MUELLER INDUSTRIES, INC.
ANNUAL REPORT 1999
Focused on Growth
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)
1999 1998 1997 1996 1995
Summary of Operations
Net sales $ 1,168,744 $ 929,391 $ 888,997 $ 718,312 $ 678,838
Product shipments
(in millions of pounds) 815.2 644.6 545.3 447.0 388.3
Net income $ 99,279 $ 75,445 $ 69,770 $ 61,173 $ 44,823
Diluted earnings per share $ 2.51 $ 1.90 $ 1.78 $ 1.57 $ 1.17
Significant Year-End Data
Cash and cash equivalents $ 149,454 $ 80,568 $ 69,978 $ 96,956 $ 48,357
Ratio of current assets to current liabilities 2.9 to 1 2.7 to 1 3.1 to 1 3.5 to 1 3.1 to 1
Long-term debt (including current portion) $ 149,870 $ 194,549 $ 72,093 $ 59,650 $ 75,902
Debt as a percent of total capitalization 20.8% 27.9% 14.7% 14.6% 21.0%
Stockholders' equity $ 569,430 $ 502,122 $ 418,040 $ 348,082 $ 285,875
Book value per share $ 16.31 $ 14.02 $ 11.94 $ 9.98 $ 8.24
Capital expenditures $ 40,115 $ 55,440 $ 36,865 $ 18,868 $ 40,980
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To Our Shareholders, Customers, and Employees
Nineteen ninety-nine was an outstanding year for Mueller. We set records in
every category - sales, operating income, net income, earnings per share,
pounds of product manufactured, and pounds of product sold. We achieved our
eighth straight year of dynamic earnings growth. Every quarter of 1999 was
the best such quarter in the history of the company. Using 1992 as a base
year, Mueller has had an average annual compounded earnings growth rate of
over 30 percent. Specifically, net income increased to $99.3 million in
1999, compared to $75.4 million in 1998, a gain of 32 percent. Earnings were
$2.51 per diluted share, up 32 percent from $1.90 in the prior year. Net
sales totaled $1.2 billion in 1999, up from $929 million in 1998. And
Mueller shipped 815.2 million pounds of product in 1999, 26 percent more
than in 1998.
Premier Year for Copper Tube.
In November 1998, Mueller acquired Halstead Industries, whose copper tube
mill in Arkansas complemented Mueller's plant in Mississippi. We believed
that the acquisition presented three opportunities to increase earnings from
the tube business. The first was the elimination of redundant corporate
overhead, sales, distribution, and marketing expenses. The second was the
consolidation of manufacturing in order to rationalize production runs and
thereby reduce conversion costs. We are pleased to report that in 1999, much
of the gains we envisioned in these areas have been realized. The third
opportunity stemming from the Halstead acquisition involved a major
investment in capital equipment. Over the next six months, we plan to
complete the $24 million modernization of the Arkansas tube mill, with the
objective of further reducing conversion costs to a world-class level. This
program is well under way, with most of the needed equipment already on
order. We expect to commence reaping benefits from this investment in the
year 2000, with many more benefits coming on stream in year 2001.
Fittings Business had an Excellent Year.
Our copper and plastic fittings business had an excellent year in 1999, even
though margins were variable. For the first half of the year, prices drifted
downward despite the fact that volume was good. However, as business
continued to show vigor, prices advanced over the last six months of the
year. The year ended strongly, and we entered the year 2000 with the
fittings business in a solid position. During the year, our high-volume
copper fittings facility in Fulton, Mississippi performed very well. The
investments made over the past several years in Fulton proved their worth.
This was also true of the investments made in our Covington, Tennessee
copper fittings plant, where efficiency and productivity continued to
improve. Our plastic fittings business also benefited from the sizable
investments in capital equipment and tooling. We are confident that all
three of our plastic fittings manufacturing plants are today world-class in
terms of cost structure, manufacturing flexibility, and quality of products
produced.
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Major Investment in Europe.
As 1999 commenced, copper tube prices in Europe declined precipitously and
continued at a subpar level for most of the year. Recently, tube prices have
trended upward while business volume remains good. Subject to confirmation
of Regional Selective Assistance financial support from the Department of
Trade and Industry (United Kingdom), Mueller will launch a $40 million
capital program in Great Britain dedicated to dramatically reducing costs.
This program will produce some benefits in late 2001 but many more in the
years beyond. In the meantime, we will take actions to improve operations
and confirm our commitments to our European customers. Further, as the
European economies improve as expected, we should benefit from increased
demand.
Industrial Products had a Superior Year.
Industrial Products achieved record earnings in 1999. Each product line
performed well, despite volatility in the price of metals. Our Industrial
Products manufacturing base is highly competitive; however, we are committed
to relentless improvement. We are currently investing $10 million to install
a continuous caster in our brass rod mill. The new caster will improve
product quality while lowering production costs.
Progress at Other Businesses.
The integration of B&K (acquired August 1998) into our Standard Products
Division is largely completed. B&K, an importer and distributor of
residential and commercial plumbing products, grew by more than 50 percent
during 1999, and reached its profit objectives.
Utah Railway Company's earnings declined during 1999 principally due to a
fire that closed a large customer's coal mine. The mine recently reopened
and normal shipments have resumed.
Acquisition Strategy.
Our company has made 10 acquisitions over the past six years, and these have
strengthened our core businesses. By focusing on our industry, we have been
able to leverage existing manufacturing, sales, and distribution
capabilities. And of even more importance, we have become an increasingly
valuable resource to our customers. We expect to continue to grow through
strategic acquisitions. We clearly have the balance sheet, cash flow, and
borrowing capacity to acquire one or more businesses of significant size.
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Mueller's Financial Condition is Excellent.
We ended 1999 with nearly $150 million in cash and a modest 20.8 percent
debt-to-total capitalization ratio. Cash flow continues to be strong, and we
anticipate funding our capital improvement programs and our share buy-back
program from internal sources.
On October 18, 1999, our Board of Directors authorized the repurchase of up
to four million of our common shares on the open market. Through December
1999, we have repurchased 444,200 shares at an average cost of $30.96 per
share. We have not aggressively pressed the buy-back program, preferring
instead to repurchase shares opportunistically. Mueller has substantial
borrowing capacity based upon its premier balance sheet and cash flow. We
have the financial means to take advantage of opportunities to continue to
improve and grow our company.
Mueller's Business Outlook for 2000.
Current economic conditions are providing a very positive environment for
our business. Inflation last year was a modest 2.7 percent. Consumer
confidence is near an all-time high, and unemployment hovers at its lowest
level in 30 years. Interest rates have risen over the past 15 months, but
thus far have had little effect on housing starts. Housing starts registered
a strong 1.66 million units in 1999, and as of this writing, continue to be
robust. We believe that in the year 2000, purchasing new homes and upgrading
existing homes will continue to be a high priority for the American
consumer.
A Word of Thanks.
The key to any company's success is the dedication, enthusiasm, and
initiative of its employees. Mueller has been able to attract and retain
many, many talented people who have these qualities. Our success has been
due to their efforts. They have worked long hours and made many sacrifices
to make Mueller the company it is today. We want everyone to know how very
much we appreciate and value our management team and all our employees. We
are also grateful to our Board of Directors who have been unfailingly
responsive to the needs of our company. We have frequently called upon their
wisdom and experience to make Mueller a better company.
Sincerely,
/S/HARVEY L. KARP
Harvey L. Karp
Chairman of the Board
/S/WILLIAM D. O'HAGAN
William D. O'Hagan
President and Chief Executive Officer
March 17, 2000
[PHOTO]
Harvey L. Karp, Chairman of the Board, and William D. O'Hagan,
President and Chief Executive Officer
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[GRAPH]
Net Income
($ millions)
1995 1996 1997 1998 1999
Net income $44.8 $61.2 $69.8 $75.4 $99.3
[GRAPH]
Net Sales
($ millions)
1995 1996 1997 1998 1999
Net Sales $679 $718 $889 $929 $1,169
[GRAPH]
Pounds of Product Sold
(millions)
1995 1996 1997 1998 1999
Pounds of Product Sold 388.3 447.0 545.3 644.6 815.2
[GRAPH]
Diluted Earnings Per Share
($)
1995 1996 1997 1998 1999
Diluted Earnings Per Share $1.17 $1.57 $1.78 $1.90 $2.51
[GRAPH]
Debt-to-Total Capitalization
1995 1996 1997 1998 1999
Debt ($ millions) $ 75.9 $ 59.6 $ 72.1 $194.5 $149.9
Equity ($ millions) $285.9 $348.1 $418.0 $502.1 $569.4
Ratio (percent) 21.0% 14.6% 14.7% 27.9% 20.8%
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[GRAPH]
Stockholders' Equity
($ millions)
1995 1996 1997 1998 1999
Stockholders' Equity $285.9 $348.1 $418.0 $502.1 $569.4
[GRAPH]
Cash Flow
($ millions)
1995 1996 1997 1998 1999
Earnings Before Interest,
Taxes, Depreciation
and Amortization (EBITDA) $ 81.9 $108.9 $123.2 $135.0 $187.8
The New Dynamics of the Housing Industry
The housing industry over the past 15 years has largely paralleled the
performance of the economy as a whole. The chart below shows that since 1985
the housing industry has performed very well except for the brief recession
of 1991. We believe there are three dynamic factors at work:
1 Innovations in Mortgage Finance.
Since the early 1980s, when Adjustable Rate Mortgages (ARMs) became widely
available, ARMs have grown in popularity as an alternative to traditional
30-year fixed-rate mortgages. Prior to that time, as long-term mortgage
rates increased, many potential homebuyers were priced out of the market.
Further, lower down payment requirements and loan origination costs have
reduced the cash burden of purchasing a home. Today, homebuyers have
alternatives not available prior to the early 1980s: they can opt for
shorter-term, flexible lower-rate and refinanceable ARMs. For example, in
1994 and again in 1999 as mortgage rates advanced, homebuyers turned to
ARMs, and the housing market continued to prosper.
2 Demographic Trends.
Since 1985, single-family housing starts averaged 1.1 million units per
year. We believe this is less than the number required to maintain our
nation's housing stock and provide for our growing population. The shortfall
has resulted in a pent-up demand for housing. Household formations should
continue to grow at approximately 1.1 to 1.2 million annually over the next
decade. The balance of demand for new construction relates to net removals
and changes in vacancies as the population continues to migrate to the South
and West.
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3 Economic Stability.
Low unemployment and inflation have combined with steady growth of GDP to
create high levels of consumer confidence. Specifically, the housing
affordability index in 1985 was 94.8. It has remained over 100 since then,
and is currently at 134.4. This means that America's entire middle class
currently qualifies to buy a home. These factors imply that the housing
market is fundamentally sound and in a more stable, less cyclical
environment than prior to 1985.
[GRAPH]
Single-Family Housing Starts
(millions, SAAR)
Single-Family Housing Starts
1985 1.072
1986 1.179
1987 1.146
1988 1.081
1989 1.003
1990 0.894
1991 0.840
1992 1.029
1993 1.125
1994 1.198
1995 1.076
1996 1.160
1997 1.133
1998 1.271
1999 1.331
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Company Overview
Standard Products Division
[GRAPH]
Net Sales
($ millions)
1995 1996 1997 1998 1999
Net Sales $397 $442 $561 $624 $859
[GRAPH]
Operating Income
($ millions)
1995 1996 1997 1998 1999
Operating Income $ 41 $ 75 $ 72 $ 83 $129
U.S. Copper Tube
PLANTS:
Fulton, Mississippi
Wynne, Arkansas
Clinton, Tennessee
PRODUCTS AND APPLICATIONS
Water tube, in straight lengths and coils for plumbing and
construction
Dehydrated coils and nitrogen-charged straight lengths for
refrigeration and air-conditioning
Industrial tube, in straight lengths and level-wound coils, for
fittings, redraw, etc.
Line sets for controlling the flow of refrigerant gases
CUSTOMERS
Plumbing wholesalers, home centers, and hardware wholesalers
and co-ops
Air-conditioning and refrigeration wholesalers and OEMs
Mueller's copper fitting plants and OEMs
Wholesalers and OEMs
1999 HIGHLIGHTS
Successfully started copper casting facility *
Completed ACR tube production system expansion * Fully rationalized
production between Fulton and Wynne mills * Integrated B&K
acquisition
Fully consolidated two line set production facilities
2000 OBJECTIVES
Complete Wynne mill modernization * Install new annealing furnace
* Upgrade, improve Wynne casting operation * Complete equipment
reliability initiative * Complete implementation of integrated ERP
software
Expand foam rubber production capacity and offering
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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
1999 HIGHLIGHTS
Completed installation of warehouse and distribution management
technologies * Completed retail packaging facility * Integrated B&K
acquisition
2000 OBJECTIVES
Upgrade distribution * Rebuild coldheader equipment and integrate
material supply * Modernize tee press processes * Complete
implementation of integrated ERP software
Plastic Fittings
PLANTS
Kalamazoo, Michigan
Cerritos, California
Upper Sandusky, Ohio
PRODUCTS AND APPLICATIONS
A broad line of over 1,000 PVC and ABS plastic fittings and valves
for drainage, waste and ventilation, in housing and commercial
construction, recreational vehicles, and manufactured housing
CUSTOMERS
Plumbing wholesalers, home centers, hardware wholesalers and co-ops,
and distributors to the manufactured housing and recreational
vehicle industry
1999 HIGHLIGHTS
Installed new presses and tooling * Successful prototype of new
extrusion process * Integrated B&K acquisition
2000 OBJECTIVES
Automate valve assembly * Continue new process R&D * Additional
retail packaging automation * Upgrade Kalamazoo distribution
* Complete implementation of integrated ERP software
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
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1999 HIGHLIGHTS
All new information systems upgrade * New bundling equipment *
Completed full transition to two manufacturing facilities
2000 OBJECTIVES
Initiate two-year European modernization program, including new
extrusion press and drawing equipment * Replace billet furnace in
Longueville * Increase casting capability * Complete implementation
of integrated ERP software
Industrial Products Division
[GRAPH]
Net Sales
($ millions)
1995 1996 1997 1998 1999
Net Sales $251 $256 $293 $275 $290
[GRAPH]
Operating Income
($ millions)
1995 1996 1997 1998 1999
Operating Income $ 20 $ 27 $ 30 $ 28 $ 30
Brass Rod
PLANTS
Port Huron, Michigan
PRODUCTS AND APPLICATIONS
A broad range of rounds, squares, hexagons, and special shapes in
free machining, thread rolling, and forging alloys for numerous end
products, including plumbing brass, valves and fittings, and
industrial machinery and equipment
CUSTOMERS
OEMs, contract machining companies and distributors
1999 HIGHLIGHTS
Initiated casting capacity upgrade * Installed new annealing furnace
* Installed new two-roll and 24-roll straighteners for rounds and
hexagon bars * Upgraded computerized maintenance control system *
Upgraded tool room capability with EDM and die hone * Installed
stomper/deslagger with closed-hood system on melter
2000 OBJECTIVES
Install horizontal continuous caster * Enhance/add modernized drawing
equipment * Improve scrap/chip handling processes
Engineered Products
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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
barbecue grill markets
Shaped and formed tube, produced to tight tolerances, for baseboard
heating, appliances, medical instruments, etc.;
coaxial cables
CUSTOMERS
OEMs
1999 HIGHLIGHTS
Installed new and rebuilt forging trim presses and slug heating
furnaces * Consolidated sales organization * Increased ball valve
capacity * Upgraded machining capability * Enhanced information
systems and processes * Added part cleaning process with
environmentally friendly process in lieu of outsourcing
2000 OBJECTIVES
Complete new automated lube system in Marysville * Rebuild/automate
forming presses (Forgings and Impacts) * Automatic range valve
assembly machine at Lincoln Brass * Expand and upgrade machining
capabilities * Rationalize valve and manifold business
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. Mueller also owns other natural resource properties.
Highlights for 1999 include: built railroad yard; sold Alaska Gold; acquired
Salt Lake City Southern Railroad Company.
Objectives for 2000 include: replace locomotive fleet with more efficient
units.
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Capital investments drive down costs.
Capital investments translate into higher productivity, greater efficiency,
and improved product quality. Our investments include information systems,
automated distribution facilities, as well as tooling, machinery and
equipment. Our mission is to be at the cutting edge of the best worldwide
technology and practices.
Mueller's businesses are highly competitive. To prosper, we must utilize
the best available technologies and systems. Our goal is to relentlessly
reduce the costs of manufacturing, selling, and distributing our products.
We are confident that Mueller is currently a world-class company, but we
strive to become even better. In 1999, we invested $40 million in capital
improvements including the commencement of the modernization program at the
Wynne, Arkansas tube mill, completion of the Fulton, Mississippi copper
billet casting facility, and the expansion of ACR tube capacity, among many
others. During 2000, the pace of our capital investments will accelerate.
We expect to invest or commit approximately $90 million; our most ambitious
year ever. The 2000 year projects will include: the first stage of our
European modernization program; horizontal continuous casting for our brass
rod mill; the installation of an upcaster for use in making copper fittings;
an automated Bonderlube and cleaning line at our impacts plant; the
replacement of 14 locomotives for the Utah Railway; and many more. These
investments are driven by our commitment to be a low-cost producer of every
product we manufacture. We believe that the best defense, as well as the
best offense, is to keep driving down our costs.
Capital investments are key to our success. Over the past five years,
Mueller has invested nearly $200 million to drive down costs. The return on
this investment is reflected in our increased profitability.
[GRAPH]
Capital Expenditures
($ millions)
1995 1996 1997 1998 1999
Capital Expenditures $41.0 $18.9 $36.9 $55.4 $40.1
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Acquisitions accelerate our growth.
Mueller's acquisition program has accelerated our growth. Approximately 45
percent of our 1999 sales originated from companies acquired over the past
five years. All of our acquisitions have focused on our industry, and in
every case have strengthened our core businesses. We believe that an
acquisition should leverage our existing manufacturing, sales, and
distribution capabilities. We seek companies that are well managed, and are
able to utilize Mueller's financial resources to grow at a faster pace. We
do not require that an acquisition candidate be immediately accretive to
earnings. Rather, our emphasis is on building value by unleashing the
potential of acquired businesses through capital improvements and
integration with our core businesses. Mueller has made 10 acquisitions in
recent years at an aggregate cost of over $200 million. Our financial
capabilities permit us to make additional acquisitions of substantial size.
At 1999 year-end, Mueller had approximately $150 million in cash, strong
earnings, a formidable cash flow, and an under-leveraged balance sheet. We
have the resources to balance our organic growth with growth through
acquisitions.
Approximately 45 percent of Mueller's 1999 sales originated from
acquisitions made over the past five years. Before we make an acquisition,
we must have in place a plan to enhance its operations and profitability.
[GRAPH]
Percent
Sales from ongoing operations 55%
Sales from acquisitions 45%
Mueller is focused on growth. We are committed to building a world-class
manufacturing company with the objective of increasing shareholder value.
Our growth has been well balances, coming from organic sources and
acquisitions.
Mueller's Management Philosophy
We believe that we must strive to be the best at everything we do. We are
determined to be world-class in manufacturing, selling, and distributing our
products. Being world-class means utilizing the best available technology,
systems, tooling, and equipment. We employ talented, dedicated, and
enthusiastic people and provide them with an environment in which they can
excel. We organize our efforts with the prime objective of providing our
customers with superior services, which add value to their businesses. We
seek to be a resource to our customers, as well as a source of supply.
Several years ago, Mueller began using a strategic management system known
as the Balanced Scorecard (BSC). The BSC focuses on basic corporate
functions such as customer service, internal process improvement, and
employee development. The functions are critical to Mueller's continued
long-term growth. The BSC has helped our management team to be more
effective in directing our rapidly growing enterprise. We view our
shareholders as partners. They are deserving of our best efforts and
fidelity. Increasing shareholder value is the measure of our success.
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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 and
other natural resource properties and interests. SPD and IPD account for
more than 98 percent of consolidated net sales and more than 81 percent of
consolidated total assets.
During 1998, the Company completed three acquisitions: (i) Halstead
Industries, Inc. (Halstead), which operates a copper tube mill in Wynne,
Arkansas and a line sets factory in Clinton, Tennessee; (ii) B&K Industries,
Inc. (B&K), based in Elk Grove Village, Illinois, a significant importer and
distributor of residential and commercial plumbing products in the United
States that sells through all major distribution channels including hardware
co-ops, home centers, plumbing wholesalers, hardware wholesalers, OEMs, and
manufactured housing wholesalers; and (iii) Lincoln Brass Works, Inc.
(Lincoln), which produces custom valve assemblies, custom metal assemblies,
gas delivery systems, and tubular products, primarily for the gas appliance
market, at two manufacturing facilities in Tennessee.
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.
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Results of Operations
1999 PERFORMANCE COMPARED TO 1998
Consolidated net sales in 1999 were $1,168.7 million or 25.7 percent
higher than $929.4 million in 1998. Pounds of product sold totaled 815.2
million in 1999 or 26.5 percent more than the 644.6 million pounds sold in
1998. These increases were due primarily to acquisitions which occurred
during 1998. Net selling prices generally fluctuate with changes in raw
material prices; therefore, pounds sold is an additional measurement of the
Company's growth. The COMEX average copper price in 1999 was approximately 4
percent lower than the 1998 average. This change impacts the Company's net
sales and cost of goods sold.
Businesses acquired in 1998 accounted for approximately $341.8 million
of the Company's 1999 net sales and those acquired in 1997 added
approximately $148.8 million. The Halstead acquisition was completed in the
fourth quarter of 1998 and the other two acquisitions were completed in the
third quarter of 1998. Core product lines that existed prior to the 1998 and
1997 acquisitions accounted for the balance of the Company's 1999 growth.
Cost of goods sold increased $166.2 million, to $886.5 million in 1999.
This increase is primarily attributable to acquisitions and higher sales of
core products. Gross profit was 24.1 percent of net sales in 1999 compared
to 22.5 percent in 1998 and cost of sales improved accordingly. This
improvement resulted from lower manufacturing costs, continued higher yields
from production, reduced metal costs, and improved spreads in certain
products, particularly copper tube.
Depreciation and amortization increased to $37.0 million in 1999
compared to $24.9 million in 1998. This increase was due to 1998
acquisitions and capital expenditures in recent years, which totaled $40.1
million in 1999 and $55.4 million in 1998.
Selling, general, and administrative expense increased to $97.3 million
in 1999. When measured on a basis of cost per pound of product sold, these
expenses averaged 11.9 cents a pound in 1999 and 11.7 cents a pound in 1998.
Approximately 66 percent of the $21.9 million increase was attributable to
businesses acquired in 1998.
Interest expense increased to $11.7 million in 1999 from $5.8 million
in 1998. The 1999 increase resulted primarily from funds borrowed in the
fourth quarter of 1998 to purchase Halstead and from certain debt assumed by
the Company in the acquisition of B&K. The Company capitalized interest of
$.4 million for major capital improvement projects in 1999 compared to $.8
million in 1998.
The provision for environmental reserves totaled $2.1 million in 1998
whereas none was required in 1999.
Other income increased to $9.5 million in 1999 from $8.5 million in
1998. Within this classification, interest income increased $1.5 million to
$6.6 million in 1999 while gains from disposal of non-manufacturing
properties decreased $.3 million to $1.8 million in 1999. Rent and royalty
income decreased $.4 million from $1.4 million in 1998.
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The Company provided $46.4 million for income taxes in 1999, of which
$31.3 million was deferred. Current income tax expense of $15.1 million
decreased from 1998 primarily due to realization of an ordinary loss of
approximately $70 million as a consequence of the sale of Alaska Gold
Company, offset by increased taxable income. The 31.9 percent effective tax
rate for 1999, which is comparable to the 1998 rate of 31.0 percent,
reflects the recognition of certain tax attributes discussed in Note 7 and
certain favorable state tax credits, including IRB financings.
The Company's employment was 4,356 at the end of 1999. This compares to
4,788 at the 1998 year-end.
Standard Products Division
Net sales by SPD were $858.5 million in 1999 compared to $624.4 million
in 1998 for a 37 percent increase. Operating income was $129.1 million in
1999 compared to $83.0 million in 1998. The profit improvement resulted from
increased volume, lower manufacturing costs, and improved spreads in certain
products, particularly copper tube.
Industrial Products Division
IPD's net sales were $290.3 million in 1999 compared to $274.6 million
in 1998. Due to the lower cost of raw materials, the average selling price
for finished product was approximately 7 percent lower in 1999 compared to
1998 levels. Operating income was $29.9 million in 1999 compared to $28.3
million in 1998. Increased volume and lower manufacturing costs accounted
for the profit improvement.
Other Businesses
Utah Railway Company hauled 5.3 million tons of coal in 1999, slightly
less than in 1998. Revenue totaled $22.1 million in 1999 compared to $23.5
million in 1998. This decrease is due to production interruptions caused by
a fire at one of the coal mines served by Utah Railway Company. The mine re-
opened in late 1999. Alaska Gold Company's net sales were $.2 million in
1999 compared to $8.2 million in 1998. On April 26, 1999, the Company sold
100 percent of its interest in Alaska Gold Company.
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. The COMEX average copper price in 1998 was approximately 27 percent
lower than the 1997 average, which 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. 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.
-17-
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, which totaled $55.4 million
in 1998 and $36.9 million in 1997, and to the 1998 and 1997 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.
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 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 were
related 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 $83.0 million in
1998 compared to $71.7 million in 1997. The profit improvement resulted from
increased volume, lower manufacturing costs, and improved spreads in certain
products, particularly copper tube.
-18-
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 levels. Operating income was $28.3 million in 1998 compared to $29.8
million in 1997.
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. 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.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance increased to $149.5
million at year-end. Major components of the 1999 change include $164.8
million of cash provided by operating activities, $23.1 million of cash used
in investing activities, and $73.2 million of cash used in financing
activities.
Net income of $99.3 million in 1999 was the primary component of cash
provided by operating activities. Depreciation and amortization of $37.0
million and deferred income taxes of $31.3 million were the primary non-cash
adjustments. Major changes in working capital included a $15.3 million
increase in receivables, a $13.0 million decrease in inventories, a $15.0
million decrease in other assets, and a $14.0 million decrease in current
and other liabilities.
The major component of net cash used in investing activities during
1999 included $40.1 million for capital expenditures. Other components
included cash provided by proceeds from sales of properties and escrowed IRB
funds. Capital expenditures were primarily related to improvements in
manufacturing processes.
Net cash used in financing activities totaled $73.2 million. During
1999, the Company paid $169.7 million for debt repayments offset by $125.0
million of proceeds from the issuance of long-term debt. The Company also
repurchased 560 thousand shares of its stock in private transactions, plus
444 thousand shares under a stock buy-back plan totaling $29.7 million.
The Company has a $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. There are no
outstanding borrowings against the Credit Facility. The Company did,
however, have approximately $5.0 million in letters of credit backed by this
Credit Facility at the end of 1999. At December 25, 1999, the Company's
total debt was $149.9 million or 20.8 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.
-19-
The Company is investing approximately $24 million for capital
improvements at its Wynne copper tube mill. The project will update the
extrusion and drawing equipment employed at the mill. The project, when
completed mid-year 2000, will significantly improve the mill's conversion
costs as well as yield.
The Company is also planning a new $10 million investment at our Port
Huron, Michigan brass rod mill. This investment, which is expected to be
completed near the end of 2000, will increase our casting capacity, improve
yield, and reduce conversion costs.
Subject to confirmation of Regional Selective Assistance financial
support from the Department of Trade and Industry (United Kingdom), the
Company has also authorized approximately $40 million for the modernization
of its European factories. This investment will upgrade the casting,
extrusion, drawing, and finishing processes at these operations. The project
is expected to be completed near the end of 2001.
Management believes that cash provided by operations and currently
available cash of $149.5 million will be adequate to meet the Company's
normal future capital expenditure and operational needs. The Company's
current ratio was 2.9 to 1 at December 25, 1999.
On October 18, 1999, the Company's Board of Directors authorized the
repurchase of up to four million shares of the Company's common stock from
time-to-time over the next year through open market transactions or through
privately negotiated transactions. The Company will have no obligation to
purchase any shares and may cancel, suspend, or extend the time period for
the purchase of shares at any time. The purchases will be funded primarily
through existing cash and cash from operations. The Company may hold such
shares in treasury or use a portion of the repurchased shares for employee
benefit plans, as well as for other corporate purposes. Through December 25,
1999, the Company has repurchased approximately 444 thousand shares under
this program.
Environmental Matters
The Company ended 1999 with total environmental reserves of
approximately $13.0 million. This balance includes $6.4 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.
-20-
Interest Rates
At December 25, 1999 and December 26, 1998, the fair value of the
Company's debt is estimated at $150.3 million and $195.2 million,
respectively, 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 25, 1999 by
$.4 million and 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 $.4
million at December 25, 1999 and $.6 million at December 26, 1998.
The Company had $119.0 million of variable-rate debt outstanding at
December 25, 1999 and $142.2 million at December 26, 1998. At these
borrowing levels, a hypothetical 10 percent increase in interest rates would
have had an unfavorable impact on the Company's pretax earnings and cash
flows of $.8 million in 1999 and 1998. 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 $16.5 million at December 25, 1999 and $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 25,
1999 and December 26, 1998 amounts to $3.5 million and $2.7 million,
respectively. 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.
-21-
The Company occasionally enters into forward fixed-price arrangements
with certain customers. The Company may utilize futures or option contracts
to hedge risks associated with forward fixed-price arrangements. The Company
may also utilize futures or option contracts to manage price risk associated
with inventory. The total amount of such contracts was approximately 1.0
million pounds at December 25, 1999 and includes varying maturity dates in
2000. At December 26, 1998, the amount of such contracts was approximately
5.3 million pounds. 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 is not aware of any Year 2000 issues that have affected its
operations. In preparation for the Year 2000, the Company established a Year
2000 program to evaluate, confirm compliance, and identify any necessary
changes to its information technology and operating systems. The Company
retained a consulting firm specializing in this area to assist in the
program. The Company expensed approximately $850 thousand related to this
outside consultant. In addition, the Company replaced certain hardware and
modified its developed software code at a cost, that was immaterial. During
1999, the Company upgraded the business systems of our European businesses
with Year 2000 compliant systems.
Since January 1, 2000, the Company has not experienced any disruption
to our business as the result of any year 2000 date functions. Management
believes that the risk that the Company would be unable to maintain customer
services due to future Year 2000 system failures is remote.
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). This statement requires companies to record
derivative instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values
of a derivative would be accounted for depending on the use of a derivative
and whether it qualifies for hedge accounting. In June 1999, the FASB issued
Statement No. 137, which delayed the effective date of SFAS No. 133 to the
Company's fiscal year 2001. 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 on the financial position
of the Company.
Cautionary Statement Regarding Forward-Looking Information
This Annual Report contains various forward-looking statements and
includes assumptions concerning the Company's operations, future results,
and prospects. These forward-looking statements are based on current
expectations and are subject to risk and uncertainties. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995, Mueller provides the following cautionary statement identifying
important economic, political, and technological factors, among others, the
absence of which could cause actual results or events to differ materially
from those set forth in or implied by the forward-looking statements and
related assumptions.
-22-
Such factors include: (i) continuation of the current and projected
future business environment, including interest rates and capital and
consumer spending; (ii) continuation of the strong domestic housing industry
environment; (iii) fluctuations in commodity prices (including prices of
copper and other raw materials); (iv) competitive factors and competitor
responses to Mueller initiatives; (v) successful implementation and
completion of major capital projects; (vi) stability of government laws and
regulations, including taxes; and (vii) continuation of the environment to
make acquisitions, domestic and foreign, including regulatory requirements
and market values of candidates.
-23-
Mueller Industries, Inc.
Consolidated Statements of Income
Years Ended December 25, 1999, December 26, 1998, and December 27, 1997
(In thousands, except per share data)
1999 1998 1997
Net sales $ 1,168,744 $ 929,391 $ 888,997
Cost of goods sold 886,531 720,293 704,801
---------- -------- --------
Gross profit 282,213 209,098 184,196
Depreciation and amortization 36,986 24,899 20,998
Selling, general, and administrative
expense 97,301 75,390 63,489
---------- -------- --------
Operating income 147,926 108,809 99,709
Interest expense (11,681) (5,839) (4,968)
Environmental reserves - (2,133) (3,100)
Other income, net 9,464 8,503 9,180
---------- -------- --------
Income before income taxes 145,709 109,340 100,821
Income tax expense (46,430) (33,895) (31,051)
---------- -------- --------
Net income $ 99,279 $ 75,445 $ 69,770
========== ======== ========
Weighted average shares for basic
earnings per share 35,594 35,452 34,997
Effect of dilutive stock options 4,011 4,192 4,253
---------- -------- --------
Adjusted weighted average shares for
diluted earnings per share 39,605 39,644 39,250
---------- -------- --------
Basic earnings per share $ 2.79 $ 2.13 $ 1.99
========== ======== ========
Diluted earnings per share $ 2.51 $ 1.90 $ 1.78
========== ======== ========
See accompanying notes to consolidated financial statements.
-24-
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 25, 1999 and December 26, 1998
(In thousands)
1999 1998
Assets
Current assets
Cash and cash equivalents $ 149,454 $ 80,568
Accounts receivable, less allowance for doubtful
accounts of $5,367 in 1999 and $4,929 in 1998 167,858 155,601
Inventories 119,644 134,732
Current deferred income taxes - 5,140
Other current assets 3,790 6,283
-------- --------
Total current assets 440,746 382,324
Property, plant, and equipment, net 347,846 379,082
Goodwill, net 94,530 75,988
Other assets 20,958 37,300
-------- --------
Total Assets $ 904,080 $ 874,694
======== ========
See accompanying notes to consolidated financial statements.
-25-
Mueller Industries, Inc.
Consolidated Balance Sheets (continued)
As of December 25, 1999 and December 26, 1998
(In thousands, except share data)
1999 1998
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 31,012 $ 19,980
Accounts payable 49,958 46,641
Accrued wages and other employee costs 30,182 26,636
Other current liabilities 41,909 49,317
-------- --------
Total current liabilities 153,061 142,574
Long-term debt, less current portion 118,858 174,569
Pension liabilities 6,624 5,924
Postretirement benefits other than pensions 6,967 6,660
Environmental reserves 12,965 16,321
Deferred income taxes 24,275 10,490
Other noncurrent liabilities 11,546 15,680
-------- --------
Total liabilities 334,296 372,218
-------- --------
Minority interest in subsidiaries 354 354
Stockholders' equity
Preferred stock - shares authorized 4,985,000;
none outstanding - -
Series A junior participating preferred stock -
$1.00 par value; shares authorized 15,000;
none outstanding - -
Common stock - $.01 par value; shares authorized
100,000,000; issued 40,091,502 in 1999 and
1998; outstanding 34,918,646
in 1999 and 35,807,596 in 1998 401 401
Additional paid-in capital, common 259,977 258,171
Retained earnings since January 1, 1991 372,477 273,198
Cumulative translation adjustments (8,112) (3,317)
Treasury common stock, at cost (55,313) (26,331)
-------- --------
Total stockholders' equity 569,430 502,122
-------- --------
Commitments and contingencies - -
-------- --------
Total Liabilities and Stockholders' Equity $ 904,080 $ 874,694
======== ========
See accompanying notes to consolidated financial statements.
-26-
Mueller Industries, Inc.
Consolidated Statements of Cash Flows
Years Ended December 25, 1999, December 26, 1998, and December 27, 1997
(In thousands)
1999 1998 1997
Operating activities:
Net income $ 99,279 $ 75,445 $ 69,770
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 31,130 24,076 20,012
Amortization 5,856 823 986
Provision for doubtful accounts
receivable 1,503 556 107
Minority interest in subsidiaries,
net of dividend paid - (337) 294
Deferred income taxes 31,257 4,870 2,830
Gain on disposal of properties (1,847) (2,156) (3,702)
Changes in assets and liabilities, net
of businesses acquired:
Receivables (15,339) 12,973 (24,422)
Inventories 12,992 (4,875) 1,329
Other assets 14,973 (3,219) (5,451)
Current liabilities 622 (6,016) (3,543)
Other liabilities (14,657) (3,165) (5,416)
Other, net (1,014) (65) 136
-------- -------- --------
Net cash provided by operating activities 164,755 98,910 52,930
-------- -------- --------
Investing activities:
Acquisition of businesses (675) (158,514) (37,874)
Capital expenditures (40,115) (55,440) (36,865)
Proceeds from sales of properties 7,137 2,559 5,826
Escrowed IRB proceeds 6,022 14,739 (21,146)
Note receivable 4,484 (4,484) -
-------- -------- --------
Net cash used in investing activities (23,147) (201,140) (90,059)
-------- -------- --------
Financing activities:
Proceeds from issuance of long-term debt 125,000 - 27,500
Repayments of long-term debt (29,819) (19,396) (18,133)
Proceeds from the sale of treasury stock 1,093 7,284 615
Acquisition of treasury stock (29,669) - -
Net (repayments) borrowings on lines
of credit (139,840) 125,451 -
-------- -------- --------
Net cash (used in) provided by
financing activities (73,235) 113,339 9,982
-------- -------- --------
See accompanying notes to consolidated financial statements.
-27-
Mueller Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Years Ended December 25, 1999, December 26, 1998, and December 27, 1997
(In thousands)
1999 1998 1997
Effect of exchange rate changes on cash 513 (519) 169
-------- -------- --------
Increase (decrease) in cash and
cash equivalents 68,886 10,590 (26,978)
Cash and cash equivalents at the
beginning of the year 80,568 69,978 96,956
-------- -------- --------
Cash and cash equivalents at the
end of the year $ 149,454 $ 80,568 $ 69,978
======== ======== ========
For supplemental disclosures of cash flow information, see
Notes 1, 5, 7, and 12.
See accompanying notes to consolidated financial statements.
-28-
Mueller Industries, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 25 1999, December 26, 1998, and December 27, 1997
(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 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
Comprehensive income:
Net income - - - 99,279 - - - 99,279
Other comprehensive income:
Foreign currency translation - - - - (4,795) - - (4,795)
--------
Comprehensive income 94,484
Issuance of shares under
incentive stock option plan - - 406 - - (115) 687 1,093
Repurchase of common stock - - - - - 1,004 (29,669) (29,669)
Proceeds from payment on
note receivable from officer - - 1,400 - - - - 1,400
------- --- ------- ------- ----- ------ ------- --------
Balance, December 25, 1999 40,092 $ 401 $ 259,977 $ 372,477 $ (8,112) 5,173 $(55,313) $ 569,430
======= === ======= ======= ===== ====== ======= ========
<FN>
See accompanying notes to consolidated financial statements.
-29-
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
NATURE OF OPERATIONS
The principal business of Mueller Industries, Inc. is the manufacture
and sale of copper tube and fittings; brass and copper alloy rod, bar, and
shapes; aluminum and brass forgings; aluminum and copper impact extrusions;
plastic fittings and valves; refrigeration valves and fittings; fabricated
tubular products; and gas valves and assemblies. The Company markets its
products to the HVAC, plumbing, refrigeration, hardware, and other
industries. During 1999, the Company operated 20 factories in eight states,
Canada, Great Britain, and France and had distribution facilities nationwide
and sales representation worldwide. The Company also operates a short line
railroad through its subsidiary, Utah Railway Company. 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 five to 20 years for machinery and equipment.
INTANGIBLE ASSETS
The excess of the cost over the fair value of net assets of businesses
acquired is recorded as goodwill and is amortized on a straight-line basis
over 25 years. The cost of other acquired intangibles is amortized on a
straight-line basis over their estimated useful lives. The Company
continually evaluates the carrying value of goodwill and other intangible
assets. Any impairments would be recognized when the expected future
undiscounted operating cash flows derived from such intangible assets is
less than their carrying value.
REVENUE RECOGNITION
Revenue is recognized when products are shipped or services are
performed.
-30-
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
Interpretations as permitted by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
EARNINGS PER SHARE
Basic earnings per share 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 25, 1999 and December 26, 1998, temporary investments consisted of
certificates of deposit, commercial paper, bank repurchase agreements, and
U.S. and foreign government securities totaling $157.0 million and $81.4
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.
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 $.9 million of copper.
-31-
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 $1.1 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.
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 (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). This statement requires companies to record
derivative instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values
of a derivative would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. In June 1999, the
FASB issued Statement No. 137, which delayed the effective date of SFAS No.
133 to the Company's fiscal year 2001. 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 on the
financial position of the Company.
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 consolidated financial statements
have been reclassified to conform to the 1999 presentation.
-32-
Note 2 - Inventories
Inventories consist of the following:
(In thousands)
1999 1998
Raw material and supplies $ 28,337 $ 26,544
Work-in-process 14,423 18,196
Finished goods 76,884 89,672
Gold - 320
-------- --------
Inventories $ 119,644 $ 134,732
======== ========
Inventories valued using the LIFO method totaled $29.0 million at
December 25, 1999 and $28.9 million at December 26, 1998. The approximate
FIFO cost of such inventories was $29.9 million at December 25, 1999 and
$26.9 million at December 26, 1998.
Note 3 - Properties
Properties stated at fair value as of December 28, 1990, with
subsequent additions recorded at cost, are as follows:
(In thousands)
1999 1998
Land and land improvements $ 7,994 $ 12,537
Buildings 68,436 67,879
Machinery and equipment 376,764 370,080
Construction in progress 25,466 41,686
-------- --------
478,660 492,182
Less accumulated depreciation (130,814) (113,100)
-------- --------
Property, plant, and equipment, net $ 347,846 $ 379,082
======== ========
-33-
Note 4 - Other Current Liabilities
Other current liabilities consist of the following:
(In thousands)
1999 1998
Accrued discounts and allowances $ 14,850 $ 15,022
Accrued severance and related
costs for acquired businesses 1,558 9,266
Freight settlements due to other railroads 3,191 2,866
Income taxes payable 2,884 1,393
Deferred income taxes 681 -
Other 18,745 20,770
-------- --------
Other current liabilities $ 41,909 $ 49,317
======== ========
Note 5 - Long-Term Debt
Long-term debt consists of the following:
(In thousands)
1999 1998
Floating rate unsecured notes,
due through 2003 $ 118,421 $ -
Line-of-credit at floating rate - 120,000
Line-of-credit at floating rate - 19,840
8.38% Unsecured note payable,
due through September 30, 2000 3,571 7,142
7.54% Unsecured note payable,
due through December 31, 1999 1,000 5,000
1993 Series IRBs with interest at 6.95%, due
through December 15, 2000 2,857 5,714
1994 Series IRBs with interest at 8.825%, due
through 2001 3,857 6,429
1997 Series IRBs with interest at 7.39%, due
through 2014 17,125 20,625
1997 Series IRBs with interest at 7.31%, due
through 2009 1,465 1,925
Other, including capitalized lease obligations 1,574 7,874
-------- --------
149,870 194,549
Less current portion of long-term debt (31,012) (19,980)
-------- --------
Long-term debt $ 118,858 $ 174,569
======== ========
-34-
During fiscal 1999, 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 paid
down the $120 million balance under a line-of-credit. The Agreement requires
quarterly principal payments on the term note of approximately $3.3 million
plus interest through 2003, with a balloon payment of $65.8 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 has an unsecured $100 million line-of-credit (the Credit
Facility) which expires in May 2001, but may be extended for successive one
year periods by agreement of the parties. Borrowings under the Credit
Facility bear interest, at the Company's option, at (i) prime rate less .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 $5.0
million at December 25, 1999. This Credit Facility was temporarily increased
to $125 million in November 1998, at which time the Company borrowed $120
million to fund the acquisition of Halstead Industries, Inc. (Halstead)
including payment of Halstead's existing debt. The Agreement returned the
ceiling under this Credit Facility to its original level of $100 million.
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; there was no balance outstanding at year-
end. The Company expects to terminate this agreement during the first
quarter of 2000.
Borrowings under the above agreements 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 are $31.0 million,
$15.7 million, $17.0 million, $16.7 million, and $68.4 million for the years
2000 through 2004 respectively, and $1.1 million thereafter. Interest paid
in 1999, 1998, and 1997 was $12.4 million, $6.3 million, and $4.8 million,
respectively. During 1999, 1998, and 1997, the Company capitalized interest
of $.4 million, $.8 million, and $.1 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
1999 and 1998, based on the estimated current incremental borrowing rates
for similar types of borrowing arrangements.
Note 6 - Stockholders' Equity
In 1998, the Company declared a two-for-one stock split effected in the
form of a 100 percent stock dividend. All presentations of share data
herein, including earnings per share, have been restated to reflect the
split for all periods presented.
-35-
On November 10, 1994, the Company declared a dividend distribution of
one Right for each outstanding share of the Company's common stock. Each
Right entitles the holder to purchase one unit consisting of one-thousandth
of a share of Series A Junior Participating Preferred Stock at a purchase
price of $160 per unit, subject to adjustment. The Rights will not be
exercisable, or transferable apart from the Company's common stock, until 10
days following an announcement that a person or affiliated group has
acquired, or obtained the right to acquire, beneficial ownership of 15
percent or more of its common stock other than pursuant to certain offers
for all shares of the Company's common stock that have been determined to be
fair to, and in the best interest of, the Company's stockholders. The
Rights, which do not have voting rights, will be exercisable by all holders
(except for a holder or affiliated group beneficially owning 15 percent or
more of the Company's common stock, whose Rights will be void) so that each
holder of a Right shall have the right to receive, upon the exercise
thereof, at the then current exercise price, the number of shares of the
Company's common stock having a market value of two times the exercise price
of the Rights. All Rights expire on November 10, 2004, and may be redeemed
by the Company at a price of $.01 at any time prior to either their
expiration or such time that the Rights become exercisable.
In the event that the Company is acquired in a merger or other business
combination, or certain other events occur, provision shall be made so that
each holder of a Right (except Rights previously voided) shall have the
right to receive, upon exercise thereof at the then current exercise price,
the number of shares of common stock of the surviving company which at the
time of such transaction would have a market value of two times the exercise
price of the Right.
On October 18, 1999, the Company's Board of Directors authorized the
repurchase of up to four million shares of the Company's common stock from
time-to-time over the next year through open market transactions or through
privately negotiated transactions. The Company will have no obligation to
purchase any shares and may cancel, suspend, or extend the time period for
the purchase of shares at any time. The purchases will be funded primarily
through existing cash and cash from operations. The Company may hold such
shares in treasury or use a portion of the repurchased shares for employee
benefit plans, as well as for other corporate purposes. Through December 25,
1999, the Company has repurchased approximately 444 thousand shares under
this program.
-36-
Note 7 - Income Taxes
The components of income before income taxes were taxed under the
following jurisdictions:
(In thousands)
1999 1998 1997
Domestic $ 154,765 $ 108,135 $ 101,577
Foreign (9,056) 1,205 (756)
-------- -------- --------
Income before income taxes $ 145,709 $ 109,340 $ 100,821
======== ======== ========
Income tax expense consists of the following:
(In thousands)
1999 1998 1997
Current tax expense:
Federal $ 12,052 $ 24,882 $ 23,855
Foreign 1,692 2,400 2,666
State and local 1,429 1,743 1,700
-------- -------- --------
Current tax expense 15,173 29,025 28,221
-------- -------- --------
Deferred tax expense (benefit):
Federal 30,570 4,226 3,872
Foreign - 595 (1,263)
State and local 687 49 221
-------- -------- --------
Deferred tax expense 31,257 4,870 2,830
-------- -------- --------
Income tax expense $ 46,430 $ 33,895 $ 31,051
======== ======== ========
U.S. income and foreign withholding taxes are provided on the earnings
of foreign subsidiaries that are expected to be remitted to the extent that
taxes on the distribution of such earnings would not be offset by foreign
tax credits.
-37-
The difference between the reported income tax expense and a tax
determined by applying the applicable U.S. federal statutory income tax rate
to income before income taxes, is reconciled as follows:
(In thousands)
1999 1998 1997
Expected income tax expense $ 50,998 $ 38,269 $ 35,287
State and local income tax,
net of federal benefit 929 1,133 1,254
Foreign income taxes 4,371 2,119 (398)
Valuation allowance (8,220) (5,481) (4,226)
Other, net (1,648) (2,145) (866)
-------- -------- --------
Income tax expense $ 46,430 $ 33,895 $ 31,051
======== ======== ========
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)
1999 1998
Deferred tax assets:
Accounts receivable $ 1,229 $ 988
Inventories 1,326 1,762
Pension, OPEB, and accrued items 9,011 7,335
Other reserves 9,679 11,668
Deferred loss - 26,562
Net operating loss carryforwards 34,137 29,612
Capital loss carryforwards 16,181 16,887
Foreign tax credits 1,109 1,711
Alternative minimum tax credit
carryforwards 4,026 4,026
-------- --------
Total deferred tax assets 76,698 100,551
Less valuation allowance (48,652) (46,592)
-------- --------
Deferred tax assets, net of
valuation allowance 28,046 53,959
-------- --------
Deferred tax liabilities:
Property, plant, and equipment 51,373 59,005
Other 1,629 304
-------- --------
Total deferred tax liabilities 53,002 59,309
-------- --------
Net deferred tax liability $ (24,956) $ (5,350)
======== ========
-38-
As of December 25, 1999, the Company had net operating loss
carryforwards (NOLs) available to offset future federal taxable income of
$68.1 million, of which $57.3 million have been recognized. These NOLs
expire as follows: $.7 million in 2002, $59.8 million in 2005, $6.8 million
in 2006, and $.8 million in 2012. Annual limitations on these NOLs are
approximately $18.1 million in 2000, $17.3 million in 2001, and
approximately $14.4 million thereafter. During 1999, 1998, and 1997, the
Company recognized $2.3 million, $4.1 million, and $3.8 million,
respectively, of NOL 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.
As of December 25, 1999, the Company had foreign net operating loss
carryforwards (foreign NOLs) available to offset $30.2 million of foreign
subsidiary income. These foreign NOLs have not been recognized and expire as
follows: $.2 million in 2000, $.9 million in 2001, $2.4 million in 2002,
$1.0 million in 2003, and $4.8 million in 2004. The remaining $20.9 million
of foreign NOLs are available to offset foreign subsidiary income over an
indefinite period.
The sale of Alaska Gold Company during April 1999, resulted in the
realization of an ordinary federal tax loss of approximately $70 million of
which $45 million has been recognized. The Internal Revenue Service agreed
to allow this loss as part of the comprehensive closing agreement (the
Closing Agreement), which concluded the audit of the years 1993 through
1995. For financial reporting purposes, additional recognition may occur in
future periods.
The Closing Agreement also allows a capital loss carryforward of which
$42.6 million remains available to offset capital gains of the Company
through December 30, 2000. The tax benefits relating to this unrecognized
capital loss, if any, will be recognized primarily as additions to paid-in
capital.
Income taxes paid were approximately $13.5 million in 1999, $26.8
million in 1998, and $29.9 million in 1997.
-39-
Note 8 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. The
following tables provide a reconciliation of the changes in the plans'
benefit obligations and the fair value of the plans' assets over the two-
year period ending December 25, 1999, and a statement of the plans' funded
status as of December 25, 1999 and December 26, 1998:
(In thousands)
Pension Benefits Other Benefits
1999 1998 1999 1998
Change in benefit
obligation:
Obligation at
beginning of year $ 80,227 $ 47,394 $ 8,041 $ 8,118
Service cost 3,180 2,384 19 14
Interest cost 6,834 5,305 647 633
Participant
contributions 443 177 - -
Plan amendments 3,656 - (120) -
Actuarial loss (gain) 4,012 3,343 803 (111)
Business acquisitions 12,496 25,209 - -
Benefit payments (5,371) (3,812) (1,167) (613)
Settlement (101) - - -
Foreign currency
translation
adjustment (700) 227 - -
-------- -------- -------- --------
Obligation at end
of year $ 104,676 $ 80,227 $ 8,223 $ 8,041
======== ======== ======== ========
Change in fair value
of plan assets:
Fair value of
plan assets at
beginning
of year $ 92,011 $ 59,567 $ - $ -
Actual return on
plan assets 21,915 7,693 - -
Employer contributions 2,087 3,087 1,167 613
Participant contributions 443 177 - -
Business acquisitions 13,663 25,072 - -
Benefit payments (5,371) (3,812) (1,167) (613)
Settlement (101) - - -
Foreign currency
translation adjustment (668) 227 - -
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 123,979 $ 92,011 $ - $ -
======== ======== ======== ========
-40-
(In thousands)
Pension Benefits Other Benefits
1999 1998 1999 1998
Funded status:
Funded (underfunded)
status at end of year $ 19,303 $ 11,784 $ (8,223) $ (8,041)
Unrecognized prior
service cost 5,176 2,389 (112) -
Unrecognized gain (26,348) (17,481) (370) (1,197)
-------- -------- -------- --------
Net amount recognized $ (1,869) $ (3,308) $ (8,705) $ (9,238)
======== ======== ======== ========
Effective April 1, 1999, pursuant to collective bargaining agreements,
two of the Company's single employer plans were amended increasing the
plans' benefit obligation. Changes in pension benefits for 1999 include the
plans assumed with the acquisitions of Halstead and Lincoln Brass Works,
Inc. (Lincoln), and for 1998 included the Wednesbury Tube Company plan.
The following table provides the amounts recognized in the Consolidated
Balance Sheets as of December 25, 1999 and December 26, 1998:
(In thousands)
Pension Benefits Other Benefits
1999 1998 1999 1998
Prepaid benefit cost $ 3,697 $ 1,806 $ - $ -
Accrued benefit
liability (5,566) (5,114) (8,705) (9,238)
-------- -------- -------- --------
Net amount recognized $ (1,869) $ (3,308) $ (8,705) $ (9,238)
======== ======== ======== ========
-41-
The components of net periodic benefit costs are as follows:
(In thousands)
1999 1998 1997
Pension Benefits:
Service cost $ 3,180 $ 2,384 $ 525
Interest cost 6,834 5,305 3,476
Expected return on
plan assets (8,146) (6,838) (3,956)
Amortization of prior
service cost 869 568 560
Amortization of net gain (933) (1,462) (738)
-------- -------- --------
Net periodic benefit
cost (income) $ 1,804 $ (43) $ (133)
======== ======== ========
Other Benefits:
Service cost $ 19 $ 14 $ 24
Interest cost 647 633 636
Amortization of prior
service cost (8) - -
Amortization of net gain (23) (34) (26)
-------- -------- --------
Net periodic benefit cost $ 635 $ 613 $ 634
======== ======== ========
The prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10 percent of the greater of the benefit obligation and the
market-related value of assets are amortized over the average remaining
service period of active participants.
The assumptions used in the measurement of the Company's benefit
obligation are as follows:
Pension Benefits Other Benefits
1999 1998 1999 1998
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 7.25%-8.5% 7.5%-8.5% N/A N/A
Rate of compensation
increases 3.50% 3.25% N/A N/A
Only one pension plan uses the rate of compensation increase in its
benefit formula. All other pension plans are based on length of service.
-42-
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is assumed to range from 8.2 to
8.9 percent for 2000, gradually decrease to 6.25 percent for 2004, and
remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, increasing
the assumed health care cost trend rates by one percentage point would
increase the accumulated postretirement benefit obligation by $545 thousand
and the service and interest cost components of net periodic postretirement
benefit costs by $46 thousand for 1999. Decreasing the assumed health care
cost trend rates by one percentage point would decrease the accumulated
postretirement benefit obligation and the service and interest cost
components of net periodic postretirement benefit costs for 1999 by $522
thousand and $44 thousand, respectively.
The Company sponsors voluntary employee savings plans that qualify
under Section 401(k). Compensation expense for the Company's matching
contribution to the 401(k) plans was $1.5 million in 1999, $1.2 million in
1998, and $.8 million in 1997.
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992
(the Act) was enacted. The Act mandates a method of providing for
postretirement benefits to UMWA current and retired employees, including
some retirees who were never employed by the Company. In October 1993,
beneficiaries were assigned to the Company and the Company began its
mandated contributions to the UMWA Combined Benefit Fund, a multiemployer
trust. Beginning in 1994, the Company was required to make contributions for
assigned beneficiaries under an additional multiemployer trust created by
the Act, the UMWA 1992 Benefit Plan. The ultimate amount of the Company's
liability under the Act will vary due to factors which include, among other
things, the validity, interpretation, and regulation of the Act, its joint
and several obligation, the number of valid beneficiaries assigned, and the
extent to which funding for this obligation will be satisfied by transfers
of excess assets from the 1950 UMWA pension plan and transfers from the
Abandoned Mine Reclamation Fund. Nonetheless, the Company believes it has an
adequate reserve for this liability, which is classified as other noncurrent
liabilities.
The Company maintains a nonqualified, deferred compensation plan, which
permits certain management employees to annually elect to defer, on a 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, $.5 million, and $.3 million in 1999,
1998, and 1997, 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 $3.8 million and $2.9
million at December 25, 1999 and December 26, 1998, respectively.
The Company makes contributions to certain multiemployer defined benefit
pension plan trusts that cover union employees based on collective bargaining
agreements. Contributions by employees are not required nor are they
permitted. Pension expense under the multiemployer defined benefit pension
plans was $.3 million for 1999, 1998, and 1997.
-43-
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 and $3.1 million in 1997, for
pending environmental matters. The basis for the provision is updated
information and results of ongoing remediation and monitoring programs.
Management believes that the outcome of pending environmental matters will not
materially affect the financial condition or results of operations of the
Company.
The Company is involved in certain litigation as a result of claims that
arise in the ordinary course of business, which management believes will not
have a material adverse effect on the Company's financial condition or results
of operations.
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 $5.2 million in 2000, $3.5 million in
2001, $2.8 million in 2002, $2.6 million in 2003, $2.6 million in 2004, and
$5.5 million thereafter. Total lease expense amounted to $11.3 million in 1999,
$8.8 million in 1998, and $7.7 million in 1997.
Note 10 - Other Income
Other income, net included in the Consolidated Statements of Income
consists of the following:
(In thousands)
1999 1998 1997
Rent and royalties $ 1,026 $ 1,420 $ 2,188
Interest income 6,591 5,127 3,584
Gain on disposal of properties, net 1,847 2,156 3,702
Minority interest in income of
subsidiaries - (200) (294)
-------- -------- --------
Other income, net $ 9,464 $ 8,503 $ 9,180
======== ======== ========
-44-
Note 11 - Stock Options
The Company follows APB No. 25 in accounting for its employee stock
options. Under APB No. 25, no compensation expense is recognized because the
exercise price of the Company's incentive employee stock options equals the
market price of the underlying stock on the date of grant.
Under existing plans, the Company may grant options to purchase shares
of common stock at prices not less than the fair market value of the stock
on the date of the grant. Generally, the options vest annually in 20 percent
increments over a five-year period beginning one year from the date of the
grant. Any unexercised options expire after not more than ten years. No
options may be granted after ten years from the date of plan adoption.
Additionally, the Company has granted stock options to key executives
as retention incentives and inducements to enter into employment agreements
with the Company. Generally, these special grants have terms and conditions
similar to those granted under the Company's other stock option plans.
On June 15, 1998, the Company loaned $4.5 million, on a full recourse
basis, to an officer. The officer used $1.4 million of the proceeds to
exercise options to purchase Company stock. That portion of the loan was
classified as a reduction of additional paid-in capital, while the remaining
balance of the loan was included in other assets in the Company's 1998
consolidated financial statements. The loan was paid in full during 1999.
The loan was secured by common stock of the Company. The income tax benefit
associated with the exercise of 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 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
Granted 158 34.25
Exercised (121) 10.60
Expired, cancelled, or surrendered (10) 19.65
--------
Outstanding at December 25, 1999 5,199 $ 6.94
========
-45-
(Shares in thousands)
Weighted Average
Options Exercise Price
Options exercisable at:
December 27, 1997 4,601 $ 3.07
December 26, 1998 4,194 3.46
December 25, 1999 4,410 4.17
Exercise prices for stock options outstanding at December 25, 1999,
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 L. Karp and
expire one year after Mr. Karp's separation from employment with the
Company. Mr. Karp's options have an exercise price of $2.06 per share. The
weighted average remaining life of the remaining 1.6 million shares is 6.5
years, and the weighted average exercise price of these shares is $17.93.
The weighted average fair value per option granted was $17.71 in 1999, $8.69
in 1998, and $9.31 in 1997.
As of December 25, 1999, the Company had reserved 4.2 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 1999, 1998, and 1997:
weighted average expected life of the options of six years; and no dividend
payments. The weighted average risk free interest rate used in the model was
6.84 percent for 1999, 4.85 percent for 1998, and 5.55 percent for 1997. The
volatility factor of the expected market value of the Company's common stock
was 0.433 in 1999, 0.344 in 1998, and 0.344 in 1997.
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.
-46-
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)
1999 1998 1997
Net income $ 99,279 $ 75,445 $ 69,770
SFAS No. 123 compensation expense (1,879) (1,316) (960)
-------- -------- --------
SFAS No. 123 pro forma net income $ 97,400 $ 74,129 $ 68,810
======== ======== ========
Pro forma earnings per share:
Basic $ 2.74 $ 2.09 $ 1.97
Diluted $ 2.47 $ 1.88 $ 1.76
======== ======== ========
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 September 30, 1999, the Company's subsidiary, Utah Railway Company,
purchased the stock of the Salt Lake City Southern Railroad Company, Inc.
(SLCS) for $675 thousand. SLCS operates pursuant to an easement on
approximately 25 miles of track, owned by the Utah Transit Authority, from
downtown Salt Lake City to near Draper, Utah.
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
importer and 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.
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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 final assessment of fair values of the assets and reserves
associated with the Halstead and Lincoln acquisitions was completed during
1999. The determination of final fair values resulted in adjustments
consisting of changes from initially recorded values. These adjustments
increased working capital by $.9 million and goodwill and other assets by
$16.4 million, and decreased property, plant, and equipment by $30.4 million
and other liabilities by $13.0 million. The total fair value of assets
acquired in 1998 and 1997 was $240.1 million and $69.8 million,
respectively. Liabilities assumed in these 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 $99.3 million, which is being amortized over
25 years.
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.
The following condensed pro forma consolidated results of operations
are presented as if the 1998 and 1997 acquisitions had occurred at the
beginning of 1997. This information combines the historical results of
operations of the Company and the acquired businesses after the effects of
estimated purchase accounting adjustments. The pro forma information does
not purport to be indicative of the results that would have been obtained if
the operations had actually been combined during the 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
========= =========
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Note 13 - Industry Segments
The Company's three reportable segments include its Standard Products
Division (SPD), its Industrial Products Division (IPD), and Other
Businesses. These segments are classified primarily by the markets for their
products. Performance of segments is generally evaluated by their operating
income.
SPD manufactures copper tube and fittings, plastic fittings, and line
sets. These products are manufactured in the U.S., Canada, and Europe and
are sold primarily to wholesalers.
IPD manufactures brass rod, impact extrusions, and forgings as well as
a variety of end-products including plumbing brass; automotive components;
valves and fittings; and specialty copper, copper-alloy, and aluminum
tubing. These products are sold primarily to OEM customers.
The Other Businesses segment comprises primarily a short line railroad.
Summarized segment and geographic information is shown in the following
tables. Geographic sales data indicates the location from which products are
shipped. Unallocated expenses include general corporate expenses, plus
certain charges or credits not included in segment activity.
Segment Information:
(In thousands)
1999 1998 1997
Net sales:
Standard Products Division $ 858,525 $ 624,437 $ 560,787
Industrial Products Division 290,270 274,597 292,869
Other Businesses 22,263 31,637 35,688
Elimination of intersegment sales (2,314) (1,280) (347)
---------- -------- --------
$ 1,168,744 $ 929,391 $ 888,997
========== ======== ========
Depreciation and amortization:
Standard Products Division $ 26,495 $ 15,713 $ 12,410
Industrial Products Division 7,936 5,948 5,057
Other Businesses 787 1,699 1,479
General corporate 1,768 1,539 2,052
---------- -------- --------
$ 36,986 $ 24,899 $ 20,998
========== ======== ========
Operating income:
Standard Products Division $ 129,141 $ 83,010 $ 71,659
Industrial Products Division 29,935 28,325 29,764
Other Businesses 3,297 5,661 3,458
Unallocated expenses (14,447) (8,187) (5,172)
---------- -------- --------
$ 147,926 $ 108,809 $ 99,709
========== ======== ========
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(In thousands)
1999 1998 1997
Expenditures for long-lived assets:
Standard Products Division $ 31,089 $ 198,135 $ 49,880
Industrial Products Division 5,063 16,735 8,273
Other Businesses 960 4,782 2,727
---------- -------- --------
$ 37,112 $ 219,652 $ 60,880
========== ======== ========
Segment assets:
Standard Products Division $ 599,596 $ 610,914 $ 357,646
Industrial Products Division 136,586 144,004 127,609
Other Businesses 40,088 50,446 51,378
General corporate 127,810 69,330 74,143
---------- -------- --------
$ 904,080 $ 874,694 $ 610,776
========== ======== ========
Geographic Information:
(In thousands)
1999 1998 1997
Net sales:
United States $ 1,015,968 $ 754,024 $ 753,771
Foreign 152,776 175,367 135,226
---------- -------- --------
$ 1,168,744 $ 929,391 $ 888,997
========== ======== ========
Long-lived assets:
United States $ 425,214 $ 448,852 $ 264,747
Foreign 38,120 43,518 29,141
---------- -------- --------
$ 463,334 $ 492,370 $ 293,888
========== ======== ========
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Note 14 - Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
1999
Net sales $ 287,840 $ 293,342 $ 287,880 $ 299,682
Gross profit (1) 66,100 73,002 71,539 71,572
Net income 21,683 25,445 26,340 25,811
Diluted earnings per share 0.55 0.64 0.66 0.66
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
<FN>
(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 25, 1999 and December 26, 1998, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 25, 1999.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Mueller Industries, Inc. at December 25, 1999 and December 26, 1998, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 25, 1999, in conformity with
accounting principles generally accepted in the United States.
/S/ERNST & YOUNG LLP
Memphis, Tennessee
February 4, 2000
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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 1999 and 1998 were as
follows:
High Low Close
1999
Fourth quarter $ 36 15/16 $ 28 5/16 $ 32 7/8
Third quarter 35 5/8 28 28 3/8
Second quarter 33 7/8 21 1/8 32 1/2
First quarter 27 19 3/8 22 5/8
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
As of February 28, 2000, the number of holders of record of Mueller's common
stock was approximately 3,000. On February 28, 2000, the closing price for
Mueller's common stock on the New York Stock Exchange was $27 15/16.
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)
1999 1998 (1) 1997 (1) 1996 1995
For the fiscal year:
Net sales $ 1,168,744 $ 929,391 $ 888,997 $ 718,312 $ 678,838
Operating income 147,926 108,809 99,709 90,462 64,011
Net income 99,279 75,445 69,770 61,173 44,823
Diluted earnings
per share (2) 2.51 1.90 1.78 1.57 1.17
At year-end:
Total assets 904,080 874,694 610,776 509,357 450,835
Long-term debt 118,858 174,569 53,113 44,806 59,653
<FN>
(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 stock 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,
AK Steel Corporation
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
Executive Officers
Harvey L. Karp Chairman of the Board
William D. O'Hagan President and Chief Executive Officer
Lee R. Nyman Senior Vice President
Manufacturing/Engineering
William H. Hensley Vice President, General Counsel and
Secretary
Kent A. McKee Vice President and
Chief Financial Officer
Other Officers and Management
John B. Hansen Vice President, Strategic Initiatives
Tommy L. Jamison Vice President, Strategic Engineering
Services
Michael E. Stoll Vice President, Purchasing
Richard W. Corman Corporate Controller
James E. Browne Assistant Secretary
Standard Products Division
Roy C. Harris Vice President and General Manager
Larry D. Birch Vice President, Sales and Marketing
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Gregory L. Christopher Vice President, Supply Chain Management
Bruce R. Clements Vice President, Manufacturing,
Copper Tube
Daniel R. Corbin Vice President, Fittings Manufacturing
Robert A. Haskins Vice President, Domestic Wholesale
Louis F. Pereira General Manager, Canadian Operations
Michael L. Beasley Director, Information Systems
Andrew A. Sippel Controller
B&K Industries
Peter D. Berkman President
European Operations
Robert L. Fleeman Vice President and General Manager
Robert 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
Gerald J. Leary Vice President and General Manager,
Engineered Products
William F. Navarre Vice President, Manufacturing
David G. Rice Controller
Other Businesses
Gary L. Barker President, Utah Railway Company
Michael W. Baum President,
Mining Remedial Recovery Company
Scott Miller Vice President,
Arava Natural Resources Company
John E. West III Executive Vice President,
Utah Railway Company
-56-
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 12, 2000.
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:
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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