPLICATIONS Over 1,500 wrot copper elbows, tees and adapters, and assorted cast copper fittings for plumbing, heating, air-conditioning, and refrigeration CUSTOMERS Plumbing and air-conditioning wholesalers, home centers, hardware wholesalers and co-ops, and OEMs Plastic Fittings PLANTS Kalamazoo, Michigan Cerritos, California Upper Sandusky, Ohio PRODUCTS AND APPLICATIONS A broad line of over 1,000 PVC and ABS plastic fittings and valves for drainage, waste and ventilation, in housing and commercial construction, recreational vehicles, and manufactured housing CUSTOMERS Plumbing wholesalers, home centers, hardware wholesalers and co-ops, and distributors to the manufactured housing and recreational vehicle industry European Copper Tube PLANTS Bilston, Great Britain Longueville, France PRODUCTS AND APPLICATIONS Copper tube in various lengths, diameters and hardnesses for plumbing, refrigeration, and heating Industrial tube for redraw, copper fittings, etc. -13- CUSTOMERS Builders' merchants, plumbing, refrigeration, and heating wholesalers OEMs Industrial Products Division Brass Rod PLANTS Port Huron, Michigan PRODUCTS AND APPLICATIONS A broad range of rounds, squares, hexagons, and special shapes in free machining, thread rolling, and forging alloys for numerous end products, including plumbing brass, valves and fittings, and industrial machinery and equipment CUSTOMERS OEMs, contract machining companies and distributors Engineered Products PLANTS Port Huron, Michigan Marysville, Michigan Brighton, Michigan Hartsville, Tennessee Jacksboro, Tennessee Waynesboro, Tennessee Middletown, Ohio North Wales, Pennsylvania Salisbury, Maryland PRODUCTS AND APPLICATIONS Brass and aluminum hot metal forgings in assorted alloys for plumbing brass, valves and fittings, and industrial machinery and equipment Cold-formed aluminum and copper products for automotive, industrial, and recreational components High volume machining of aluminum, steel , brass and cast iron, forgings, impacts, and castings for automotive applications Valves and custom OEM products for refrigeration and air- conditioning applications Custom valve and other metal assemblies for the gas appliance and barbecue grill markets Shaped and formed tube, produced to tight tolerances, for baseboard heating, appliances, medical instruments, etc.; coaxial cables CUSTOMERS OEMs Other Businesses Utah Railway Company, established in 1912, hauls coal to connections with national carriers, power plants and to other destinations. Utah Railway Company also provides train switching services in Utah's central corridor. -14- FINANCIAL REVIEW 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 plants are located throughout the United States and in Canada, France, and Great Britain. The Company also owns a short line railroad in Utah. The Company's businesses are managed and organized into three segments: (i) Standard Products Division (SPD); (ii) Industrial Products Division (IPD); and (iii) Other Businesses. SPD manufactures and sells copper tube, and copper and plastic fittings and valves. Outside of the United States, SPD manufactures copper tube in Europe and copper fittings in Canada. SPD sells these products to wholesalers in the HVAC (heating, ventilation, and air-conditioning), plumbing and refrigeration markets, and to distributors to the manufactured housing and recreational vehicle industries. IPD manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. IPD sells its products primarily to original equipment manufacturers (OEMs), many of which are in the HVAC, plumbing and refrigeration markets. Other Businesses is composed primarily of Utah Railway Company. SPD and IPD account for more than 98 percent of consolidated net sales and more than 86 percent of consolidated total assets. New housing starts and commercial construction are important determinants of the Company's sales to the HVAC, refrigeration, and plumbing markets because the principal end use of a significant portion of the Company's products is in the construction of single and multi-family housing and commercial buildings. Profitability of certain of the Company's product lines depends upon the "spreads" between the cost of raw material and the selling prices of its completed products. The open market prices for copper cathode and scrap, for example, influence the selling price of copper tubing, a principal product manufactured by the Company. The Company attempts to minimize the effects of fluctuations in material costs by passing through these costs to its customers. Spreads fluctuate based upon competitive market conditions. -15- Results of Operations 2000 PERFORMANCE COMPARED WITH 1999 Consolidated net sales in 2000 were $1,206.2 million or 3.2 percent higher than $1,168.7 million in 1999. Pounds of product sold totaled 785.9 million in 2000 or 3.6 percent less than the 815.2 million pounds sold in 1999. The decrease in pounds sold was a result of production interruptions in the first quarter and the slower economic environment in the second half of the year. Net selling prices generally fluctuate with changes in raw material prices; therefore, pounds sold is an additional measurement of the Company's performance. The COMEX average copper price in 2000 was approximately 16.4 percent higher than the 1999 average. This change impacts the Company's net sales and cost of goods sold. Cost of goods sold increased $38.8 million to $925.3 million in 2000. This increase is primarily attributable to higher raw material costs, mostly copper. Gross profit was 23.3 percent of net sales in 2000 compared with 24.1 percent in 1999. The decline in gross profit is attributable to lower volumes and increases in raw material and energy costs in the second half of 2000. Depreciation and amortization increased to $37.5 million in 2000 compared with $37.0 million in 1999. This increase was due to acquisitions in 2000 and capital expenditures in recent years. Selling, general, and administrative expense decreased to $94.8 million in 2000 reflecting lower volume. Interest expense decreased to $9.3 million in 2000 from $11.7 million in 1999. The Company capitalized interest of $1.2 million for major capital improvement projects in 2000 compared with $0.4 million in 1999. The provision for environmental reserves totaled $2.0 million in 2000 whereas none was required in 1999. Other income increased to $9.6 million in 2000 from $9.5 million in 1999. The Company provided $54.2 million for income taxes in 2000, of which $8.9 million was deferred. Current income tax expense of $45.3 million increased from 1999 primarily due to the 1999 realization of an ordinary loss as a consequence of the sale of natural resource property. The 36.9 percent effective tax rate for 2000, compared with the 1999 rate of 31.9 percent, reflects the Company having recognized the majority of historical tax benefits in prior years. The Company's employment was 4,291 at the end of 2000 compared with 4,356 at the 1999 year-end. Standard Products Division Net sales by SPD were $882.4 million in 2000 compared with $858.5 million in 1999 for a 2.8 percent increase. Operating income was $128.5 million in 2000 compared with $129.1 million in 1999. Higher raw material and energy costs were factors in reducing margins and operating income. During 2000, operating income was reduced by a $2.1 million charge for expected severance and termination costs associated with our European modernization program. -16- Industrial Products Division IPD's net sales were $302.5 million in 2000 compared with $290.3 million in 1999. During 2000, the Company completed two acquisitions: (i) Micro Gauge, Inc. and a related business, Microgauge Machining, Inc., a specialized machining operation and (ii) Propipe Technologies, Inc., a fabricator of gas train manifold systems. Operating income was $30.6 million in 2000 compared with $29.9 million in 1999. Increased volume and lower manufacturing costs accounted for the profit improvement. Other Businesses Utah Railway Company hauled 6.0 million tons of coal in 2000, 12.6 percent more than in 1999. During 2000, a fire occurred at one of the coal mines served by Utah Railway; future shipments will likely be impacted. Segment revenue totaled $24.7 million in 2000 compared with $22.3 million in 1999. Operating income was $3.4 million in 2000 compared with $3.3 million in 1999. 1999 PERFORMANCE COMPARED WITH 1998 Consolidated net sales in 1999 were $1,168.7 million or 25.7 percent higher than $929.4 million in 1998. Pounds of product sold totaled 815.2 million in 1999 or 26.5 percent more than the 644.6 million pounds sold in 1998. These increases were due primarily to acquisitions which occurred during 1998. The COMEX average copper price in 1999 was approximately 4 percent lower than the 1998 average. During 1998, the Company completed three acquisitions: (i) Halstead Industries, Inc. (Halstead), which operates a copper tube mill in Wynne, Arkansas and a line sets factory in Clinton, Tennessee; (ii) B&K Industries, Inc. (B&K), based in Elk Grove Village, Illinois, a significant importer and distributor of residential and commercial plumbing products in the United States that sells through all major distribution channels including hardware co-ops, home centers, plumbing wholesalers, hardware wholesalers, OEMs, and manufactured housing wholesalers; and (iii) Lincoln Brass Works, Inc., which produces custom valve assemblies, custom metal assemblies, gas delivery systems, and tubular products, primarily for the gas appliance market, at two manufacturing facilities in Tennessee. Businesses acquired in 1998 accounted for approximately $341.8 million of the Company's 1999 net sales and those acquired in 1997 added approximately $148.8 million. The Halstead acquisition was completed in the fourth quarter of 1998 and the other two acquisitions were completed in the third quarter of 1998. Core product lines that existed prior to the 1998 acquisitions accounted for the balance of the Company's 1999 growth. Cost of goods sold increased $166.2 million, to $886.5 million in 1999. This increase was primarily attributable to acquisitions and higher sales of core products. Gross profit was 24.1 percent of net sales in 1999 compared with 22.5 percent in 1998 and cost of sales improved accordingly. This improvement resulted from lower manufacturing costs, continued higher yields from production, reduced metal costs, and improved spreads in certain products, particularly copper tube. -17- Depreciation and amortization increased to $37.0 million in 1999 compared with $24.9 million in 1998. This increase was due to 1998 acquisitions and capital expenditures in recent years, which totaled $40.1 million in 1999 and $55.4 million in 1998. Selling, general, and administrative expense increased to $97.3 million in 1999. When measured on a basis of cost per pound of product sold, these expenses averaged 11.9 cents a pound in 1999 and 11.7 cents a pound in 1998. Approximately 66 percent of the $21.9 million increase was attributable to businesses acquired in 1998. Interest expense increased to $11.7 million in 1999 from $5.8 million in 1998. The 1999 increase resulted primarily from funds borrowed in the fourth quarter of 1998 to purchase Halstead and from certain debt assumed by the Company in the acquisition of B&K. The Company capitalized interest of $0.4 million for major capital improvement projects in 1999 compared with $0.8 million in 1998. The provision for environmental reserves totaled $2.1 million in 1998 whereas none was required in 1999. Other income increased to $9.5 million in 1999 from $8.5 million in 1998. The Company provided $46.4 million for income taxes in 1999, of which $31.3 million was deferred. Current income tax expense of $15.1 million decreased from 1998 primarily due to realization of an ordinary loss of approximately $70 million as a consequence of the sale of Alaska Gold Company, offset by increased taxable income. The 31.9 percent effective tax rate for 1999, which is comparable to the 1998 rate of 31.0 percent, reflects the recognition of certain tax attributes discussed in Note 6 and certain favorable state tax credits, including IRB financings. The Company's employment was 4,356 at the end of 1999 compared with 4,788 at the 1998 year-end. Standard Products Division Net sales by SPD were $858.5 million in 1999 compared with $624.4 million in 1998 for a 37 percent increase. Operating income was $129.1 million in 1999 compared with $83.0 million in 1998. The profit improvement resulted from increased volume, lower manufacturing costs, and improved spreads in certain products, particularly copper tube. Industrial Products Division IPD's net sales were $290.3 million in 1999 compared with $274.6 million in 1998. Due to the lower cost of raw materials, the average selling price for finished product was approximately 7 percent lower in 1999 compared with 1998 levels. Operating income was $29.9 million in 1999 compared with $28.3 million in 1998. Increased volume and lower manufacturing costs accounted for the profit improvement. -18- Other Businesses Utah Railway Company hauled 5.3 million tons of coal in 1999, slightly less than in 1998. Revenue totaled $22.1 million in 1999 compared with $23.5 million in 1998. This decrease was due to production interruptions caused by a fire at one of the coal mines served by Utah Railway Company. Alaska Gold Company's net sales were $0.2 million in 1999 compared with $8.2 million in 1998. On April 26, 1999, the Company sold 100 percent of its interest in Alaska Gold Company. Liquidity and Capital Resources The Company's cash and cash equivalents balance decreased to $100.3 million at year-end. Major components of the 2000 change included $118.5 million of cash provided by operating activities, $78.0 million of cash used in investing activities and $88.7 million of cash used in financing activities. Net income of $92.7 million in 2000 was the primary component of cash provided by operating activities. Depreciation and amortization of $37.5 million and deferred income taxes of $8.9 million were the primary non-cash adjustments. Major changes in working capital included a $15.9 million decrease in receivables, a $22.8 million increase in inventories, and a $11.6 million decrease in current and other liabilities. The major components of net cash used in investing activities during 2000 included $63.5 million for capital expenditures and $15.2 million for business acquisitions. Capital expenditures were primarily related to improvements in manufacturing processes. Net cash used in financing activities totaled $88.7 million. During 2000, the Company paid $133.0 million for debt repayments offset by $90.0 million of proceeds from the issuance of long-term debt. The Company repurchased 1.9 million shares of its common stock at a cost of $48.4 million. In November 2000, the Company entered into a $200 million unsecured line-of-credit (Credit Facility) which expires in November 2003. At year- end, the Company had borrowings of $90.0 million against the Credit Facility, the proceeds of which were used to repay a term note. These transactions lowered the Company's borrowing rate by 85 basis points effective in early 2001. Additionally, approximately $6.1 million in letters of credit are backed by the Credit Facility at the end of 2000. At December 30, 2000, the Company's total debt was $106.9 million or 14.8 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. The Company is in compliance with all of its debt covenants. The Company is investing $10.0 million at its Port Huron, Michigan brass rod mill, the majority of which was funded at year-end. This investment, which is expected to be completed during 2001, will increase our casting capacity, improve yield, and reduce conversion costs. -19- The Company also is investing approximately $40.0 million for the modernization of its European factories. This investment will upgrade the casting, extrusion and drawing processes at these operations. The project is expected to be completed near the end of 2001. Management believes that cash provided by operations and currently available cash of $100.3 million will be adequate to meet the Company's normal future capital expenditure and operational needs. The Company's current ratio is 3.4 to 1 at December 30, 2000. On October 18, 1999, the Company's Board of Directors authorized the repurchase of up to four million shares of the Company's common stock from time-to-time over the next year through open market transactions or through privately negotiated transactions. During 2000, this authorization was expanded and extended to repurchase up to a total of ten million shares through October 2001. The Company will have no obligation to purchase any shares and may cancel, suspend, or extend the time period for the purchase of shares at any time. The purchases will be funded primarily through existing cash and cash from operations. The Company may hold such shares in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. Through December 30, 2000, the Company has repurchased approximately 2.3 million shares under this authorization. Environmental Matters The Company ended 2000 with total environmental reserves of approximately $9.9 million. Based upon information currently available, management believes that the outcome of pending environmental matters will not materially affect the overall financial position and results of operations of the Company. Market Risk The Company is exposed to market risk from changes in foreign exchange, interest rates, 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. A discussion of the Company's accounting policies for management of market risk is included in the Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements. Interest Rates At December 30, 2000 and December 25, 1999, the fair value of the Company's debt was estimated at $107.1 million and $150.3 million, respectively, using yields obtained for similar types of borrowing arrangements and taking into consideration the underlying terms of the debt. Such fair value exceeded the carrying value of debt at December 30, 2000 by $0.3 million and at December 25, 1999 by $0.4 million. Market risk is estimated as the potential change in fair value resulting from a hypothetical 10 percent decrease in interest rates and amounted to $0.2 million at December 30, 2000 and $0.4 million at December 25, 1999. -20- The Company had $90.5 million of variable-rate debt outstanding at December 30, 2000 and $119.0 million at December 25, 1999. At these borrowing levels, a hypothetical 10 percent increase in interest rates would have had an unfavorable impact on the Company's pretax earnings and cash flows of $0.6 million in 2000 and $0.8 million in 1999. The primary interest rate exposure on floating-rate debt is based on LIBOR. Foreign Currency Exchange Rates Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than an entity's functional currency. The Company and its subsidiaries generally enter into transactions denominated in their respective functional currencies. Foreign currency exposures arising from transactions denominated in currencies other than the functional currency are not material; however, the Company may utilize certain forward fixed-rate contracts to hedge such transactional exposures. At year-end, the Company held open forward contracts to deliver the equivalent of approximately $1.6 million in other currencies. Gains and losses with respect to these positions are reflected in earnings upon completion of the transaction. 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 French franc, 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. The net investment, excluding U.S. dollar denominated loans and advances, in foreign subsidiaries translated into U.S. dollars using the year-end exchange rates was $6.1 million at December 30, 2000 and $16.5 million at December 25, 1999. The potential loss in value of the Company's net investment in foreign subsidiaries resulting from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates at December 30, 2000 and December 25, 1999 amounted to $4.5 million and $3.5 million, respectively. This change would be reflected in the equity section of the Company's Consolidated Balance Sheet. Cost of Raw Materials and Energy Copper and brass represent the largest components of the Company's variable cost 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, could materially and adversely affect the Company's business, results of operations and financial condition. -21- The Company occasionally enters into forward fixed-price arrangements with certain customers. The Company may utilize futures or option contracts to hedge risks associated with forward fixed-price arrangements. The Company may also utilize futures or option contracts to manage price risk associated with inventory. The total amount of such contracts was approximately 0.5 million pounds at December 30, 2000 and includes varying maturity dates in 2001. Gains or losses with respect to these positions are 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. Futures contracts may also be used to manage price risk associated with natural gas purchases. Gains and losses with respect to these positions are reflected in earnings upon consumption of natural gas. Periodic value fluctuations of the contracts generally offset the value fluctuations of the underlying natural gas prices. At year-end, the Company held open hedge forward contracts to purchase approximately $2.8 million of natural gas over the next 18 months. Recently Issued Accounting Standards During 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This statement requires companies to record derivative instruments on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the value of a derivative would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In June 1999, the FASB issued Statement No. 137, which delayed the effective date of SFAS No. 133 to the Company's fiscal year 2001. Additionally, in June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS No. 138), which amends SFAS No. 133 and must be adopted concurrently with the Company's adoption of SFAS No. 133. The adoption of SFAS No. 133 and SFAS No. 138 will not have a significant effect on earnings or the financial position of the Company. Cautionary Statement Regarding Forward-Looking Information This Annual Report contains various forward-looking statements and includes assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Mueller provides the following cautionary statement identifying important economic, political, and technological factors, among others, the absence of which could cause actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. -22- Such factors include: (i) the current and projected future business environment, including interest rates and capital and consumer spending; (ii) a strong domestic housing industry environment; (iii) fluctuations in commodity prices (including prices of copper and other raw materials); (iv) competitive factors and competitor responses to Mueller initiatives; (v) successful implementation and completion of major capital projects; (vi) stability of government laws and regulations, including taxes; and (vii) continuation of the environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates. -23- Mueller Industries, Inc. Consolidated Statements of Income Years Ended December 30, 2000, December 25, 1999, and December 26, 1998 (In thousands, except per share data)
2000 1999 1998 Net sales $ 1,206,168 $ 1,168,744 $ 929,391 Cost of goods sold 925,311 886,531 720,293 ---------- -------- -------- Gross profit 280,857 282,213 209,098 Depreciation and amortization 37,457 36,986 24,899 Selling, general, and administrative expense 94,754 97,301 75,390 ---------- -------- -------- Operating income 148,646 147,926 108,809 Interest expense (9,287) (11,681) (5,839) Environmental reserves (2,049) - (2,133) Other income, net 9,603 9,464 8,503 ---------- -------- -------- Income before income taxes 146,913 145,709 109,340 Income tax expense (54,223) (46,430) (33,895) ---------- -------- -------- Net income $ 92,690 $ 99,279 $ 75,445 ========== ======== ======== Weighted average shares for basic earnings per share 34,305 35,594 35,452 Effect of dilutive stock options 3,791 4,011 4,192 ---------- -------- -------- Adjusted weighted average shares for diluted earnings per share 38,096 39,605 39,644 ---------- -------- -------- Basic earnings per share $ 2.70 $ 2.79 $ 2.13 ========== ======== ======== Diluted earnings per share $ 2.43 $ 2.51 $ 1.90 ========== ======== ======== See accompanying notes to consolidated financial statements.
-24- Mueller Industries, Inc. Consolidated Balance Sheets As of December 30, 2000 and December 25, 1999 (In thousands)
2000 1999 Assets Current assets Cash and cash equivalents $ 100,268 $ 149,454 Accounts receivable, less allowance for doubtful accounts of $5,612 in 2000 and $5,367 in 1999 152,157 167,858 Inventories 142,325 119,644 Current deferred income taxes 4,101 - Other current assets 6,320 3,790 -------- -------- Total current assets 405,171 440,746 Property, plant, and equipment, net 379,885 347,846 Goodwill, net 102,673 94,530 Other assets 22,547 20,958 -------- -------- Total Assets $ 910,276 $ 904,080 ======== ======== See accompanying notes to consolidated financial statements.
-25- Mueller Industries, Inc. Consolidated Balance Sheets (continued) As of December 30, 2000 and December 25, 1999 (In thousands, except share data)
2000 1999 Liabilities and Stockholders' Equity Current liabilities Current portion of long-term debt $ 5,909 $ 31,012 Accounts payable 43,733 49,958 Accrued wages and other employee costs 26,994 30,182 Other current liabilities 41,213 41,909 -------- -------- Total current liabilities 117,849 153,061 Long-term debt, less current portion 100,975 118,858 Pension liabilities 5,688 6,624 Postretirement benefits other than pensions 8,485 6,967 Environmental reserves 9,862 12,965 Deferred income taxes 39,362 24,275 Other noncurrent liabilities 13,653 11,546 -------- -------- Total liabilities 295,874 334,296 -------- -------- Minority interest in subsidiaries 297 354 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 in 2000 and 1999; outstanding 33,358,061 in 2000 and 34,918,646 in 1999 401 401 Additional paid-in capital, common 260,979 259,977 Retained earnings 465,167 372,477 Cumulative translation adjustments (11,826) (8,112) Treasury common stock, at cost (100,616) (55,313) -------- -------- Total stockholders' equity 614,105 569,430 -------- -------- Commitments and contingencies - - -------- -------- Total Liabilities and Stockholders' Equity $ 910,276 $ 904,080 ======== ======== See accompanying notes to consolidated financial statements.
-26- Mueller Industries, Inc. Consolidated Statements of Cash Flows Years Ended December 30, 2000, December 25, 1999, and December 26, 1998 (In thousands)
2000 1999 1998 Operating activities: Net income $ 92,690 $ 99,279 $ 75,445 Reconciliation of net income to net cash provided by operating activities: Depreciation 32,601 31,130 24,076 Amortization 4,856 5,856 823 Provision for doubtful accounts receivable 663 1,503 556 Minority interest in subsidiaries, net of dividend paid (57) - (337) Deferred income taxes 8,912 31,257 4,870 Income tax benefit from exercise of stock options 1,402 - 3,771 Gain on disposal of properties (413) (1,847) (2,156) Changes in assets and liabilities, net of businesses acquired: Receivables 15,862 (15,339) 12,973 Inventories (22,835) 12,992 (4,875) Other assets 621 14,973 (3,219) Current liabilities (11,597) 622 (6,016) Other liabilities (43) (14,657) (3,165) Other, net (4,188) (1,014) (65) -------- -------- -------- Net cash provided by operating activities 118,474 164,755 102,681 -------- -------- -------- Investing activities: Acquisition of businesses (15,245) (675) (158,514) Capital expenditures (63,458) (40,115) (55,440) Proceeds from sales of properties 683 7,137 2,559 Escrowed IRB proceeds - 6,022 14,739 Note receivable - 4,484 (4,484) -------- -------- -------- Net cash used in investing activities (78,020) (23,147) (201,140) -------- -------- -------- Financing activities: Proceeds from issuance of long-term debt 90,000 125,000 - Repayments of long-term debt (132,986) (29,819) (19,396) Proceeds from the sale of treasury stock 2,708 1,093 3,513 Acquisition of treasury stock (48,411) (29,669) - Net (repayments) borrowings on lines of credit - (139,840) 125,451 -------- -------- -------- Net cash (used in) provided by financing activities (88,689) (73,235) 109,568 -------- -------- -------- See accompanying notes to consolidated financial statements.
-27- Mueller Industries, Inc. Consolidated Statements of Cash Flows (continued) Years Ended December 30, 2000, December 25, 1999, and December 26, 1998 (In thousands)
2000 1999 1998 Effect of exchange rate changes on cash (951) 513 (519) -------- -------- -------- (Decrease) increase in cash and cash equivalents (49,186) 68,886 10,590 Cash and cash equivalents at the beginning of the year 149,454 80,568 69,978 -------- -------- -------- Cash and cash equivalents at the end of the year $ 100,268 $ 149,454 $ 80,568 ======== ======== ======== For supplemental disclosures of cash flow information, see Notes 1, 4, 6, and 12. See accompanying notes to consolidated financial statements.
-28 Mueller Industries, Inc. Consolidated Statements of Stockholders' Equity Years Ended December 30, 2000, December 25, 1999, and December 26, 1998 (In thousands)
Common Stock Additional Cumulative Treasury Stock Number Paid-In Retained Translation Number of Shares Amount Capital Earnings Adjustments of Shares Cost Total Balance, December 27, 1997 40,000 $ 200 $ 253,928 $ 197,753 $ (3,232) 4,982 $ (30,609) $ 418,040 Comprehensive income: Net income - - - 75,445 - - - 75,445 Other comprehensive income: Foreign currency translation - - - - (85) - - (85) -------- Comprehensive income 75,360 Issuance of shares under incentive stock option plan - - (765) - - (698) 4,278 3,513 Par value of shares issued in connection with a two-for- one stock split - 200 (200) - - - - - Issuance of shares for business acquisition 92 1 2,837 - - - - 2,838 Note receivable from officer - - (1,400) - - - - (1,400) Tax benefit related to employee stock options - - 3,771 - - - - 3,771 ------- --- ------- ------- ------- ------ ------- -------- Balance, December 26, 1998 40,092 401 258,171 273,198 (3,317) 4,284 (26,331) 502,122 Comprehensive income: Net income - - - 99,279 - - - 99,279 Other comprehensive income: Foreign currency translation - - - - (4,795) - - (4,795) -------- Comprehensive income 94,484 Issuance of shares under incentive stock option plan - - 406 - - (115) 687 1,093 Repurchase of common stock - - - - - 1,004 (29,669) (29,669) Proceeds from payment on note receivable from officer - - 1,400 - - - - 1,400 ------- --- ------- ------- ------- ------ ------- -------- Balance, December 25, 1999 40,092 401 259,977 372,477 (8,112) 5,173 (55,313) 569,430 Comprehensive income: Net income - - - 92,690 - - - 92,690 Other comprehensive income: Foreign currency translation - - - - (3,714) - - (3,714) -------- Comprehensive income 88,976 Issuance of shares under incentive stock option plan - - (400) - - (295) 3,108 2,708 Repurchase of common stock - - - - - 1,856 (48,411) (48,411) Tax benefit related to employee stock options - - 1,402 - - - - 1,402 ------- --- ------- ------- ------- ------ ------- -------- Balance, December 30, 2000 40,092 $ 401 $ 260,979 $ 465,167 $ (11,826) 6,734 $(100,616) $ 614,105 ======= === ======= ======= ======= ====== ======= ======== See accompanying notes to consolidated financial statements.
-29 Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies Nature of Operations The principal business of Mueller Industries, Inc. is the manufacture and sale of copper tube and fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. The Company markets its products to the HVAC, plumbing, refrigeration, hardware, and other industries. During 2000, the Company operated 22 factories in eight states, Canada, Great Britain, and France and had distribution facilities nationwide and sales representation worldwide. The Company also operates a short line railroad through its subsidiary, Utah Railway Company. Principles of Consolidation The consolidated financial statements include the accounts of Mueller Industries, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The minority interest represents separate private ownership of 25 percent of Ruby Hill Mining Company and 19 percent of Richmond-Eureka Mining Company. Inventories The Company's inventories are valued at the lower of cost or market. The material component of its U.S. copper tube and copper fittings inventories is valued on a last-in, first-out (LIFO) basis. Other inventories, including the non-material components of U.S. copper tube and copper fittings, are valued on a first-in, first-out (FIFO) basis. Inventory costs include material, labor costs, and manufacturing overhead. Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives ranging from 20 to 40 years for buildings and five to 20 years for machinery and equipment. Intangible Assets The excess of the cost over the fair value of net assets of businesses acquired is recorded as goodwill and is amortized on a straight-line basis over 20 to 25 years. The cost of other acquired intangibles is amortized on a straight-line basis over their estimated useful lives. Accumulated amortization as of December 30, 2000 and December 25, 1999 was $12.6 million and $7.7 million, respectively. The Company continually evaluates the carrying value of long-lived assets. Any impairments would be recognized when the expected future undiscounted cash flows derived from such long-lived assets are less than their carrying value. -30- Revenue Recognition Revenue is recognized when products are shipped or services are performed. Stock-Based Compensation The Company accounts for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related interpretations as permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Earnings Per Share Basic earnings per share is computed based on the average number of common shares outstanding. Diluted earnings per share reflects the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options calculated using the treasury stock method. Income Taxes The Company accounts for income taxes using the liability method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Cash Equivalents Temporary investments with maturities of three months or less are considered to be cash equivalents. These investments are stated at cost. At December 30, 2000 and December 25, 1999, temporary investments consisted of certificates of deposit, commercial paper, bank repurchase agreements, and U.S. and foreign government securities which totaled $105.3 million and $157.0 million, respectively. These carrying amounts approximated fair value. Concentrations of Credit and Market Risk Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company's customer base, and their dispersion across different industries, including HVAC, plumbing, refrigeration, hardware, automotive, OEMs, and others. The Company minimizes its exposure to base metal price fluctuations through various strategies. Generally, it prices an equivalent amount of copper raw material, under flexible pricing arrangements it maintains with its suppliers, at the time it determines the selling price of finished products to its customers. -31- Forward fixed-price arrangements may be entered into with certain customers. The Company may utilize futures or option contracts to hedge risks associated with forward fixed-price arrangements. Also, the Company may utilize futures or option contracts to manage price risk associated with inventory. Gains or losses with respect to these positions are reflected in earnings upon the sale of inventory. Periodic value fluctuations of the contracts generally offset the value fluctuations of the underlying fixed-price transactions or inventory. At year-end, the Company held open hedge forward contracts to deliver approximately $0.4 million of copper. Futures contracts may also be used to manage price risk associated with natural gas purchases. Gains and losses with respect to these positions are reflected in earnings upon consumption of natural gas. Periodic value fluctuations of the contracts generally offset the value fluctuations of the underlying natural gas prices. At year-end, the Company held open hedge forward contracts to purchase approximately $2.8 million of natural gas over the next 18 months. The Company's sales are principally denominated and collected in the U.S. dollar. Certain sales are collected in other currencies. The market risk regarding currency exchange rate fluctuations may be hedged using forward contracts. At year-end, the Company held open forward contracts to deliver the equivalent of approximately $1.6 million in other currencies. Gains and losses with respect to these positions are reflected in earnings upon collection of receivables. Foreign Currency Translation For foreign subsidiaries, the functional currency is the local currency. Balance sheet accounts are translated at exchange rates in effect at the end of the year and income statement accounts are translated at average exchange rates for the year. Translation gains and losses are included as a separate component of stockholders' equity. Transaction gains and losses included in the Consolidated Statements of Income were not significant. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. -32- Recently Issued Accounting Standards During 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This statement requires companies to record derivative instruments on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the value of a derivative would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. In June 1999, the FASB issued Statement No. 137, which delayed the effective date of SFAS No. 133 to the Company's fiscal year 2001. Additionally, in June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS No. 138), which amends SFAS No. 133 and must be adopted concurrently with the Company's adoption of SFAS No. 133. The adoption of SFAS No. 133 and SFAS No. 138 will not have a significant effect on earnings or the financial position of the Company. Reclassifications Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassifed to conform to the 2000 presentation. Note 2 - Inventories (In thousands)
2000 1999 Raw material and supplies $ 25,073 $ 28,337 Work-in-process 30,395 14,423 Finished goods 86,857 76,884 -------- -------- Inventories $ 142,325 $ 119,644 ======== ========
Inventories valued using the LIFO method totaled $37.3 million at December 30, 2000 and $29.0 million at December 25, 1999. The approximate FIFO cost of such inventories was $39.9 million at December 30, 2000 and $29.9 million at December 25, 1999. -33- Note 3 - Property, Plant, and Equipment, Net (In thousands)
2000 1999 Land and land improvements $ 9,162 $ 8,495 Buildings 73,268 70,996 Machinery and equipment 419,290 383,164 Construction in progress 47,552 25,817 -------- -------- 549,272 488,472 Less accumulated depreciation (169,387) (140,626) -------- -------- Property, plant, and equipment, net $ 379,885 $ 347,846 ======== ========
Note 4 - Long-Term Debt (In thousands)
2000 1999 Line-of-credit at floating rate, matures November 2003 $ 90,000 $ - Floating rate unsecured notes, due through 2003 - 118,421 8.38% Unsecured note payable, due through 2000 - 3,571 7.54% Unsecured note payable, due through 2000 - 1,000 1993 Series IRBs with interest at 6.95%, due 2000 - 2,857 1994 Series IRBs with interest at 8.825%, due through 2001 1,286 3,857 1997 Series IRBs with interest at 7.39%, due through 2014 13,625 17,125 1997 Series IRBs with interest at 7.31%, due through 2009 1,005 1,465 Other, including capitalized lease obligations 968 1,574 -------- -------- 106,884 149,870 Less current portion of long-term debt (5,909) (31,012) -------- -------- Long-term debt $ 100,975 $ 118,858 ======== ========
-34- On November 30, 2000, the Company executed a Credit Agreement (the Agreement) with a syndicate of six banks establishing an unsecured $200 million revolving credit facility (the Credit Facility) which matures in November 2003. Borrowings under the Credit Facility bear interest, at the Company's option, at (i) LIBOR plus a variable premium or (ii) the larger of Prime, or the Federal Funds rate plus .50 percent. LIBOR advances may be based upon the one, two, three, or six-month LIBOR. The variable premium over LIBOR is based on certain financial ratios, and can range from 25 to 40 basis points. At year-end the premium was 32.5 basis points, but dropped to 25 basis points subsequent to year-end. Additionally, a facility fee is payable quarterly on the total commitment and varies from 12.5 to 22.5 basis points based upon the Company's capitalization ratios. When funded debt is 50 percent or more of the commitment, a utilization fee is payable quarterly on the average loan balance outstanding and varies from 0 to 20 basis points based upon the capitalization ratio. Proceeds from the initial draw on the Credit Facility were used to pay off existing notes. Availability of funds under the Credit Facility is reduced by the amount of certain outstanding letters of credit, which totaled approximately $6.1 million at December 30, 2000. Borrowings under the above Agreement require the Company, among other things, to maintain certain minimum levels of net worth and meet certain minimum financial ratios. The Company is in compliance with all debt covenants. During fiscal 1999, the Company executed an Amended and Restated Credit Agreement (the 1999 Agreement) with its syndicate of banks, which established an unsecured, $125 million term note. Proceeds from this note paid down the $120 million balance under an existing line-of-credit. The 1999 Agreement required quarterly principal payments on the term note of approximately $3.3 million plus interest. Interest on the note was based on the 90-day LIBOR interest rate plus a premium of 110 to 130 basis points as determined by certain financial ratios. The proceeds from the initial draw on the Credit Facility and existing cash were used to pay off this term note in 2000. Aggregate annual maturities of the Company's debt are $5.9 million, $3.9 million, $93.5 million, $2.7 million, and $0.1 million for the years 2001 through 2005 respectively, and $0.8 million thereafter. Interest paid in 2000, 1999, and 1998 was $10.6 million, $12.4 million, and $6.3 million, respectively. During 2000, 1999, and 1998, the Company capitalized interest of $1.2 million, $0.4 million, and $0.8 million, respectively, related to its major capital improvement programs. Using a discounted cash flow analysis, the fair value of the Company's debt approximated book value at the end of 2000 and 1999, based on the estimated current incremental borrowing rates for similar types of borrowing arrangements. Note 5 - Stockholders' Equity In 1998, the Company declared a two-for-one stock split effected in the form of a 100 percent stock dividend. All presentations of share data herein, including earnings per share, have been restated to reflect the split for all periods presented. -35- On November 10, 1994, the Company declared a dividend distribution of one Right for each outstanding share of the Company's common stock. Each Right entitles the holder to purchase one unit consisting of one-thousandth of a share of Series A Junior Participating Preferred Stock at a purchase price of $160 per unit, subject to adjustment. The Rights will not be exercisable, or transferable apart from the Company's common stock, until 10 days following an announcement that a person or affiliated group has acquired, or obtained the right to acquire, beneficial ownership of 15 percent or more of its common stock other than pursuant to certain offers for all shares of the Company's common stock that have been determined to be fair to, and in the best interest of, the Company's stockholders. The Rights, which do not have voting rights, will be exercisable by all holders (except for a holder or affiliated group beneficially owning 15 percent or more of the Company's common stock, whose Rights will be void) so that each holder of a Right shall have the right to receive, upon the exercise thereof, at the then current exercise price, the number of shares of the Company's common stock having a market value of two times the exercise price of the Rights. All Rights expire on November 10, 2004, and may be redeemed by the Company at a price of $0.01 at any time prior to either their expiration or such time that the Rights become exercisable. In the event that the Company is acquired in a merger or other business combination, or certain other events occur, provision shall be made so that each holder of a Right (except Rights previously voided) shall have the right to receive, upon exercise thereof at the then current exercise price, the number of shares of common stock of the surviving company which at the time of such transaction would have a market value of two times the exercise price of the Right. On October 18, 1999, the Company's Board of Directors authorized the repurchase of up to four million shares of the Company's common stock from time-to-time over the next year through open market transactions or through privately negotiated transactions. During 2000, this authorization was expanded to purchase up to 10 million shares and extended through October 2001. The Company will have no obligation to purchase any shares and may cancel, suspend, or extend the time period for the purchase of shares at any time. The purchases will be funded primarily through existing cash and cash from operations. The Company may hold such shares in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. Through December 30, 2000, the Company has repurchased approximately 2.3 million shares under this authorization. -36- Note 6 - Income Taxes The components of income before income taxes were taxed under the following jurisdictions: (In thousands)
2000 1999 1998 Domestic $ 156,150 $ 154,765 $ 108,135 Foreign (9,237) (9,056) 1,205 -------- -------- -------- Income before income taxes $ 146,913 $ 145,709 $ 109,340 ======== ======== ========
Income tax expense consists of the following: (In thousands)
2000 1999 1998 Current tax expense: Federal $ 42,479 $ 12,052 $ 24,882 Foreign 816 1,692 2,400 State and local 2,016 1,429 1,743 -------- -------- -------- Current tax expense 45,311 15,173 29,025 -------- -------- -------- Deferred tax expense: Federal 8,412 30,570 4,226 Foreign - - 595 State and local 500 687 49 -------- -------- -------- Deferred tax expense 8,912 31,257 4,870 -------- -------- -------- Income tax expense $ 54,223 $ 46,430 $ 33,895 ======== ======== ========
U.S. income and foreign withholding taxes are provided on the earnings of foreign subsidiaries that are expected to be remitted to the extent that taxes on the distribution of such earnings would not be offset by foreign tax credits. -37- The difference between the reported income tax expense and a tax determined by applying the applicable U.S. federal statutory income tax rate to income before income taxes is reconciled as follows: (In thousands)
2000 1999 1998 Expected income tax expense $ 51,420 $ 50,998 $ 38,269 State and local income tax, net of federal benefit 1,810 1,616 1,182 Foreign income taxes 3,493 4,371 2,119 Valuation allowance (3,923) (8,220) (5,481) Other, net 1,423 (2,335) (2,194) -------- -------- -------- Income tax expense $ 54,223 $ 46,430 $ 33,895 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: (In thousands)
2000 1999 Deferred tax assets: Accounts receivable $ 1,961 $ 1,229 Inventories 1,140 1,326 Pension, OPEB, and accrued items 9,649 9,011 Other reserves 10,392 9,679 Net operating loss carryforwards 30,653 34,137 Capital loss carryforwards 760 16,181 Foreign tax credits 359 1,109 Alternative minimum tax credit carryforwards 4,026 4,026 -------- -------- Total deferred tax assets 58,940 76,698 Less valuation allowance (31,626) (48,652) -------- -------- Deferred tax assets, net of valuation allowance 27,314 28,046 -------- -------- Deferred tax liabilities: Property, plant, and equipment 60,566 51,373 Other 2,009 1,629 -------- -------- Total deferred tax liabilities 62,575 53,002 -------- -------- Net deferred tax liability $ (35,261) $ (24,956) ======== ========
-38- As of December 30, 2000, the Company had recognized domestic net operating loss carryforwards (NOLs) of $50.0 million, of which $43.2 million expire in 2005 and $6.8 million expire in 2006. Annual limitations on these NOLs are approximately $17.3 million in 2001, and approximately $14.4 thereafter. During 2000, 1999, and 1998, the Company recognized $3.8 million, $2.3 million, and $4.1 million, respectively, of NOL tax attributes, reducing the deferred income tax provision in each year. In addition, the Company has alternative minimum tax credit carryforwards of approximately $4.0 million which are available to reduce future federal regular income taxes, if any, over an indefinite period. As of December 30, 2000, the Company had foreign net operating loss carryforwards (foreign NOLs) available to offset $39.7 million of foreign subsidiary income. These foreign NOLs have not been recognized and expire as follows: $0.7 million in 2001, $2.0 million in 2002, and $2.3 million in 2005. The remaining $34.7 million of foreign NOLs are available to offset foreign subsidiary income over an indefinite period. The sale of Alaska Gold Company during April 1999, resulted in the realization of an ordinary federal tax loss of approximately $70 million of which $45 million has been recognized. The Internal Revenue Service agreed to allow this loss as part of the comprehensive closing agreement, which concluded the audit of the years 1993 through 1995. For financial reporting purposes, additional recognition may occur in future periods. Income taxes paid were approximately $43.6 million in 2000, $13.5 million in 1999, and $26.8 million in 1998. Note 7 - Other Current Liabilities (In thousands)
2000 1999 Accrued discounts and allowances $ 19,956 $ 14,850 Accrued severance and related costs 2,187 1,558 Freight settlements due to other railroads 1,882 3,191 Income taxes payable 4,615 2,884 Other 12,573 19,426 -------- -------- Other current liabilities $ 41,213 $ 41,909 ======== ========
-39- Note 8 - Employee Benefits The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for certain of its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and the fair value of the plans' assets over the two- year period ending December 30, 2000, and a statement of the plans' funded status as of December 30, 2000 and December 25, 1999: (In thousands)
Pension Benefits Other Benefits 2000 1999 2000 1999 Change in benefit obligation: Obligation at beginning of year $ 104,676 $ 80,227 $ 8,223 $ 8,041 Service cost 2,620 3,180 16 19 Interest cost 7,193 6,834 621 647 Participant contributions 400 443 - - Plan amendments 562 3,656 - (120) Actuarial (gain) loss (3,970) 4,012 (359) 803 Business acquisitions 185 12,496 - - Benefit payments (5,316) (5,371) (505) (1,167) Settlement (55) (101) - - Foreign currency translation adjustment (2,878) (700) - - -------- -------- -------- -------- Obligation at end of year $ 103,417 $ 104,676 $ 7,996 $ 8,223 ======== ======== ======== ======== Change in fair value of plan assets: Fair value of plan assets at beginning of year $ 123,979 $ 92,011 $ - $ - Actual return on plan assets 8,970 21,915 - - Employer contributions 1,702 2,087 505 1,167 Participant contributions 400 443 - - Business acquisitions - 13,663 - - Benefit payments (5,316) (5,371) (505) (1,167) Settlement (55) (101) - - Foreign currency translation adjustment (2,997) (668) - - -------- -------- -------- -------- Fair value of plan assets at end of year $ 126,683 $ 123,979 $ - $ - ======== ======== ======== ========
-40- (In thousands)
Pension Benefits Other Benefits 2000 1999 2000 1999 Funded status: Funded (underfunded) status at end of year $ 23,266 $ 19,303 $ (7,996) $ (8,223) Unrecognized prior service cost 4,909 5,176 (104) (112) Unrecognized gain (28,604) (26,348) (705) (370) -------- -------- -------- -------- Net amount recognized $ (429) $ (1,869) $ (8,805) $ (8,705) ======== ======== ======== ========
The following table provides the amounts recognized in the Consolidated Balance Sheets as of December 30, 2000 and December 25, 1999: (In thousands)
Pension Benefits Other Benefits 2000 1999 2000 1999 Prepaid benefit cost $ 4,809 $ 3,697 $ - $ - Accrued benefit liability (5,238) (5,566) (8,805) (8,705) -------- -------- -------- -------- Net amount recognized $ (429) $ (1,869) $ (8,805) $ (8,705) ======== ======== ======== ========
The components of net periodic benefit costs are as follows: (In thousands)
2000 1999 1998 Pension Benefits: Service cost $ 2,620 $ 3,180 $ 2,384 Interest cost 7,193 6,834 5,305 Expected return on plan assets (9,614) (8,146) (6,838) Amortization of prior service cost 875 869 568 Amortization of net gain (1,701) (933) (1,462) -------- -------- -------- Net periodic benefit cost (income) $ (627) $ 1,804 $ (43) ======== ======== ======== -41-
(In thousands)
2000 1999 1998 Other Benefits: Service cost $ 16 $ 19 $ 14 Interest cost 621 647 633 Amortization of prior service cost (8) (8) - Amortization of net gain (25) (23) (34) -------- -------- -------- Net periodic benefit cost $ 604 $ 635 $ 613 ======== ======== ========
The prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10 percent of the greater of the benefit obligation or the market-related value of assets are amortized over the average remaining service period of active participants. The assumptions used in the measurement of the Company's benefit obligations are as follows:
Pension Benefits Other Benefits 2000 1999 2000 1999 Weighted average assumptions: Discount rate 6.50%-7.75% 6.50%-7.75% 7.5%-8.50% 7.5%-8.50% Expected return on plan assets 7.00%-9.00% 7.25%-8.50% N/A N/A Rate of compensation increases 3.25% 3.50% N/A N/A
Only one pension plan uses the rate of compensation increase in its benefit formula. All other pension plans are based on length of service. The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is assumed to range from 7.7 to 8.1 percent for 2001, gradually decrease to 6.25 percent for 2003, and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation by $559 thousand and the service and interest cost components of net periodic postretirement benefit costs by $48 thousand for 2000. Decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the accumulated postretirement benefit obligation and the service and interest cost components of net periodic postretirement benefit costs for 2000 by $509 thousand and $43 thousand, respectively. -42- The Company sponsors voluntary employee savings plans that qualify under Section 401(k). Compensation expense for the Company's matching contribution to the 401(k) plans was $2.0 million in 2000, $1.5 million in 1999, and $1.2 million in 1998. In October 1992, the Coal Industry Retiree Health Benefit Act of 1992 (the Act) was enacted. The Act mandates a method of providing for postretirement benefits to UMWA current and retired employees, including some retirees who were never employed by the Company. In October 1993, beneficiaries were assigned to the Company and the Company began its mandated contributions to the UMWA Combined Benefit Fund, a multiemployer trust. Beginning in 1994, the Company was required to make contributions for assigned beneficiaries under an additional multiemployer trust created by the Act, the UMWA 1992 Benefit Plan. The ultimate amount of the Company's liability under the Act will vary due to factors which include, among other things, the validity, interpretation, and regulation of the Act, its joint and several obligation, the number of valid beneficiaries assigned, and the extent to which funding for this obligation will be satisfied by transfers of excess assets from the 1950 UMWA pension plan and transfers from the Abandoned Mine Reclamation Fund. Nonetheless, the Company believes it has an adequate reserve for this liability, which is classified as other noncurrent liabilities. The Company maintains a nonqualified, deferred compensation plan, which permits certain management employees to annually elect to defer, on a pretax basis, a portion of their compensation. The deferred benefit to be provided is based on the amount of compensation deferred, Company match, and earnings on the deferrals. The expense associated with the deferred compensation plan was $0.2 million, $0.5 million, and $0.5 million in 2000, 1999, and 1998, respectively. The Company has invested in certain assets to assist in funding this plan. The fair value of these assets, included in other assets, was $5.1 million and $3.8 million at December 30, 2000 and December 25, 1999, respectively. The Company makes contributions to certain multiemployer defined benefit pension plan trusts that cover union employees based on collective bargaining agreements. Contributions by employees are not required nor are they permitted. Pension expense under the multiemployer defined benefit pension plans was $0.3 million for 2000, 1999, and 1998. Note 9 - Commitments and Contingencies The Company is subject to environmental standards imposed by federal, state, local, and foreign environmental laws and regulations. It has provided and charged to income $2.0 million in 2000 and $2.1 million in 1998 for pending environmental matters. The basis for the provision is updated information and results of ongoing remediation and monitoring programs. Management believes that the outcome of pending environmental matters will not materially affect the financial condition or results of operations of the Company. The Company is involved in certain litigation as a result of claims that arise in the ordinary course of business, which management believes will not have a material adverse effect on the Company's financial condition or results of operations. -43- The Company leases certain facilities and equipment under operating leases expiring on various dates through 2008. The lease payments under these agreements aggregate to approximately $4.7 million in 2001, $3.5 million in 2002, $3.2 million in 2003, $3.1 million in 2004, $2.0 million in 2005, and $4.4 million thereafter. Total lease expense amounted to $9.2 million in 2000, $11.3 million in 1999 and $8.8 million in 1998. Note 10 - Other Income, Net (In thousands)
2000 1999 1998 Rent and royalties $ 799 $ 1,026 $ 1,420 Interest income 8,391 6,591 5,127 Gain on disposal of properties, net 413 1,847 2,156 Minority interest in income of subsidiaries - - (200) -------- -------- -------- Other income, net $ 9,603 $ 9,464 $ 8,503 ======== ======== ========
Note 11 - Stock Options The Company follows APB No. 25 in accounting for its employee stock options. Under APB No. 25, no compensation expense is recognized 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. Under existing plans, the Company may grant options to purchase shares of common stock at prices not less than the fair market value of the stock on the date of the grant. Generally, the options vest annually in 20 percent increments over a five-year period beginning one year from the date of the grant. Any unexercised options expire after not more than ten years. No options may be granted after ten years from the date of plan adoption. Additionally, the Company has granted stock options to key executives as retention incentives and inducements to enter into employment agreements with the Company. Generally, these special grants have terms and conditions similar to those granted under the Company's other stock option plans. On June 15, 1998, the Company loaned $4.5 million, on a full recourse basis, to an officer. The officer used $1.4 million of the proceeds to exercise options to purchase Company stock. That portion of the loan was classified as a reduction of additional paid-in capital, while the remaining balance of the loan was included in other assets in the Company's 1998 consolidated financial statements. The loan was paid in full during 1999. The loan was secured by common stock of the Company. The income tax benefit associated with the exercise of stock options reduced income taxes payable, classified as other current liabilities, by $1.4 million in 2000 and $3.8 million in 1998. Such benefits are reflected as additions directly to additional paid-in capital. -44- A summary of the Company's stock option activity and related information follows: (Shares in thousands)
Weighted Average Options Exercise Price Outstanding at December 27, 1997 5,521 $ 5.11 Granted 403 20.62 Exercised (698) 5.05 Expired, cancelled, or surrendered (54) 15.20 -------- Outstanding at December 26, 1998 5,172 6.22 Granted 158 34.25 Exercised (121) 10.60 Expired, cancelled, or surrendered (10) 19.65 -------- Outstanding at December 25, 1999 5,199 6.94 Granted 150 24.42 Exercised (311) 10.07 Expired, cancelled, or surrendered (16) 24.70 -------- Outstanding at December 30, 2000 5,022 $ 7.22 ========
(Shares in thousands)
Weighted Average Options Exercise Price Options exercisable at: December 26, 1998 4,194 $ 3.46 December 25, 1999 4,410 4.17 December 30, 2000 4,377 4.75
Exercise prices for stock options outstanding at December 30, 2000, ranged from $2.06 to $37.04. Of the 5.0 million stock options that are outstanding at year-end, 3.6 million are owned by Mr. Harvey L. Karp and expire one year after Mr. Karp's separation from employment with the Company. Mr. Karp's options have an exercise price of $2.06 per share. The weighted average remaining life of the remaining 1.4 million shares is 6.91 years, and the weighted average exercise price of these shares is $20.27. The weighted average fair value per option granted was $12.60 in 2000, $17.71 in 1999, and $8.69 in 1998. As of December 30, 2000, the Company had reserved 3.8 million shares of its common stock for issuance pursuant to certain stock option plans. Additionally, the Company had reserved 15 thousand shares of preferred stock for issuance pursuant to the shareholder rights plan. -45- Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options at the date of grant was estimated using the following weighted average assumptions for the years 2000, 1999, and 1998: weighted average expected life of the options of six years; and no dividend payments. The weighted average risk free interest rate used in the model was 5.00 percent for 2000, 6.84 percent for 1999, and 4.85 percent for 1998. The volatility factor of the expected market value of the Company's common stock was 0.479 in 2000, 0.433 in 1999, and 0.344 in 1998. The pro forma information is determined using the Black-Scholes option valuation model. Option valuation models require highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows: (In thousands, except per share data)
2000 1999 1998 Net income $ 92,690 $ 99,279 $ 75,445 SFAS No. 123 pro forma compensation expense (2,257) (1,879) (1,316) -------- -------- -------- SFAS No. 123 pro forma net income $ 90,433 $ 97,400 $ 74,129 ======== ======== ======== Pro forma earnings per share: Basic $ 2.64 $ 2.74 $ 2.09 Diluted $ 2.39 $ 2.47 $ 1.88 ======== ======== ========
Because SFAS No. 123 applies only to stock-based compensation awards for 1995 and later years, the pro forma disclosures under SFAS No. 123 are not likely to be indicative of future disclosures until the disclosures reflect all outstanding, nonvested awards. Note 12 - Acquisitions On April 20, 2000, Mueller acquired Micro Gauge, Inc. and a related business, Microgauge Machining Inc., (collectively Micro Gauge) for approximately $9.1 million. These acquisitions bring to our Industrial Products Division specialized machining capabilities which were previously outsourced to Micro Gauge. In addition, on June 28, 2000, the Company acquired Propipe Technologies, Inc., a fabricator of gas train manifold systems, for approximately $6.1 million. -46- On September 30, 1999, the Company's subsidiary, Utah Railway Company, purchased the stock of the Salt Lake City Southern Railroad Company, Inc. (SLCS) for $675 thousand. SLCS operates pursuant to an easement on approximately 25 miles of track, owned by the Utah Transit Authority, from downtown Salt Lake City to near Draper, Utah. During the second half of 1998, the Company completed three acquisitions. Halstead Industries, Inc. (Halstead), which operates a copper tube mill in Wynne, Arkansas, and a line sets facility in Clinton, Tennessee, was acquired for approximately $95 million cash. The Company also paid off existing bank debt of Halstead for approximately $24.8 million. The Company acquired B&K Industries, Inc., an importer and distributor of residential and commercial plumbing products, for approximately $33.5 million, of which approximately 90 percent was paid in cash and the remainder paid in shares of Mueller common stock. Also, the Company acquired Lincoln Brass Works, Inc. (Lincoln), which produces custom control valve assemblies, as well as custom metal assemblies, gas delivery systems, and tubular products primarily for the gas appliance market with manufacturing facilities in Jacksboro, Tennessee and Waynesboro, Tennessee, for a nominal consideration plus the pay off of existing bank debt of approximately $7.5 million. Each of the acquisitions was accounted for using the purchase method of accounting. Therefore, the results of operations of the acquired businesses were included in the consolidated financial statements of the Company from their respective acquisition dates. The purchase price for these acquisitions, which was financed by available cash balances and credit facilities, has been allocated to the assets of the acquired businesses based on their respective fair market values. The total fair value of assets acquired in 2000 and 1998 was $19.1 million and $240.1 million, respectively. Liabilities assumed in these acquisitions were $3.9 million in 2000 and $78.7 million in 1998. The excess of the purchase price over the net assets acquired in 2000 and 1998 was $7.4 million and $99.3 million, respectively, which is being amortized over 25 years. The final assessment of fair values of the assets and reserves associated with the Halstead and Lincoln acquisitions was completed during 1999. The determination of final fair values resulted in adjustments consisting of changes from initially recorded values. These adjustments increased working capital by $0.9 million and goodwill and other assets by $16.4 million, and decreased property, plant, and equipment by $30.4 million and other liabilities by $13.0 million. Pro forma consolidated results of operations as if the 1998 acquisitions had occurred at the beginning of 1998 include net sales of $1,168.1 million, net income of $71.4 million, basic earnings per share of $2.01, and diluted earnings per share of $1.80. 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 and is not necessarily indicative of operating results to be expected in future periods. The effects of the 2000 and 1999 acquisitions on the consolidated financial statements are not significant and have been excluded from the pro forma presentation. -47- Note 13 - Industry Segments The Company's three reportable segments include its Standard Products Division (SPD), its Industrial Products Division (IPD), and Other Businesses. These segments are classified primarily by the markets for their products. Performance of segments is generally evaluated by their operating income. SPD manufactures copper tube and fittings, plastic fittings, and line sets. These products are manufactured in the U.S., Canada, and Europe and are sold primarily to wholesalers. IPD manufactures brass rod, impact extrusions, and forgings as well as a variety of end-products including plumbing brass; automotive components; valves and fittings; and specialty copper, copper-alloy, and aluminum tubing. These products are sold primarily to OEM customers. The Other Businesses segment is comprised primarily of a short line railroad. Summarized segment and geographic information is shown in the following tables. Geographic sales data indicates the location from which products are shipped. Unallocated expenses include general corporate expenses, plus certain charges or credits not included in segment activity. Segment Information: (In thousands)
2000 1999 1998 Net sales: Standard Products Division $ 882,407 $ 858,525 $ 624,437 Industrial Products Division 302,523 290,270 274,597 Other Businesses 24,667 22,263 31,637 Elimination of intersegment sales (3,429) (2,314) (1,280) ---------- ---------- ---------- $ 1,206,168 $ 1,168,744 $ 929,391 ========== ========== ========== Depreciation and amortization: Standard Products Division $ 26,246 $ 26,495 $ 15,713 Industrial Products Division 8,791 7,936 5,948 Other Businesses 783 787 1,699 General corporate 1,637 1,768 1,539 ---------- ---------- ---------- $ 37,457 $ 36,986 $ 24,899 ========== ========== ==========
-48- Segment Information (continued): (In thousands)
2000 1999 1998 Operating income: Standard Products Division $ 128,466 $ 129,141 $ 83,010 Industrial Products Division 30,604 29,935 28,325 Other Businesses 3,377 3,297 5,661 Unallocated expenses (13,801) (14,447) (8,187) ---------- ---------- ---------- $ 148,646 $ 147,926 $ 108,809 ========== ========== ========== Expenditures for long-lived assets: Standard Products Division $ 43,581 $ 31,089 $ 198,135 Industrial Products Division 34,380 5,063 16,735 Other Businesses 74 960 4,782 ---------- ---------- ---------- $ 78,035 $ 37,112 $ 219,652 ========== ========== ========== Segment assets: Standard Products Division $ 621,370 $ 599,596 $ 610,914 Industrial Products Division 164,210 136,586 144,004 Other Businesses 30,014 40,088 50,446 General corporate 94,682 127,810 69,330 ---------- ---------- ---------- $ 910,276 $ 904,080 $ 874,694 ========== ========== ==========
Geographic Information: (In thousands)
2000 1999 1998 Net sales: United States $ 1,053,399 $ 1,015,968 $ 754,024 Foreign 152,769 152,776 175,367 ---------- ---------- ---------- $ 1,206,168 $ 1,168,744 $ 929,391 ========== ========== ========== Long-lived assets: United States $ 455,356 $ 425,214 $ 448,852 Foreign 49,749 38,120 43,518 ---------- ---------- ---------- $ 505,105 $ 463,334 $ 492,370 ========== ========== ==========
-49- Note 14 - Quarterly Financial Information (Unaudited) (In thousands, except per share data)
First Second Third Fourth Quarter Quarter Quarter Quarter 2000 Net sales $ 302,350 $ 328,583 $ 295,979 $ 279,256 Gross profit (1) 75,836 80,790 61,916 62,315 Net income 26,566 29,762 19,307 17,055 Basic earnings per share 0.76 0.86 0.56 0.51 Diluted earnings per share 0.69 0.78 0.50 0.46 1999 Net sales $ 287,840 $ 293,342 $ 287,880 $ 299,682 Gross profit (1) 66,100 73,002 71,539 71,572 Net income 21,683 25,445 26,340 25,811 Basic earnings per share 0.61 0.71 0.74 0.74 Diluted earnings per share 0.55 0.64 0.66 0.66 (1) Gross profit is net sales less cost of goods sold, which excludes depreciation and amortization.
-50- Report of Independent Auditors The Stockholders of Mueller Industries, Inc. We have audited the accompanying consolidated balance sheets of Mueller Industries, Inc. as of December 30, 2000 and December 25, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mueller Industries, Inc. at December 30, 2000 and December 25, 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States. /S/ERNST & YOUNG LLP Memphis, Tennessee February 9, 2001 -51- CAPITAL STOCK INFORMATION The high, low, and closing prices of Mueller's common stock on the New York Stock Exchange for each fiscal quarter of 2000 and 1999 were as follows:
High Low Close 2000 Fourth quarter $ 26.938 $ 20.063 $ 26.813 Third quarter 32.250 22.063 22.563 Second quarter 34.250 26.000 26.500 First quarter 36.625 26.188 28.313 1999 Fourth quarter $ 36.938 $ 28.313 $ 32.875 Third quarter 35.625 28.000 28.375 Second quarter 33.875 21.125 32.500 First quarter 27.000 19.375 22.625
As of March 6, 2001, the number of holders of record of Mueller's common stock was approximately 2,800. On March 6, 2001, the closing price for Mueller's common stock on the New York Stock Exchange was $31.55. The Company has paid no cash dividends on its common stock and presently does not anticipate paying cash dividends in the near future. -52- Selected Financial Data (In thousands, except per share data)
2000 (1) 1999 (1) 1998 (1) 1997 1996 For the fiscal year: Net sales $ 1,206,168 $ 1,168,744 $ 929,391 $ 888,997 $ 718,312 Operating income 148,646 147,926 108,809 99,709 90,462 Net income 92,690 99,279 75,445 69,770 61,173 Diluted earnings per share (2) 2.43 2.51 1.90 1.78 1.57 At year-end: Total assets 910,276 904,080 874,694 610,776 509,357 Long-term debt 100,975 118,858 174,569 53,113 44,806 (1) Includes the effects of acquisitions described in Note 12 to the consolidated financial statements. (2) In 1998, the Company declared a two-for-one stock split effected in the form of a 100 percent dividend. Diluted earnings per share has been restated to reflect the split for all periods presented.
-53- CORPORATE INFORMATION Board of Directors Harvey L. Karp Chairman of the Board, Mueller Industries, Inc. Gary S. Gladstein (1)(2) Senior Consultant, Soros Fund Management LLC Robert B. Hodes(1)(3) Counsel, Willkie Farr & Gallagher G.E. Manolovici(1)(2)(3) Private Investor William D. O'Hagan President and Chief Executive Officer, Mueller Industries, Inc. (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Nominating Committee Executive Officers Harvey L. Karp Chairman of the Board William D. O'Hagan President and Chief Executive Officer Lee R. Nyman Senior Vice President Manufacturing/Engineering Kent A. McKee Vice President and Chief Financial Officer Roy C. Harris Vice President and Chief Information Officer John P. Fonzo Vice President, General Counsel and Secretary Other Officers and Management Robert L. Fleeman Vice President, International Sales Tommy L. Jamison Vice President, Strategic Engineering Service Michael E. Stoll Vice President, Purchasing Richard W. Corman Corporate Controller James E. Browne Assistant Secretary -54- Standard Products Division Larry D. Birch Vice President, Sales-Corporate Accounts Gregory L. Christopher Vice President, Sales and Supply Chain Management Bruce R. Clements Vice President, Manufacturing, Copper Tube Daniel R. Corbin Vice President, Manufacturing, Plastics John B. Hansen Vice President, Marketing Robert A. Haskins Vice President, Sales Louis F. Pereira General Manager, Canadian Operations Peter D. Berkman President, B&K Industries Robert J. Pasquarelli Vice President and General Manager, European Operations Industrial Products Division James H. Rourke Group Vice President and General Manager Gerald J. Leary Vice President and General Manager, Engineered Products William F. Navarre Vice President, Manufacturing Other Businesses Gary L. Barker President, Utah Railway Company -55- Stockholder Information Annual Meeting The Annual Meeting of Stockholders will be held at the Company's Headquarters at 8285 Tournament Drive, Suite 150, Memphis, TN 38125, 10:00 a.m. local time, May 10, 2001. Common Stock Mueller common stock is traded on the NYSE - Symbol MLI. Form 10-K Copies of the Company's Annual Report on Form 10-K are available upon written request: c/o Mueller Industries, Inc. 8285 Tournament Drive, Suite 150 Memphis, TN 38125 Attention: Investor Relations Independent Auditors Ernst & Young LLP Memphis, Tennessee Transfer Agent and Registrar Continental Stock Transfer & Trust Co. 2 Broadway New York, NY 10004 Stockholder Inquiries To notify the Company of address changes or lost certificates, stockholders can call Continental Stock Transfer & Trust Co. at (212) 509-4000. -56-