MUELLER INDUSTRIES, INC.
1998 ANNUAL REPORT
Mueller Industries, Inc. 1998 Annual Report
Mueller: Focused on Growth
Mueller Industries, Inc.
Mueller Industries, Inc. is a leading manufacturer of copper tube and
fittings; brass and copper alloy rod, bar and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and
valves; refrigeration valves and fittings; and fabricated tubular
products. Mueller's plants are located throughout the United States and in
Canada, France and Great Britain. The Company also owns a short line
railroad in Utah and various natural resource properties.
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MUELLER INDUSTRIES, INC.
Financial Highlights
(Dollars in thousands, except per share data)
1998 1997 1996 1995 1994
Summary of Operations
Net sales $ 929,391 $ 888,997 $ 718,312 $ 678,838 $ 550,003
Product shipments
(in millions of pounds) 644.6 545.3 447.0 388.3 380.6
Net income $ 75,445 $ 69,770 $ 61,173 $ 44,823 $ 27,926
Diluted earnings per share $ 1.90 $ 1.78 $ 1.57 $ 1.17 $ 0.70
Significant Year-End Data
Cash and cash equivalents $ 80,568 $ 69,978 $ 96,956 $ 48,357 $ 34,492
Ratio of current assets to current liabilities 2.7 to 1 3.1 to 1 3.5 to 1 3.1 to 1 2.7 to 1
Long-term debt (including current portion) $ 194,549 $ 72,093 $ 59,650 $ 75,902 $ 94,736
Debt as a percent of total capitalization 27.9% 14.7% 14.6% 21.0% 28.1%
Stockholders' equity $ 502,122 $ 418,040 $ 348,082 $ 285,875 $ 241,948
Book value per share $ 14.02 $ 11.94 $ 9.98 $ 8.24 $ 6.95
Capital expenditures $ 55,440 $ 36,865 $ 18,868 $ 40,980 $ 48,152
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A Report to our Stockholders, Customers and Employees
Mueller is focused on growth. We are committed to building a world-class
manufacturing company, with the objective of increasing shareholder value.
It is therefore a pleasure to report that 1998 was a year of both
financial and strategic achievement.
Sales, net earnings, pounds of product shipped and earnings per share all
set records. Substantial improvements were made in manufacturing and
customer service. Also, we completed three acquisitions that offer major
opportunities for future growth.
A Seventh Year of Record Results
Net income increased to $75.4 million in 1998, compared to $69.8 million
in 1997, a gain of 8 percent. Earnings rose to $1.90 a diluted share, up 7
percent from $1.78 in the prior year. Net sales increased to $929.4
million in 1998, up from $889.0 million in 1997. Mueller shipped 645
million pounds of product in 1998, 18 percent more than in 1997.
Capital Investments Fuel Organic Growth
Mueller's U.S. manufacturing operations performed well in 1998. Brass rod
had a record year, while copper tube, copper fittings and plastic fittings
all posted their second best annual earnings. Volume increased in each of
these four key businesses.
In 1997, we began a two-year program to build a copper casting facility
adjoining our tube mill in Fulton, Mississippi; this program is discussed
further on page 6. A separate program to improve our ACR tube operation,
begun late last year, should be completed in 1999. This investment will
reduce the cost of making ACR tube, while enhancing throughput and
quality.
A multi-year program to improve the efficiency of our copper fittings
operations is proceeding well. Conversion costs continue to decline at
both the Covington, Tennessee facility and the high-volume copper fittings
plant in Fulton, Mississippi. We anticipate further improvement in 1999
and beyond.
We are also continuing to invest in our plastic fittings factories. A new
program was initiated in the fall of 1998 to upgrade our molds, which will
reduce part weight and material cost.
The brass rod mill in Port Huron, Michigan is improving its casting and
finishing capabilities. These initiatives, to be completed in 1999, should
result in increased efficiency. Other businesses in the Industrial
Products Division performed well in 1998, and are positioned to show
further improvement in 1999.
European Operations Reach Milestone
In the first half of 1997, Mueller acquired three copper tube mills in
Europe for a modest investment. We determined that the best way to reduce
costs and increase productivity was to consolidate operations. In
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accordance with that program, manufacturing ceased at our mill in
Laigneville, France, in December 1998. We are consolidating operations
from that facility into our other two European mills. After incurring
losses in 1998, we expect our European operations to break even by the
second half of 1999, and thereafter make increasingly positive
contributions. We continue to view Europe's large market for copper tube
as a substantial opportunity for earnings growth.
Progress at Other Businesses
Utah Railway Company had a good year, with an earnings increase of 27
percent. Coal tonnage hauled increased by 12 percent over 1997. Revenue
from its new switching services in Utah's central corridor also grew.
Separately, Mueller has entered into a contract to sell Alaska Gold
Company. This sale is subject to various contingencies. If completed, the
transaction will result in a modest capital gain.
Acquisitions Provide Further Opportunities for Growth
Mueller completed three acquisitions in 1998. In November, we acquired
Halstead Industries, Inc., with 1998 sales in excess of $200 million. This
purchase strengthens our copper tube and line sets businesses, by adding a
copper tube mill in Wynne, Arkansas, and a line sets plant in Clinton,
Tennessee, creating opportunities for rationalization of production and
distribution. We also have the opportunity of reducing manufacturing costs
in Wynne through capital investments.
In August, we purchased B&K Industries, Inc., a significant import
distributor of residential and commercial plumbing products in the United
States. B&K had sales of approximately $60 million in 1998. B&K has the
expertise to facilitate the sale of Mueller's manufactured products in the
large, and growing, retail marketplace. Rapid progress has already been
made with the establishment of major new national accounts.
In September, we purchased Lincoln Brass Works, Inc., with 1998 sales of
about $35 million. Lincoln has strong metal fabrication and machining
capabilities that complement our existing brass forging business.
Lincoln's know-how in metal valves is of particular value to us.
Mueller will continue to seek acquisitions that relate to our core
businesses and product lines. Our acquisition strategy is discussed later
in this report.
Mueller's Financial Condition is Excellent
Our strong balance sheet enabled us to invest more than $200 million for
acquisitions and capital improvements in 1998. At the end of the year,
Mueller held $81 million in cash and had a modest 28 percent debt-to-total
capitalization ratio. Shortly after our fiscal year-end, we completed
a $125 million unsecured bank financing on attractive terms. At the same
time, we restored availability under our $100 million line of credit. We
have the financial resources, earnings and cash flow to fund substantial
additional growth.
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Management Strength Continues to Grow
The dedication, initiative and enthusiasm of our management team, and of
all our employees, has been indispensable to Mueller's success. Mueller
continues to attract dynamic and talented employees. The individuals
pictured on the following pages are symbolic of the growing strength of
our management team.
In 1997, Mueller introduced a strategic management system, the Balanced
Scorecard (BSC). The BSC expands corporate goals beyond traditional
financial objectives to include measurements of long-term strength, such
as customer service, internal process improvement and employee
development. The BSC helps management focus on those facets of our
business that are critical to Mueller's continued, long-term growth. It
was an essential part of 1998's accomplishments, and it will enable us to
effectively manage our rapidly growing enterprise.
Allan Mactier retired from Mueller's Board of Directors in November 1998,
after serving on the Board since 1990. His wisdom and counsel contributed
materially to the Board's deliberations. G. E. Manolovici, a Mueller Board
member from 1990 to 1993, has returned to the Board. He now chairs the
Board's Audit Committee, and serves on the Compensation Committee. Also,
effective April 1, 1999, Earl W. Bunkers will retire as our chief
financial officer; he contributed significantly to the success we have
enjoyed during his 8 years of service.
The Economic Outlook is Positive
Key economic factors indicate another solid year for the U.S. housing
industry. Mortgage rates remain low by historical standards; the interest
rate on thirty-year fixed rate mortgages is near 7 percent. Housing starts
are currently running at an annual rate of over 1.8 million units; the
last full year with 1.8 million starts was 1986. Consumer confidence
continues strong. Inflation last year was only 1.6 percent, the lowest
rate since 1965. Unemployment is at its lowest level in a generation. This
is a very positive environment for our business.
Sincerely,
/S/HARVEY L. KARP
Harvey L. Karp
Chairman of the Board
/S/WILLIAM D. O'HAGAN
William D. O'Hagan
President and Chief Executive Officer
March 17, 1999
[PHOTO}
Harvey L. Karp, Chairman of the Board (right), and William D. O'Hagan,
President and Chief Executive Officer
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[GRAPH]
Product shipments have grown rapidly...
(millions of pounds)
1994 1995 1996 1997 1998
Product shipments 380.6 388.3 447.0 545.3 644.6
[GRAPH]
...as has net income...
(millions of dollars)
1994 1995 1996 1997 1998
Net income $27.9 $44.8 $61.2 $69.8 $75.4
[GRAPH]
...and earnings per share.
(dollars)
1994 1995 1996 1997 1998
Earnings per share $0.70 $1.17 $1.57 $1.78 $1.90
[GRAPH]
Company Overview
Standard Products Division
[GRAPH]
Net Sales
(millions of dollars)
1994 1995 1996 1997 1998
Net Sales $309 $397 $442 $561 $624
[GRAPH]
Operating Income
(millions of dollars)
1994 1995 1996 1997 1998
Operating Income $28 $41 $75 $73 $86
U.S. Copper Tube
PLANTS:
Fulton, Mississippi
Wynne, Arkansas
Clinton, Tennessee
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PRODUCTS AND APPLICATIONS
Water tube, in straight lengths and coils for plumbing and
construction
Dehydrated coils and nitrogen-charged straight lengths for
refrigeration and air-conditioning
Industrial tube, in straight lengths and level-wound coils, for
fittings, redraw, etc.
Line sets for controlling the flow of refrigerant gases
CUSTOMERS
Plumbing wholesalers, home centers and hardware wholesalers
and co-ops
Air-conditioning and refrigeration wholesalers and OEMs
Mueller's copper fittings plants and OEMs
Wholesalers and OEMs
1998 HIGHLIGHTS
Acquired Halstead Industries (renamed Mueller Copper Tube Products,
Inc.) * Acquired B&K Industries * Completed major work on Fulton
copper casting facility * Expanded distribution warehouse *
Installed new runout table in Fulton
1999 OBJECTIVES
Rationalize production between Wynne and Fulton mills * Initiate
capital investments at Wynne, including new extruding and drawing
equipment * Start-up copper casting facility * Improve process to
wash, rinse and dry ACR tube * Enhance information systems
supporting customer service
Copper Fittings
PLANTS
Fulton, Mississippi
Covington, Tennessee
Port Huron, Michigan
Strathroy, Ontario, Canada
PRODUCTS AND APPLICATIONS
Over 1,500 wrot copper elbows, tees and adapters, and assorted cast
copper fittings for plumbing, heating, air-conditioning and
refrigeration
CUSTOMERS
Plumbing and air-conditioning wholesalers, home centers, hardware
wholesalers and co-ops, and OEMs
1998 HIGHLIGHTS
Acquired B&K Industries * Continued modernization of Covington plant *
Achieved substantial efficiency improvements at Fulton facility *
Developed integrated customer service facility
1999 OBJECTIVES
Finish modernization of Covington plant * Rebuild coldheader
equipment in Port Huron * Upgrade warehouse management technology
at regional distribution centers
Plastic Fittings
PLANTS
Kalamazoo, Michigan
Cerritos, California
Upper Sandusky, Ohio
PRODUCTS AND APPLICATIONS
A full line of over 1,000 PVC and ABS plastic fittings and valves
for drainage, waste and ventilation, in housing and commercial
construction, recreational vehicles and manufactured housing
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CUSTOMERS
Plumbing wholesalers, home centers, hardware wholesalers and co-ops,
and distributors to the manufactured housing and recreational
vehicle industry
1998 HIGHLIGHTS
Acquired B&K Industries * Installed additional presses * Updated
molds * Purchased previously leased facilities in Cerritos
1999 OBJECTIVES
Upgrade Kalamazoo warehouse * Install new tooling * Increase direct
shipments from Kalamazoo and Cerritos
European Copper Tube
PLANTS
Bilston, Great Britain
Longueville, France
PRODUCTS AND APPLICATIONS
Copper tube in various lengths, diameters and hardnesses for
plumbing, refrigeration and heating
Industrial tube for redraw, copper fittings, etc.
CUSTOMERS
Builders' merchants, plumbing, refrigeration and heating wholesalers
OEMs
1998 HIGHLIGHTS
Ceased manufacturing at Laigneville on December 30, 1998 * Installed
spinner blocks and material handling equipment in Longueville *
Acquired drawbenches and other equipment for Longueville and
Bilston
1999 OBJECTIVES
Rationalize tube production and distribution * Install new
information systems * Update bundling and capping equipment in
Bilston
Industrial Products Division
[GRAPH]
Net Sales
(millions of dollars)
1994 1995 1996 1997 1998
Net Sales $225 $251 $256 $293 $275
[GRAPH]
Operating Income
(millions of dollars)
1994 1995 1996 1997 1998
Operating Income $17 $20 $27 $30 $31
Brass Rod
PLANTS
Port Huron, Michigan
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PRODUCTS AND APPLICATIONS
A broad range of rounds, squares, hexagons and special shapes in
free machining, thread rolling and forging alloys for numerous end
products, including plumbing brass, valves and fittings, and
industrial machinery and equipment
CUSTOMERS
OEMs, contract machining companies and distributors
1998 HIGHLIGHTS
Achieved record shipments * Increased casting capacity * Installed
automated bundling system
1999 OBJECTIVES
Upgrade casting process * Upgrade straighteners * Continue to
improve yield
Engineered Products
PLANTS
Port Huron, Michigan
Marysville, Michigan
Hartsville, Tennessee
Jacksboro, Tennessee
Waynesboro, Tennessee
North Wales, Pennsylvania
Salisbury, Maryland
PRODUCTS AND APPLICATIONS
Brass and aluminum hot metal forgings in assorted alloys for
plumbing brass, valves and fittings, and industrial machinery and
equipment
Cold formed aluminum and copper products for automotive, industrial
and recreational components
Valves and custom OEM products for refrigeration and air-
conditioning applications
Custom valve and other metal assemblies for the gas appliance and
BBQ grill markets
Shaped and formed tube, produced to tight tolerances, for baseboard
heating, appliances, medical instruments, etc.;
coaxial cables
CUSTOMERS
OEMs
1998 HIGHLIGHTS
Acquired Lincoln Brass Works * Consolidated sales organization *
Invested in annealing, cleaning and machining
1999 OBJECTIVES
Invest to improve manufacturing processes and reduce costs * Offer
customers additional value-added products, based on our full range
of manufacturing capabilities
Other Businesses
Utah Railway Company, established in 1912, hauls coal to connections
with national carriers, power plants and to other destinations. Utah
Railway Company also provides train switching services in Utah's
central corridor. Separately, Alaska Gold Company mines placer gold in
Nome, Alaska. Mueller also owns other natural resource properties.
1998 HIGHLIGHTS
Purchased 10 locomotives to support switching operations
1999 OBJECTIVES
Build new yard track to strengthen switching capabilities * Divest
Alaska Gold Company
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MANUFACTURING EXCELLENCE LEADS TO GROWTH
Mueller is a world-class manufacturing company. Over the past five years
we have invested more than $200 million in capital improvements. These
investments have eliminated bottlenecks, improved quality and pushed down
production costs. Mueller is now one of the lowest-cost manufacturers in
each of our product lines.
For 1999, we have budgeted $50 million for more capital additions and
improvements. Our objective is to achieve a return on investment of at
least 20 percent.
The largest investment project in 1999 is the modernization of our
recently acquired copper tube mill in Wynne, Arkansas. Plans are in place
to upgrade the Wynne facility with new extruding and drawing equipment. We
anticipate cost reductions and productivity improvements similar to those
achieved from the modernization of our mill in Fulton, Mississippi.
The rationalization of production between Wynne and the mill in Fulton is
already under way. Instead of making a full product line in Wynne, and a
full line in Fulton, each facility will focus on those items at which it
is most efficient. This specialization will minimize changeovers, reduce
tooling costs and increase capacity.
[PHOTO]
A program is under way to reduce the cost of making ACR tube.
[PHOTO]
Casting facility near completion
[PHOTO]
In 1997, we began a two-year program to build a copper casting facility
adjoining our tube mill in Fulton, Mississippi. This $33.4 million
investment will allow the mill to use a lower-cost mix of copper scrap and
cathode, while improving billet quality. This project is on schedule to
start operations this spring. Since copper represents by far Mueller's
largest production cost, savings can be realized when the spread between
the price of scrap and the price of cathode widens.
"Two mills can make tube much more efficiently than one. The possibilities
are incredible!"
[PHOTO]
BRUCE CLEMENTS joined Mueller in September 1998, as Vice President of
Copper Tube Manufacturing.
[GRAPH]
Capital improvements have pushed down
manufacturing and distribution costs
(Costs per pound, excluding raw materials; 1995=100)
1995 1996 1997 1998
Copper Tube (Fulton) 100 90 88 88
Copper Fittings 100 95 91 88
Plastic Fittings 100 88 81 74
Brass Rod 100 97 92 87
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SUPERIOR CUSTOMER SERVICE ADDS VALUE TO MUELLER PRODUCTS
Mueller is dedicated to superior customer service. We will not be
satisfied until every order is shipped complete, error-free and delivered
on time. In pursuit of this goal, we have programs in place to ensure
product availability and timely delivery.
We have installed state-of-the-art information systems, including
Electronic Data Interchange (EDI), and have invested in employee training
programs. Recently, we inaugurated an integrated customer service
facility. This facility allows the same individual to support the customer
from order entry throughout fulfillment, thereby ensuring quality service.
B&K Industries, Inc., acquired in August 1998, is known for going beyond
the call of duty to find solutions for customer needs. B&K's extensive
import line, coupled with Mueller's manufactured products, provides our
retail customers with one-stop sourcing and efficient purchasing. B&K's
expertise in serving the retail marketplace has already allowed Mueller to
establish major new national accounts.
[PHOTO]
B&K's logo is recognized as a mark of quality in home centers and hardware
stores nationwide.
"Mueller believes in long-term business relationships. Knowing our
customers is key to our own success!"
[PHOTO]
PETER BERKMAN is the President of B&K Industries, acquired in August 1998.
[PHOTO]
DIRECT SHIPMENT GETS TUBE TO THE CUSTOMER FASTER
Last year we expanded the Fulton tube mill's distribution capabilities.
More than 65 percent of the shipments from the mill now go directly to the
customer, instead of through distribution centers. Direct shipment reduces
handling costs, improves service and enables more effective use of
inventory.
[PHOTO]
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ACQUISITIONS STRENGTHEN OUR CORE BUSINESSES
Mueller has made nine acquisitions over the past five years. Every
acquisition has strengthened our core businesses. By focusing on our
industry, we have been able to leverage existing manufacturing, sales and
distribution capabilities.
This acquisition strategy has created economies of scale, extended our
product lines, opened up new markets and made our Company an increasingly
valuable resource to our customers.
We expect to continue to grow through strategic acquisitions. The
candidates of greatest interest are sound businesses where new investment
can generate long-term growth. We do not require an acquisition to be
immediately accretive to earnings; however, we do insist on a clear vision
of the acquisition's ability to build future value.
Mueller ended 1998 with $81 million in cash, a $100 million line of credit
available and a modest 28 percent debt-to-total-capitalization ratio. We
have the resources to support further acquisitions and to make the
investments required to realize the potential of the companies we buy.
"Every acquisition has strengthened our core businesses!"
[PHOTO]
DAVID RICE joined Mueller in April 1998, as Controller of the Industrial
Products Division.
[PHOTO]
Mueller's line sets business grew substantially with the acquisition of
Halstead in November 1998.
[PHOTO]
Lincoln Brass Works, acquired in September 1998, is a large consumer of
Mueller brass rod.
NINE ACQUISITIONS IN FIVE YEARS STRENGTHEN MUELLER'S CORE BUSINESSES
SEPTEMBER 1994 DWV PLASTIC FITTINGS
Purchased plants in Michigan and California. Began rationalizing
production of over 1,000 different DWV plastic fittings between new
plants and existing plant in Ohio. By 1998, per pound production and
distribution costs had fallen 45 percent from 1993 levels.
JUNE 1996 LINE SETS
Entered line sets business. Line sets are made from copper tube and
sold by our sales force to wholesale and OEM customers.
JUNE 1996 MUELLER TOOL & MACHINE
Purchased a custom tool fabricator, enabling faster tool and machine
development in support of copper fittings and other manufacturing
operations.
DECEMBER 1996 PRECISION TUBE
Bought redraw facility, manufacturing copper tubing, copper alloy
tubing, aluminum tubing and fabricated tubular products. Strong
presence in the baseboard heating industry.
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FEBRUARY 1997 WEDNESBURY TUBE
Purchased copper tube mill in England. Mueller's manufacturing expands
to Europe, which has a copper tube market as large as the United
States.
MAY 1997 DESNOYERS
Acquired copper tube operations near Paris, expanding our presence in
Europe. Both Desnoyers and Wednesbury were acquired for a modest
investment, with the objective of reducing their cost structure and
increasing productivity.
AUGUST 1998 B&K INDUSTRIES
Bought a significant import distributor of residential and commercial
plumbing products. B&K's distribution network and expertise give
Mueller new access to the retail marketplace.
SEPTEMBER 1998 LINCOLN BRASS WORKS
Purchased operation with strong metal fabrication and machining
capabilities that complement existing brass forging operation.
Lincoln is also a large consumer of Mueller brass rod and forgings.
NOVEMBER 1998 HALSTEAD INDUSTRIES
Acquired a U.S. producer of copper tube and line sets, creating
opportunity to realize substantial economies of scale.
[GRAPH]
Over the past five years, Mueller has invested more than $400 million to
grow our businesses.
(millions of dollars)
1994 1995 1996 1997 1998
Capital Expenditures $48.2 $41.0 $18.9 $36.9 $ 55.4
Acquisitions $12.8 $ 0.0 $ 0.4 $37.9 $158.5
[GRAPH]
However, debt remains a modest percent of total capitalization...
(millions of dollars)
1994 1995 1996 1997 1998
Debt $ 94.7 $ 75.9 $ 59.6 $ 72.1 $194.5
Equity $241.9 $285.9 $348.1 $418.0 $502.1
Ratio (percent) 28.1% 21.0% 14.6% 14.7% 27.9%
[GRAPH]
...supported by powerful cash flow.
(millions of dollars)
1994 1995 1996 1997 1998
Earnings Before Interest,
Taxes, Depreciation
and Amortization (EBITDA) $ 56.4 $ 81.9 $108.9 $123.2 $135.0
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Financial Review
Overview
Mueller Industries, Inc. is a leading manufacturer of copper tube and
fittings; brass and copper alloy rod, bar and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and
valves; refrigeration valves and fittings; and fabricated tubular
products. Mueller's plants are located throughout the United States and in
Canada, France and Great Britain. The Company also owns a short line
railroad in Utah and natural resource properties in the Western U.S.
The Company's businesses are managed and organized into three
segments: (i) Standard Products Division (SPD); (ii) Industrial Products
Division (IPD); and (iii) Other Businesses. SPD manufactures and sells
copper tube, and copper and plastic fittings and valves. Outside of the
United States, SPD manufactures copper tube in Europe and copper fittings
in Canada. SPD sells these products to wholesalers in the HVAC (heating,
ventilation and air-conditioning), plumbing and refrigeration markets, and
to distributors to the manufactured housing and recreational vehicle
industries. IPD manufactures and sells brass and copper alloy rod, bar and
shapes; aluminum and brass forgings; aluminum and copper impact
extrusions; refrigeration valves and fittings; fabricated tubular
products; and gas valves and assemblies. IPD sells its products primarily
to original equipment manufacturers (OEMs), many of which are in the HVAC,
plumbing and refrigeration markets. Other Businesses include Utah Railway
Company, Alaska Gold Company and other natural resource properties and
interests. SPD and IPD account for more than 96 percent of consolidated
net sales and more than 86 percent of consolidated total assets.
During 1998, the Company completed three acquisitions: (i) Halstead
Industries, Inc. (Halstead) operates a copper tube mill in Wynne, Arkansas
and a line sets factory in Clinton, Tennessee; (ii) B&K Industries, Inc.
(B&K), based in Elk Grove Village, Illinois, is a significant import
distributor of residential and commercial plumbing products in the United
States that sells through all major distribution channels including
hardware co-ops, home centers, plumbing wholesalers, hardware wholesalers,
OEMs and manufactured housing wholesalers; and (iii) Lincoln Brass Works,
Inc. (Lincoln) produces custom valve assemblies, custom metal assemblies,
gas delivery systems and tubular products, primarily for the gas appliance
market, at two manufacturing facilities in Tennessee.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration and
plumbing markets because the principal end use of a significant portion of
the Company's products is in the construction of single and multi-family
housing and commercial buildings.
Profitability of certain of the Company's product lines depends upon
the "spreads" between the cost of raw material and the selling prices of
its completed products. The open market prices for copper cathode and
scrap, for example, influence the selling price of copper tubing, a
principal product manufactured by the Company. The Company attempts to
minimize the effects of fluctuations in material costs by passing through
these costs to its customers. "Spreads" fluctuate based upon competitive
market conditions.
-14-
Results of Operations
1998 Performance Compared to 1997
Consolidated net sales in 1998 were $929.4 million or 4.5 percent
higher than $889.0 million in 1997. Pounds of product sold totaled 644.6
million in 1998 or 18.2 percent more than the 545.3 million pounds sold in
1997. Net selling prices generally fluctuate with changes in raw material
prices; therefore, pounds sold is an additional measurement of the
Company's growth. For example, the COMEX average copper price in 1998 was
approximately 27 percent lower than the 1997 average. This decline impacts
the Company's net sales and cost of goods sold.
Acquisitions contributed to growth in 1998. Businesses acquired in
1997 added approximately $168.6 million to the Company's 1998 net sales
and those acquired in 1998 added approximately $59.7 million. The Halstead
acquisition was completed in the fourth quarter of 1998 and the other two
acquisitions were completed in the third quarter. Growth from core product
lines that existed prior to the 1997 and 1998 acquisitions added 6.1
percent to the Company's 1998 growth measured in pounds of product
shipped.
Cost of goods sold increased $15.5 million, or 2.2 percent, to $720.3
million in 1998. This increase is primarily attributable to acquisitions
and higher sales of core products. Gross profit was 22.5 percent of net
sales in 1998 compared to 20.7 percent in 1997 and cost of sales improved
accordingly. This 1.8 percent rate improvement resulted from lower
manufacturing costs, continued higher yields from production, reduced
metal costs and improved spreads in certain products, particularly copper
tube.
Depreciation and amortization increased $3.9 million, or 18.6
percent, to $24.9 million in 1998 compared to $21.0 million in 1997. This
increase was due to capital expenditures in recent years, $55.4 million in
1998 and $36.9 million in 1997, and to the 1997 and 1998 acquisitions.
Selling, general and administrative expense increased $11.9 million,
or 18.7 percent, to $75.4 million in 1998. When measured on a basis of
cost per pound of product sold, these expenses averaged 11.7 cents a pound
in 1998 and 11.6 cents a pound in 1997. Approximately 90 percent of the
$11.9 million increase was attributable to businesses acquired in 1997 and
1998.
Interest expense increased 17.5 percent in 1998 to $5.8 million. The
1998 increase resulted primarily from funds borrowed against the Company's
line of credit in the fourth quarter of 1998 to purchase Halstead and from
certain debt assumed by the Company in the acquisition of B&K. The Company
capitalized interest of $.8 million for major capital improvement projects
in 1998 compared to $.1 million in 1997.
The provision for environmental reserves totaled $2.1 million in 1998
compared to $3.1 million in 1997. This provision is based on updated
information and on results of ongoing environmental remediation and
monitoring programs at previously identified sites.
-15-
Other income decreased to $8.5 million in 1998 from $9.2 million in
1997. Within this classification, interest income increased $1.5 million
to $5.1 million in 1998 while gains from disposal of non-manufacturing
properties decreased $1.5 million to $2.2 million in 1998. Rent and
royalty income decreased $.8 million from $2.2 million in 1997.
The Company provided $33.9 million for income taxes in 1998, of which
$4.9 million was deferred. Current income tax expense of $29.0 million
increased approximately $.8 million over 1997 primarily because of
increased taxable income. The 31.0 percent effective tax rate for 1998,
which is comparable to the 1997 rate, reflects the recognition of certain
tax attributes discussed in Note 6 and certain favorable state tax
credits, including IRB financings.
The Company's employment increased from 3,378 positions at the end of
1997 to 4,788 at the 1998 year-end. Of this increase, 1,335 positions
relate to businesses acquired during 1998.
Standard Products Division
Net sales by SPD were $624.4 million in 1998 compared to $560.8
million in 1997 for an 11.3 percent increase. Operating income was $85.5
million in 1998 compared to $73.0 million in 1997. The profit improvement
resulted from increased volume, lower manufacturing costs and improved
spreads in certain products, particularly copper tube.
Industrial Products Division
IPD's net sales were $274.6 million in 1998 compared to $292.9
million in 1997. Due to the lower cost of raw materials, the average
selling price for finished product was approximately 20 percent lower in
1998 compared to 1997's levels. Operating income was $31.2 million in 1998
compared to $29.6 million in 1997. Increased volume and lower
manufacturing costs accounted for the profit improvement.
Other Businesses
Utah Railway Company hauled 5.5 million tons of coal in 1998 or 11.6
percent more than in 1997. Revenue totaled $23.5 million in 1998 compared
to $19.7 million in 1997. In late 1998, there was a fire at one of the
coal mines served by Utah Railway Company. We expect the mine to re-open
in 1999, though this is not certain. Extensive delays would have a
negative impact on the future profitability of the railroad. Alaska Gold
Company's net sales were $8.2 million in 1998 compared to $15.5 million in
1997. Alaska Gold sold its 1998 gold production in 1998, whereas in 1997
it sold two years of gold production. Continuing low gold prices have
caused suspension of Alaska Gold's winter open pit mining, although summer
mining activity will continue. Separately, Mueller has entered into a
contract to sell Alaska Gold Company, subject to various contingencies.
1997 Performance Compared to 1996
Consolidated net sales of $889.0 million in 1997 compares with $718.3
million in 1996. The increase was due to acquisitions, internal growth and
gold sales of $15.5 million. Businesses acquired during 1997 added
approximately $128.6 million to net sales. In 1997, the Company's core
-16-
manufacturing businesses shipped 545.3 million pounds of product compared
to 447.0 million pounds in 1996. Of this increase, 73.9 percent was
attributable to acquired businesses. Net sales were also affected by lower
copper prices, which were partially offset by higher prices of other
products.
Cost of goods sold totaled $704.8 million in 1997 compared to $554.6
million in 1996. The increase is primarily attributable to acquisitions,
higher sales volume and gold sales. The Company's gross profit, excluding
acquisitions, was 23.4 percent compared to 22.8 percent in 1996. This
improvement resulted from continued higher yields, cost reductions and
certain price increases. Including acquisitions, gross profit increased
$20.5 million to $184.2 million, or 20.7 percent of net sales in 1997.
Depreciation and amortization totaled $21.0 million in 1997 compared
to $18.5 million in 1996. This increase was due to heavy capital
investment programs in recent years and to the 1997 acquisitions.
Selling, general and administrative expense increased $8.7 million in
1997 to $63.5 million or 7.1 percent of net sales. It was 7.6 percent in
1996. The 1997 increase was due mainly to the acquisitions and higher
sales volume.
Interest expense decreased 7.1 percent in 1997 to $5.0 million
compared to $5.3 million in 1996. The provision for environmental reserves
totaled $3.1 million in 1997 compared to $2.0 million in 1996. The 1997
provision relates to Mining Remedial Recovery Company, a non-core
subsidiary, and is based on updated information and results of ongoing
environmental remediation and monitoring programs at previously identified
sites. Other income increased to $9.2 million in 1997 from $5.3 million in
1996. This increase occurred primarily from higher gold royalty income and
gains from the sale of coal mining property in Hiawatha, Utah, and certain
other properties at Alaska Gold.
The Company provided $31.1 million for income taxes in 1997, of which
$2.8 million was deferred. Current tax expense of $28.3 million increased
$5.1 million over 1996 because of higher taxable income. The 30.8 percent
effective tax rate for 1997, which is equal to the 1996 rate, reflects the
recognition of certain tax attributes discussed in Note 6 and certain
favorable state tax credits including IRB financings.
The Company's employment level increased to 3,378 at year-end.
Substantially all of the additional employees relate to businesses
acquired during 1997.
Standard Products Division
In 1997, SPD net sales increased $118.6 million to $560.8 million, a
26.8 percent increase over 1996. Much of the increase in net sales is
attributable to acquisitions that occurred in the first half of 1997.
Operating income was $73.0 million in 1997, a $2.2 million decrease from
1996. Losses at acquired European businesses offset operating income
improvements at the Company's U.S. businesses. Improvements at the
Company's domestic operations resulted from higher sales volumes,
favorable pricing in copper and plastic fittings, and overall productivity
gains.
-17-
Industrial Products Division
IPD's net sales were $292.9 million in 1997, a 14.3 percent increase
over 1996. Operating income was $29.6 million in 1997 compared to $27.5
million in 1996. Operating income increased primarily due to higher sales
volume, as well as productivity and yield improvements in manufacturing
operations.
Other Businesses
Net sales were $35.7 million in 1997 compared to $20.3 million in
1996. The increase was primarily due to gold sales of $15.5 million in
1997; none was sold in 1996. Transportation revenues of Utah Railway
Company were $19.7 million in 1997 compared to $20.0 million in 1996. Utah
Railway Company hauled 4.9 million tons of coal in 1997, down 21.7 percent
from 1996. This decline was the result of temporary operating difficulties
at the coal mines served, along with service disruptions in the Union
Pacific system. Alaska Gold Company sold 54,500 ounces of gold in 1997,
including production and royalty gold from both 1997 and 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance increased $10.6
million during 1998 to $80.6 million at year-end. Major components of the
1998 change include $98.9 million of cash provided by operating
activities, $201.1 million of cash used in investing activities and $113.3
million of cash provided by financing activities.
Net income of $75.4 million in 1998 was the primary component of cash
provided by operating activities. Depreciation and amortization of $24.9
million and deferred income taxes of $4.9 million were the primary non-
cash adjustments. Major changes in working capital included a $13.0
million decrease in receivables, a $3.2 million increase in other assets
and a $9.2 million decrease in current and other liabilities.
Major components of net cash used in investing activities in 1998
included $55.4 million for capital expenditures and $158.5 million for
business acquisitions. Investments in acquisitions include Halstead, B&K
and Lincoln. Other components include escrowed IRB proceeds and a note
receivable. Capital expenditures were primarily related to improvements in
manufacturing processes as well as the purchase of previously leased land
and buildings for one of the Company's existing facilities.
Net cash provided by financing activities totaled $113.3 million. In
1997, the Company entered into IRB financing agreements for two capital
projects in Mississippi. These IRB financing obligations totaled $27.5
million, of which $6.4 million remained in escrow at the 1998 year-end.
These IRBs have favorable tax attributes. Also, during 1998 the Company
paid $19.4 million of scheduled debt repayments.
The Company used its line of credit facility to fund the acquisition
of Halstead in the fourth quarter of 1998. This involved implementation of
a temporary bulge facility to increase the Company's borrowing
availability under its existing line of credit to $125 million. At the end
of the fiscal year, borrowings outstanding under this facility were at
$120 million.
-18-
Subsequent to fiscal year-end, the Company completed a restructured
financing arrangement by borrowing $125 million in an unsecured term note
(Term Note) from its bank syndicate. The Term Note matures on December 31,
2003 and carries an interest rate based on 90-day LIBOR. Additionally, the
restructured financing restored to its original level the Company's $100
million unsecured line of credit (Credit Facility) which expires in May
2001. The Credit Facility may be extended for successive one-year periods
by agreement of the parties. Subsequent to the restructuring, there are no
outstanding borrowings against the Credit Facility. The Company did,
however, have approximately $4.2 million in letters of credit backed by
this Credit Facility at the end of 1998. At December 26, 1998, the
Company's total debt was $194.5 million or 27.9 percent of its total
capitalization.
The Company's financing obligations contain various covenants which
require, among other things, the maintenance of minimum levels of working
capital, tangible net worth and debt service coverage ratios. The Company
is in compliance with all of its debt covenants.
The Company is implementing a $33.4 million capital improvement
project at its Fulton copper tube mill to improve the utilization of scrap
metal and enhance the mill's casting processes. This project is also
expected to improve yield, productivity and billet quality. The project,
when completed in the first half of 1999, will allow the tube mill to use
more scrap copper when market conditions warrant.
The Company is considering various long-term capital investments for
its businesses, including its recently acquired Wynne, Arkansas copper
tube mill, European operations and others, that will improve their cost
structure and productivity.
Management believes that cash provided by operations and currently
available cash of $80.6 million will be adequate to meet the Company's
normal future capital expenditure and operational needs. Additionally, the
remaining escrowed IRB cash will be used to partially fund certain capital
improvement projects. The Company's current ratio is 2.7 to 1 at December
26, 1998.
Environmental Matters
The Company ended 1998 with total environmental reserves of
approximately $16.3 million. This balance includes $7.3 million for
businesses acquired in 1998. Based upon information currently available,
management believes that the outcome of pending environmental matters will
not materially affect the overall financial position and results of
operations of the Company.
Market Risk
The Company is exposed to market risk from changes in foreign
exchange, interest rates and raw material costs. To reduce such risks, the
Company may periodically use financial instruments. All hedging
transactions are authorized and executed pursuant to policies and
procedures. Further, the Company does not buy or sell financial
instruments for trading purposes. A discussion of the Company's accounting
policies for management of market risk is included in the Summary of
Significant Accounting Policies in the Notes to the Consolidated Financial
Statements.
-19-
Interest Rates
At December 26, 1998, the fair value of the Company's debt is
estimated at $195.2 million, using yields obtained for similar types of
borrowing arrangements and taking into consideration the underlying terms
of the debt. Such fair value exceeds the carrying value of debt at
December 26, 1998 by $.7 million. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 10 percent
decrease in interest rates and amounts to $.6 million at December 26,
1998.
The Company had $142.2 million of variable rate debt outstanding at
December 26, 1998. At this borrowing level, a hypothetical 10 percent
increase in interest rates would have a $.8 million unfavorable impact on
the Company's pretax earnings and cash flows. The primary interest rate
exposure on floating rate debt is based on LIBOR.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other
than an entity's functional currency. The Company and its subsidiaries
generally enter into transactions denominated in their respective
functional currencies. Foreign currency exposures arising from
transactions denominated in currencies other than the functional currency
are not material; however, the Company may utilize certain forward fixed
rate contracts to hedge such transactional exposures.
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, and the French franc. 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 is $27.3 million at December 26, 1998. 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 26, 1998 amounts to
$2.7 million. This change would be reflected in the equity section of the
Company's Consolidated Balance Sheet.
Cost of Raw Materials
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, could materially and adversely
affect the Company's business, results of operations and financial
condition.
The Company enters into forward fixed price arrangements with certain
customers. The Company may utilize futures or option contracts to hedge
risks associated with forward fixed price arrangements. The Company may
also utilize futures or option contracts to manage price risk associated
-20-
with inventory. The total amount of such contracts was approximately 5.3
million pounds at December 26, 1998 and includes varying maturity dates in
1999. Gains or losses with respect to these positions are reflected in
earnings upon the sale of inventory. Periodic value fluctuations of the
contracts generally offset the value fluctuations of the underlying fixed
price transactions or inventory.
Year 2000 Program
The Company has established a Year 2000 program to evaluate, confirm
compliance and identify any necessary changes to its information
technology (IT) and operating (non-IT) systems to address Year 2000
requirements. The Company has retained a consulting firm specializing in
this area to assist in the program. To date, the Company has expensed
approximately $.7 million related to this outside consultant and it
believes that future expenses will be approximately $.4 million in 1999.
There are four phases to this program: assessment; inventory; test and
correction; and certification. Assessment involves the examination of the
Company's IT and non-IT systems for specific date impacts, component
complexity and inter-relationships. Inventory involves the identification
and categorization of the Company's systems, applications, data
structures, system interfaces, programmable logic controllers, etc.,
which, based on the assessment, potentially raise certain Year 2000
issues. Once the assessment and inventory are completed, the Company plans
to determine Year 2000 compliance through a combination of corrections,
testing, use assessments and third party verifications. Once this is
completed, Mueller will be positioned to certify its systems and
facilities as Year 2000 compliant. The Company expects its Year 2000
Program will be completed by September 30, 1999.
The Company has completed its assessment and inventory of its IT
systems. Based on this assessment, Mueller has replaced certain hardware
and modified its developed software code at a cost which is immaterial.
Certain business systems of the Company's European businesses are not Year
2000 compliant, but this will be resolved within the context of an overall
upgrade to these information systems in order to accommodate, among other
things, the Euro single currency. Total implementation costs for this
upgrade are estimated at approximately $.9 million.
The Company has completed its assessment and inventory of non-IT
systems at over half of its North American manufacturing facilities.
Mueller selected these factories for assessment and inventory because of
their importance or likelihood of Year 2000 issues. Assessment and
inventory at the remaining factories is scheduled for completion by the
end of the second quarter. At the surveyed facilities, Mueller has
identified a small number of non-IT systems which were not Year 2000
compliant. The Company plans to replace and/or correct and certify as
compliant these systems by the second quarter of 1999 at an estimated cost
that is not material. To the extent Mueller does not identify all non-IT
systems which are not Year 2000 compliant, production on individual pieces
of equipment might be curtailed for a period of time. However, management
believes that the risk that it would be unable to maintain customer
services due to Year 2000 equipment failures is low.
-21-
The Company is in the process of contacting its major product
and service suppliers to determine their Year 2000 readiness, and will
continue to follow up these inquiries to ensure, to the best of its
ability, that these suppliers will be Year 2000 compliant. Nonetheless,
there can be no assurance that the systems used by these suppliers will be
remediated in a timely manner, which, if not remediated, may have an
adverse effect on Mueller. The Company intends to defer development of any
Year 2000 contingency plans until it completes its assessment of third
party suppliers, which is scheduled to be completed at all currently owned
locations by June 1999. The Company estimates that it has no exposure for
contingencies related to the Year 2000 issue for the products it has sold.
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). This statement requires companies to record
derivative instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of a derivative would be accounted for depending on the use of a
derivative and whether it qualifies for hedge accounting. SFAS No. 133 is
effective for the Company's fiscal year 2000. Because of the Company's
minimal historical use of derivatives, management anticipates that the
adoption of SFAS No. 133 will not have a significant effect on earnings or
the financial position of the Company.
Cautionary Statement Regarding Forward-Looking Information
This Annual Report contains various forward-looking statements and
includes assumptions concerning the Company's operations, future results
and prospects. These foward-looking statements are based on current
expectations and are subject to risk and uncertainties. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, Mueller provides the following cautionary statement
identifying important economic, political and technological factors, among
others, the absence of which could cause actual results or events to
differ materially from those set forth in or implied by the forward-
looking statements and related assumptions.
Such factors include: (i) continuation of the current and projected
future business environment, including interest rates and capital and
consumer spending; (ii) fluctuations in commodity prices (including prices
of copper and other raw materials); (iii) competitive factors and
competitor responses to Mueller initiatives; (iv) successful
implementation and completion of major capital projects; (v) stability of
government laws and regulations, including taxes; (vi) changes in labor
relations; and (vii) continuation of the environment to make acquisitions,
domestic and foreign, including regulatory requirements and market values
of candidates.
-22-
Mueller Industries, Inc.
Consolidated Statements of Income
Years Ended December 26, 1998, December 27, 1997 and December 28, 1996
(In thousands, except per share data)
1998 1997 1996
Net sales $ 929,391 $ 888,997 $ 718,312
Cost of goods sold 720,293 704,801 554,570
-------- -------- --------
Gross profit 209,098 184,196 163,742
Depreciation and amortization 24,899 20,998 18,472
Selling, general and administrative
expense 75,390 63,489 54,808
-------- -------- --------
Operating income 108,809 99,709 90,462
Interest expense (5,839) (4,968) (5,346)
Environmental reserves (2,133) (3,100) (2,045)
Other income, net 8,503 9,180 5,341
-------- -------- --------
Income before income taxes 109,340 100,821 88,412
Income tax expense (33,895) (31,051) (27,239)
-------- -------- --------
Net income $ 75,445 $ 69,770 $ 61,173
======== ======== ========
Weighted average shares for basic
earnings per share 35,452 34,997 34,799
Effect of dilutive stock options 4,192 4,253 4,194
-------- -------- --------
Adjusted weighted average shares for
diluted earnings per share 39,644 39,250 38,993
-------- -------- --------
Basic earnings per share $ 2.13 $ 1.99 $ 1.76
======== ======== ========
Diluted earnings per share $ 1.90 $ 1.78 $ 1.57
======== ======== ========
See accompanying notes to consolidated financial statements.
-23-
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 26, 1998 and December 27, 1997
(In thousands)
1998 1997
Assets
Current assets
Cash and cash equivalents $ 80,568 $ 69,978
Accounts receivable, less allowance for doubtful
accounts of $4,929 in 1998 and $3,680 in 1997 155,601 128,902
Inventories 134,732 98,181
Current deferred income taxes 5,140 5,023
Other current assets 6,283 6,967
-------- --------
Total current assets 382,324 309,051
Property, plant and equipment, net 379,082 260,364
Goodwill, net 75,988 -
Deferred income taxes - 7,837
Other assets 37,300 33,524
-------- --------
Total Assets $ 874,694 $ 610,776
======== ========
See accompanying notes to consolidated financial statements.
-24-
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 26, 1998 and December 27, 1997
(In thousands, except share data)
1998 1997
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 19,980 $ 18,980
Accounts payable 46,641 30,530
Accrued wages and other employee costs 26,636 21,095
Other current liabilities 49,317 29,952
-------- --------
Total current liabilities 142,574 100,557
Long-term debt, less current portion 174,569 53,113
Pension liabilities 5,924 6,743
Postretirement benefits other than pensions 6,660 7,479
Environmental reserves 16,321 10,368
Deferred income taxes 10,490 2,040
Other noncurrent liabilities 15,680 11,745
-------- --------
Total liabilities 372,218 192,045
-------- --------
Minority interest in subsidiaries 354 691
Stockholders' equity
Preferred stock - shares authorized 4,985,000;
none outstanding - -
Series A junior participating preferred stock -
$1.00 par value; shares authorized 15,000;
none outstanding - -
Common stock - $.01 par value; shares authorized
100,000,000; issued 40,091,502 in 1998 and
40,000,000 in 1997; outstanding 35,807,596
in 1998 and 35,017,416 in 1997 401 200
Additional paid-in capital, common 258,171 253,928
Retained earnings since January 1, 1991 273,198 197,753
Cumulative translation adjustments (3,317) (3,232)
Treasury common stock, at cost (26,331) (30,609)
-------- --------
Total stockholders' equity 502,122 418,040
Commitments and contingencies - -
-------- --------
Total Liabilities and Stockholders' Equity $ 874,694 $ 610,776
======== ========
See accompanying notes to consolidated financial statements.
-25-
Mueller Industries, Inc.
Consolidated Statements of Cash Flows
Years Ended December 26, 1998, December 27, 1997 and December 28, 1996
(In thousands)
1998 1997 1996
Operating activities:
Net income $ 75,445 $ 69,770 $ 61,173
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 24,899 20,998 18,472
Provision for doubtful accounts
receivable 556 107 435
Minority interest in subsidiaries,
net of dividend paid (337) 294 397
Deferred income taxes 4,870 2,830 4,144
Gain on disposal of properties (2,156) (3,702) (973)
Changes in assets and liabilities, net of
businesses acquired:
Receivables 12,973 (24,422) (5,628)
Inventories (4,875) 1,329 (10,070)
Other assets (3,219) (5,451) (793)
Current liabilities (6,016) (3,543) 12,477
Other liabilities (3,165) (5,416) (495)
Other, net (65) 136 (439)
-------- -------- --------
Net cash provided by operating activities 98,910 52,930 78,700
-------- -------- --------
Investing activities:
Acquisition of businesses (158,514) (37,874) (417)
Capital expenditures (55,440) (36,865) (18,868)
Proceeds from sales of properties 2,559 5,826 4,142
Escrowed IRB proceeds 14,739 (21,146) -
Note receivable (4,484) - -
-------- -------- --------
Net cash used in investing activities (201,140) (90,059) (15,143)
-------- -------- --------
Financing activities:
Proceeds from issuance of long-term debt 120,000 27,500 -
Repayments of long-term debt (19,396) (18,133) (16,252)
Proceeds from the sale of treasury stock 7,284 615 1,294
Proceeds from line of credit, net 5,451 - -
-------- -------- --------
Net cash provided by (used in)
financing activities 113,339 9,982 (14,958)
-------- -------- --------
See accompanying notes to consolidated financial statements.
-26-
Effect of exchange rate changes on cash (519) 169 -
-------- -------- --------
Increase (decrease) in cash and
cash equivalents 10,590 (26,978) 48,599
Cash and cash equivalents at the
beginning of the year 69,978 96,956 48,357
-------- -------- --------
Cash and cash equivalents at the
end of the year $ 80,568 $ 69,978 $ 96,956
======== ======== ========
For supplemental disclosures of cash flow information, see
Notes 1, 4, 6 and 12.
See accompanying notes to consolidated financial statements.
-27-
Mueller Industries, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 26, 1998, December 27, 1997 and December 28, 1996
(In thousands)
Common Stock Additional Cumulative Treasury Stock
Number Paid-In Retained Translation Number
of Shares Amount Capital Earnings Adjustments of Shares Cost Total
Balance, December 30, 1995 40,000 $ 200 $ 253,969 $ 66,810 $ (2,545) 5,301 $(32,559) $285,875
Comprehensive income:
Net income - - - 61,173 - - - 61,173
Other comprehensive income:
Foreign currency translation - - - - (260) - - (260)
--------
Comprehensive income 60,913
Issuance of shares under
employee stock purchase plan - - 484 - - (79) 484 968
Issuance of shares under
incentive stock option plan - - (239) - - (92) 565 326
------- --- ------- ------- ----- ------ ------- --------
Balance, December 28, 1996 40,000 200 254,214 127,983 (2,805) 5,130 (31,510) 348,082
Comprehensive income:
Net income - - - 69,770 - - - 69,770
Other comprehensive income:
Foreign currency translation - - - - (427) - - (427)
--------
Comprehensive income 69,343
Issuance of shares under
incentive stock option plan - - (286) - - (148) 901 615
------- --- ------- ------- ----- ------ ------- -------
Balance, December 27, 1997 40,000 200 253,928 197,753 (3,232) 4,982 (30,609) 418,040
Comprehensive income:
Net income - - - 75,445 - - - 75,445
Other comprehensive income:
Foreign currency translation - - - - (85) - - (85)
--------
Comprehensive income 75,360
Issuance of shares under
incentive stock option plan - - (765) - - (698) 4,278 3,513
Par value of shares issued in
connection with a two-for-
one stock split - 200 (200) - - - - -
Issuance of shares for
business acquisition 92 1 2,837 - - - - 2,838
Note receivable from officer - - (1,400) - - - - (1,400)
Tax benefit related to
employee stock options - - 3,771 - - - - 3,771
------- --- ------- ------- ----- ------ ------- -------
Balance, December 26, 1998 40,092 $ 401 $ 258,171 $ 273,198 $ (3,317) 4,284 $(26,331) $502,122
======= === ======= ======= ===== ====== ======= =======
See accompanying notes to consolidated financial statements.
-28-
Notes to Consolidated Financial Statement
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The principal business of Mueller Industries, Inc. is the manufacture
and sale of copper tube and fittings; brass and copper alloy rod, bar and
shapes; aluminum and brass forgings; aluminum and copper impact
extrusions; plastic fittings and valves; refrigeration valves and
fittings; fabricated tubular products; and gas valves and assemblies. The
Company markets its products to the HVAC, plumbing, refrigeration,
hardware and other industries. During 1998, the Company operated 22
factories in 8 states, Canada, Great Britain and France and had
distribution facilities nationwide and sales representation worldwide.
The Company also operates a short line railroad through its
subsidiary, Utah Railway Company, and conducts placer gold mining through
its subsidiary, Alaska Gold Company. In addition, the Company owns
interests in or leases other natural resource properties.
Principles of Consolidation
The consolidated financial statements include the accounts of Mueller
Industries, Inc. and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
minority interest represents separate private ownership of 25 percent of
Ruby Hill Mining Company and 19 percent of Richmond-Eureka Mining Company.
Inventories
The Company's inventories are valued at the lower of cost or market.
The material component of its U.S. copper tube and copper fittings
inventories is valued on a last-in, first-out (LIFO) basis. Other
inventories, including the non-material components of U.S. copper tube and
copper fittings, are valued on a first-in, first-out (FIFO) basis.
Inventory costs include material, labor costs and manufacturing overhead.
Depreciation
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 5 to 20 years for machinery and equipment.
Amortization
Amortization of goodwill is computed on a straight-line basis over 25
or 30 years. Other intangible assets are amortized on a straight-line
basis over estimated useful lives ranging from 3 to 10 years.
Revenue Recognition
Revenue is recognized when products are shipped or services are
performed.
-29-
Pensions and Other Postretirement Benefit Plans
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits (SFAS No. 132). The provisions of SFAS No. 132
revise disclosure requirements related to pension and other postretirement
benefit plans. It does not change the methods of measurement or
recognition of assets, liabilities and benefit costs of these plans.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25) and related
Interpretations as permitted by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).
Earnings Per Share
Basic earnings per share has been computed based on the average
number of common shares outstanding. Diluted earnings per share reflects
the increase in average common shares outstanding that would result from
the assumed exercise of outstanding stock options calculated using the
treasury stock method.
Income Taxes
The Company accounts for income taxes using the liability method
required by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes.
Cash Equivalents
Temporary investments with maturities of three months or less are
considered to be cash equivalents. These investments are stated at cost.
At December 26, 1998 and December 27, 1997, temporary investments
consisted of certificates of deposit, commercial paper, bank repurchase
agreements and U.S. and foreign government securities totaling $81.4
million and $70.9 million, respectively. These carrying amounts
approximate fair value.
Concentrations of Credit and Market Risk
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different industries, including
HVAC, plumbing, refrigeration, hardware, automotive, OEMs and others.
The Company minimizes its exposure to base metal price fluctuations
through various strategies. Generally, it prices an equivalent amount of
copper raw material, under flexible pricing arrangements it maintains with
its suppliers, at the time it determines the selling price of finished
products to its customers.
-30-
The Company enters into forward fixed price arrangements with certain
customers. The Company may utilize futures or option contracts to hedge
risks associated with forward fixed price arrangements. The Company may
also utilize futures or option contracts to manage price risk associated
with inventory. Gains or losses with respect to these positions are
reflected in earnings upon the sale of inventory. Periodic value
fluctuations of the contracts generally offset the value fluctuations of
the underlying fixed price transactions or inventory. At year-end, the
Company held open hedge forward contracts to deliver approximately $3.8
million of copper.
The Company's sales are principally denominated and collected in the
U.S. dollar. Certain sales are collected in other currencies. The market
risk regarding currency exchange rate fluctuations may be hedged using
forward contracts. At year-end, the Company held open forward contracts to
deliver the equivalent of approximately $1.0 million in other currencies.
Foreign Currency Translation
For foreign subsidiaries, the functional currency is the local
currency. Balance sheet accounts are translated at exchange rates in
effect at the end of the year and income statement accounts are translated
at average exchange rates for the year. Translation gains and losses are
included as a separate component of stockholders' equity. Transaction
gains and losses included in the Consolidated Statements of Income were
not significant.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). This
statement establishes rules for the reporting of comprehensive income and
its components. Comprehensive income for the Company consists of net
income and foreign currency translation adjustments and is presented in
the Consolidated Statements of Stockholders' Equity. The adoption of SFAS
No. 130 by the Company had no impact on total stockholders' equity. Prior
year financial statements have been reclassified to conform to the SFAS
No. 130 requirements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). This statement requires companies to record
derivative instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of a derivative would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133 is
-31-
effective for the Company's fiscal year 2000. Because of the Company's
minimal historical use of derivatives, management anticipates that the
adoption of SFAS No. 133 will not have a significant effect on earnings or
the financial position of the Company.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to the 1998 presentation.
Note 2 - Inventories
Inventories consist of the following:
(In thousands)
1998 1997
Raw material and supplies $ 26,544 $ 19,960
Work-in-process 18,196 20,283
Finished goods 89,672 57,531
Gold 320 407
-------- --------
Inventories $ 134,732 $ 98,181
======== ========
Inventories valued using the LIFO method totaled $28.9 million at
December 26, 1998 and $20.2 million at December 27, 1997. The approximate
FIFO cost of such inventories was $26.9 million at December 26, 1998 and
$22.8 million at December 27, 1997.
Note 3 - Properties
Properties stated at fair value as of December 28, 1990, with
subsequent additions recorded at cost, are as follows:
(In thousands)
1998 1997
Land and land improvements $ 12,537 $ 9,859
Buildings 67,879 38,099
Machinery and equipment 370,080 281,013
Construction in progress 41,686 20,531
-------- --------
492,182 349,502
Less accumulated depreciation (113,100) (89,138)
-------- --------
Property, plant and equipment, net $ 379,082 $ 260,364
======== ========
-32-
Note 4 - Long-Term Debt
Long-term debt consists of the following:
(In thousands)
1998 1997
Line of credit at floating rate
subsequently refinanced
by a term note $ 120,000 $ -
Line of credit at floating rate,
matures March 31, 2000 19,840 -
8.38% Unsecured notes payable,
due through 2000 7,142 10,714
7.54% Unsecured note payable, due through 1999 5,000 9,000
1993 Series IRBs with interest at 6.95%, due
through 2000 5,714 8,571
1994 Series IRBs with interest at 8.825%, due
through 2001 6,429 9,000
1997 Series IRBs with interest at 7.39%, due
through 2014 20,625 24,125
1997 Series IRBs with interest at 7.31%, due
through 2009 1,925 2,385
Other, including capitalized lease obligations 7,874 8,298
-------- --------
194,549 72,093
Less current portion of long-term debt (19,980) (18,980)
-------- --------
Long-term debt $ 174,569 $ 53,113
======== ========
The Company has an unsecured $100 million line of credit (the Credit
Facility) which was temporarily increased to $125 million in November
1998. During the fourth quarter of 1998, the Company borrowed $120 million
under the Credit Facility. Proceeds from this borrowing were used to fund
the acquisition of Halstead Industries, Inc. (Halstead) including payment
of Halstead's existing debt.
On December 30, 1998, subsequent to fiscal year-end, the Company
executed an Amended and Restated Credit Agreement (the Agreement) with its
syndicate of eight banks. The Agreement established an unsecured, $125
million term note, the proceeds of which were primarily used to pay down
the balance under the Credit Facility. The Agreement also returned the
ceiling under the Credit Facility to its original level of $100 million.
The Agreement requires quarterly principal payments on the term note of
approximately $3.3 million plus interest through 2003, with a balloon
payment of $62.5 million due December 31, 2003. Interest is based on the
90-day LIBOR interest rate plus a premium of 110 to 130 basis points as
determined by certain financial ratios.
The Company's Credit Facility expires in May 2001, but may be
extended for successive one-year periods by agreement of the parties.
-33-
Borrowings under the Credit Facility bear interest, at the Company's
option, at (i) prime rate less .5 percent, (ii) LIBOR plus .27 percent,
subject to adjustment, or (iii) Federal Funds rate plus .65 percent. A
commitment fee of 17.5 basis points per year on the unused portion of the
Credit Facility is payable quarterly. Availability of funds under the
Credit Facility is reduced by the amount of certain outstanding letters of
credit, which totaled approximately $4.2 million at December 26, 1998.
During 1998, the Company assumed an additional $22 million line of credit
under similar terms in connection with the acquisition of B&K Industries,
Inc. (B&K). This line of credit is secured by certain assets of B&K and
matures March 31, 2000.
Borrowings under the above arrangements require the Company, among
other things, to maintain certain minimum levels of net worth and meet
certain minimum financial ratios. The Company is in compliance with all
debt covenants.
Aggregate annual maturities of the Company's debt after execution of
the Agreement are $26.6 million, $51.8 million, $16.3 million, $17.7
million and $17.4 million (not including the balloon payment of $62.5
million under the Agreement due December 31, 2003) for the fiscal years
1999 through 2003, respectively, and $69.7 million thereafter. Interest
paid in 1998, 1997 and 1996 was $6.3 million, $4.8 million and $5.2
million, respectively. During 1998, 1997 and 1996 the Company capitalized
interest of $.8 million, $.1 million and $.3 million, respectively,
related to its major capital improvement programs. Using a discounted cash
flow analysis, the fair value of the Company's debt approximates book
value at the end of 1998 and 1997, based on the estimated current
incremental borrowing rates for similar types of borrowing arrangements.
Note 5 - Stockholders' Equity
In May 1998, the Company declared a two-for-one stock split effected
in the form of a 100 percent stock dividend. All presentations of share
data herein, including earnings per share, have been restated to reflect
the split for all periods presented.
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.
-34-
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.
Note 6 - Income Taxes
The components of income before income taxes were taxed under the
following jurisdictions:
(In thousands)
1998 1997 1996
Domestic $ 108,135 $ 101,577 $ 80,557
Foreign 1,205 (756) 7,855
-------- -------- --------
Income before income taxes $ 109,340 $ 100,821 $ 88,412
======== ======== ========
Income tax expense consists of the following:
(In thousands)
1998 1997 1996
Current tax expense:
Federal $ 24,882 $ 23,855 $ 18,296
Foreign 2,400 2,666 3,249
State and local 1,743 1,700 1,550
-------- -------- --------
Current tax expense 29,025 28,221 23,095
-------- -------- --------
Deferred tax expense (benefit):
Federal 4,226 3,872 3,995
Foreign 595 (1,263) -
State and local 49 221 149
-------- -------- --------
Deferred tax expense 4,870 2,830 4,144
-------- -------- --------
Income tax expense $ 33,895 $ 31,051 $ 27,239
======== ======== ========
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.
-35-
The difference between the reported income tax expense and a tax
determined by applying the applicable U.S. federal statutory income tax
rate to income before income taxes, is reconciled as follows:
(In thousands)
1998 1997 1996
Expected income tax expense $ 38,269 $ 35,287 $ 30,944
State and local income tax,
net of federal benefit 1,133 1,254 1,027
Foreign income taxes 2,119 (398) 1,035
Closing Agreement (3,105) - -
Valuation allowance (5,481) (4,226) (4,622)
Other, net 960 (866) (1,145)
-------- -------- --------
Income tax expense $ 33,895 $ 31,051 $ 27,239
======== ======== ========
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)
1998 1997
Deferred tax assets:
Accounts receivable $ 988 $ 1,047
Inventories 1,762 1,762
Pension, OPEB and accrued items 7,335 9,939
Other reserves 11,668 9,963
Deferred loss 26,562 -
Net operating loss carryforwards 29,612 38,218
Loss carryforward-prior abandonment
of preferred stock 16,887 40,757
Foreign tax credits 1,711 2,106
Alternative minimum tax credit
carryforwards 4,026 4,053
-------- --------
Total deferred tax assets 100,551 107,845
Less valuation allowance (46,592) (52,073)
-------- --------
Deferred tax assets, net of
valuation allowance 53,959 55,772
-------- --------
Deferred tax liabilities:
Property, plant and equipment 59,005 43,522
Other 304 1,430
-------- --------
Total deferred tax liabilities 59,309 44,952
-------- --------
Net deferred tax (liability) asset $ (5,350) $ 10,820
======== ========
-36-
As of December 26, 1998, the Company had net operating loss
carryforwards (NOLs) available to offset future federal taxable income of
$84.6 million, of which $73.8 million have been recognized. These NOLs
expire as follows: $11.5 million in 2001, $6.5 million in 2002, $59.8
million in 2005 and $6.8 million in 2006. Annual limitations on these NOLs
are approximately $17.3 million through 2001 and approximately $14.4
million through 2006. During 1998, 1997 and 1996, the Company recognized
$4.1 million, $3.8 million and $.7 million, respectively, of these tax
attributes, reducing the deferred income tax provision in each year. As
additional NOLs are utilized, the Company expects to recognize additional
tax attributes in the future by reducing the valuation allowance. The tax
effect of future recognition of any of the remaining NOLs of approximately
$10.8 million will reduce the deferred income tax provisions in the
periods recognized. In addition, the Company has alternative minimum tax
credit carryforwards of approximately $4.0 million which are available to
reduce future federal regular income taxes, if any, over an indefinite
period.
In August 1998, the Company entered into a comprehensive closing
agreement (the Closing Agreement) with the Internal Revenue Service, which
concluded the audit of the years 1993 through 1995. In 1995, the Company
abandoned all its rights and interests in the preferred stock of Sharon
Specialty Steel Inc. (a Delaware corporation) which filed for bankruptcy
protection. The abandonment of the preferred stock resulted in the Company
recognizing a tax loss. The Closing Agreement specifies that the character
of the tax loss is a capital loss. The remaining $44.4 million of this
unrecognized capital loss is available to offset capital gains of the
Company, if any, through December 30, 2000. The tax benefits relating to
this loss will be recognized primarily as additions to paid-in capital.
The Closing Agreement also provides for an ordinary loss of
approximately $70 million, of which $14 million has been recognized.
Realization of this ordinary loss is dependent upon the occurrence of
certain events. For financial reporting purposes, additional recognition
may occur in future periods based upon the assessment of realization. Such
assessments would consider relevant risks associated with realization.
Income taxes paid were approximately $26.8 in 1998, $29.9 million in
1997 and $19.3 million in 1996.
-37-
Note 7 - Other Current Liabilities
Other current liabilities consist of the following:
(In thousands)
1998 1997
Accrued discounts and allowances $ 15,022 $ 6,985
Accrued severance and related
costs for acquired businesses 9,266 -
Freight settlements due to other railroads 2,866 3,724
Income taxes payable 1,393 1,559
Other 20,770 17,684
-------- --------
Other current liabilities $ 49,317 $ 29,952
======== ========
Note 8 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. The
following tables provide a reconciliation of the changes in the plans'
benefit obligations and the fair value of the plans' assets over the two-
year period ending December 26, 1998, and a statement of the plans' funded
status as of December 26, 1998 and December 27, 1997:
(In thousands)
Pension Benefits Other Benefits
1998 1997 1998 1997
Change in benefit
obligation:
Obligation at
beginning of year $ 47,394 $ 47,498 $ 8,118 $ 9,320
Service cost 2,384 525 14 24
Interest cost 5,305 3,476 633 636
Participant
contributions 177 - - -
Actuarial loss (gain) 3,343 (124) (111) (1,275)
Business acquisitions 25,209 - - -
Benefit payments (3,812) (3,981) (613) (587)
Foreign currency
translation
adjustment 227 - - -
-------- -------- -------- --------
Obligation at end
of year $ 80,227 $ 47,394 $ 8,041 $ 8,118
======== ======== ======== ========
-38-
Pension Benefits Other Benefits
1998 1997 1998 1997
Change in fair value
of plan assets:
Fair value of
plan assets at
beginning
of year $ 59,567 $ 49,523 $ - $ -
Actual return on
plan assets 7,693 13,903 - -
Employer contributions 3,087 122 613 587
Participant contributions 177 - - -
Business acquisitions 25,072 - - -
Benefit payments (3,812) (3,981) (613) (587)
Foreign currency
translation adjustment 227 - - -
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 92,011 $ 59,567 $ - $ -
======== ======== ======== ========
Funded status:
Funded (underfunded)
status at end of year $ 11,784 $ 12,173 $ (8,041) $ (8,118)
Unrecognized prior
service cost 2,389 2,957 - -
Unrecognized gain (17,481) (22,304) (1,197) (1,132)
-------- -------- -------- --------
Net amount recognized $ (3,308) $ (7,174) $ (9,238) $ (9,250)
======== ======== ======== ========
The following table provides the amounts recognized in the
Consolidated Balance Sheets as of December 26, 1998 and December 27, 1997:
(In thousands)
Pension Benefits Other Benefits
1998 1997 1998 1997
Prepaid benefit cost $ 1,806 $ 1,027 $ - $ -
Accrued benefit
liability (5,114) (8,201) (9,238) (9,250)
-------- -------- -------- --------
Net amount recognized $ (3,308) $ (7,174) $ (9,238) $ (9,250)
======== ======== ======== ========
For actuarial purposes, the annual rate of increase in the per capita
cost of covered health care benefits ranges from 8.2 to 8.9 percent for
1999. The rate is assumed to decrease gradually to 6.25 percent for 2003
and remain at that level thereafter.
-39-
The components of net periodic benefit cost are as follows:
(In thousands)
1998 1997 1996
Pension Benefits:
Service cost $ 2,384 $ 525 $ 490
Interest cost 5,305 3,476 3,232
Expected return on
plan assets (6,838) (3,956) (3,372)
Amortization of prior
service cost 568 560 560
Amortization of net gain (1,462) (738) (598)
-------- -------- --------
Net periodic benefit cost $ (43) $ (133) $ 312
======== ======== ========
Other Benefits:
Service cost $ 14 $ 24 $ 25
Interest cost 633 636 717
Amortization of net gain (34) (26) -
-------- -------- --------
Net periodic benefit cost $ 613 $ 634 $ 742
======== ======== ========
The Company acquired Lincoln Brass Works, Inc. (Lincoln) on September
15, 1998, and Halstead on October 30, 1998, including their pension
benefit plans.
The assumptions used in the measurement of the Company's benefit
obligation are as follows:
(In thousands)
Pension Benefits Other Benefits
1998 1997 1998 1997
Weighted-average
assumptions:
Discount rate 7.0%-7.75% 7.0%-7.75% 7.5%-8.5% 7.5%-8.5%
Expected return on
plan assets 7.5%-8.5% 7.5%-8.5% N/A N/A
Rate of compensation
increases 3.25% 3.50% N/A N/A
The Wednesbury pension plan uses the rate of compensation increase in
its benefit formula. All other pension plans are based on length of
service.
-40-
The assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A one percent change in
the assumed health care cost trend rates would have had the following
effects during 1998:
(In thousands)
1 Percent 1 Percent
Increase Decrease
Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost $ 49 $ (44)
Effect on the health care component of the
accumulated postretirement benefit obligation 580 (524)
The Company has employee savings plans that qualify under Section
401(k). Compensation expense for the 401(k) match was $1.2 million in
1998, $.8 million in 1997 and $.5 million in 1996.
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992
(the Act) was enacted. The Act mandates a method of providing for
postretirement benefits to UMWA current and retired employees, including
some retirees who were never employed by the Company. In October 1993,
beneficiaries were assigned to the Company and the Company began its
mandated contributions to the UMWA Combined Benefit Fund, a multiemployer
trust. Beginning in 1994, the Company was required to make contributions
for assigned beneficiaries under an additional multiemployer trust created
by the Act, the UMWA 1992 Benefit Plan. The ultimate amount of the
Company's liability under the Act will vary due to factors which include,
among other things, the validity, interpretation and regulation of the
Act, its joint and several obligation, the number of valid beneficiaries
assigned and the extent to which funding for this obligation will be
satisfied by transfers of excess assets from the 1950 UMWA pension plan
and transfers from the Abandoned Mine Reclamation Fund. Nonetheless, the
Company believes it has an adequate reserve for this liability, which is
classified as other noncurrent liabilities.
In 1996, the Company established a nonqualified, deferred
compensation plan, which permits certain management employees to annually
elect to defer, on a pre-tax basis, a portion of their compensation. The
deferred benefit to be provided is based on the amount of compensation
deferred, Company match and earnings on the deferrals. The expense
associated with the deferred compensation plan was $.5 million, $.3
million and $.1 million in 1998, 1997 and 1996, respectively. The Company
has invested in corporate-owned life insurance policies to assist in
funding this plan. The cash surrender value of these policies, included in
other assets, was $2.9 million and $2.1 million at December 26, 1998 and
December 27, 1997, respectively.
-41-
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 $.3 million for 1998, 1997 and 1996.
Note 9 - Commitments and Contingencies
The Company is subject to environmental standards imposed by federal,
state, local and foreign environmental laws and regulations. It has
provided and charged to income $2.1 million in 1998, $3.1 million in 1997
and $2.0 million in 1996, for pending environmental matters. The basis for
the increase is updated information and results of ongoing remediation and
monitoring programs. Management believes that the outcome of pending
environmental matters will not materially affect the financial condition
or results of operations of the Company.
The Company is involved in certain litigation as a result of claims
that arise in the ordinary course of business, which management believes
will not have a material adverse effect on the Company's financial
condition or results of operations.
The Company leases certain facilities and equipment under operating
leases expiring on various dates through 2008. The lease payments under
these agreements aggregate to approximately $7.9 million in 1999, $5.1
million in 2000, $3.1 million in 2001, $2.3 million in 2002, $2.3 million
in 2003 and $7.9 million thereafter. Total lease expense amounted to $8.8
million in 1998, $7.7 million in 1997 and $7.7 million in 1996.
Note 10 - Other Income
Other income, net included in the Consolidated Statements of Income
consists of the following:
(In thousands)
1998 1997 1996
Rent and royalties $ 1,420 $ 2,188 $ 1,413
Interest income 5,127 3,584 3,352
Gain on disposal of properties, net 2,156 3,702 973
Minority interest in income of
subsidiaries (200) (294) (397)
-------- -------- --------
Other income, net $ 8,503 $ 9,180 $ 5,341
======== ======== ========
Note 11 -Stock Options
The Company follows APB No. 25 in accounting for its employee stock
options. Under APB No. 25, no compensation expense is recognized because
the exercise price of the Company's incentive employee stock options
equals the market price of the underlying stock on the date of grant.
-42-
Under existing plans, the Company may grant options to purchase
shares of common stock at prices not less than the fair market value of
the stock on the date of the grant. Generally, the options vest annually
in 20 percent increments over a 5 year period beginning one year from the
date of the grant. Any unexercised options expire after not more than 10
years. No options may be granted after 10 years from the date of plan
adoption.
Additionally, the Company has granted stock options to key executives
as retention incentives and inducements to enter into employment
agreements with the Company. Generally, these special grants have terms
and conditions similar to those granted under the Company's other stock
option plans.
On June 15, 1998, the Company loaned $4.5 million, on a full recourse
basis, to an officer. The officer used $1.4 million of the proceeds to
exercise options to purchase Company stock. That portion of the loan has
been classified as a reduction of additional paid-in capital, while the
remaining balance of the loan is included in other assets in the Company's
consolidated financial statements. The loan is secured by common stock of
the Company.
The income tax benefit associated with the exercise of these options
reduced income taxes payable, classified as other current liabilities, by
$3.8 million. Such benefits are reflected as additions directly to
additional paid-in capital.
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, 1995 5,301 $ 3.68
Granted 149 18.71
Exercised (92) 3.57
Expired, cancelled, or surrendered (10) 2.03
--------
Outstanding at December 28, 1996 5,348 4.11
Granted 321 21.33
Exercised (148) 4.20
--------
Outstanding at December 27, 1997 5,521 5.11
Granted 403 20.62
Exercised (698) 5.05
Expired, cancelled, or surrendered (54) 15.20
--------
Outstanding at December 26, 1998 5,172 $ 6.22
========
Options exercisable at:
December 28, 1996 4,383 $ 2.74
December 27, 1997 4,601 3.07
December 26, 1998 4,194 3.46
-43-
Exercise prices for stock options outstanding at December 26, 1998,
ranged from $2.06 to $37.04. Of the 5.2 million stock options that are
outstanding at year-end, 3.6 million are owned by Mr. Harvey 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 1.6 million shares is 6.8
years, and the weighted average exercise price of these shares is $15.74.
The weighted average fair value per option granted was $8.69 in 1998,
$9.31 in 1997 and $8.45 in 1996.
As of December 26, 1998, the Company had reserved 4.3 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 1998, 1997 and 1996:
volatility factor of the expected market value of the Company's common
stock of 0.344; weighted average expected life of the options of 6 years;
and no dividend payments. The risk free interest rate used in the model
was 4.85 percent for 1998, 5.55 percent for 1997 and 6.50 percent for
1996.
The pro forma information is determined using the Black-Scholes
option valuation model. Option valuation models require highly subjective
assumptions including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods. The
Company's pro forma information follows:
(In thousands, except per share data)
1998 1997 1996
Net income $ 75,445 $ 69,770 $ 61,173
SFAS No. 123 compensation expense (1,316) (960) (560)
-------- -------- --------
SFAS No. 123 pro forma net income $ 74,129 $ 68,810 $ 60,613
======== ======== ========
Pro forma earnings per share:
Basic $ 2.09 $ 1.97 $ 1.74
Diluted $ 1.88 $ 1.76 $ 1.56
======== ======== ========
-44-
Because SFAS No. 123 applies only to stock-based compensation awards
for 1995 and later years, the pro forma disclosures under SFAS No. 123 are
not likely to be indicative of future disclosures until the disclosures
reflect all outstanding, nonvested awards.
Note 12 - Acquisitions
On October 30, 1998, the Company acquired approximately 58 percent of
Halstead's outstanding shares. The remaining shares were acquired on
November 20, 1998, for a total purchase price of approximately $95 million
cash. The Company also paid off existing bank debt of Halstead for
approximately $24.8 million. Halstead operates a copper tube mill in
Wynne, Arkansas, and a line sets facility in Clinton, Tennessee.
On September 15, 1998, the Company acquired Lincoln, which operates
manufacturing facilities in Jacksboro, Tennessee and Waynesboro,
Tennessee. Lincoln produces custom control valve assemblies, as well as
custom metal assemblies, gas delivery systems and tubular products
primarily for the gas appliance market. For a nominal consideration, the
Company acquired 100 percent of the outstanding common shares of Lincoln.
Lincoln's existing bank debt of approximately $7.5 million was paid off by
the Company at closing.
On August 10, 1998, the Company completed the acquisition of B&K, an
import distributor of residential and commercial plumbing products in the
United States. B&K sells to all major distribution channels including
hardware co-ops, home centers, plumbing wholesalers, hardware wholesalers,
OEMs and manufactured housing wholesalers. The purchase price was $33.5
million, of which approximately 90 percent was paid in cash and the
remainder paid in shares of Mueller common stock.
During the first half of 1997, the Company acquired the assets and
certain liabilities of Precision Tube Company, Inc., the assets of
Wednesbury Tube Company and Desnoyers S.A.
Each of the acquisitions was accounted for using the purchase method
of accounting. Therefore, the results of operations of the acquired
businesses were included in the consolidated financial statements of the
Company from their respective acquisition dates. The purchase price for
these acquisitions, which was financed by available cash balances and
credit facilities, has been allocated to the assets of the acquired
businesses based on their respective fair market values. The total fair
value of assets acquired in 1998 and 1997 was $240.1 million and $69.8
million, respectively. Liabilities assumed in the acquisitions were $78.7
million in 1998 and $31.9 million in 1997. The excess of the purchase
price over the net assets acquired in 1998 was approximately $76.5 million
which is being amortized over 25 or 30 years. The consolidated financial
statements reflect the preliminary allocations of the Halstead and Lincoln
purchase prices, as the purchase price allocations have not been
finalized.
The following condensed pro forma consolidated results of operations
are presented as if the acquisitions had occurred at the beginning of
1997. This information combines the historical results of operations of
the Company and the acquired businesses after the effects of estimated
purchase accounting adjustments. The pro forma information does not
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purport to be indicative of the results that would have been obtained if
the operations had actually been combined during the periods presented and
is not necessarily indicative of operating results to be expected in
future periods.
(In thousands, except per share data)
1998 1997
Net sales $1,168,103 $1,283,175
Net income 71,369 54,644
Pro forma earnings per share:
Basic $ 2.01 $ 1.56
Diluted $ 1.80 $ 1.39
========= =========
The final assessment of fair values of the assets and reserves
associated with the Desnoyers S.A. acquisition was completed during 1998.
The determination of final fair values resulted in adjustments consisting
of changes from initially recorded values. These adjustments increased
property, plant and equipment and other current liabilities by
approximately $12.4 million and $8.6 million, respectively, and decreased
other assets by approximately $3.8 million.
Note 13 - Industry Segments
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosures About Segments of an Enterprise and Related
Information, which changes the way the Company reports information about
its operating segments. The information for 1997 and 1996 has been
restated from the prior year's presentation in order to conform to the
1998 presentation.
The Company's three reportable segments include its Standard Products
Division (SPD), its Industrial Products Division (IPD) and Other
Businesses. These segments are classified primarily by the markets for
their products. Performance of segments is generally evaluated by their
operating income.
SPD manufactures copper tube and fittings, plastic fittings and line
sets. These products are manufactured in the U.S., Canada and Europe and
are sold primarily to wholesalers.
IPD manufactures brass rod, impact extrusions and forgings as well as
a variety of end-products including plumbing brass; automotive components;
valves and fittings; and specialty copper, copper-alloy and aluminum
tubing. These products are sold primarily to OEM customers.
The Other Businesses segment is comprised primarily of a short line
railroad.
Summarized segment and geographic information is shown in the
following tables. Geographic sales data indicates the location from which
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products are shipped. Unallocated expenses include general corporate
expenses, plus certain charges or credits not included in segment
activity.
Segment Information:
(In thousands)
1998 1997 1996
Net sales:
Standard Products Division $ 624,437 $ 560,787 $ 442,206
Industrial Products Division 274,597 292,869 256,206
Other Businesses 31,637 35,688 20,286
Elimination of intersegment sales (1,280) (347) (386)
-------- -------- --------
$ 929,391 $ 888,997 $ 718,312
======== ======== ========
Depreciation and amortization:
Standard Products Division $ 14,913 $ 12,410 $ 10,467
Industrial Products Division 5,948 5,057 4,243
Other Businesses 1,699 1,479 1,388
General corporate 2,339 2,052 2,374
-------- -------- --------
$ 24,899 $ 20,998 $ 18,472
======== ======== ========
Operating income:
Standard Products Division $ 85,530 $ 72,972 $ 75,210
Industrial Products Division 31,216 29,555 27,472
Other Businesses 5,661 3,458 2,385
Unallocated expenses (13,598) (6,276) (14,605)
-------- -------- --------
$ 108,809 $ 99,709 $ 90,462
======== ======== ========
Expenditures for long-lived assets:
Standard Products Division $ 198,135 $ 49,880 $ 6,460
Industrial Products Division 16,735 8,273 5,361
Other Businesses 4,782 2,727 3,131
-------- -------- --------
$ 219,652 $ 60,880 $ 14,952
======== ======== ========
Segment assets:
Standard Products Division $ 610,914 $ 357,646 $ 239,589
Industrial Products Division 144,004 127,609 109,877
Other Businesses 50,446 51,378 52,285
General corporate 69,330 74,143 107,606
-------- -------- --------
$ 874,694 $ 610,776 $ 509,357
======== ======== ========
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Geographic Information:
(In thousands)
1998 1997 1996
Net sales:
United States $ 754,024 $ 753,771 $ 687,745
Foreign 175,367 135,226 30,567
-------- -------- --------
$ 929,391 $ 888,997 $ 718,312
======== ======== ========
Long-lived assets:
United States $ 448,852 $ 264,747 $ 221,433
Foreign 43,518 29,141 3,148
-------- -------- --------
$ 492,370 $ 293,888 $ 224,581
======== ======== ========
Note 14 - Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
1998
Net sales $ 226,652 $ 225,867 $ 212,746 $ 264,126
Gross profit (1) 51,195 52,349 48,794 56,760
Net income 19,265 19,710 18,765 17,705
Diluted earnings per share 0.49 0.50 0.47 0.45
1997
Net sales $ 201,366 $ 215,437 $ 229,133 $ 243,061
Gross profit (1) 45,582 42,752 47,757 48,105
Net income 15,758 16,339 18,051 19,622
Diluted earnings per share 0.40 0.42 0.46 0.50
(1) Gross profit is net sales less cost of goods sold, which excludes
depreciation and amortization.
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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 26, 1998 and December 27, 1997,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 26,
1998. 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 generally accepted
auditing standards. 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 26, 1998 and December 27, 1997, and
the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 26, 1998, in conformity with
generally accepted accounting principles.
/S/ERNST & YOUNG LLP
Memphis, Tennessee
February 5, 1999
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Capital Stock Information
The high, low and closing prices of Mueller's common stock on the New York
Stock Exchange for each fiscal quarter of 1998 and 1997 were as follows:
High Low Close
1998
Fourth quarter $ 27 $ 14 7/8 $ 20 1/16
Third quarter 40 23 13/16 26 1/2
Second quarter 38 1/16 29 11/16 37
First quarter 32 1/2 25 1/32 31 31/32
1997
Fourth quarter $ 28 11/16 $ 21 7/32 $ 26 19/32
Third quarter 24 1/8 21 1/4 22 5/8
Second quarter 22 11/16 18 1/16 21 1/2
First quarter 22 7/8 18 19 7/8
As of March 1, 1999, the number of holders of record of Mueller's common
stock was approximately 3,200. The New York Stock Exchange's closing price
for Mueller's common stock on March 1, 1999 was $21.50.
The Company has paid no cash dividends on its common stock and presently
does not anticipate paying cash dividends in the near future.
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Selected Financial Data
(In thousands, except per share data)
1998 (1) 1997 (1) 1996 1995 1994
For the fiscal year:
Net sales $ 929,391 $ 888,997 $ 718,312 $ 678,838 $ 550,003
Operating income 108,809 99,709 90,462 64,011 43,952
Net income 75,445 69,770 61,173 44,823 27,926
Diluted earnings
per share (2) 1.90 1.78 1.57 1.17 0.70
At year-end:
Total assets 874,694 610,776 509,357 450,835 430,755
Long-term debt 174,569 53,113 44,806 59,653 76,125
(1) Includes the effects of acquisitions described in Note 12 to the
consolidated financial statements.
(2) In 1998 and 1995, the Company declared two-for-one stock splits
effected in the form of 100 percent dividends. Diluted earnings per
share has been restated to reflect the splits for all periods presented.
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Directors, Corporate Officers and Divisional Management
Board of Directors
Harvey L. Karp Chairman of the Board,
Mueller Industries, Inc.
Robert B. Hodes(1)(3) Counsel, Willkie Farr & Gallagher
G.E. Manolovici(1)(2) Private Investor
William D. O'Hagan President and Chief Executive Officer,
Mueller Industries, Inc.
Robert J. Pasquarelli(1)(2)(3) General Manager - Mansfield,
Armco, Inc.
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
Executive Officers
Harvey L. Karp Chairman of the Board
William D. O'Hagan President and Chief Executive Officer
Earl W. Bunkers Executive Vice President and
Chief Financial Officer*
Lee R. Nyman Senior Vice President
Manufacturing/Engineering
William H. Hensley Vice President, General Counsel and
Secretary
Kent A. McKee Vice President and
Chief Financial Officer **
*Retiring April 1, 1999
**Effective April 1, 1999
Other Officers and Management
Robert A. Haskins Vice President Sales and Marketing
Lowell J. Hill Vice President Human Resources
Richard G. Miller Vice President Business Development
Michael E. Stoll Vice President Purchasing
Richard W. Corman Corporate Controller
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Standard Products Division
Roy C. Harris Division General Manager
Larry D. Birch Vice President North American Sales
Gregory L. Christopher Vice President Supply Chain Management
Bruce R. Clements Vice President Manufacturing -
Copper Tube
Daniel R. Corbin Vice President Manufacturing -
Plastic Fittings
Robert L. Fleeman Vice President International Sales
John B. Hansen Vice President Marketing
Tommy L. Jamison Vice President Manufacturing -
Copper Fittings
Louis F. Pereira General Manager Canadian Operations
Andrew A. Sippel Controller
B&K Industries
Peter D. Berkman President
European Operations
Roger Y. Boutonnet Director - French Operations
Peter J. S. Brookes Finance Director
Peter J. Marsh Sales Director - U.K.
Brian Parsons Manufacturing Director - U.K.
Industrial Products Division
James H. Rourke Group Vice President
Chuck W. Blackledge General Manager - Precision Tube
Gerald J. Leary Vice President & General Manager -
Engineered Products
Kevin N. McGrath Vice President Sales and Marketing
William F. Navarre Vice President Manufacturing
David G. Rice Controller
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Other Businesses
Gary L. Barker President -
Arava Natural Resources Company
Michael W. Baum President -
Mining Remedial Recovery Company
John E. West III Executive Vice President -
Utah Railway Company
Shareholder Information
Annual Meeting
The Annual Meeting of Stockholders will be held at the Company's
Headquarters at 8285 Tournament Drive, Suite 150,
Memphis, TN 38125,
10:00 A.M. local time,
May 6, 1999.
Common Stock
Mueller common stock is traded
on the NYSE - Symbol MLI.
Form 10-K
Copies of the Company's Annual Report on Form 10-K are
available upon written request:
c/o Mueller Industries, Inc.
8285 Tournament Drive, Suite 150 Memphis, TN 38125
Attention: Investor Relations
Independent Auditors
Ernst & Young LLP
Memphis, Tennessee
Transfer Agent and Registrar
Continental Stock Transfer & Trust Co.,
2 Broadway,
New York, NY 10004
Stockholder Inquiries
To notify the Company of address changes or lost certificates,
stockholders can call
Continental Stock Transfer &
Trust Co. at (212) 509-4000.
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