UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 27, 2003 Commission file number 1-6770 MUELLER INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 25-0790410 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8285 Tournament Drive, Suite 150 Memphis, Tennessee 38125 (Address of principal executive offices) Registrant's telephone number, including area code: (901) 753-3200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, $0.01 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ] The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter was $911,997,281. The number of shares of the Registrant's common stock outstanding as of February 25, 2004 was 34,917,827 excluding 5,173,675 treasury shares. -1- DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document are incorporated by reference into this Report: Registrant's Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, scheduled to be mailed on or about March 24, 2004 (Part III). MUELLER INDUSTRIES, INC. ------------------- As used in this report, the terms "Company", "Mueller", and "Registrant" mean Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole, unless the context indicates otherwise. ------------------- TABLE OF CONTENTS Page Part I Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 12 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 12 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 14 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 Item 9A. Controls and Procedures 14 Part III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 15 Item 13. Certain Relationships and Related Transactions 18 Item 14. Principal Accounting Fees and Services 18 Part IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 18 Signatures 22 -2- PART I ITEM 1. BUSINESS Introduction The Company is a leading manufacturer of copper, brass, plastic, and aluminum products. The range of these products is broad: copper tube and fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; and fabricated tubular products. Mueller's operations are located throughout the United States, and in Canada, Mexico, and Great Britain. The Company's businesses are managed and organized into two segments: Standard Products Division ("SPD") and Industrial Products Division ("IPD"). SPD manufactures and sells copper tube, copper and plastic fittings, and valves. Outside of the United States, SPD manufactures and sells copper tube in Europe. SPD sells these products to wholesalers in the HVAC (heating, ventilation, and air-conditioning), plumbing, and refrigeration markets, to distributors to the manufactured housing and recreational vehicle industries, and to building material retailers. IPD manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. IPD sells its products primarily to original equipment manufacturers ("OEMs"), many of which are in the HVAC, plumbing, and refrigeration markets. The majority of the Company's manufacturing facilities operated at moderate levels during 2003 and 2002, and high levels in 2001. During 2002, the Company sold its wholly owned subsidiary, Utah Railway Company. Certain expenses related primarily to retiree benefits at inactive operations were formerly combined with the operations of Utah Railway Company under a third industry segment, Other Businesses. Following the sale of Utah Railway Company and its classification as discontinued operations, these expenses of inactive operations have been combined into the unallocated expenses classification. Information concerning segments and geographic information appears under "Note 15 - Industry Segments" in the Notes to Consolidated Financial Statements for the year ended December 27, 2003 in Item 8 of this Report, which is incorporated herein by reference. The Company is a Delaware corporation incorporated on October 3, 1990. Standard Products Division Mueller's Standard Products Division includes a broad line of copper tube, which ranges in size from 1/8 inch to 8 inch diameter, and is sold in various straight lengths and coils. Mueller is a market leader in the air- conditioning and refrigeration tube markets. Additionally, Mueller supplies a variety of water tube in straight lengths and coils used for plumbing applications in virtually every type of construction project. -3- SPD also includes copper and plastic fittings and related components for the plumbing and heating industry that are used in water distribution systems, heating systems, air-conditioning, and refrigeration applications, and drainage, waste, and vent systems. A major portion of Mueller's products are ultimately used in the domestic residential and commercial construction markets and, to a lesser extent, in the automotive and heavy on and off-the-road vehicle markets. On September 27, 2002, the Company acquired certain assets of Colonial Engineering, Inc.'s Fort Pierce, Florida operations. These operations manufacture injected molded plastic pressure fittings for plumbing, agricultural, and industrial use including a line of PVC Schedule 40 and 80 and CPVC fittings. In December 2002, the Company initiated a plan to sell or liquidate its French manufacturing operations, Mueller Europe S. A. On March 3, 2003, Mueller Europe S.A. filed a petition for liquidation with the Commercial Court of Provins Province, France and, on March 4, 2003, the Court declared the entity to be in liquidation. The disposition of remaining assets and obligations of Mueller Europe S.A. is under the jurisdiction of the Court. In 2003, the Company recognized operating losses from discontinued operations incurred by Mueller Europe S.A. for the period the business operated. SPD markets primarily through its own sales and distribution organization, which maintains sales offices and distribution centers throughout the United States and in Canada, Mexico, and Europe. Additionally, products are sold and marketed through a network of agents, which, when combined with the Company's sales organization, provide the Company broad geographic market representation. The businesses in which SPD is engaged are highly competitive. The principal methods of competition for Mueller's products are customer service, availability, and price. The total amount of order backlog for SPD as of December 27, 2003 was not significant. The Company competes with various companies, depending on the product line. In the U.S. copper tubing business, the domestic competition includes Cerro Copper Products Co., Inc., Reading Tube Corporation, and Wolverine Tube, Inc., as well as many actual and potential foreign competitors. In the European copper tubing business, Mueller competes with at least eight European-based manufacturers of copper tubing as well as other foreign-based manufacturers. In the copper fittings market, competitors include Elkhart Products, a division of Amcast Industrial Corporation, and NIBCO, Inc., as well as several foreign manufacturers. Additionally, the Company's copper tube and fittings businesses compete with a large number of manufacturers of substitute products made from other metals and plastic. The plastic fittings competitors include NIBCO, Inc., Charlotte Pipe & Foundry, and other companies. Management believes that no single competitor offers such a wide-ranging product line as Mueller and that this is a competitive advantage in some markets. -4- Industrial Products Division Mueller's Industrial Products Division includes brass rod, nonferrous forgings, and impact extrusions that are sold primarily to OEMs in the plumbing, refrigeration, fluid power, and automotive industries, as well as to other manufacturers and distributors. The Port Huron, Michigan mill extrudes brass, bronze, and copper alloy rod in sizes ranging from 3/8 inches to 4 inches in diameter. These alloys are used in applications that require a high degree of machinability, wear and corrosion resistance, as well as electrical conductivity. IPD also manufactures brass and aluminum forgings, which are used in a wide variety of end products, including automotive components, brass fittings, industrial machinery, valve bodies, gear blanks, and computer hardware. The Company also serves the automotive, military ordnance, aerospace, and general manufacturing industries with cold-formed aluminum and copper impact extrusions. Typical applications for impacts are high strength ordnance, high-conductivity electrical components, builders' hardware, hydraulic systems, automotive parts, and other uses where toughness must be combined with varying complexities of design and finish. Other products include valves and custom OEM products for refrigeration and air-conditioning applications, and shaped and formed tube, produced to tight tolerances, for baseboard heating, appliances, and medical instruments. The total amount of order backlog for IPD as of December 27, 2003 was not significant. On August 21, 2002, the Company acquired 100 percent of the outstanding stock of Overstreet-Hughes, Co., Inc. Overstreet-Hughes, located in Carthage, Tennessee, manufactures precision tubular components and assemblies primarily for the OEM air-conditioning market. 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. IPD primarily sells directly to OEM customers. Competitors, primarily in the brass rod market, include Cerro Metal Products Company, Inc., Chase Industries, Inc., a subsidiary of Olin Corporation, Extruded Metals Inc., and others both domestic and foreign. Outside of North America, IPD sells products through various channels. Labor Relations At December 27, 2003, the Company employed approximately 3,500 employees, of which approximately 1,200 were represented by various unions. The union contracts that cover employees at the Company's Port Huron, Michigan facilities expire April 1, 2004, and the union contract that covers employees at the Company's Wynne, Arkansas facility expires June 28, 2004. The Company expects to renew these contracts without material disruption of its operations. The union contract at the Company's U.K. operation is renewed annually. Other contracts expire on various dates through October 2006. -5- Raw Material and Energy Availability The major portion of Mueller's base metal requirements (primarily copper) is normally obtained through short-term supply contracts with competitive pricing provisions (for cathode) and the open market (for scrap). Other raw materials used in the production of brass, including brass scrap, zinc, tin, and lead, are obtained from zinc and lead producers, open-market dealers, and customers with brass process scrap. Raw materials used in the fabrication of aluminum and plastic products are purchased in the open market from major producers. Adequate supplies of raw material have historically been available to the Company from primary producers, metal brokers, and scrap dealers. Sufficient energy in the form of natural gas, fuel oils, and electricity is available to operate the Company's production facilities. While temporary shortages of raw material and fuels may occur occasionally, to date they have not materially hampered the Company's operations. An increasing demand for copper and copper alloy from China has had an affect on the global distribution of such commodities. The extent and duration of these conditions and the consequent impact on price/availability, if any, in the long-term is unknowable at this time. In the short-term, due to the increased demand for copper (cathode and scrap) and copper alloy products from the export market, the raw material market is tightening. Mueller has commitments for a portion of its metal requirements through 2004 and has extended its forward purchases in the spot market more than normal. Historically, rising prices have resulted in increased availability of copper scrap in the United States, which can normally be purchased at then market prices. Mueller's copper tube facilities can accommodate copper scrap as the primary feedstock. To the extent scrap remains available, this represents an additional source of supply. While the Company will continue to react to market developments, resultant pricing volatility or supply disruptions, if any, could nonetheless adversely affect the Company. Environmental Matters Compliance with environmental laws and regulations is a matter of high priority for the Company. Mueller's provision for environmental compliance includes charges of $1.2 million in 2003, $1.6 million in 2002, and $3.6 million in 2001. Except as discussed below, the Company does not anticipate that it will need to make material expenditures for such compliance activities during the remainder of the 2004 fiscal year, or for the next two fiscal years. Mining Remedial Recovery Company Mining Remedial Recovery Company ("MRRC"), a wholly owned subsidiary, was formed for the purpose of managing the remediation of certain properties and the appropriate disposition thereof. -6- Mammoth Mine Site MRRC owns certain inactive mines in Shasta County, California. MRRC has continued a program, begun in the late 1980s, of sealing mine portals with concrete plugs in mine adits which were discharging water. The sealing program has achieved a reduction in the metal load in discharges from these adits; however, additional reductions are being required. In response to a 1996 Order issued by the California Regional Water Quality Control Board ("QCB"), MRRC completed a feasibility study in 1997 describing measures designed to mitigate the effects of acid rock drainage. In December 1998, the QCB modified the order extending MRRC's time to comply with water quality standards until December 1, 2003. In September 2002, the QCB adopted a new order requiring MRRC to adopt Best Management Practices ("BMP") to control discharges of acid mine drainage. The new order extends the time to comply with water quality standards until September 2007. MRRC has agreed to implement BMP to reduce or prevent the discharge of acid mine drainage until such point as compliance with the order is achieved or, through the Use Attainability Analysis process, the designated, beneficial uses of the respective watercourses are modified, allowing for the adoption of alternative receiving water limits. MRRC estimates it will spend between $0.5 and $1.0 million annually over the next several years to comply with the order. U.S.S. Lead In 1991, U.S.S. Lead Refinery, Inc. ("Lead Refinery") responded to an information request from the EPA under Superfund for information on whether Lead Refinery arranged for the disposal of hazardous substances in the vicinity of the Grand Calumet River/Indiana Harbor Ship Canal. By letter dated February 4, 1997, the Indiana Department of Environmental Management ("IDEM") notified Lead Refinery that a preassessment screening of the Grand Calumet River and the Indiana Harbor Canal conducted pursuant to Superfund had identified releases of hazardous substances from Lead Refinery and other potentially responsible parties ("PRPs") that had adversely impacted natural resources. Based on its prescreening work, IDEM performed sampling in this area and initiated an assessment plan, which will determine the nature and extent of any required remediation and any resulting assessments against any of the PRPs. In 1991, Lead Refinery also responded to an information request under Superfund regarding the site in East Chicago, Indiana. In 1992, the EPA advised Lead Refinery of its intent to list the property as a Superfund site; however, as of February 27, 2004, the EPA had deferred such listing. In 1993, Lead Refinery entered into a Consent Order with the EPA pursuant to Section 3008(h) of the Resource Conservation and Recovery Act ("RCRA"). The Consent Order covers remediation activities at the East Chicago, Indiana site and provides for Lead Refinery to complete certain on-site interim remedial activities and studies that extend off-site. In November 1996, the EPA approved, with modifications, the Interim Stabilization Measures Workplan and designated a Corrective Action Management Unit ("CAMU") at the Lead Refinery site. Site activities, which began in December 1996, were substantially concluded in the fourth quarter of 2002. Costs for remaining cleanup efforts on site are estimated to be less than $0.5 million. In the process of remediating the site, Lead Refinery identified petroleum -7- contamination on site. As a result, Lead Refinery installed a slurry wall around the CAMU and initiated characterization of areas suspected to have petroleum contamination. Lead Refinery has addressed this contamination pursuant to plans approved by the EPA. Additionally, Lead Refinery has conducted initial investigations to determine if other contamination exists that is not addressed by the Consent Order. Lead Refinery, without additional assistance from MRRC, lacks the financial resources needed to complete any additional remediation determined to be required and may seek financial assistance from other PRPs to permit Lead Refinery to conduct a private-party cleanup under RCRA, to the extent available under applicable law and regulations. Lead Refinery has been informed by the former owner and operator of a Superfund site located in Pedricktown, New Jersey that it intends to seek CERCLA response costs for alleged shipments of hazardous substances to the site. Lead Refinery has executed an agreement regarding that site, which indefinitely extends the statute of limitations. By letter dated January 26, 1996, Lead Refinery and other PRPs received from the EPA a proposed Administrative Order on Consent to perform the remedial design for operable Unit 1 of the Pedricktown Superfund Site. Lead Refinery determined not to execute the Administrative Order on Consent. Several other PRPs, however, executed the agreement and are conducting the remedial design. In October 2003, Lead Refinery received a settlement offer for $929 thousand for CERCLA contribution to past and future response costs incurred at the NL/Taracorp Superfund site located in Granite City, Illinois. Lead Refinery declined that offer. In February of 2004, NL Industries, Inc. filed a contribution action against all non-settling PRPs on the EPA's allocation list, including Lead Refinery, seeking payments of an equitable share of clean-up costs incurred by that corporation. Lead Refinery intends to contest this action and seek a voluntary dismissal of Lead Refinery from the action. Other In connection with acquisitions, the Company established environmental reserves to fund the cost of remediation at sites currently or formerly owned by various acquired entities. The Company, through its acquired subsidiaries, is engaged in ongoing remediation and site characterization studies. Mueller Copper Tube Products, Inc. In 1999, Mueller Copper Tube Products, Inc. ("MCTP") commenced a cleanup and remediation of soil and groundwater at its Wynne, Arkansas plant. MCTP is currently removing trichloroethene, a cleaning solvent formerly used by MCTP, from the soil and groundwater. On August 30, 2000, MCTP received approval of its Final Comprehensive Investigation report and Storm Water Drainage Investigation Report addressing the treatment of soils and groundwater, from the Arkansas Department of Environmental Quality. The Company established a reserve for this project in connection with the acquisition of MCTP in 1998. -8- Other Business Factors The Registrant's business is not materially dependent on patents, trademarks, licenses, franchises, or concessions held. In addition, expenditures for company-sponsored research and development activities were not material during 2003, 2002, or 2001. No material portion of the Registrant's business involves governmental contracts. Seasonality of the Company's sales is not significant. SEC Filings We make available through our Internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. To retrieve any of this information, you may access our Internet home page at www.muellerindustries.com, select Mueller Financials, and then select SEC Filings. ITEM 2. PROPERTIES Information pertaining to the Registrant's major operating facilities is included below. Except as noted, the Registrant owns all of its principal properties. The Registrant's plants are in satisfactory condition and are suitable for the purpose for which they were designed and are now being used. Approximate Location Property Size Description Standard Products Division Fulton, MS 418,000 sq. ft. Copper tube mill. Facility includes 52.37 acres casting, extruding, and finishing equipment to produce copper tubing, including tube feed stock for the Company's copper fittings plants and Precision Tube factory. Fulton, MS 103,000 sq. ft. Casting facility. Facility includes 11.9 acres casting equipment to produce copper billets used in the adjoining copper tube mill. Wynne, AR 682,000 sq. ft.(1) Copper tube mill. Facility includes 39.2 acres extrusion and finishing equipment to produce copper tubing and copper tube line sets. Fulton, MS 58,500 sq. ft. Packaging and bar coding facility for 15.53 acres retail channel sales. -9- Approximate Location Property Size Description Fulton, MS 70,000 sq. ft.(2) Copper fittings plant. High-volume 7.68 acres facility that produces copper fittings using tube feed stock from the Company's adjacent copper tube mill. Covington, TN 159,500 sq. ft. Copper fittings plant. Facility 40.88 acres produces copper fittings using tube feed stock from the Company's copper tube mills. Port Huron, MI 40,000 sq. ft. Formed tube plant. Produces copper 5.11 acres fittings using cold heading equipment. Kalamazoo, MI 205,000 sq. ft. Plastic fittings plant. Produces DWV 18 acres fittings using injection molding equipment. Cerritos, CA 115,000 sq. ft. Plastic fittings plant. Produces DWV 5.1 acres fittings using injection molding equipment. Upper 82,000 sq. ft. Plastic fittings plant. Produces DWV Sandusky, OH 7.52 acres fittings using injection molding equipment. Fort Pierce, FL 69,875 sq. ft. Plastic fittings plant. Produces 5.60 acres pressure plastic fittings using injection molding equipment. Bilston, 402,500 sq. ft. Copper tube mill. Facility includes England 14.95 acres casting, extruding, and finishing United Kingdom equipment to produce copper tubing. Industrial Products Division Port Huron, MI 322,500 sq. ft. Brass rod mill. Facility includes 71.5 acres casting, extruding, and finishing equipment to produce brass rods and bars, in various shapes and sizes. Port Huron, MI 127,500 sq. ft. Forgings plant. Produces brass and aluminum forgings. Marysville, MI 81,500 sq. ft. Aluminum and copper impacts plant. 6.72 acres Produces made-to-order parts using cold impact processes. -10- Approximate Location Property Size Description Hartsville, TN 78,000 sq. ft. Refrigeration products plant. 4.51 acres Produces products used in refrigeration applications such as ball valves, line valves, and compressor valves. Carthage, TN 67,520 sq. ft. Fabrication facility. Produces precision 10.98 acres tubular components and assemblies. Jacksboro, TN 65,066 sq. ft. Bending and fabricating facility. 11.78 acres Produces gas burners, supply tubes, and manifolds for the gas appliance industry. Waynesboro, TN 57,000 sq. ft.(3) Gas valve plant. Facility produces 5.0 acres brass valves and assemblies for the gas appliance industry. North Wales, PA 174,000 sq. ft. Precision Tube factory. Facility 18.9 acres fabricates copper tubing, copper alloy tubing, aluminum tubing, and fabricated tubular products. Brighton, MI 65,000 sq. ft.(4) Machining operation. Facility machines component parts for supply to automotive industry. Middletown, OH 55,000 sq. ft. Fabricating facility. Produces burner 2.0 acres systems and manifolds for the gas appliance industry. In addition, the Company owns and/or leases other properties used as distribution centers and corporate offices. (1) Facility is located on land leased from a local municipality, with an option to purchase at nominal cost. (2) Facility is leased under a long-term lease agreement, with an option to purchase at nominal cost. (3) Facility is leased from a local municipality for a nominal amount. (4) Facility is leased under an operating lease. ITEM 3. LEGAL PROCEEDINGS Environmental Proceedings Reference is made to "Environmental Matters" in Item 1 of this Report, which is incorporated herein by reference, for a description of environmental proceedings. -11- Other Matters The Company is aware of investigations of competition in markets in which it participates, or has participated in the past, in Europe, Canada and the United States. On October 21, 2003, the Company was informed that the investigations of which it was aware in the United States have been closed. On September 1, 2003, the European Commission released a statement alleging infringements in Europe of competition rules by manufacturers of copper tubes including the Company and businesses in France and England, which it acquired in 1997. The Company took the lead in bringing these issues to the attention of the European Commission and has fully cooperated in the resulting investigation from its inception. The Company does not anticipate any material adverse effect on its business or financial position as a result of the European Commission's action or other investigations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES As of February 24, 2004, the number of holders of record of Mueller's Common Stock was approximately 2,000. On February 25, 2004, the closing price for Mueller's Common Stock on the New York Stock Exchange was $31.93. Through December 27, 2003, the Company has paid no cash dividends on its Common Stock. Subsequent to December 27, 2003, the Company declared a regular quarterly dividend of 10 cents per share on its Common Stock. Payment of dividends in the future is dependent upon the Company's financial condition, cash flows, capital requirements, earnings, and other factors. The high, low, and closing prices of Mueller's Common Stock on the New York Stock Exchange for each fiscal quarter of 2003 and 2002 were as follows:
High Low Close 2003 Fourth quarter $ 34.83 $ 24.95 $ 34.83 Third quarter 29.65 25.40 25.40 Second quarter 28.38 24.70 27.06 First quarter 28.23 22.99 24.92 2002 Fourth quarter $ 29.70 $ 24.29 $ 27.33 Third quarter 31.60 23.84 25.51 Second quarter 36.12 31.15 31.75 First quarter 35.43 30.44 34.99
-12- ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)
2003 2002 2001 2000 1999 For the fiscal year: Net sales (1) $ 999,078 $ 952,983 $ 969,106 $ 1,157,660 $ 1,110,361 Operating income (1) 49,384 85,756 105,529 145,638 145,676 Net income from continuing operations 44,221 71,177 65,423 92,985 99,362 Diluted earnings per share from continuing operations 1.19 1.92 1.76 2.44 2.51 At year-end: Total assets 1,055,184 987,947 916,065 910,276 904,080 Long-term debt 11,437 14,005 46,977 100,975 118,858 (1) From continuing operations
-13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations is contained in the caption "Financial Review" in the "Consolidated Financial Statements" submitted as a separate section of this Annual Report on Form 10-K commencing on page F-1. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are contained in the caption "Financial Review" in the "Consolidated Financial Statements" submitted as a separate section of this Annual Report on Form 10-K commencing on page F-1. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements required by this item are contained in the "Consolidated Financial Statements" submitted as a separate section of this Annual Report on Form 10-K commencing on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective. There were no changes in the Company's internal control over financial reporting during the Company's fiscal quarter ending December 27, 2003, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -14- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is contained under the captions "Ownership of Common Stock by Directors and Executive Officers and Information about Director Nominees," "Corporate Governance," "Audit Committee Report," and "Section 16(a) Beneficial Ownership Compliance Reporting" in the Company's Proxy Statement for its 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or about March 24, 2004 which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is contained under the caption "Executive Compensation" in the Company's Proxy Statement for its 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or about March 24, 2004, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plan Information The following table discloses information regarding the securities to be issued and the securities remaining available for issuance under the Registrant's stock-based incentive plans as of December 27, 2003 (shares in thousands): -15-
(c) Number of securities remaining available for future (a) Number of securities (b) Weighted average issuance under equity to be issued upon exercise exercise price of compensation plans (excluding of outstanding options, outstanding options securities reflected in column Plan category warrants, and rights warrants, and rights (a)) Equity compensation plans approved by security holders 1,110 $ 23.665 714 Equity compensation plans not approved by security holders 3,015 6.083 - -------------- -------------- Total 4,125 10.816 714 ============== ==============
-16- Pursuant to Option Agreements, dated December 4, 1991 and March 3, 1992, Mr. Karp was granted options (the "Karp Options") to acquire 3.6 million shares of Common Stock at an exercise price of $2.0625 per share (as adjusted for subsequent stock splits) of which 2.4 million shares remained unexercised at December 27, 2003. The Karp Options are currently fully exercisable and will remain exercisable until one year after termination of Mr. Karp's employment with the Company under Mr. Karp's employment agreement with the Company (the "Karp Employment Agreement"), unless Mr. Karp's employment is terminated for Cause (as defined in the Karp Employment Agreement), in which case the Karp Options shall only remain exercisable for a period of 30 days following Mr. Karp's receipt of written notice from the Company specifying the basis for Cause. On May 7, 1997, Mr. O'Hagan was granted an option to acquire 180 thousand shares of Common Stock at an exercise price of $19.875 per share (as adjusted for a subsequent stock split), on October 9, 1998 Mr. O'Hagan was granted an option to acquire 200 thousand shares of Common Stock at an exercise price of $15.9375 per share, on February 13, 2002 Mr. O'Hagan was granted an option to acquire 100 thousand shares of Common Stock at an exercise price of $31.75 per share and on February 13, 2003 Mr. O'Hagan was granted an option to acquire 100 thousand share of Common Stock at an exercise price of $25.10 per share (collectively, the "O'Hagan Treasury Options"). Each of the O'Hagan Treasury Options has a term of ten years, subject to earlier expiration upon termination of employment, and vests ratably over a five-year period from the date of the grant, except that if there is a Change in Control as defined in Mr. O'Hagan's employment agreement with the Company (the "O'Hagan Employment Agreement"), all of the O'Hagan Treasury Options will become immediately exercisable on the later to occur of (i) the day Mr. O'Hagan notifies the Company he is terminating his employment with the Company as a result of said change, and (ii) ten days prior to the date Mr. O'Hagan's employment with the Company is terminated by the Company. In addition, all outstanding unvested O'Hagan Treasury Options will immediately vest and become exercisable if Mr. O'Hagan's employment is terminated by the Company without Cause (as defined in the O'Hagan Employment Agreement) or by Mr. O'Hagan for Good Reason (as defined in the O'Hagan Employment Agreement). The O'Hagan Treasury Options may only be exercised for shares of Common Stock held in treasury by the Company. On June 30, 2000 and June 30, 2003, the Company granted to Messrs. Robert J. Pasquarelli and Michael O. Fifer, respectively, options to acquire 15 thousand and 20 thousand shares of Common Stock, respectively, at an exercise price of $27.8125 and $27.06 per share, respectively. Each of these options has a term of ten years, subject to earlier expiration upon termination of employment, and vests and becomes exercisable ratably over a five-year period from the date of the grant. These options may only be exercised for shares of Common Stock held in treasury by the Company. Other information required by Item 12 is contained under the captions "Principal Stockholders" and "Ownership of Common Stock by Directors and Executive Officers and Information about Director Nominees" in the Company's Proxy Statement for its 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or about March 24, 2004 which is incorporated herein by reference. -17- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is contained under the caption "Principal Accounting Fees and Services" in the Company's Proxy Statement for its 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or about March 24, 2004 which is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements: the financial statements, notes, and report of independent auditors described in Item 8 of this Annual Report on Form 10-K are contained in the "Consolidated Financial Statements" submitted as a separate section of this Annual Report on Form 10-K commencing on page F-1. 2. Financial Statement Schedule: the financial statement schedule described in Item 8 of this report contained in the "Consolidated Financial Statements" submitted as a separate section of this Annual Report on Form 10-K commencing on page F-1. 3. Exhibits: 3.1 Certificate of Incorporation of the Registrant and all amendments thereto. 3.2 By-laws of the Registrant, as amended and restated, effective November 10, 1994 (Incorporated herein by reference to Exhibit 3.2 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 4.1 Rights Agreement, dated as of November 10, 1994, between the Registrant and Continental Stock Transfer and Trust Company, as Rights Agent, which includes the Form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant, as Exhibit A, the Form of Rights Certificate, as Exhibit B, and the Summary of Rights to Purchase Preferred Stock, as Exhibit C (Incorporated herein by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 4.2 Credit Agreement among the Registrant (as Borrower) and Standard Federal Bank and other banking institutions and Standard Federal Bank (as Agent) dated as of November 6, 2003. -18- 4.3 Certain instruments with respect to long-term debt of the Registrant have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instruments does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish a copy of each such instrument upon request of the Securities and Exchange Commission. 10.1 Stock Option Agreement, dated December 4, 1991, by and between the Registrant and Harvey L. Karp (Incorporated herein by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.2 Stock Option Agreement, dated March 3, 1992, by and between the Registrant and Harvey L. Karp (Incorporated herein by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.3 Mueller Industries, Inc. 1991 Incentive Stock Option Plan (Incorporated herein by reference to Exhibit 10.6 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.4 Summary description of the Registrant's 2004 bonus plan for certain key employees. 10.5 Amended and Restated Employment Agreement, effective as of September 17, 1997, by and between the Registrant and Harvey L. Karp (Incorporated herein by reference to Exhibit 10.8 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.6 Amended and Restated Employment Agreement, effective as of September 17, 1997, by and between the Registrant and William D. O'Hagan (Incorporated herein by reference to Exhibit 10.9 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.7 Amendment to Amended and Restated Employment Agreement, effective May 12, 2000, by and between the Registrant and William D. O'Hagan (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q, dated July 24, 2000, for the quarter ended June 24, 2000). 10.8 Mueller Industries, Inc. 1994 Stock Option Plan (Incorporated herein by reference to Exhibit 10.11 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.9 Mueller Industries, Inc. 1994 Non-Employee Director Stock Option Plan (Incorporated herein by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). -19- 10.10 Mueller Industries, Inc. Deferred Compensation Plan, effective December 1, 2000 (Incorporated herein by reference to Exhibit 10.13 of the Registrant's Annual Report on Form 10-K, dated March 26, 2001, for the fiscal year ended December 30, 2000). 10.11 Mueller Industries, Inc. 1998 Stock Option Plan (Incorporated herein by reference to Exhibit 10.14 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.12 Stock Option Agreement, dated May 7, 1997, by and between the Registrant and William D. O'Hagan. 10.13 Stock Option Agreement, dated October 9, 1998, by and between the Registrant and William D. O'Hagan. 10.14 Stock Option Agreement, dated February 13, 2002, by and between the Registrant and William D. O'Hagan (Incorporated herein by reference to Exhibit 10.17 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.15 Employment Agreement, effective October 17, 2002, by and between the Registrant and Kent A. McKee (Incorporated herein by reference to Exhibit 10.18 of the Registrant's Annual Report on Form 10-K, dated March 24, 2003, for the fiscal year ended December 28, 2002). 10.16 Stock Option Agreement, dated February 13, 2003, by and between the Registrant and William D. O'Hagan. 10.17 Nonqualified Stock Option Agreement, dated June 30, 2000, by and between the Registrant and Robert J. Pasquarelli. 10.18 Nonqualified Stock Option Agreement, dated June 30, 2003, by and between the Registrant and Michael O. Fifer. 14.0 Code of Business Conduct and Ethics. 21.0 Subsidiaries of the Registrant. 23.0 Consent of Independent Auditors (Includes report on Financial Statement Schedule). 31.1 Certification of Chief Executive Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -20- 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) During the three months ended December 27, 2003, the registrant filed the following Current Report on Form 8-K: October 14, 2003: Item 7. Financial Statements and Exhibits. Item 12. Results of Operations and Financial Condition. Third Quarter Earnings Release. -21- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 1, 2004. MUELLER INDUSTRIES, INC. /s/ HARVEY L. KARP Harvey L. Karp, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date /s/HARVEY L KARP Chairman of the Board, and Director March 1, 2004 Harvey L. Karp /s/ GENNARO J. FULVIO Director March 1, 2004 Gennaro J. Fulvio /s/ GARY S. GLADSTEIN Director March 1, 2004 Gary S. Gladstein /s/ TERRY HERMANSON Director March 1, 2004 Terry Hermanson /s/ ROBERT B. HODES Director March 1, 2004 Robert B. Hodes /s/ WILLIAM D. O'HAGAN President, Chief Executive Officer, March 1, 2004 William D. O'Hagan Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the date indicated. Signature and Title Date /s/ KENT A. MCKEE March 1, 2004 Kent A. McKee Vice President and Chief Financial Officer (Principal Accounting Officer) /s/ RICHARD W. CORMAN March 1, 2004 Richard W. Corman Corporate Controller -22- MUELLER INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Review F-2 Consolidated Statements of Income for the years December 27, 2003, December 28, 2002, and December 29, 2001 F-13 Consolidated Balance Sheets as of December 27, 2003 and December 28, 2002 F-15 Consolidated Statements of Cash Flows for the years December 27, 2003, December 28, 2002, and December 29, 2001 F-17 Consolidated Statements of Stockholders' Equity for the years December 27, 2003, December 28, 2002, and December 29, 2001 F-19 Notes to Consolidated Financial Statements F-22 Report of Independent Auditors F-49 FINANCIAL STATEMENT SCHEDULE Schedule for the fiscal years ended December 27, 2003, December 28, 2002, and December 29, 2001. Valuation and Qualifying Accounts (Schedule II) F-50 F-1 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 operations are located throughout the United States and in Canada, Mexico, and Great Britain. The Company's businesses are managed and organized into two segments: (i) Standard Products Division (SPD) and (ii) Industrial Products Division (IPD). SPD manufactures and sells copper tube, and copper and plastic fittings and valves. Outside of the United States, SPD manufactures copper tube in Europe. SPD sells these products to wholesalers in the HVAC (heating, ventilation, and air-conditioning), plumbing and refrigeration markets, to distributors to the manufactured housing and recreational vehicle industries, and to building material retailers. IPD manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. IPD sells its products primarily to original equipment manufacturers (OEMs), many of which are in the HVAC, plumbing and refrigeration markets. New housing starts and commercial construction are important determinants of the Company's sales to the HVAC, refrigeration and plumbing markets because the principal end use of a significant portion of the Company's products is in the construction of single and multi-family housing and commercial buildings. Repairs and remodeling projects are also important drivers of underlying demand for these products. Profitability of certain of the Company's product lines depends upon the "spreads" between the cost of raw material and the selling prices of its completed products. The open market prices for copper cathode and scrap, for example, influence the selling price of copper tubing, a principal product manufactured by the Company. The Company attempts to minimize the effects of fluctuations in material costs by passing through these costs to its customers. The Company's earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions. Earnings and profitability is also subject to market trends such as substitute products and imports. Plastic plumbing systems are the primary substitute product; these products represent an increasing share of consumption. Imports of copper tubing from Mexico have increased in recent years, although U.S. consumption is still predominantly supplied by U.S. manufacturers. F-2 RESULTS OF OPERATIONS 2003 Performance Compared with 2002 Consolidated net sales in 2003 were $999.1 million, a 4.8 percent increase over net sales of $953.0 million in 2002. Pounds of product sold totaled 695.8 million in 2003 compared with 694.0 million pounds sold in 2002. Net selling prices generally fluctuate with changes in raw material prices. The COMEX average copper price in 2003 was approximately 80 cents per pound, or 13 percent more than the 2002 average of 71 cents. This change impacted the Company's net sales and cost of goods sold, particularly in the later part of the year as COMEX steadily climbed, ending the year at $1.04 per pound. Cost of goods sold increased $71.1 million, to $815.8 million in 2003. This increase was attributable primarily to higher raw material costs. Gross profit was $183.2 million or 18.3 percent of net sales in 2003 compared with $208.2 million or 21.8 percent of net sales in 2002. The decline in gross profit was due to lower spreads in core product lines, primarily copper tube, fittings, and brass rod. The quarterly gross profit trend bottomed out in the first quarter and steadily improved throughout the year. Depreciation and amortization increased to $39.0 million in 2003 from $37.4 million in 2002; the increase was due to capital expenditures. Selling, general, and administrative expense increased to $94.9 million in 2003; this increase was due to (i) higher distribution costs related to expansion of dedicated warehousing, (ii) health and medical benefit plans, (iii) pension costs, and (iv) additional provisions for doubtful accounts. Interest expense decreased to $1.2 million in 2003 from $1.5 million in 2002. This decrease was primarily due to debt reductions. Environmental expense totaled $1.2 million in 2003 compared with $1.6 million in 2002. Other income was slightly lower due to lower interest income yields on invested cash balances. Income tax expense declined substantially to $7.2 million, for an effective rate of 14 percent, due to the recognition of a deferred income tax benefit. During the third quarter of 2003, the Company recognized a deferred income tax benefit, upon the closure of the open tax year, by reducing a valuation allowance of $9.3 million related to an operating loss resulting from the 1999 sale of a subsidiary. Realization of the tax benefit occurred during the year of sale. During 2002, the Company sold its wholly owned subsidiary, Utah Railway Company, and initiated steps to sell or liquidate its French manufacturing operations, Mueller Europe S.A. The Company expects no further obligations or contingencies from these discontinued operations and, therefore, during 2003 it recognized a $1.7 million gain to reflect adjustments to the previous estimates on disposition. The Company's employment was approximately 3,500 at the end of 2003 compared with 3,600 at the end of 2002. F-3 Standard Products Division Net sales by SPD were $718 million in 2003 compared with $679 million in 2002 for a 5.6 percent increase. Operating income was $54.1 million in 2003 compared with $79.0 million in 2002. The decline in operating profit was due to lower spreads in certain product lines, primarily copper tube and fittings, and increased distribution costs. Industrial Products Division IPD's net sales were $292 million in 2003 compared with $280 million in 2002. Operating income was $11.7 million in 2003 compared with $20.4 million in 2002. Brass rod earnings declined on lower volume and spreads. The division's results also declined due to poor performance of certain product lines including Overstreet-Hughes, Co., Inc. (Overstreet-Hughes). The results of Overstreet-Hughes, which manufactures precision tubular components and assemblies primarily for the OEM air-conditioning market, did not meet expectation during 2003; the Company is evaluating alternatives to improve performance to an acceptable level. If the Company is unable to achieve improvements, a write-down of these assets could be necessary in the future. 2002 Performance Compared with 2001 Consolidated net sales in 2002 were $953 million, 1.7 percent less than net sales of $969 million in 2001. Pounds of product sold totaled 694 million in 2002 or 6.8 percent more than the 650 million pounds sold in 2001. This increase in pounds sold was primarily attributable to the brass rod business. The COMEX average copper price in 2002 was approximately 1.2 percent less than the 2001 average. This change impacted the Company's net sales and cost of goods sold. Cost of goods sold increased $4.4 million, to $745 million in 2002. This increase was attributable to increased volumes. Gross profit was $208 million or 21.8 percent of net sales in 2002 compared with $229 million or 23.6 percent of net sales in 2001. The decline in gross profit was due to lower spreads in certain product lines, primarily copper tube. Depreciation and amortization decreased to $37.4 million in 2002 from $39.5 million in 2001. The decrease was due primarily to discontinuing goodwill amortization, totaling $4.4 million in 2001, in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". Selling, general, and administrative expense increased 1.5 percent to $85.0 million in 2002, reflecting increased volume. Interest expense decreased to $1.5 million in 2002 from $3.3 million in 2001. This decrease was primarily due to debt reductions. No interest was capitalized during 2002, whereas $1.4 million of interest was capitalized on major capital improvement projects in 2001. Environmental expense totaled $1.6 million in 2002 compared with $3.6 million in 2001. Other income remained flat at $5.8 million in 2002 and 2001. F-4 During 2002, the Company sold its wholly owned subsidiary, Utah Railway Company, to Genessee & Wyoming Inc. Proceeds from the sale were $55.4 million. The Company recognized a gain of $21.1 million, net of income taxes of $11.6 million, from the sale. Also during 2002, the Company initiated steps to sell or liquidate its French manufacturing operations, Mueller Europe S.A. The Company recognized a loss of $13.4 million, net of $15.2 million income tax benefit, to write-down the value of the French business to its net realizable value. The Company provided $17.3 million for income taxes attributable to continuing operations in 2002, of which $9.7 million was deferred. The sale of Utah Railway Company enabled the Company to utilize previously unrecognized capital loss carryforwards. In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the recognition of this capital loss carryforward benefit of $12.7 million was classified as a reduction to current income taxes on continuing operations. Current income tax expense of $7.6 million reflects the benefit of recognizing this capital loss carryforward. The 2002 effective tax rate was 19.5 percent while the 2001 rate was 37.3 percent. The Company's employment at its ongoing operations was approximately 3,600 at the end of 2002. This compares with approximately 3,400 at the 2001 year-end. This increase is attributable to acquisitions. Standard Products Division Net sales by SPD were $679 million in 2002 compared with $722 million in 2001 for a 6 percent decrease. Operating income was $79.0 million in 2002 compared with $105 million in 2001. The decline in operating profit was due to lower spreads in certain product lines, primarily copper tube. In September 2002, the Company acquired certain assets of Colonial Engineering, Inc.'s Fort Pierce, Florida operations. These operations manufacture injected molded plastic pressure fittings for plumbing, agricultural, and industrial use including a line of PVC Schedule 40 and 80 and CPVC fittings. These operations generated sales of approximately $15 million in 2001. Total consideration paid was approximately $14.1 million. Industrial Products Division IPD's net sales were $280 million in 2002 compared with $252 million in 2001. Operating income was $20.4 million in 2002 compared with $17.5 million in 2001. Volume increases were responsible for the increase in 2002 earnings. In August 2002, the Company acquired 100 percent of the outstanding stock of Overstreet-Hughes. Overstreet-Hughes, located in Carthage, Tennessee, manufactures precision tubular components and assemblies primarily for the OEM air-conditioning market and had sales in 2001 of approximately $8 million. Total consideration paid at closing, including assumption of debt, was approximately $6.3 million. A contingent payment of up to $2 million will be paid if certain financial targets are achieved. F-5 LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents balance increased to $255.1 million at year-end. Major components of the 2003 change included $73.4 million of cash provided by operating activities, $36.2 million of cash used in investing activities and $3.5 million of cash used in financing activities. Net income from continuing operations of $44.2 million in 2003 was the primary component of cash provided by operating activities. Depreciation and amortization of $39.0 million were the primary non-cash adjustments. Major changes in working capital included a $34.0 million increase in trade accounts receivable due to better volumes and higher raw material costs in the fourth quarter of 2003 compared with the fourth quarter of 2002. The major components of net cash used for investing activities during 2003 included $27.2 million used for capital expenditures and $10.8 million used for acquiring an additional equity interest in Conbraco Industries, Inc. Conbraco, headquartered in Matthews, North Carolina, is a manufacturer of flow control products including Apollo ball valves, automation products, backflow preventers, butterfly valves, check valves, investment cast steel products, marine valves, safety relief valves, strainers and plumbing and heating products for commercial and industrial applications. The $10.8 million investment, made at the beginning of the year, increased the Company's interest in Conbraco to approximately 34 percent. Net cash used in financing activities totaled $3.5 million consisting primarily of $3.9 million for debt repayments partially offset by proceeds from the sale of treasury stock. The Company has a $150 million unsecured line-of-credit (Credit Facility) which expires in November 2006. At year-end, the Company had no borrowings against the Credit Facility. Approximately $7.2 million in letters of credit were backed by the Credit Facility at the end of 2003. At December 27, 2003, the Company's total debt was $14.3 million or 2 percent of its total capitalization. Covenants contained in the Company's financing obligations require, among other things, the maintenance of minimum levels of working capital, tangible net worth, and debt service coverage ratios. At December 27, 2003, the Company was in compliance with all of its debt covenants. The Company expects to invest between $20 and $25 million for capital expenditures during 2004. F-6 Contractual cash obligations of the Company at December 27, 2003 included the following: (In millions)
Payments Due by Year 2005- 2007- Total 2004 2006 2008 Thereafter Long-term debt, including capital lease obligations $ 14.3 $ 2.8 $ 0.7 $ 0.5 $ 10.3 Operating leases 22.4 6.6 8.4 5.6 1.8 Purchase commitments (a) 143.3 143.3 - - - ----- ----- ----- ----- ----- Total contractual cash obligations $180.0 $152.7 $ 9.1 $ 6.1 $ 12.1 ===== ===== ===== ===== =====
(a) Purchase commitments include $17.7 million of open fixed price purchases of raw materials. Additionally, the Company has contractual supply commitments, totaling $125.6 million at year-end prices, for raw materials consumed in the ordinary course of business; these contracts contain variable pricing based upon COMEX. The above obligations will be satisfied with existing cash (which net of indebtedness is $240.1 million), and cash generated by operations. Additionally, the cash flow to fund pension and OPEB obligations is insignificant. During 2003, funded pension assets recovered a significant portion of market value declines experienced in 2002 and 2001. The Company has no off-balance sheet financing arrangements except for the operating leases identified above. Fluctuations in the cost of copper and other raw materials affect the Company's liquidity. Changes in material costs directly impact components of working capital, primarily inventories and accounts receivable. Since the end of the third quarter of 2003, there has been a significant increase in COMEX copper prices. From the September 30, 2003 close through late February of 2004, the cost has risen to approximately $1.30 per pound, or approximately 60 percent. This rise in the price of cathode has also resulted in sharp increases in the open market price for copper scrap and, to a lesser extent, the price of brass scrap. Subsequent to year-end the Company's Board of Directors declared a regular quarterly dividend of 10 cents per share on its common stock. Payment of dividends in the future is dependent upon the Company's financial condition, cash flows, capital requirements, earnings, and other factors. F-7 Management believes that cash provided by operations and currently available cash of $255.1 million will be adequate to meet the Company's normal future capital expenditure and operational needs. The Company's current ratio was 5 to 1 at December 27, 2003. The Company's Board of Directors has authorized the repurchase until October 2004 of up to ten million shares of the Company's common stock through open market transactions or through privately negotiated transactions. The Company has no obligation to purchase any shares and may cancel, suspend, or extend the time period for the purchase of shares at any time. Any purchases will be funded primarily through existing cash and cash from operations. The Company may hold any shares purchased in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. Through December 27, 2003, the Company had repurchased approximately 2.4 million shares under this authorization. Environmental Matters The Company ended 2003 with total environmental reserves of approximately $9.6 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 RISKS The Company is exposed to market risk from changes in foreign currency exchange, raw material costs, and energy costs. To reduce such risks, the Company may periodically use financial instruments. All hedging transactions are authorized and executed pursuant to policies and procedures. Further, the Company does not buy or sell financial instruments for trading purposes. A discussion of the Company's accounting for derivative instruments and hedging activities is included in the Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements. Foreign Currency Exchange Rates Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than an entity's functional currency. The Company and its subsidiaries generally enter into transactions denominated in their respective functional currencies. Foreign currency exposures arising from transactions denominated in currencies other than the functional currency are not material; however, the Company may utilize certain forward fixed-rate contracts to hedge such transactional exposures. Gains and losses with respect to these positions are deferred in stockholders' equity as a component of comprehensive income and reflected in earnings upon collection of receivables. At year-end, the Company had no open forward contracts to exchange foreign currencies. F-8 The Company's primary foreign currency exposure arises from foreign- denominated revenues and profits and their translation into U.S. dollars. The primary currencies to which the Company is exposed include the Canadian dollar, the British pound sterling, the Euro, and the Mexican peso. The Company generally views as long-term its investments in foreign subsidiaries with a functional currency other than the U.S. dollar. As a result, the Company generally does not hedge these net investments. The net investment in foreign subsidiaries translated into U.S. dollars using the year-end exchange rates was $60.6 million at December 27, 2003 and $73.6 million at December 28, 2002. 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 27, 2003 and December 28, 2002 amounted to $6.1 million and $7.6 million, respectively. This change would be reflected in the equity section of the Company's Consolidated Balance Sheet. Cost and Availability of Raw Materials and Energy Copper and brass represent the largest component of the Company's variable costs of production. The cost of these materials is subject to global market fluctuations caused by factors beyond the Company's control. Significant increases in the cost of metal, to the extent not reflected in prices for the Company's finished products, or the lack of availability could materially and adversely affect the Company's business, results of operations and financial condition. The Company occasionally enters into forward fixed-price arrangements with certain customers. The Company may utilize forward contracts to hedge risks associated with forward fixed-price arrangements. The Company may also utilize forward contracts to manage price risk associated with inventory. Gains or losses with respect to these positions are deferred in stockholders' equity as a component of comprehensive income and reflected in earnings upon the sale of inventory. Periodic value fluctuations of the contracts generally offset the value fluctuations of the underlying fixed- price transactions or inventory. At year-end, the Company held open forward contracts to purchase approximately $1.0 million of copper over the next 12 months. Futures contracts may also be used to manage price risk associated with natural gas purchases. Gains and losses with respect to these positions are deferred in stockholders' equity as a component of comprehensive income and reflected in earnings upon consumption of natural gas. Periodic value fluctuations of the contracts generally offset the value fluctuations of the underlying natural gas prices. At year-end, the Company held open hedge forward contracts to purchase approximately $1.0 million of natural gas over the next three months. F-9 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States. Application of these principles requires the Company to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters which are inherently uncertain. The accounting policies and estimates that are most critical to aid in understanding and evaluating the results of operations and financial position of the Company include the following: Inventory Valuation Inventories are valued at the lower of cost or market. The most significant component of the Company's inventory is copper; the domestic copper inventories are valued under the LIFO method. The market price of copper cathode and scrap are subject to volatility. During periods when open market prices decline below net book value, the Company may need to provide an allowance to reduce the carrying value of its inventory. In addition, certain items in inventory may be considered obsolete and, as such, the Company may establish an allowance to reduce the carrying value of those items to their net realizable value. Changes in these estimates related to the value of inventory, if any, may result in a materially adverse or positive impact on the Company's reported financial position or results of operations. The Company recognizes the impact of any changes in estimates, assumptions, and judgments in income in the period in which it is determined. Deferred Taxes Deferred tax assets and liabilities are recognized on the difference between the financial statement and the tax law treatment of certain items. Realization of certain components of deferred tax assets is dependent upon the occurrence of future events. The Company records a valuation allowance to reduce its deferred tax asset to the amount it believes is more likely than not to be realized. These valuation allowances can be impacted by changes in tax laws, changes to statutory tax rates, and future taxable income levels and are based on the Company's judgment, estimates, and assumptions regarding those future events. In the event the Company were to determine that it would not be able to realize all or a portion of the net deferred tax assets in the future, the Company would increase the valuation allowance through a charge to income in the period that such determination is made. Conversely, if the Company were to determine that it would be able to realize its deferred tax assets in the future, in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance through an increase to income in the period that such determination is made. F-10 Environmental Reserves The Company recognizes an environmental liability when it is probable the liability exists and the amount is reasonably estimable. The Company estimates the duration and extent of its remediation obligations based upon reports of outside consultants, internal analyses of clean-up costs and ongoing monitoring, communications with regulatory agencies, and changes in environmental law. If the Company were to determine that its estimates of the duration or extent of its environmental obligations were no longer accurate, the Company would adjust its environmental liabilities accordingly in the period that such determination is made. Allowance for Doubtful Accounts The Company provides an allowance for receivables that may not be fully collected. In circumstances where the Company is aware of a customer's inability to meet its financial obligations (i.e., bankruptcy filings or substantial down-grading of credit ratings), it records a reserve for bad debts against amounts due to reduce the net recognized receivable to the amount it believes most likely will be collected. For all other customers, the Company recognizes reserves for bad debts based on its historical collection experience. If circumstances change (i.e., greater than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations), the Company's estimates of the recoverability of amounts due could be reduced by a material amount. Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 149, "An Amendment of Statement 133 on Derivative Instruments and Hedging Activities", in April 2003 and Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" in May 2003, revised Statement of Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106", in December 2003, and revised FASB Interpretation No. 46, "Variable Interest Entities", (the Statements). The provisions of these Statements, which are currently not applicable to the Company, became, or will become, effective in whole or in part at various times in 2003 and thereafter. These Statements will be considered and adopted, where and when applicable, by the Company at the appropriate future point in time. None of the Statements had a significant effect on the results of operations or financial position of the Company reported in the accompanying Consolidated Financial Statements. F-11 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, the Company 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. Such factors include: (i) the current and projected future business environment, including interest rates and capital and consumer spending; (ii) the domestic housing and commercial construction industry environment; (iii) availability and price fluctuations in commodities (including copper, natural gas, and other raw materials, including crude oil that indirectly effects plastic resins); (iv) competitive factors and competitor responses to the Company's initiatives; (v) stability of government laws and regulations, including taxes; and (vi) continuation of the environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates. F-12 Mueller Industries, Inc. Consolidated Statements of Income Years Ended December 27, 2003, December 28, 2002, and December 29, 2001 (In thousands, except per share data)
2003 2002 2001 Net sales $ 999,078 $ 952,983 $ 969,106 Cost of goods sold 815,849 744,781 740,366 --------- --------- --------- Gross profit 183,229 208,202 228,740 Depreciation and amortization 38,954 37,440 39,461 Selling, general, and administrative expense 94,891 85,006 83,750 --------- --------- --------- Operating income 49,384 85,756 105,529 Interest expense (1,168) (1,460) (3,311) Environmental expense (1,165) (1,639) (3,600) Other income, net 4,385 5,810 5,787 --------- --------- --------- Income from continuing operations before income taxes 51,436 88,467 104,405 Income tax expense (7,215) (17,290) (38,982) --------- --------- --------- Income from continuing operations 44,221 71,177 65,423 Discontinued operations, net of income taxes: Income (loss) from operation of discontinued operations (539) (886) 1,532 Gain on disposition of discontinued operations 1,699 7,701 - --------- --------- --------- Net income $ 45,381 $ 77,992 $ 66,955 ========= ========= ========= See accompanying notes to consolidated financial statements.
F-13 Mueller Industries, Inc. Consolidated Statements of Income (continued) Years Ended December 27, 2003, December 28, 2002, and December 29, 2001 (In thousands, except per share data)
2003 2002 2001 Weighted average shares for basic earnings per share 34,264 33,993 33,409 Effect of dilutive stock options 2,597 3,055 3,836 --------- --------- --------- Adjusted weighted average shares for diluted earnings per share 36,861 37,048 37,245 ========= ========= ========= Basic earnings (loss) per share: From continuing operations $ 1.29 $ 2.09 $ 1.96 From discontinued operations (0.02) (0.03) 0.04 From gain on disposition of discontinued operations 0.05 0.23 - --------- --------- --------- Basic earnings per share $ 1.32 $ 2.29 $ 2.00 ========= ========= ========= Diluted earnings (loss) per share: From continuing operations $ 1.19 $ 1.92 $ 1.76 From discontinued operations (0.01) (0.02) 0.04 From gain on disposition of discontinued operations 0.05 0.21 - --------- --------- --------- Diluted earnings per share $ 1.23 $ 2.11 $ 1.80 ========= ========= ========= See accompanying notes to consolidated financial statements.
F-14 Mueller Industries, Inc. Consolidated Balance Sheets As of December 27, 2003 and December 28, 2002 (In thousands)
2003 2002 Assets Current assets Cash and cash equivalents $ 255,088 $ 217,601 Accounts receivable, less allowance for doubtful accounts of $4,734 in 2003 and $6,443 in 2002 163,006 132,427 Inventories 140,548 142,953 Current deferred income taxes 9,035 4,506 Other current assets 2,678 2,860 ---------- ---------- Total current assets 570,355 500,347 Property, plant, and equipment, net 345,537 352,469 Goodwill, net 104,849 105,551 Other assets 34,443 29,580 ---------- ---------- Total Assets $ 1,055,184 $ 987,947 ========== ========== See accompanying notes to consolidated financial statements.
F-15 Mueller Industries, Inc. Consolidated Balance Sheets (continued) As of December 27, 2003 and December 28, 2002 (In thousands, except share data)
2003 2002 Liabilities and Stockholders' Equity Current liabilities Current portion of long-term debt $ 2,835 $ 4,161 Accounts payable 42,081 41,004 Accrued wages and other employee costs 25,631 26,199 Other current liabilities 42,959 34,987 ---------- ---------- Total current liabilities 113,506 106,351 Long-term debt, less current portion 11,437 14,005 Pension liabilities 18,077 22,364 Postretirement benefits other than pensions 13,566 13,186 Environmental reserves 9,560 9,110 Deferred income taxes 63,734 59,269 Other noncurrent liabilities 10,238 9,718 ---------- ---------- Total liabilities 240,118 234,003 ---------- -------- Minority interest in subsidiaries 208 421 Stockholders' equity Preferred stock - shares authorized 4,985,000; none outstanding - - Series A junior participating preferred stock - $1.00 par value; shares authorized 15,000; none outstanding - - Common stock - $.01 par value; shares authorized 100,000,000; issued 40,091,502; outstanding 34,276,343 in 2003 and 34,257,419 in 2002 401 401 Additional paid-in capital, common 259,110 258,939 Retained earnings 655,495 610,114 Accumulated other comprehensive loss (5,586) (21,133) Treasury common stock, at cost (94,562) (94,798) ---------- ---------- Total stockholders' equity 814,858 753,523 ---------- ---------- Commitments and contingencies - - ---------- ---------- Total Liabilities and Stockholders' Equity $ 1,055,184 $ 987,947 ========== ========== See accompanying notes to consolidated financial statements.
F-16 Mueller Industries, Inc. Consolidated Statements of Cash Flows Years Ended December 27, 2003, December 28, 2002, and December 29, 2001 (In thousands)
2003 2002 2001 Operating activities: Net income from continuing operations $ 44,221 $ 71,177 $ 65,423 Reconciliation of net income from continuing operations to net cash provided by operating activities: Depreciation 38,531 36,979 34,539 Amortization 423 461 4,922 Income tax benefit from exercise of stock options 18 13,243 356 Deferred income taxes (287) 9,686 15,737 Provision for doubtful accounts receivable 3,172 374 526 Minority interest in subsidiaries, net of dividend paid (213) 150 (26) Loss (gain) on disposal of properties 290 (485) (249) Equity in loss of unconsolidated subsidiaries 460 - - Changes in assets and liabilities, net of businesses acquired: Receivables (35,129) 6,021 1,293 Inventories 2,948 (13,744) 13,778 Other assets 3,240 (4,154) 1,534 Current liabilities 14,620 3,683 (14,591) Other liabilities (54) (91) (585) Other, net 1,176 917 (1,204) --------- --------- --------- Net cash provided by operating activities 73,416 124,217 121,453 --------- --------- --------- Investing activities: Proceeds from sale of Utah Railway Company - 55,403 - Capital expenditures (27,236) (23,265) (46,624) Acquisition of businesses - (20,457) - Proceeds from sales of properties 1,412 8,165 2,715 Purchase of Conbraco Industries, Inc. common stock (10,806) (7,320) - Escrowed IRB proceeds 449 2,445 (2,515) --------- --------- --------- Net cash (used in) provided by investing activities (36,181) 14,971 (46,424) --------- --------- --------- See accompanying notes to consolidated financial statements.
F-17 Mueller Industries, Inc. Consolidated Statements of Cash Flows (continued) Years Ended December 27, 2003, December 28, 2002, and December 29, 2001 (In thousands)
2003 2002 2001 Financing activities: Repayments of long-term debt $ (3,894) $ (34,119) $ (65,911) Acquisition of treasury stock - (14,754) - Proceeds from the sale of treasury stock 389 3,204 1,729 Proceeds from issuance of long-term debt - - 10,000 --------- --------- --------- Net cash used in financing activities (3,505) (45,669) (54,182) --------- --------- --------- Effect of exchange rate changes on cash 3,505 719 (1,084) --------- --------- --------- Increase in cash and cash equivalents 37,235 94,238 19,763 Cash provided by discontinued operations 252 1,501 1,831 Cash and cash equivalents at the beginning of the year 217,601 121,862 100,268 --------- --------- --------- Cash and cash equivalents at the end of the year $ 255,088 $ 217,601 $ 121,862 ========= ========= ========= For supplemental disclosures of cash flow information, see Notes 1, 5, 7, and 13. See accompanying notes to consolidated financial statements.
F-18 Mueller Industries, Inc. Consolidated Statements of Stockholders' Equity Years Ended December 27, 2003, December 28, 2002, and December 29, 2001 (In thousands)
Accumulated Common Stock Additional Other Treasury Stock Number Paid-In Retained Comprehensive Number of Shares Amount Capital Earnings Income (Loss) of Shares Cost Total Balance, December 30, 2000 40,092 $ 401 $ 260,979 $ 465,167 $ (11,826) 6,734 $(100,616) $ 614,105 Comprehensive income: Net income - - - 66,955 - - - 66,955 Other comprehensive income (loss): Foreign currency translation - - - - (4,564) - - (4,564) Minimum pension liability adjustment, net of applicable income tax benefit of $1,165 - - - - (4,370) - - (4,370) Cumulative effect of change in accounting for derivative financial instruments, net of applicable income taxes of $75 - - - - 122 - - 122 Change in fair value of derivatives, net of applicable income tax benefit of $1,414 - - - - (2,306) - - (2,306) Losses reclassified into earnings from other comprehensive income, net of applicable income tax benefit of $556 - - - - 906 - - 906 -------- Comprehensive income 56,743 Issuance of shares under incentive stock option plan - - 312 - - (109) 1,417 1,729 Tax benefit related to employee stock options - - 356 - - - - 356 ------- ---- -------- -------- -------- ------ -------- -------- Balance, December 29, 2001 40,092 401 261,647 532,122 (22,038) 6,625 (99,199) 672,933 See accompanying notes to consolidated financial statements.
F-19 Mueller Industries, Inc. Consolidated Statements of Stockholders' Equity (continued) Years Ended December 27, 2003, December 28, 2002, and December 29, 2001 (In thousands)
Accumulated Common Stock Additional Other Treasury Stock Number Paid-In Retained Comprehensive Number of Shares Amount Capital Earnings Income (Loss) of Shares Cost Total Balance, December 29, 2001 40,092 $ 401 $ 261,647 $ 532,122 $ (22,038) 6,625 $ (99,199) $ 672,933 Comprehensive income: Net income - - - 77,992 - - - 77,992 Other comprehensive income (loss): Foreign currency translation - - - - 10,706 - - 10,706 Minimum pension liability adjustment, net of applicable income taxes of $1,153 - - - - (12,747) - - (12,747) Change in fair value of derivatives, net of applicable income tax benefit of $386 - - - - (630) - - (630) Losses reclassified into earnings from other comprehensive income, net of applicable income tax benefit of $685 - - - - 3,576 - - 3,576 -------- Comprehensive income 78,897 Issuance of shares under incentive stock option plan - - (15,951) - - (1,247) 19,155 3,204 Repurchase of common stock - - - - - 456 (14,754) (14,754) Tax benefit related to employee stock options - - 13,243 - - - - 13,243 ------- ---- -------- -------- -------- ------ -------- -------- Balance, December 28, 2002 40,092 401 258,939 610,114 (21,133) 5,834 (94,798) 753,523 See accompanying notes to consolidated financial statements.
F-20 Mueller Industries, Inc. Consolidated Statements of Stockholders' Equity (continued) Years Ended December 27, 2003, December 28, 2002, and December 29, 2001 (In thousands)
Accumulated Common Stock Additional Other Treasury Stock Number Paid-In Retained Comprehensive Number of Shares Amount Capital Earnings Income (Loss) of Shares Cost Total Balance, December 28, 2002 40,092 $ 401 $ 258,939 $ 610,114 $ (21,133) 5,834 $ (94,798) $ 753,523 Comprehensive income: Net income - - - 45,381 - - - 45,381 Other comprehensive income: Foreign currency translation - - - - 10,941 - - 10,941 Minimum pension liability adjustment, net of applicable income taxes of $3 - - - - 4,277 - - 4,277 Change in fair value of derivatives, net of applicable income tax benefit of $156 - - - - 255 - - 255 Losses reclassified into earnings from other comprehensive income, net of applicable income tax benefit of $45 - - - - 74 - - 74 -------- Comprehensive income 60,928 Issuance of shares under incentive stock option plan - - 153 - - (19) 236 389 Tax benefit related to employee stock options - - 18 - - - - 18 ------- ---- -------- -------- -------- ------ -------- -------- Balance, December 27, 2003 40,092 $ 401 $ 259,110 $ 655,495 $ (5,586) 5,815 $ (94,562) $ 814,858 ======= ==== ======== ======== ======== ====== ======== ======== See accompanying notes to consolidated financial statements.
F-21 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. Mueller's operations are located throughout the United States and in Canada, Mexico, and Great Britain. Principles of Consolidation The Consolidated Financial Statements include the accounts of Mueller Industries, Inc. and its majority owned 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. Revenue Recognition Revenue is recognized when products are shipped. The Company classifies the cost of shipping its product to customers as a component of cost of goods sold. 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 27, 2003 and December 28, 2002, temporary investments consisted of certificates of deposit, commercial paper, bank repurchase agreements, and U.S. and foreign government securities totaling $254.9 million and $219.7 million, respectively. Allowance for Doubtful Accounts The Company provides an allowance for receivables that may not be fully collected. In circumstances where the Company is aware of a customer's inability to meet its financial obligations (i.e., bankruptcy filings or substantial down-grading of credit ratings), it records a reserve for bad debts against amounts due to reduce the net recognized receivable to the amount it believes most likely will be collected. For all other customers, the Company recognizes reserves for bad debts based on its historical collection experience. If circumstances change (i.e., greater than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations), the Company's estimates of the recoverability of amounts due could be reduced by a material amount. F-22 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. The market price of copper cathode and scrap are subject to volatility. During periods when open market prices decline below net book value, the Company may need to provide an allowance to reduce the carrying value of its inventory. In addition, certain items in inventory may be considered obsolete and, as such, the Company may establish an allowance to reduce the carrying value of those items to their net realizable value. Changes in these estimates related to the value of inventory, if any, may result in a materially adverse or positive impact on the Company's reported financial position or results of operations. The Company recognizes the impact of any changes in estimates, assumptions, and judgments in income in the period in which it is determined. Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation of buildings, machinery, and equipment 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. Goodwill and Other Intangible Assets Goodwill represents cost in excess of fair values assigned to the underlying net assets of acquired businesses and, prior to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) in 2002, was amortized using the straight- line method over 20 to 25 years. Following the adoption of SFAS No. 142, amortization of goodwill was discontinued. All other intangible assets are amortized over their estimated useful lives. Under SFAS No. 142, goodwill is subject to impairment testing which compares carrying values to fair values and, when appropriate, the carrying value of these assets is required to be reduced to fair value. The Company performs its annual impairment assessment in the fourth quarter of each fiscal year, unless circumstances dictate more frequent assessments. For testing purposes, the Company uses components of its reporting segments; components of a segment having similar economic characteristics are combined. No impairment loss resulted from the 2003 or 2002 tests performed under SFAS No. 142. There can be no assurance that goodwill impairment will not occur in the future. F-23 Environmental Reserves The Company recognizes an environmental liability when it is probable the liability exists and the amount is reasonably estimable. The Company estimates the duration and extent of its remediation obligations based upon reports of outside consultants, internal analyses of clean-up costs and ongoing monitoring, communications with regulatory agencies, and changes in environmental law. If the Company were to determine that its estimates of the duration or extent of its environmental obligations were no longer accurate, the Company would adjust its environmental liabilities accordingly in the period that such determination is made. 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 Deferred tax assets and liabilities are recognized on the difference between the financial statement and the tax law treatment of certain items. Realization of certain components of deferred tax assets is dependent upon the occurrence of future events. The Company records a valuation allowance to reduce its deferred tax asset to the amount it believes is more likely than not to be realized. These valuation allowances can be impacted by changes in tax laws, changes to statutory tax rates, and future taxable income levels and are based on the Company's judgment, estimates, and assumptions regarding those future events. In the event the Company were to determine that it would not be able to realize all or a portion of the net deferred tax assets in the future, the Company would increase the valuation allowance through a charge to income in the period that such determination is made. Conversely, if the Company were to determine that it would be able to realize its deferred tax assets in the future, in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance through an increase to income in the period that such determination is made. Stock-Based Compensation The Company accounts for its stock-based compensation plans using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related Interpretations. No stock-based employee compensation expense is reflected in net income because the exercise price of the Company's incentive employee stock options equals the market price of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS No. 123), to stock-based employee compensation. F-24 (In thousands, except per share data)
2003 2002 2001 Net income $ 45,381 $ 77,992 $ 66,955 SFAS No. 123 compensation expense, net of income taxes (2,028) (2,485) (1,991) --------- --------- --------- SFAS No. 123 pro forma net income $ 43,353 $ 75,507 $ 64,964 ========= ========= ========= Pro forma earnings per share: Basic $ 1.27 $ 2.22 $ 1.94 Diluted $ 1.18 $ 2.04 $ 1.75 Earnings per share, as reported: Basic $ 1.32 $ 2.29 $ 2.00 Diluted $ 1.23 $ 2.11 $ 1.80
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 geographic areas and 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. At December 27, 2003, the Company held open forward commitments to purchase approximately $1.0 million of copper in the next 12 months and approximately $1.0 million of natural gas in the next three months. F-25 Derivative Instruments and Hedging Activities The Company has utilized forward contracts to manage the volatility related to purchases of copper and natural gas, and sales denominated in foreign currencies. In addition, the Company has reduced its exposure to increases in interest rates by entering into an interest rate swap contract. These contracts have been designated as cash flow hedges. In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), the Company has recorded the fair value of these contracts in the Consolidated Balance Sheet. The related gains and losses on the contracts are deferred in stockholders' equity as a component of comprehensive income. With respect to the copper and natural gas contracts, deferred gains and losses are recognized in cost of goods sold in the period in which the related sales or consumption of the commodities are recognized. Deferred gains and losses on foreign currency contracts are recognized in selling, general, and administrative expense in the period in which the foreign sales are collected. Deferred gain or loss on the interest rate swap contract is recognized in interest expense in the period in which the related interest payment being hedged is expensed. To the extent that the changes in the fair value of the contracts do not perfectly offset the changes in the present value of the hedged transactions, that ineffective portion is immediately recognized in earnings. Gains and losses recognized by the Company in 2003 related to the ineffective portion of its hedging instruments, as well as gains and losses related to the portion of the hedging instruments excluded from the assessment of hedge effectiveness, were not material to the Company's Consolidated Financial Statements. Should these contracts no longer meet hedge criteria in accordance with SFAS No. 133, either through lack of effectiveness or because the hedged transaction is not probable of occurring, all deferred gains and losses related to the hedge will be immediately reclassified from accumulated other comprehensive loss into earnings. The Company primarily executes derivative contracts with major financial institutions. These counterparties expose the Company to credit risk in the event of non-performance. The amount of such exposure is limited to the unpaid portion of amounts due to the Company pursuant to terms of the derivative instruments, if any. Although there are no collateral requirements, if a downgrade in the credit rating of these counterparties occurs, management believes that this exposure is mitigated by provisions in the derivative arrangements which allow for the legal right of offset of any amounts due to the Company from the counterparties with any amounts payable to the counterparties by the Company. As a result, management considers the risk of counterparty default to be minimal. Fair Value of Financial Instruments The carrying amounts for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term maturity of these instruments. Using a discounted cash flow analysis, the fair value of the Company's long-term debt instruments exceeded their carrying value by $1.2 million and $1.0 million at December 27, 2003 and December 28, 2002, respectively, based on the estimated current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company's interest rate swap contract was approximately $1.0 million at December 27, 2003. This value represents the estimated amount the Company would need to F-26 pay if such contract were terminated before maturity, principally resulting from market interest rate decreases. The contracted rates on committed forward contracts do not exceed the market rates for similar term contracts at December 27, 2003. The Company estimates the fair value of contracts by obtaining quoted market prices. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 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 in stockholders' equity as a component of comprehensive income. 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, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 149, "An Amendment of Statement 133 on Derivative Instruments and Hedging Activities", in April 2003 and Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", in May 2003, revised Statement of Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88 and 106", in December 2003, and revised FASB Interpretation No. 46, "Variable Interest Entities", (the Statements). The provisions of these Statements, which are currently not applicable to the Company, became, or will become, effective in whole or in part at various times in 2003 and thereafter. These Statements will be considered and adopted, where and when applicable, by the Company at the appropriate future point in time. None of the Statements had a significant effect on the results of operations or financial position of the Company reported in the accompanying Consolidated Financial Statements. F-27 Note 2 - Inventories (In thousands)
2003 2002 Raw material and supplies $ 22,261 $ 22,692 Work-in-process 20,395 21,477 Finished goods 97,892 98,784 ---------- ---------- Inventories $ 140,548 $ 142,953 ========== ==========
Inventories valued using the LIFO method totaled $34.2 million at December 27, 2003 and $37.2 million at December 28, 2002. At December 27, 2003, the approximate FIFO cost of such inventories was $42.0 million. At December 28, 2002, the FIFO cost of inventories approximated the LIFO value. Note 3 - Property, Plant, and Equipment, Net (In thousands)
2003 2002 Land and land improvements $ 8,753 $ 9,332 Buildings 90,279 86,924 Machinery and equipment 466,006 442,987 Construction in progress 16,976 13,618 ---------- ---------- 582,014 552,861 Less accumulated depreciation (236,477) (200,392) ---------- ---------- Property, plant, and equipment, net $ 345,537 $ 352,469 ========== ==========
Note 4 - Goodwill Effective at the beginning of 2002, the Company ceased the amortization of goodwill in accordance with SFAS No. 142. A reconciliation of reported net income and earnings per share to pro forma net income and earnings per share that would have resulted if SFAS No. 142 had been adopted at the beginning of 2001 is as follows: F-28 (In thousands, except per share data)
2003 2002 2001 Net income $ 45,381 $ 77,992 $ 66,955 Goodwill amortization, net of tax - - 3,849 --------- --------- --------- Pro forma net income $ 45,381 $ 77,992 $ 70,804 ========= ========= ========= Pro forma earnings per share: Basic $ 1.32 $ 2.29 $ 2.12 Diluted $ 1.23 $ 2.11 $ 1.90 Earnings per share, as reported: Basic $ 1.32 $ 2.29 $ 2.00 Diluted $ 1.23 $ 2.11 $ 1.80
The changes in the carrying amount of goodwill during the year ended December 27, 2003 were as follows: (In thousands)
Standard Industrial Products Products Division Division Total Balance at December 29, 2001 $ 90,249 $ 8,500 $ 98,749 Goodwill acquired during the year 4,610 2,192 6,802 --------- --------- --------- Balance at December 28, 2002 94,859 10,692 105,551 Adjustments to the fair value of businesses acquired during 2002 (789) 87 (702) --------- --------- --------- Balance at December 27, 2003 $ 94,070 $ 10,779 $ 104,849 ========= ========= =========
F-29 Note 5 - Long-Term Debt (In thousands)
2003 2002 2001 Series IRBs with interest at 6.63%, due 2021 $ 10,000 $ 10,000 1997 Series IRBs with interest at 7.39%, due through 2014 3,125 6,625 Other, including capitalized lease obligations 1,147 1,541 ---------- ---------- 14,272 18,166 Less current portion of long-term debt (2,835) (4,161) ---------- ---------- Long-term debt $ 11,437 $ 14,005 ========== ==========
The Company has a Credit Agreement (the Agreement) with a syndicate of five banks establishing an unsecured $150 million revolving credit facility (the Credit Facility) which matures in November 2006. Borrowings under the Credit Facility bear interest, at the Company's option, at (i) LIBOR plus a variable premium or (ii) the greater 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 35 to 50 basis points. At December 27, 2003, the premium was 35 basis points. Additionally, a facility fee is payable quarterly on the total commitment and varies from 150 to 250 basis points based upon the Company's capitalization ratio. Availability of funds under the Credit Facility is reduced by the amount of certain outstanding letters of credit, which totaled approximately $7.2 million at December 27, 2003. Borrowings under the Agreement require the Company, among other things, to maintain certain minimum levels of net worth and meet certain minimum financial ratios. At December 27, 2003, the Company was in compliance with all debt covenants. Aggregate annual maturities of the Company's debt are $2.8 million, $0.2 million, $0.4 million, $0.3 million, and $0.2 million for the years 2004 through 2008 respectively, and $10.4 million thereafter. Interest paid in 2003, 2002, and 2001 was $1.2 million, $1.6 million, and $5.5 million, respectively. During 2001, the Company capitalized interest of $1.4 million related to its major capital improvement programs. No interest was capitalized in 2003 or in 2002. The Company has guarantees which are letters of credit issued by the Company generally to guarantee the payment of insurance deductibles and retiree health benefits. The terms of the Company's guarantees are generally one year but are renewable annually as required. The maximum potential amount of future payments the Company could be required to make under its guarantees at December 27, 2003 was $7.2 million. F-30 Note 6 - Stockholders' Equity 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 $.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. The Company's Board of Directors has authorized the repurchase until October 2004 of up to ten million shares of the Company's common stock through open market transactions or through privately negotiated transactions. The Company has no obligation to purchase any shares and may cancel, suspend, or extend the time period for the purchase of shares at any time. Any purchases will be funded primarily through existing cash and cash from operations. The Company may hold any shares purchased in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. Through December 27, 2003, the Company had repurchased approximately 2.4 million shares under this authorization. Components of accumulated other comprehensive loss are as follows: (In thousands)
2003 2002 Cumulative foreign currency translation adjustment $ 7,715 $ (3,226) Minimum pension liability, net of income tax (12,840) (17,117) Unrealized derivative losses, net of income tax (461) (790) ---------- ---------- Accumulated other comprehensive loss $ (5,586) $ (21,133) ========== ==========
F-31 The change in cumulative foreign currency translation adjustment primarily relates to the Company's investment in its U.K. and Canadian subsidiaries and fluctuations in exchange rates between their local currencies and the U.S. dollar. Note 7 - Income Taxes The components of income from continuing operations before income taxes were taxed under the following jurisdictions: (In thousands)
2003 2002 2001 Domestic $ 60,937 $ 90,667 $ 114,984 Foreign (9,501) (2,200) (10,579) --------- --------- --------- Income from continuing operations before income taxes $ 51,436 $ 88,467 $ 104,405 ========= ========= =========
Income tax expense attributable to continuing operations consists of the following: (In thousands)
2003 2002 2001 Current tax expense: Federal $ 4,928 $ 6,917 $ 21,532 Foreign 1,744 287 595 State and local 830 400 1,118 --------- --------- --------- Current tax expense 7,502 7,604 23,245 --------- --------- --------- Deferred tax (benefit) expense: Federal 504 9,215 15,032 Foreign (869) 137 (54) State and local 78 334 759 --------- --------- --------- Deferred tax (benefit) expense (287) 9,686 15,737 --------- --------- --------- Income tax expense $ 7,215 $ 17,290 $ 38,982 ========= ========= =========
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. F-32 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 from continuing operations before income taxes is reconciled as follows: (In thousands)
2003 2002 2001 Expected income tax expense $ 18,003 $ 30,964 $ 36,542 State and local income tax, net of federal benefit 618 594 1,542 Foreign income taxes 220 1,330 3,657 Valuation allowance (12,190) (14,928) (284) Other, net 564 (670) (2,475) --------- --------- --------- Income tax expense $ 7,215 $ 17,290 $ 38,982 ========= ========= =========
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)
2003 2002 Deferred tax assets: Accounts receivable $ 1,640 $ 1,806 Inventories 1,523 1,560 Pension, OPEB, and accrued items 11,103 10,531 Other reserves 8,035 7,905 Net operating loss carryforwards 10,175 22,043 Capital loss carryforwards 1,780 2,575 Foreign tax credits 2,119 - Alternative minimum tax credit carryforwards 4,026 4,026 Other 32 398 ---------- ---------- Total deferred tax assets 40,433 50,844 Less valuation allowance (20,840) (33,030) ---------- ---------- Deferred tax assets, net of valuation allowance 19,593 17,814 ---------- ----------
F-33 (In thousands)
2003 2002 Deferred tax liabilities: Property, plant, and equipment 72,884 70,356 Other 1,408 2,221 ---------- ---------- Total deferred tax liabilities 74,292 72,577 ---------- ---------- Net deferred tax liability $ (54,699) $ (54,763) ========== ==========
As of December 27, 2003, the Company had domestic net operating loss carryforwards (NOLs) of $1.1 million, which expire in 2006. In addition, the Company had 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, and capital loss carryforwards totaling $5.1 million, of which $3.8 million expire in 2004, $1.0 million expire in 2005, and $0.3 million expire in 2006. As of December 27, 2003, the Company had foreign net operating loss carryforwards (foreign NOLs) available to offset $32.7 million of foreign subsidiary income. These foreign NOLs have not been recognized, and are available to offset foreign subsidiary income over an indefinite period. The disposition of Mueller Europe S.A. reduced the Company's foreign NOLs in 2002 by $27.9 million, which had been entirely reserved by a valuation allowance. During 2003, the Company recognized a deferred income tax benefit, upon the closure of the open tax year, by reducing a valuation allowance of $9.3 million related to an operating loss resulting from the 1999 sale of a subsidiary. Realization of the tax benefit occurred during the year of sale. During 2002, the Company realized capital gains totaling approximately $41.4 million, primarily from the sale of Utah Railway Company. Existing capital loss carryforwards, which for financial reporting purposes were entirely reserved by a valuation allowance, were used to offset the 2002 capital gains. The income tax benefit of approximately $14.9 million generated by eliminating this valuation allowance was recognized in 2002 as a reduction to income taxes provided for continuing operations in accordance with SFAS No. 109. No income tax expense was included in the operation of discontinued operations in 2003 whereas $2.7 million was included in 2002 and $2.1 million was included in 2001. Income taxes paid (refunded) were approximately $0.8 million in 2003, $(0.2) million in 2002, and $28.3 million in 2001. Note 8 - Other Current Liabilities Included in other current liabilities were accrued discounts and allowances of $24.0 million at December 27, 2003 and $21.2 million at December 28, 2002. F-34 Note 9 - 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 27, 2003, and a statement of the plans' funded status as of December 27, 2003 and December 28, 2002: (In thousands)
Pension Benefits Other Benefits 2003 2002 2003 2002 Change in benefit obligation: Obligation at beginning of year $ 120,654 $ 103,008 $ 10,729 $ 8,114 Service cost 1,766 1,354 5 5 Interest cost 7,495 7,407 694 853 Participant contributions 351 295 - - Actuarial loss 3,766 11,000 146 2,527 Benefit payments (6,234) (6,049) (818) (770) Settlement (67) - - - Foreign currency translation adjustment 4,611 3,639 - - -------- -------- -------- -------- Obligation at end of year $ 132,342 $ 120,654 $ 10,756 $ 10,729 ======== ======== ======== ======== Change in fair value of plan assets: Fair value of plan assets at beginning of year $ 98,251 $ 112,563 $ - $ - Actual return on plan assets 18,535 (13,086) - - Employer contributions 1,047 1,938 818 770 Participant contributions 351 295 - - Benefit payments (6,234) (6,049) (818) (770) Settlement (67) - - - Foreign currency translation adjustment 3,006 2,590 - - -------- -------- -------- -------- Fair value of plan assets at end of year $ 114,889 $ 98,251 $ - $ - ======== ======== ======== ======== Funded status: Funded (underfunded) status at end of year $ (17,453) $ (22,403) $ (10,756) $ (10,729) Unrecognized prior service cost 2,664 3,149 (80) (88) Unrecognized loss 17,765 24,688 2,817 2,791 -------- -------- -------- -------- Net amount recognized $ 2,976 $ 5,434 $ (8,019) $ (8,026) ======== ======== ======== ========
F-35 The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with benefit obligations in excess of plan assets were $104.6 million, $103.1 million, and $84.1 million, respectively, as of December 27, 2003, and $93.9 million, $91.8 million, and $70.2 million, respectively, as of December 28, 2002. The following table provides the amounts recognized in the Consolidated Balance Sheets as of December 27, 2003 and December 28, 2002: (In thousands)
Pension Benefits Other Benefits 2003 2002 2003 2002 Prepaid benefit cost $ 8,203 $ 8,967 $ - $ - Intangible asset - 1,702 - - Accrued benefit liability (18,077) (22,365) (8,019) (8,026) Accumulated other comprehensive loss 12,850 17,130 - - -------- -------- -------- -------- Net amount recognized $ 2,976 $ 5,434 $ (8,019) $ (8,026) ======== ======== ======== ========
The components of net periodic benefit cost (income) are as follows: (In thousands)
2003 2002 2001 Pension benefits: Service cost $ 1,766 $ 1,354 $ 1,802 Interest cost 7,495 7,407 7,222 Expected return on plan assets (7,724) (9,061) (9,794) Amortization of prior service cost 491 856 904 Amortization of net (gain) loss 1,327 (714) (1,749) --------- --------- --------- Net periodic benefit cost (income) $ 3,355 $ (158) $ (1,615) ========= ========= ========= Other benefits: Service cost $ 5 $ 5 $ 13 Interest cost 694 853 702 Amortization of prior service cost (8) (8) (8) Amortization of net gain 120 122 - Curtailment gain - - (323) --------- --------- --------- Net periodic benefit cost $ 811 $ 972 $ 384 ========= ========= =========
F-36 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 and 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 2003 2002 2003 2002 Weighted average assumptions: Discount rate 6.08% 6.42% 6.25% 6.75% Expected return on plan assets 8.07% 8.05% N/A N/A Rate of compensation increases 4.25% 4.00% N/A N/A
The assumptions used in the measurement of the Company's net periodic benefit cost are as follows:
Pension Benefits Other Benefits 2003 2002 2001 2003 2002 2001 Weighted average assumptions: Discount rate 6.42% 7.25% 7.17% 6.75% 6.75% 8.21% Expected return on plan assets 8.05% 8.10% 7.96% N/A N/A N/A Rate of compensation increases 4.00% 4.25% 3.25% N/A 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 7.6 to 10.4 percent for 2003, gradually decrease to 5.5 percent for 2011, 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 $900 thousand and the service and interest cost components of net periodic postretirement benefit costs by $60 thousand for 2003. 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 2003 by $821 thousand and $56 thousand, respectively. F-37 The weighted average asset allocation of the Company's pension fund assets are as follows:
Pension Plan Assets 2003 2002 Equity securities 71% 60% Index funds 10 8 Debt securities 6 9 Cash and equivalents 2 12 Other 11 11 ------- ------- 100% 100% ======= =======
The measurement date for the majority of the plans is at year-end. The Company's pension plan obligations are long-term in nature and, accordingly, the plan assets are invested for the long-term. The Company believes that a diversified portfolio of equity securities (both actively managed and index funds) and private equity funds have an acceptable risk- return profile that, over the long-term, is better than fixed income securities. Consequently, the pension plan assets are heavily weighted to equity investments. Plan assets are monitored periodically. Based upon results, investment managers and/or asset classes are redeployed when considered necessary. Expected rates of return on plan assets were determined based on historical market returns giving consideration to the composition of each plan's portfolio. The plans' assets do not include investment in securities issued by the Company. The Company expects to contribute between $1.0 million and $1.5 million to its pension plans and approximately $1.0 million to its other postretirement benefit plans in 2004. The Company sponsors voluntary employee savings plans that qualify under Section 401(k) of the Internal Revenue Code of 1986. Compensation expense for the Company's matching contribution to the 401(k) plans was $2.0 million in 2003 and in 2002, and $2.1 million in 2001. The Company's match is a cash contribution. Participants direct the investment of their account balances by allocating among a range of asset classes including mutual funds (equity, fixed income, and balanced funds), and money market funds. The plans do not offer direct investment in securities issued by the Company. F-38 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 totaled $6.3 million in 2003 and $5.4 million in 2002. 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. During 2001, the Company match was discontinued. Other expenses associated with the plan in 2003, 2002 and 2001 were insignificant. The Company has invested in certain assets to assist in funding this plan. The fair value of these assets, included in other assets, was $6.7 million at December 27, 2003 and $5.5 million at December 28, 2002. 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 2003, 2002, and 2001. Note 10 - Commitments and Contingencies The Company is subject to environmental standards imposed by federal, state, local, and foreign environmental laws and regulations. The Company has provided and charged to income $1.2 million in 2003, $1.6 million in 2002, and $3.6 million in 2001 for pending environmental matters. The basis for the provision is updated information and results of ongoing remediation and monitoring programs. Environmental reserves total $9.6 million in 2003 and $9.1 million in 2002. These projected costs will be funded in future years as remediation programs progress. Management believes that the outcome of pending environmental matters will not materially affect the financial position or results of operations of the Company. The Company is involved in certain litigation as a result of claims that arose in the ordinary course of business, which management believes will not have a material adverse effect on the Company's financial position or results of operations. Additionally, the Company may realize the benefit of certain insurance and legal claims in the future; these gain contingencies are not recognized in the Consolidated Financial Statements. F-39 The Company is aware of investigations of competition in markets in which it participates, or has participated in the past, in Europe, Canada and the United States. On October 21, 2003, the Company was informed that the investigations of which it was aware in the United States have been closed. On September 1, 2003, the European Commission released a statement alleging infringements in Europe of competition rules by manufacturers of copper tubes including the Company and businesses in France and England, which it acquired in 1997. The Company took the lead in bringing these issues to the attention of the European Commission and has fully cooperated in the resulting investigation from its inception. The Company does not anticipate any material adverse effect on its business or financial position as a result of the European Commission's action or other investigations. The Company leases certain facilities and equipment under operating leases expiring on various dates through 2011. The lease payments under these agreements aggregate to approximately $6.6 million in 2004, $4.6 million in 2005, $3.8 million in 2006, $3.1 million in 2007, $2.5 million in 2008, and $1.8 million thereafter. Total lease expense amounted to $7.0 million in 2003, $10.6 million in 2002, and $8.8 million in 2001. Note 11 - Other Income, Net (In thousands)
2003 2002 2001 Rent and royalties $ 2,821 $ 2,364 $ 686 Interest income 2,466 3,111 4,826 (Loss) gain on disposal of properties, net (290) 485 249 Minority interest in income of subsidiaries (152) (150) 26 Equity in loss of unconsolidated subsidiary (460) - - --------- --------- --------- Other income, net $ 4,385 $ 5,810 $ 5,787 ========= ========= =========
Note 12 -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 equal 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. F-40 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. The income tax benefit associated with the exercise of stock options reduced income taxes payable, classified as other current liabilities, by $18 thousand in 2003, $13.2 million in 2002, and $0.4 million in 2001. Such benefits are reflected as additions directly to additional paid-in capital and, therefore, have no effect on the Company earnings. A summary of the Company's stock option activity and related information follows: (Shares in thousands)
Weighted Average Options Exercise Price Outstanding at December 30, 2000 5,022 $ 7.22 Granted 76 29.43 Exercised (120) 17.55 Expired, cancelled, or surrendered (42) 26.03 -------- Outstanding at December 29, 2001 4,936 7.15 Granted 261 31.79 Exercised (1,255) 2.80 Expired, cancelled, or surrendered (21) 30.39 -------- Outstanding at December 28, 2002 3,921 10.06 Granted 281 25.66 Exercised (24) 21.78 Expired, cancelled, or surrendered (53) 28.92 -------- Outstanding at December 27, 2003 4,125 10.82 ======== Options exercisable at: December 29, 2001 4,462 $ 5.24 December 28, 2002 3,410 7.24 December 27, 2003 3,554 8.03
Exercise prices for stock options outstanding at December 27, 2003, ranged from $2.06 to $37.04. Of the 4.1 million stock options outstanding at year-end, 2.4 million were owned by the Chairman of the Company's Board of Directors, 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 1.7 million shares is 5.5 years, and the weighted average exercise price of these shares is $22.99. The weighted average fair value per option granted was $10.06 in 2003, $12.49 in 2002, and $13.58 in 2001. F-41 Mr. Karp exercised options to purchase 1.2 million shares of Company stock during 2002 and none during 2003. As provided in Mr. Karp's option agreement, the Company withheld the number of shares, at their fair market value, sufficient to cover the minimum withholding taxes incurred by the exercise. These shares withheld have been classified as acquisition of treasury stock in the Company's Consolidated Financial Statements. As of December 27, 2003, the Company had reserved 2.4 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. 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 2003, 2002, and 2001 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 3.81 percent for 2003, 3.44 percent for 2002, and 4.67 percent for 2001. The volatility factor of the expected market value of the Company's common stock was 0.331 in 2003, 0.344 in 2002, and 0.418 in 2001. The pro forma information was 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 is included in the Summary of Significant Accounting Policies. Note 13 - Acquisitions On September 27, 2002, the Company acquired certain assets of Colonial Engineering, Inc.'s Fort Pierce, Florida operations. These operations manufacture injected molded plastic pressure fittings for plumbing, agricultural, and industrial use including a line of PVC Schedule 40 and 80 and CPVC fittings. These operations generated sales of approximately $15 million in 2001. The purchase price was approximately $14.1 million. On August 21, 2002, the Company acquired 100 percent of the outstanding stock of Overstreet-Hughes, Co., Inc. Overstreet-Hughes, located in Carthage, Tennessee, manufactures precision tubular components and assemblies primarily for the OEM air-conditioning market and had sales in 2001 of approximately $8 million. Total consideration paid at closing, including assumption of debt, was approximately $6.3 million. A contingent payment of up to $2 million will be paid if certain financial targets are achieved. F-42 Both of the acquisitions were accounted for using the purchase method of accounting. Therefore, the results of operations of the acquired businesses were included in the Company's Consolidated Financial Statements from their respective acquisition dates. The purchase price for these acquisitions, which was financed by available cash balances, has been allocated to the assets of the acquired businesses based on their respective fair market values. The final assessment of fair values of the assets and liabilities associated with the 2002 acquisitions was completed during 2003. The determination of final fair values resulted in adjustments from initially recorded values. These adjustments increased working capital by $0.6 million, increased other assets by $2.0 million, and decreased goodwill by $0.8 million. The total fair value of assets acquired in 2002 was $23.6 million, and the fair value of liabilities assumed in 2002 was $1.9 million. The excess of the purchase price over the net assets acquired in 2002 was $6.1 million. During 2002, the Company acquired an equity interest in Conbraco Industries, Inc. for $7.3 million in cash; early in 2003, the Company acquired an additional interest for $10.8 million. Conbraco is a manufacturer of flow control products including ball valves, automation products, backflow preventers, butterfly valves, check valves, forged steel products, marine valves, safety relief valves, strainers and plumbing and heating products for commercial and industrial applications. The Company's interest totaled 39 percent of Conbraco's equity at December 27, 2003. This investment is accounted for by the equity method of accounting, and is included in the other assets classification in the Consolidated Balance Sheet. Note 14 - Discontinued Operations On August 28, 2002, the Company completed the sale of its wholly owned subsidiary, Utah Railway Company, to Genessee & Wyoming Inc. Proceeds from the sale were approximately $55.4 million. The Company recognized a gain of $21.1 million (net of income taxes of $11.6 million) from the sale. In December 2002, the Company initiated a plan to sell or liquidate its French manufacturing operations, Mueller Europe S. A. A loss of $13.4 million was recognized to write-down this operation to its net realizable value. This loss is net of a $15.2 million income tax benefit related to the operation's cumulative losses previously unrecognized for tax purposes. Included in the loss is a provision to expense the cumulative foreign currency translation adjustment of $2.5 million, which was previously recognized as a component of other comprehensive loss. Major components of this operation included in the Consolidated Balance Sheet at December 28, 2002 were current assets of $6.3 million and current liabilities of $6.0 million. On March 3, 2003, Mueller Europe S.A. filed a petition for liquidation with the Commercial Court of Provins Province, France and on March 4, 2003 the Court declared the entity to be in liquidation. The disposition of remaining assets and obligations of Mueller Europe S.A. is under the jurisdiction of the Court. In 2003, the Company recognized operating losses from discontinued operations incurred by Mueller Europe S.A. for the period the business operated. F-43 The Company expects no further obligations or contingencies from these discontinued operations and, therefore, during 2003 it recognized a $1.7 million gain to reflect adjustments to the previous estimates on disposition. Operating results of both businesses, net of applicable income taxes, are included in the Consolidated Statements of Income classified as income (loss) from operation of discontinued operations. Operating results of discontinued operations were as follows: (In thousands)
2003 2002 2001 Net sales: Utah Railway Company $ - $ 15,394 $ 23,399 Mueller Europe S.A. 2,323 49,767 59,940 --------- --------- --------- $ 2,323 $ 65,161 $ 83,339 ========= ========= ========= Income (loss) before income taxes: Utah Railway Company $ - $ 7,482 $ 5,502 Mueller Europe S.A. (539) (5,682) (1,915) --------- --------- --------- $ (539) $ 1,800 $ 3,587 ========= ========= ========= Net income (loss): Utah Railway Company $ - $ 4,812 $ 3,465 Mueller Europe S.A. (539) (5,698) (1,933) --------- --------- --------- $ (539) $ (886) $ 1,532 ========= ========= =========
Note 15 - Industry Segments The Company's reportable segments include its Standard Products Division (SPD) and its Industrial Products Division (IPD). 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. 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. F-44 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. Certain expenses related primarily to retiree benefits at inactive operations were formerly combined with the operations of Utah Railway Company under a third industry segment, Other Businesses. Following the sale of Utah Railway Company and its classification as discontinued operations, these expenses of inactive operations have been combined into the unallocated expenses classification. In addition, the operations of Mueller Europe S.A. are classified as discontinued operations and have been eliminated from the operating results of SPD. Worldwide sales to one customer from the Standard Products Division totaled $111.0 million in 2003, $101.0 million in 2002, and $97.2 million in 2001, which represented 11 percent in 2003 and in 2002, and 10 percent in 2001 of the Company's consolidated net sales. No other customer accounted for more than 10 percent of consolidated net sales. SEGMENT INFORMATION: (In thousands)
2003 2002 2001 Net sales: Standard Products Division $ 717,606 $ 679,264 $ 721,520 Industrial Products Division 292,008 279,591 251,747 Elimination of intersegment sales (10,536) (5,872) (4,161) --------- --------- --------- $ 999,078 $ 952,983 $ 969,106 ========= ========= ========= Depreciation and amortization: Standard Products Division $ 26,038 $ 24,975 $ 27,588 Industrial Products Division 11,023 10,539 10,098 General corporate 1,893 1,926 1,775 --------- --------- --------- $ 38,954 $ 37,440 $ 39,461 ========= ========= ========= Operating income: Standard Products Division $ 54,123 $ 78,964 $ 104,603 Industrial Products Division 11,672 20,353 17,469 Unallocated expenses (16,411) (13,561) (16,543) --------- --------- --------- $ 49,384 $ 85,756 $ 105,529 ========= ========= ========= Expenditures for long-lived assets: Standard Products Division $ 21,465 $ 27,400 $ 33,902 Industrial Products Division 5,623 11,558 10,379 --------- --------- --------- $ 27,088 $ 38,958 $ 44,281 ========= ========= =========
F-45 (In thousands)
2003 2002 2001 Segment assets: Standard Products Division $ 594,236 $ 594,516 $ 604,099 Industrial Products Division 159,303 171,315 158,659 General corporate 301,645 222,116 153,307 --------- --------- --------- $1,055,184 $ 987,947 $ 916,065 ========= ========= =========
GEOGRAPHIC INFORMATION: (In thousands)
2003 2002 2001 Net sales: United States $ 895,994 $ 870,457 $ 881,357 Foreign 103,084 82,526 87,749 --------- --------- --------- $ 999,078 $ 952,983 $ 969,106 ========= ========= ========= Long-lived assets: United States $ 437,182 $ 443,295 $ 451,231 Foreign 47,647 44,305 60,921 --------- --------- --------- $ 484,829 $ 487,600 $ 512,152 ========= ========= =========
F-46 Note 16 - Quarterly Financial Information (Unaudited) (In thousands, except per share data)
First Second Third Fourth Quarter Quarter Quarter Quarter 2003 Net sales $ 232,022 $ 248,221 $ 251,053 $ 267,782 Gross profit (1) 40,107 44,760 49,093 49,269 Income from continuing operations 4,460 8,979 19,737 11,045 Loss from operations of discontinued operations, net of tax (539) - - - Gain on disposition of discontinued operations, net of tax - - 1,699 - Net income 3,921 8,979 21,436 11,045 Basic earnings (loss) per share: From continuing operations 0.13 0.26 0.58 0.32 From discontinued operations (0.02) - - - From sale of discontinued operations - - 0.05 - Basic earnings per share 0.11 0.26 0.63 0.32 Diluted earnings (loss) per share: From continuing operations 0.12 0.24 0.53 0.30 From discontinued operations (0.01) - - - From sale of discontinued operations - - 0.05 - Diluted earnings per share 0.11 0.24 0.58 0.30 (1) Gross profit is net sales less cost of goods sold, which excludes depreciation and amortization.
F-47 (In thousands, except per share data)
First Second Third Fourth Quarter Quarter Quarter Quarter 2002 Net sales $ 249,053 $ 260,507 $ 227,294 $ 216,129 Gross profit (1) 57,247 59,156 50,992 40,807 Income from continuing operations 17,865 18,716 25,822 8,774 Income (loss) from operations of discontinued operations, net of tax 71 (251) (313) (393) Gain (loss) on disposition of discontinued operations, net of tax - - 21,123 (13,422) Net income (loss) 17,936 18,465 46,632 (5,041) Basic earnings (loss) per share: From continuing operations 0.54 0.55 0.75 0.25 From discontinued operations - (0.01) (0.01) (0.01) From sale of discontinued operations - - 0.62 (0.39) Basic earnings (loss) per share 0.54 0.54 1.36 (0.15) Diluted earnings (loss) per share: From continuing operations 0.48 0.50 0.70 0.24 From discontinued operations - - - (0.01) From sale of discontinued operations - - 0.57 (0.37) Diluted earnings (loss) per share 0.48 0.50 1.27 (0.14) (1) Gross profit is net sales less cost of goods sold, which excludes depreciation and amortization.
F-48 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 27, 2003 and December 28, 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 27, 2003. 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 27, 2003 and December 28, 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 27, 2003, in conformity with accounting principles generally accepted in the United States. As discussed in Note 4 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" in 2002. /S/ERNST & YOUNG LLP Memphis, Tennessee January 30, 2004 F-49 MUELLER INDUSTRIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 27, 2003, December 28, 2002, and December 29, 2001 (In thousands)
Additions ------------------------------- Balance at Charged to Balance beginning costs and Other at end of year expenses additions Deductions of year ------------ ------------ ----------- ----------- ----------- 2003 Allowance for doubtful accounts $ 6,443 $ 3,172 $ - $ 4,881 $ 4,734 Environmental reserves $ 9,110 $ 1,165 $ 1,293 (1) $ 2,008 $ 9,560 Severance and related $ 13 $ 46 $ - $ - $ 59 Other reserves (4) $ 1,721 $ - $ - $ 986 $ 735 Valuation allowance for deferred tax assets $ 33,030 $ 1,807 $ - $ 13,997 $ 20,840 2002 Allowance for doubtful accounts $ 6,573 $ 374 $ - $ 504 $ 6,443 Environmental reserves $ 9,203 $ 1,739 $ 543 $ 2,375 $ 9,110 Severance and related $ 14 $ - $ - $ 1 $ 13 Other reserves (4) $ 3,306 $ - $ 200 $ 1,785 $ 1,721 Valuation allowance for deferred tax assets $ 58,535 $ 136 $ - $ 25,641 $ 33,030 2001 Allowance for doubtful accounts $ 5,612 $ 1,704 $ - $ 743 $ 6,573 Environmental reserves $ 9,862 $ 3,600 $ 311 (1) $ 4,570 $ 9,203 Severance and related $ 2,187 $ 707 $ - $ 2,880 $ 14 Other reserves (4) $ 11,332 $ - $ - $ 8,026 $ 3,306 Valuation allowance for deferred tax assets $ 34,286 $ 678 $ 24,530 (2) $ 959 $ 58,535 (1) Includes insurance proceeds and currency translation changes. (2) Balance reclassified from other liabilities. (3) Other additions to the valuation allowance for deferred tax assets relate to capital loss carryforwards, foreign net operating loss carryforwards, and foreign audit and withholding allowances. (4) Other reserves are included in the balance sheet captions "Other current liabilities" and "Other noncurrent liabilities".
F-50 EXHIBIT INDEX 3.1 Certificate of Incorporation of the Registrant and all amendments thereto. 4.2 Credit Agreement among the Registrant (as Borrower) and Standard Federal Bank and other banking institutions and Standard Federal Bank (as Agent) dated as of November 6, 2003. 4.3 Certain instruments with respect to long-term debt of the Registrant have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instruments does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish a copy of each such instrument upon request of the Securities and Exchange Commission. 10.4 Summary description of the Registrant's 2004 bonus plan for certain key employees. 10.12 Stock Option Agreement, dated May 7, 1997, by and between the Registrant and William D. O'Hagan. 10.13 Stock Option Agreement, dated October 9, 1998, by and between the Registrant and William D. O'Hagan. 10.16 Stock Option Agreement, dated February 13, 2003, by and between the Registrant and William D. O'Hagan. 10.17 Nonqualified Stock Option Agreement, dated June 30, 2000, by and between the Registrant and Robert J. Pasquarelli. 10.18 Nonqualified Stock Option Agreement, dated June 30, 2003, by and between the Registrant and Michael O. Fifer. 14.0 Code of Business Conduct and Ethics. 21.0 Subsidiaries of the Registrant. 23.0 Consent of Independent Auditor (Includes report on Financial Statement Schedule). 31.1 Certification of Chief Executive Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.