MUELLER INDUSTRIES, INC.
2000 ANNUAL REPORT
Looking Ahead
Mueller Industries, Inc. (NYSE:MLI) is America's leading manufacturer
of copper tube and fittings; brass and copper alloy rod, bar, and shapes;
aluminum and brass forgings; aluminum and copper impact extrusions; plastic
fittings and valves; refrigeration valves and fittings; and fabricated
tubular products. Ranked among the top 50 of all North American metals
companies, Mueller's operations are located throughout the United States
and in Mexico, Canada, France, and the United Kingdom. The Company also
owns a short line railroad in Utah.
One commentator recently had this to say about Mueller: "Following a
long period of heavy reinvestment, current management has clearly
established Mueller as the industry's low-cost producer. Management is
capitalizing on its strengths to increase customer service and has become a
key supplier to virtually all major distributors."
CONTENTS
Financial Highlights 2
Letter to Stockholders, Customers, and Employees 4
Ten-Year Review 8
Standard Products Division 11
Industrial Products Division 12
Company Overview 13
Financial Review 15
Corporate Information 54
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MUELLER INDUSTRIES, INC.
Financial Highlights
(Dollars in thousands, except per share data)
2000 1999 1998 1997 1996
Summary of Operations
Net sales $ 1,206,168 $ 1,168,744 $ 929,391 $ 888,997 $ 718,312
Product shipments
(in millions of pounds) 785.9 815.2 644.6 545.3 447.0
Net income $ 92,690 $ 99,279 $ 75,445 $ 69,770 $ 61,173
Diluted earnings per share $ 2.43 $ 2.51 $ 1.90 $ 1.78 $ 1.57
Significant Year-End Data
Cash and cash equivalents $ 100,268 $ 149,454 $ 80,568 $ 69,978 $ 96,956
Ratio of current assets to current liabilities 3.4 to 1 2.9 to 1 2.7 to 1 3.1 to 1 3.5 to 1
Long-term debt (including current portion) $ 106,884 $ 149,870 $ 194,549 $ 72,093 $ 59,650
Debt as a percent of total capitalization 14.8% 20.8% 27.9% 14.7% 14.6%
Stockholders' equity $ 614,105 $ 569,430 $ 502,122 $ 418,040 $ 348,082
Book value per share $ 18.41 $ 16.31 $ 14.02 $ 11.94 $ 9.98
Capital expenditures $ 63,458 $ 40,115 $ 55,440 $ 36,865 $ 18,868
-2-
In The Year 2000:
* "American Metal Market" magazine ranked Mueller number one among all
North American metals companies for return on assets.
* Mueller posted its ninth consecutive year of increased operating income,
and set a new Company record for pretax earnings.
* The Company reduced its long-term debt by 29 percent from 1999 levels,
and restructured its bank credit facility to reduce its borrowing rate
on funded debt by 85 basis points.
* Mueller's debt-to-total capitalization improved more than 25 percent,
dropping from 20.8 percent in 1999 to 14.8 percent.
For additional information, see the Ten-Year Review on page 8.
Industry Accolades
The year 2000 was a year of accolades for Mueller Industries, Inc. For
the first time in its history, the firm moved into the ranks of the
"Fortune" 1000. It was chosen by "Forbes" magazine for its "Platinum 400",
a list of, as "Forbes" puts it, "exceptional big corporations that pass a
stringent set of hurdles measuring both long and short-term growth and
profitability." Mueller was also recognized by "CFO" magazine as one of the
top four firms in the metals industry for tax efficiency, and ranked number
one in return on assets in the industry trade journal "American Metal
Market". In light of all these accomplishments, it was no surprise when, in
early 2001, Mueller President and CEO Bill O'Hagan was named "Copper Man of
the Year" by the Copper Club, an international industry association.
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LETTER TO STOCKHOLDERS, CUSTOMERS, AND EMPLOYEES
Mueller achieved many important goals in the year 2000, which will
result in opportunities for growth and profit enhancement in the years
ahead.
Net sales totaled $1.21 billion in 2000, up from $1.17 billion in
1999. Net income was $92.7 million in 2000 compared with $99.3 million in
1999. Net income in 2000 was affected by a significant rise in the tax rate
applicable to Mueller's earnings, from 31.9 percent in 1999 to 36.9 percent
in 2000. The tax rate increase was due primarily to having recognized the
majority of various historical tax benefits in prior years. Income before
income taxes increased in 2000 to $146.9 million compared with $145.7
million in 1999.
The year 2000 began strongly, and in the first two quarters, Mueller
achieved record results in virtually every category: net sales, operating
income, net income, and earnings per share. In the second half of the year
business slowed, reflecting the reduced momentum in the economy as a whole.
An added factor in the latter half of the year was the increase in raw
material and energy costs, which affected our margins. Nonetheless, Mueller
set a record for operating income and pretax earnings in 2000, and enjoyed
a solid and productive year.
U.S. Copper Tube Business Had an Excellent Year
Our major initiative in 2000 was to complete a capital improvement
program at our copper tube mill in Wynne, Arkansas. This program, budgeted
at $24 million, had the objective of reducing the mill's conversion costs
to a world-class level, by installing state-of-the-art extrusion and
finishing equipment. We are pleased to report that the program was
completed on time and under budget.
Our new copper refining and casting facility located in Fulton,
Mississippi operated very well during the year. This facility gives Mueller
the flexibility of using the most economical mix of copper scrap and copper
cathode. During the year the price differential between scrap and cathode
was a favorable factor in reducing the impact of higher metal costs.
Overall, our U.S. copper tube business had a strong year as demand for
tube remained high and margins were satisfactory. Also, Mueller's copper
tube line sets business had an outstanding year with record sales and
profits.
Fittings Business Had A Solid Year
Our copper and plastic fittings business in 2000 fell shy of the
results achieved in 1999. Pounds of product sold and shipped declined
slightly and profit margins also declined, more so in plastic than in
copper fittings.
-4-
Good progress was made in upgrading our distribution systems and
integrating our supporting information systems. Also, we made substantial
investments to improve our cold-header operations, including the
installation of a new copper rod upcaster. In 2001, we expect to make
additional investments in the fittings business to further reduce costs and
improve efficiencies. We believe our fittings manufacturing operations are
currently among the best in the world.
European Modernization Plan to be Completed in 2001
Mueller's European copper tube business operated at a loss in 2000,
although the loss decreased from the prior year. Obviously, we are not
satisfied with these results and have taken initiatives to improve this
situation. In 2000, Mueller launched a $40 million capital program to
significantly reduce conversion costs at our Bilston, England copper tube
facility. The program includes increasing casting capacity, and installing
a new extrusion press (similar to the presses used in our U.S. tube
operations) and drawing equipment. We expect to complete this project by
the end of 2001. The benefits from this program should commence soon
thereafter. We are confident that the European copper tube market will be a
rewarding venue for Mueller when our conversion costs are reduced to
planned levels.
Highlights of Industrial Products
Industrial products operating earnings increased about 2 percent in
2000 compared with 1999. Sales increased 4.2 percent due to the acquisition
of two small companies.
In our principal industrial products business, brass rod, competitive
pressures increased as the year progressed. This adversely affected
margins. Much the same can be said of our other businesses in the
industrial sector. Nonetheless, the Industrial Products Division achieved
the best earnings result in its history.
During the year, we made substantial progress in the installation of a
new horizontal continuous caster in our Port Huron, Michigan brass rod
plant. Additional improvements will be made to drawing equipment and
similar processes in 2001. In addition, a new automated lube system was
added to our aluminum impacts plant in Marysville, Michigan. These
investments continue to drive down our manufacturing costs.
Other Developments
B&K, our subsidiary that imports and distributes residential and
commercial plumbing products, had a challenging year in 2000. Customer
service was affected by the introduction of a new information system, and
profit margins generally declined from the levels of a year ago. We believe
these factors are now behind us and look forward to B&K making progress in
2001.
Utah Railway's operating income increased by 10 percent in 2000, but
the closure of a large customer's coal mine late in the year reduced fourth
quarter earnings. We are endeavoring to secure replacement business.
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Stock Repurchase Program
Since Mueller's stock repurchase program commenced in October 1999,
the company has acquired 2.3 million shares at an average price of $26.98
per share. The Board of Directors has authorized the repurchase of a total
of 10 million shares, subject to management's discretion. There is no
assurance that additional shares will be repurchased since such decisions
are based on competing alternate uses of available funds.
Mueller's Financial Position is Strong
We have always placed a high priority on maintaining a strong balance
sheet. A strong balance sheet is our best defense and it is our best
offense.
We ended 2000 with $100.3 million in cash and a low 14.8 percent debt-
to-total capitalization ratio. Our current ratio is an excellent 3.4 to 1.
Cash flow continues to be strong and we are capable of funding our capital
improvement programs and our share buy-back program from internal sources.
Moreover, toward year-end Mueller restructured and increased its bank
credit facility to $200 million. By doing so, we reduced our borrowing rate
on funded debt by 85 basis points. The terms of this credit facility are
comparable to a single A credit rating which reflects the underlying
strength of our financial position.
Business Outlook for 2001
The economic indicators for the housing and construction market are
more difficult to assess today than at any time in the past 10 years.
The single most important indicator, interest rates, has recently
declined and it is likely that the Federal Reserve Bank will continue to
ease interest rates. Thirty-year mortgage rates have also declined from a
high of 8.7 percent in May 2000, to less than 7.0 percent recently. This
should provide a strong stimulus to the housing market as it makes
purchasing a home more affordable. In addition, the supply of unsold new
homes is at a near record low.
On the other hand, the growth rate of the U.S. economy has clearly
slowed and there is ample evidence of cutbacks in manufacturing and retail
activity. Consumer confidence has declined. And imports have been attracted
by the strength of the U.S. dollar.
So far, we see only a modest drop in demand for housing, but we are
alert to the changing economic circumstances and are prepared financially
and operationally to make adjustments, as needed.
That being said, we are cautiously optimistic about 2001. Even an
economic slowdown has its benefits in terms of added opportunities to find
fairly priced acquisitions and to fine tune our operations. We believe that
Mueller will emerge from any economic slowdown stronger than ever before.
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In Closing, A Word of Thanks
This past summer, Robert J. Pasquarelli resigned as a director, and
accepted the position of Vice President and General Manager of our European
operations. We thank him for his 10 years of service as a director, and we
are excited that he has joined our management team. We believe his 30 years
of experience in the metals industry will be of great value to our company.
Mr. Gary S. Gladstein, a CPA with broad experience in financial
markets, was appointed a director in June 2000. Mr. Gladstein has also been
appointed Chairman of Mueller's Audit Committee. He previously served as a
director from 1990 to 1994.
Mueller is also fortunate to have attracted and retained employees who
are talented, dedicated, and enthusiastic. Our successes are due to their
efforts.
Sincerely,
/S/HARVEY L. KARP
Harvey L. Karp
Chairman of the Board
/S/WILLIAM D. O'HAGAN
William D. O'Hagan
President and Chief Executive Officer
March 16, 2001
[PHOTO]
Harvey L. Karp, Chairman of the Board, and William D. O'Hagan,
President and Chief Executive Officer
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MUELLER INDUSTRIES, INC.
Ten-Year Review
Selected Financial Data
(Dollars in thousands, except per share data)
5-YEAR
COMPOUND
GROWTH 2000 1999 1998 1997 1996
INCOME STATEMENT DATA
Net sales $ 1,206,168 $ 1,168,744 $ 929,391 $ 888,997 $ 718,312
Cost of goods sold 925,311 886,531 720,293 704,801 554,570
---------- ---------- -------- -------- --------
Gross profit 16.8% 280,857 282,213 209,098 184,196 163,742
Depreciation and amortization 37,457 36,986 24,899 20,998 18,472
Selling, general, and administrative expense 94,754 97,301 75,390 63,489 54,808
---------- ---------- -------- -------- --------
Operating income 18.4% 148,646 147,926 108,809 99,709 90,462
Interest expense (9,287) (11,681) (5,839) (4,968) (5,346)
Environmental reserves (2,049) - (2,133) (3,100) (2,045)
Other income, net 9,603 9,464 8,503 9,180 5,341
---------- ---------- -------- -------- --------
Income before income taxes 17.9% 146,913 145,709 109,340 100,821 88,412
Income tax expense (54,223) (46,430) (33,895) (31,051) (27,239)
---------- ---------- -------- -------- --------
Net income 15.7% $ 92,690 $ 99,279 $ 75,445 $ 69,770 $ 61,173
========== ========== ======== ======== ========
Adjusted weighted average shares (000) 38,096 39,605 39,644 39,250 38,993
Diluted earnings per share $ 2.43 $ 2.51 $ 1.90 $ 1.78 $ 1.57
========== ========== ======== ======== ========
BALANCE SHEET DATA
Cash and cash equivalents $ 100,268 $ 149,454 $ 80,568 $ 69,978 $ 96,956
Current assets 405,171 440,746 382,324 309,051 274,712
Working capital 287,322 287,685 239,750 208,494 195,756
Total assets 910,276 904,080 874,694 610,776 509,357
Current liabilities 117,849 153,061 142,574 100,557 78,956
Debt 106,884 149,870 194,549 72,093 59,650
Stockholders' equity 614,105 569,430 502,122 418,040 348,082
SELECTED OPERATING DATA
Cash provided by operations 16.6% $ 118,474 $ 164,755 $ 102,681 $ 52,930 $ 78,700
Capital expenditures $ 63,458 $ 40,115 $ 55,440 $ 36,865 $ 18,868
Number of employees 4,291 4,356 4,788 3,378 2,339
Current ratio 3.4 to 1 2.9 to 1 2.7 to 1 3.1 to 1 3.5 to 1
Return on average equity 15.7% 18.5% 16.4% 18.2% 19.3%
Debt to total capitalization 14.8% 20.8% 27.9% 14.7% 14.6%
Outstanding shares (000) 33,358 34,919 35,808 35,017 34,870
Book value per share $ 18.41 $ 16.31 $ 14.02 $ 11.94 $ 9.98
========== ========== ======== ======== ========
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MUELLER INDUSTRIES, INC.
Ten-Year Review (continued)
Selected Financial Data
(Dollars in thousands, except per share data)
1995 1994 1993 1992 1991
INCOME STATEMENT DATA
Net sales $ 678,838 $ 550,003 $ 501,885 $ 517,339 $ 441,431
Cost of goods sold 549,884 448,467 403,775 429,707 388,863
-------- -------- -------- -------- --------
Gross profit 128,954 101,536 98,110 87,632 52,568
Depreciation and amortization 15,452 12,689 14,160 12,505 13,294
Selling, general, and administrative expense 49,491 44,895 45,923 45,809 40,912
-------- -------- -------- -------- --------
Operating income 64,011 43,952 38,027 29,318 (1,638)
Interest expense (4,168) (6,718) (5,759) (5,694) (6,114)
Environmental reserves (1,421) (2,914) (1,060) - (2,700)
Other income, net 6,127 6,504 2,235 675 (39,283)
-------- -------- -------- -------- --------
Income before income taxes 64,549 40,824 33,443 24,299 (49,735)
Income tax expense (19,726) (12,898) (12,307) (7,633) 5,994
-------- -------- -------- -------- --------
Net income $ 44,823 $ 27,926 $ 21,136 $ 16,666 $ (43,741)
======== ======== ======== ======== ========
Adjusted weighted average shares (000) 38,298 39,560 41,772 40,220 38,984
Diluted earnings per share $ 1.17 $ 0.71 $ 0.51 $ 0.41 $ (1.12)
======== ======== ======== ======== ========
BALANCE SHEET DATA
Cash and cash equivalents $ 48,357 $ 34,492 $ 77,336 $ 44,459 $ 7,541
Current assets 211,038 183,551 194,411 182,381 152,108
Working capital 143,154 116,330 146,981 120,855 62,625
Total assets 450,835 430,755 369,743 372,547 334,786
Current liabilities 67,884 67,221 47,430 61,526 89,483
Debt 75,902 94,736 62,711 69,477 67,410
Stockholders' equity 285,875 241,948 222,114 204,421 152,609
SELECTED OPERATING DATA
Cash provided by operations $ 54,968 $ 21,963 $ 50,987 $ 38,714 $ 5,618
Capital expenditures $ 40,980 $ 48,152 $ 11,083 $ 10,952 $ 11,825
Number of employees 2,274 2,256 2,010 2,055 2,452
Current ratio 3.1 to 1 2.7 to 1 4.1 to 1 3.0 to 1 1.7 to 1
Return on average equity 17.0% 12.0% 9.9% 9.3% N/A
Debt to total capitalization 21.0% 28.1% 22.0% 25.4% 30.6%
Outstanding shares (000) 34,699 34,796 38,333 40,000 40,000
Book value per share $ 8.24 $ 6.95 $ 5.79 $ 05.11 $ 3.82
======== ======== ======== ======== ========
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[GRAPH]
Net Sales
($ millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Net Sales $441 $517 $502 $550 $679 $718 $889 $929 $1,169 $1,206
[GRAPH]
Net Income
($ millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Net Income $(44) $17 $21 $28 $45 $61 $70 $75 $99 $93
[GRAPH]
Total Assets
($ millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Total Assets $335 $373 $370 $431 $451 $509 $611 $875 $904 $910
[GRAPH]
Stockholders' Equity
($ millions)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Stockholders'
Equity $153 $204 $222 $242 $286 $348 $418 $502 $569 $614
[GRAPH]
Debt-to-Total Capitalization
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Debt-to-Total
Capitalization 30.6% 25.4% 22.0%2 28.1% 21.0% 14.6% 14.7% 27.9% 20.8% 14.8%
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STANDARD PRODUCTS DIVISION
Appropriate for a year that began a new decade, a new century, and
a new millennium, the year 2000 was one that pointed toward the future
at Mueller Industries. And nowhere in the Company was that focus more
evident than in Mueller's Standard Products Division. Net sales for the
division advanced nearly 3 percent over 1999, and 41 percent ahead of
net sales two years ago. Sharply higher raw materials costs in the
second half of the year, including increased copper and plastic resin
costs, coupled with higher energy costs, put pressure on operating
margins. However, the division's operating income dipped less than 1
percent compared to the record year it posted in 1999, and still
reflected a 55 percent increase over operating income two years before.
Copper Tube Mill Modernized
More importantly, during the year the Company made significant
capital investments in certain operations of the Standard Products
Division, assuring its ability to remain competitive and continue to
grow its share of the copper tube, copper fittings, and plastic
fittings markets both in the United States and abroad. At Mueller's
Wynne, Arkansas copper tube mill, some $22 million was invested in 2000
to update the extrusion, drawing, and finishing equipment employed at
the mill. This project, finished on time and under budget last year,
was designed to improve productivity and reduce staffing costs, as well
as improve the mill's conversion costs and yield. Already the mill has
reduced staff by 20 percent, and is achieving production which formerly
took six to seven days in only five days. Additional benefits are
expected from the Wynne mill as it completes the transition to the new
equipment and processes.
Moving Forward in Europe
In Europe, where Mueller is seeking to replicate its domestic
success in plant modernization and cost reduction, the Company launched
its most ambitious capital program yet. Some $40 million is being
invested in Mueller's copper tube mill in Bilston, England. The Bilston
project includes the installation of new casting, extrusion, and
drawing equipment, and poses the challenge of operating the existing
production lines while installing the new equipment. Former Mueller
director, now Vice President and General Manager of European
Operations, Bob Pasquarelli is directing that effort, and focusing his
team on building a state-of-the-art manufacturing infrastructure from
which Mueller can better penetrate the European markets.
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INDUSTRIAL PRODUCTS DIVISION
There's an ancient proverb that says a journey of a thousand miles
must begin with a single step. Mueller's Industrial Products Division
launched its voyage into the new century with small advances in net sales
and earnings. Net sales increased 4 percent over 1999, and operating income
was up 2 percent over the previous year. However, the division
simultaneously initiated a number of significant steps during the year,
each designed to enhance its agility in moving forward in the future.
Acquisitions Expand Product Line
In the first half of the year, Mueller made two acquisitions to add
depth and breadth to the Industrial Products Division. Micro Gauge, Inc.
and its related business, Microgauge Machining, Inc., with sales in the
$13-14 million range, were acquired for just over $9 million. Micro Gauge
specializes in the manufacture of high volume automotive parts, and
complements Mueller's impact extrusion line. By acquiring Micro Gauge,
Mueller brought in-house the specialty machining capabilities that it had
previously outsourced to Micro Gauge.
The second acquisition was Propipe Technologies, Inc., a fabricator of
gas train manifold systems, which was purchased for approximately $6
million. With 1999 sales in the $7-8 million range, Propipe's products
augment and extend Mueller's Lincoln Brass product line, and are used by
such well-known customers as Frigidaire, Trane, and Lennox. Both the Micro
Gauge and Propipe acquisitions were fully assimilated in the 2000 fiscal
year.
Capital Investments Enhance Productivity
Capital investments in the Industrial Products Division last year were
not limited to acquisitions. A major move forward began at the Port Huron,
Michigan brass rod mill, where Mueller initiated the installation of a new
horizontal continuous caster. This $10 million investment replaces higher
cost technology and is expected to increase casting capacity, improve
yield, and reduce conversion costs.
Also, an automated lube line was added at the division's Marysville,
Michigan plant at a cost of approximately $2 million. This addition, which
lubricates parts before they are formed, has significantly improved
production in Mueller's impact extrusion operation, producing, in one
shift, output comparable to that of three shifts prior to installation.
So, in its relentless quest to drive down manufacturing costs, and
maximize its service to its customers by extending its product lines,
upgrading distribution systems and rationalizing production, Mueller made
meaningful strides in 2000. The century may have only begun, but Mueller is
looking far ahead, to an even more productive future.
-12-
COMPANY OVERVIEW
Standard Products Division
U.S. Copper Tube
PLANTS:
Fulton, Mississippi
Wynne, Arkansas
Clinton, Tennessee
PRODUCTS AND APPLICATIONS
Water tube, in straight lengths and coils for plumbing and
construction
Dehydrated coils and nitrogen-charged straight lengths for
refrigeration and air-conditioning
Industrial tube, in straight lengths and level-wound coils, for
fittings, redraw, etc.
Line sets for controlling the flow of refrigerant gases
CUSTOMERS
Plumbing wholesalers, home centers, and hardware wholesalers
and co-ops
Air-conditioning and refrigeration wholesalers and OEMs
Mueller's copper fitting plants and OEMs
Wholesalers and OEMs
Copper Fittings
PLANTS
Fulton, Mississippi
Covington, Tennessee
Port Huron, Michigan
Strathroy, Ontario, Canada
PRODUCTS AND APPLICATIONS
Over 1,500 wrot copper elbows, tees and adapters, and assorted cast
copper fittings for plumbing, heating, air-conditioning, and
refrigeration
CUSTOMERS
Plumbing and air-conditioning wholesalers, home centers, hardware
wholesalers and co-ops, and OEMs
Plastic Fittings
PLANTS
Kalamazoo, Michigan
Cerritos, California
Upper Sandusky, Ohio
PRODUCTS AND APPLICATIONS
A broad line of over 1,000 PVC and ABS plastic fittings and valves
for drainage, waste and ventilation, in housing and commercial
construction, recreational vehicles, and manufactured housing
CUSTOMERS
Plumbing wholesalers, home centers, hardware wholesalers and co-ops,
and distributors to the manufactured housing and recreational
vehicle industry
European Copper Tube
PLANTS
Bilston, Great Britain
Longueville, France
PRODUCTS AND APPLICATIONS
Copper tube in various lengths, diameters and hardnesses for
plumbing, refrigeration, and heating
Industrial tube for redraw, copper fittings, etc.
-13-
CUSTOMERS
Builders' merchants, plumbing, refrigeration, and heating wholesalers
OEMs
Industrial Products Division
Brass Rod
PLANTS
Port Huron, Michigan
PRODUCTS AND APPLICATIONS
A broad range of rounds, squares, hexagons, and special shapes in
free machining, thread rolling, and forging alloys for numerous end
products, including plumbing brass, valves and fittings, and
industrial machinery and equipment
CUSTOMERS
OEMs, contract machining companies and distributors
Engineered Products
PLANTS
Port Huron, Michigan
Marysville, Michigan
Brighton, Michigan
Hartsville, Tennessee
Jacksboro, Tennessee
Waynesboro, Tennessee
Middletown, Ohio
North Wales, Pennsylvania
Salisbury, Maryland
PRODUCTS AND APPLICATIONS
Brass and aluminum hot metal forgings in assorted alloys for
plumbing brass, valves and fittings, and industrial machinery and
equipment
Cold-formed aluminum and copper products for automotive, industrial,
and recreational components
High volume machining of aluminum, steel , brass and cast iron,
forgings, impacts, and castings for automotive applications
Valves and custom OEM products for refrigeration and air-
conditioning applications
Custom valve and other metal assemblies for the gas appliance and
barbecue grill markets
Shaped and formed tube, produced to tight tolerances, for baseboard
heating, appliances, medical instruments, etc.;
coaxial cables
CUSTOMERS
OEMs
Other Businesses
Utah Railway Company, established in 1912, hauls coal to connections
with national carriers, power plants and to other destinations. Utah
Railway Company also provides train switching services in Utah's
central corridor.
-14-
FINANCIAL REVIEW
Overview
Mueller Industries, Inc. is a leading manufacturer of copper tube and
fittings; brass and copper alloy rod, bar and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and
valves; refrigeration valves and fittings; and fabricated tubular products.
Mueller's plants are located throughout the United States and in Canada,
France, and Great Britain. The Company also owns a short line railroad in
Utah.
The Company's businesses are managed and organized into three
segments: (i) Standard Products Division (SPD); (ii) Industrial Products
Division (IPD); and (iii) Other Businesses. SPD manufactures and sells
copper tube, and copper and plastic fittings and valves. Outside of the
United States, SPD manufactures copper tube in Europe and copper fittings
in Canada. SPD sells these products to wholesalers in the HVAC (heating,
ventilation, and air-conditioning), plumbing and refrigeration markets, and
to distributors to the manufactured housing and recreational vehicle
industries. IPD manufactures and sells brass and copper alloy rod, bar, and
shapes; aluminum and brass forgings; aluminum and copper impact extrusions;
refrigeration valves and fittings; fabricated tubular products; and gas
valves and assemblies. IPD sells its products primarily to original
equipment manufacturers (OEMs), many of which are in the HVAC, plumbing and
refrigeration markets. Other Businesses is composed primarily of Utah
Railway Company. SPD and IPD account for more than 98 percent of
consolidated net sales and more than 86 percent of consolidated total
assets.
New housing starts and commercial construction are important
determinants of the Company's sales to the HVAC, refrigeration, and
plumbing markets because the principal end use of a significant portion of
the Company's products is in the construction of single and multi-family
housing and commercial buildings.
Profitability of certain of the Company's product lines depends upon
the "spreads" between the cost of raw material and the selling prices of
its completed products. The open market prices for copper cathode and
scrap, for example, influence the selling price of copper tubing, a
principal product manufactured by the Company. The Company attempts to
minimize the effects of fluctuations in material costs by passing through
these costs to its customers. Spreads fluctuate based upon competitive
market conditions.
-15-
Results of Operations
2000 PERFORMANCE COMPARED WITH 1999
Consolidated net sales in 2000 were $1,206.2 million or 3.2 percent
higher than $1,168.7 million in 1999. Pounds of product sold totaled 785.9
million in 2000 or 3.6 percent less than the 815.2 million pounds sold in
1999. The decrease in pounds sold was a result of production interruptions
in the first quarter and the slower economic environment in the second half
of the year. Net selling prices generally fluctuate with changes in raw
material prices; therefore, pounds sold is an additional measurement of the
Company's performance. The COMEX average copper price in 2000 was
approximately 16.4 percent higher than the 1999 average. This change
impacts the Company's net sales and cost of goods sold.
Cost of goods sold increased $38.8 million to $925.3 million in 2000.
This increase is primarily attributable to higher raw material costs,
mostly copper. Gross profit was 23.3 percent of net sales in 2000 compared
with 24.1 percent in 1999. The decline in gross profit is attributable to
lower volumes and increases in raw material and energy costs in the second
half of 2000.
Depreciation and amortization increased to $37.5 million in 2000
compared with $37.0 million in 1999. This increase was due to acquisitions
in 2000 and capital expenditures in recent years.
Selling, general, and administrative expense decreased to $94.8
million in 2000 reflecting lower volume.
Interest expense decreased to $9.3 million in 2000 from $11.7 million
in 1999. The Company capitalized interest of $1.2 million for major capital
improvement projects in 2000 compared with $0.4 million in 1999. The
provision for environmental reserves totaled $2.0 million in 2000 whereas
none was required in 1999. Other income increased to $9.6 million in 2000
from $9.5 million in 1999.
The Company provided $54.2 million for income taxes in 2000, of which
$8.9 million was deferred. Current income tax expense of $45.3 million
increased from 1999 primarily due to the 1999 realization of an ordinary
loss as a consequence of the sale of natural resource property. The 36.9
percent effective tax rate for 2000, compared with the 1999 rate of 31.9
percent, reflects the Company having recognized the majority of historical
tax benefits in prior years.
The Company's employment was 4,291 at the end of 2000 compared with
4,356 at the 1999 year-end.
Standard Products Division
Net sales by SPD were $882.4 million in 2000 compared with $858.5
million in 1999 for a 2.8 percent increase. Operating income was $128.5
million in 2000 compared with $129.1 million in 1999. Higher raw material
and energy costs were factors in reducing margins and operating income.
During 2000, operating income was reduced by a $2.1 million charge for
expected severance and termination costs associated with our European
modernization program.
-16-
Industrial Products Division
IPD's net sales were $302.5 million in 2000 compared with $290.3
million in 1999. During 2000, the Company completed two acquisitions: (i)
Micro Gauge, Inc. and a related business, Microgauge Machining, Inc., a
specialized machining operation and (ii) Propipe Technologies, Inc., a
fabricator of gas train manifold systems. Operating income was $30.6
million in 2000 compared with $29.9 million in 1999. Increased volume and
lower manufacturing costs accounted for the profit improvement.
Other Businesses
Utah Railway Company hauled 6.0 million tons of coal in 2000, 12.6
percent more than in 1999. During 2000, a fire occurred at one of the coal
mines served by Utah Railway; future shipments will likely be impacted.
Segment revenue totaled $24.7 million in 2000 compared with $22.3 million
in 1999. Operating income was $3.4 million in 2000 compared with $3.3
million in 1999.
1999 PERFORMANCE COMPARED WITH 1998
Consolidated net sales in 1999 were $1,168.7 million or 25.7 percent
higher than $929.4 million in 1998. Pounds of product sold totaled 815.2
million in 1999 or 26.5 percent more than the 644.6 million pounds sold in
1998. These increases were due primarily to acquisitions which occurred
during 1998. The COMEX average copper price in 1999 was approximately 4
percent lower than the 1998 average.
During 1998, the Company completed three acquisitions: (i) Halstead
Industries, Inc. (Halstead), which operates a copper tube mill in Wynne,
Arkansas and a line sets factory in Clinton, Tennessee; (ii) B&K
Industries, Inc. (B&K), based in Elk Grove Village, Illinois, a significant
importer and distributor of residential and commercial plumbing products in
the United States that sells through all major distribution channels
including hardware co-ops, home centers, plumbing wholesalers, hardware
wholesalers, OEMs, and manufactured housing wholesalers; and (iii) Lincoln
Brass Works, Inc., which produces custom valve assemblies, custom metal
assemblies, gas delivery systems, and tubular products, primarily for the
gas appliance market, at two manufacturing facilities in Tennessee.
Businesses acquired in 1998 accounted for approximately $341.8 million
of the Company's 1999 net sales and those acquired in 1997 added
approximately $148.8 million. The Halstead acquisition was completed in the
fourth quarter of 1998 and the other two acquisitions were completed in the
third quarter of 1998. Core product lines that existed prior to the 1998
acquisitions accounted for the balance of the Company's 1999 growth.
Cost of goods sold increased $166.2 million, to $886.5 million in
1999. This increase was primarily attributable to acquisitions and higher
sales of core products. Gross profit was 24.1 percent of net sales in 1999
compared with 22.5 percent in 1998 and cost of sales improved accordingly.
This improvement resulted from lower manufacturing costs, continued higher
yields from production, reduced metal costs, and improved spreads in
certain products, particularly copper tube.
-17-
Depreciation and amortization increased to $37.0 million in 1999
compared with $24.9 million in 1998. This increase was due to 1998
acquisitions and capital expenditures in recent years, which totaled $40.1
million in 1999 and $55.4 million in 1998.
Selling, general, and administrative expense increased to $97.3
million in 1999. When measured on a basis of cost per pound of product
sold, these expenses averaged 11.9 cents a pound in 1999 and 11.7 cents a
pound in 1998. Approximately 66 percent of the $21.9 million increase was
attributable to businesses acquired in 1998.
Interest expense increased to $11.7 million in 1999 from $5.8 million
in 1998. The 1999 increase resulted primarily from funds borrowed in the
fourth quarter of 1998 to purchase Halstead and from certain debt assumed
by the Company in the acquisition of B&K. The Company capitalized interest
of $0.4 million for major capital improvement projects in 1999 compared
with $0.8 million in 1998. The provision for environmental reserves totaled
$2.1 million in 1998 whereas none was required in 1999. Other income
increased to $9.5 million in 1999 from $8.5 million in 1998.
The Company provided $46.4 million for income taxes in 1999, of which
$31.3 million was deferred. Current income tax expense of $15.1 million
decreased from 1998 primarily due to realization of an ordinary loss of
approximately $70 million as a consequence of the sale of Alaska Gold
Company, offset by increased taxable income. The 31.9 percent effective tax
rate for 1999, which is comparable to the 1998 rate of 31.0 percent,
reflects the recognition of certain tax attributes discussed in Note 6 and
certain favorable state tax credits, including IRB financings.
The Company's employment was 4,356 at the end of 1999 compared with
4,788 at the 1998 year-end.
Standard Products Division
Net sales by SPD were $858.5 million in 1999 compared with $624.4
million in 1998 for a 37 percent increase. Operating income was $129.1
million in 1999 compared with $83.0 million in 1998. The profit improvement
resulted from increased volume, lower manufacturing costs, and improved
spreads in certain products, particularly copper tube.
Industrial Products Division
IPD's net sales were $290.3 million in 1999 compared with $274.6
million in 1998. Due to the lower cost of raw materials, the average
selling price for finished product was approximately 7 percent lower in
1999 compared with 1998 levels. Operating income was $29.9 million in 1999
compared with $28.3 million in 1998. Increased volume and lower
manufacturing costs accounted for the profit improvement.
-18-
Other Businesses
Utah Railway Company hauled 5.3 million tons of coal in 1999, slightly
less than in 1998. Revenue totaled $22.1 million in 1999 compared with
$23.5 million in 1998. This decrease was due to production interruptions
caused by a fire at one of the coal mines served by Utah Railway Company.
Alaska Gold Company's net sales were $0.2 million in 1999 compared with
$8.2 million in 1998. On April 26, 1999, the Company sold 100 percent of
its interest in Alaska Gold Company.
Liquidity and Capital Resources
The Company's cash and cash equivalents balance decreased to $100.3
million at year-end. Major components of the 2000 change included $118.5
million of cash provided by operating activities, $78.0 million of cash
used in investing activities and $88.7 million of cash used in financing
activities.
Net income of $92.7 million in 2000 was the primary component of cash
provided by operating activities. Depreciation and amortization of $37.5
million and deferred income taxes of $8.9 million were the primary non-cash
adjustments. Major changes in working capital included a $15.9 million
decrease in receivables, a $22.8 million increase in inventories, and a
$11.6 million decrease in current and other liabilities.
The major components of net cash used in investing activities during
2000 included $63.5 million for capital expenditures and $15.2 million for
business acquisitions. Capital expenditures were primarily related to
improvements in manufacturing processes.
Net cash used in financing activities totaled $88.7 million. During
2000, the Company paid $133.0 million for debt repayments offset by $90.0
million of proceeds from the issuance of long-term debt. The Company
repurchased 1.9 million shares of its common stock at a cost of $48.4
million.
In November 2000, the Company entered into a $200 million unsecured
line-of-credit (Credit Facility) which expires in November 2003. At year-
end, the Company had borrowings of $90.0 million against the Credit
Facility, the proceeds of which were used to repay a term note. These
transactions lowered the Company's borrowing rate by 85 basis points
effective in early 2001. Additionally, approximately $6.1 million in
letters of credit are backed by the Credit Facility at the end of 2000. At
December 30, 2000, the Company's total debt was $106.9 million or 14.8
percent of its total capitalization.
Covenants contained in the Company's financing obligations require,
among other things, the maintenance of minimum levels of working capital,
tangible net worth, and debt service coverage ratios. The Company is in
compliance with all of its debt covenants.
The Company is investing $10.0 million at its Port Huron, Michigan
brass rod mill, the majority of which was funded at year-end. This
investment, which is expected to be completed during 2001, will increase
our casting capacity, improve yield, and reduce conversion costs.
-19-
The Company also is investing approximately $40.0 million for the
modernization of its European factories. This investment will upgrade the
casting, extrusion and drawing processes at these operations. The project
is expected to be completed near the end of 2001.
Management believes that cash provided by operations and currently
available cash of $100.3 million will be adequate to meet the Company's
normal future capital expenditure and operational needs. The Company's
current ratio is 3.4 to 1 at December 30, 2000.
On October 18, 1999, the Company's Board of Directors authorized the
repurchase of up to four million shares of the Company's common stock from
time-to-time over the next year through open market transactions or through
privately negotiated transactions. During 2000, this authorization was
expanded and extended to repurchase up to a total of ten million shares
through October 2001. The Company will have no obligation to purchase any
shares and may cancel, suspend, or extend the time period for the purchase
of shares at any time. The purchases will be funded primarily through
existing cash and cash from operations. The Company may hold such shares in
treasury or use a portion of the repurchased shares for employee benefit
plans, as well as for other corporate purposes. Through December 30, 2000,
the Company has repurchased approximately 2.3 million shares under this
authorization.
Environmental Matters
The Company ended 2000 with total environmental reserves of
approximately $9.9 million. Based upon information currently available,
management believes that the outcome of pending environmental matters will
not materially affect the overall financial position and results of
operations of the Company.
Market Risk
The Company is exposed to market risk from changes in foreign
exchange, interest rates, raw material costs, and energy costs. To reduce
such risks, the Company may periodically use financial instruments. All
hedging transactions are authorized and executed pursuant to policies and
procedures. Further, the Company does not buy or sell financial instruments
for trading purposes. A discussion of the Company's accounting policies for
management of market risk is included in the Summary of Significant
Accounting Policies in the Notes to the Consolidated Financial Statements.
Interest Rates
At December 30, 2000 and December 25, 1999, the fair value of the
Company's debt was estimated at $107.1 million and $150.3 million,
respectively, using yields obtained for similar types of borrowing
arrangements and taking into consideration the underlying terms of the
debt. Such fair value exceeded the carrying value of debt at December 30,
2000 by $0.3 million and at December 25, 1999 by $0.4 million. Market risk
is estimated as the potential change in fair value resulting from a
hypothetical 10 percent decrease in interest rates and amounted to $0.2
million at December 30, 2000 and $0.4 million at December 25, 1999.
-20-
The Company had $90.5 million of variable-rate debt outstanding at
December 30, 2000 and $119.0 million at December 25, 1999. At these
borrowing levels, a hypothetical 10 percent increase in interest rates
would have had an unfavorable impact on the Company's pretax earnings and
cash flows of $0.6 million in 2000 and $0.8 million in 1999. The primary
interest rate exposure on floating-rate debt is based on LIBOR.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other
than an entity's functional currency. The Company and its subsidiaries
generally enter into transactions denominated in their respective
functional currencies. Foreign currency exposures arising from transactions
denominated in currencies other than the functional currency are not
material; however, the Company may utilize certain forward fixed-rate
contracts to hedge such transactional exposures. At year-end, the Company
held open forward contracts to deliver the equivalent of approximately $1.6
million in other currencies. Gains and losses with respect to these
positions are reflected in earnings upon completion of the transaction.
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars.
The primary currencies to which the Company is exposed include the Canadian
dollar, the British pound sterling, the French franc, and the Mexican peso.
The Company generally views as long-term its investments in foreign
subsidiaries with a functional currency other than the U.S. dollar. As a
result, the Company generally does not hedge these net investments. The net
investment, excluding U.S. dollar denominated loans and advances, in
foreign subsidiaries translated into U.S. dollars using the year-end
exchange rates was $6.1 million at December 30, 2000 and $16.5 million at
December 25, 1999. The potential loss in value of the Company's net
investment in foreign subsidiaries resulting from a hypothetical 10 percent
adverse change in quoted foreign currency exchange rates at December 30,
2000 and December 25, 1999 amounted to $4.5 million and $3.5 million,
respectively. This change would be reflected in the equity section of the
Company's Consolidated Balance Sheet.
Cost of Raw Materials and Energy
Copper and brass represent the largest components of the Company's
variable cost of production. The cost of these materials is subject to
global market fluctuations caused by factors beyond the Company's control.
Significant increases in the cost of metal, to the extent not reflected in
prices for the Company's finished products, could materially and adversely
affect the Company's business, results of operations and financial
condition.
-21-
The Company occasionally enters into forward fixed-price arrangements
with certain customers. The Company may utilize futures or option contracts
to hedge risks associated with forward fixed-price arrangements. The
Company may also utilize futures or option contracts to manage price risk
associated with inventory. The total amount of such contracts was
approximately 0.5 million pounds at December 30, 2000 and includes varying
maturity dates in 2001. Gains or losses with respect to these positions are
reflected in earnings upon the sale of inventory. Periodic value
fluctuations of the contracts generally offset the value fluctuations of
the underlying fixed-price transactions or inventory.
Futures contracts may also be used to manage price risk associated
with natural gas purchases. Gains and losses with respect to these
positions are reflected in earnings upon consumption of natural gas.
Periodic value fluctuations of the contracts generally offset the value
fluctuations of the underlying natural gas prices. At year-end, the Company
held open hedge forward contracts to purchase approximately $2.8 million of
natural gas over the next 18 months.
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). This statement requires companies to record
derivative instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the value
of a derivative would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. In June 1999, the
FASB issued Statement No. 137, which delayed the effective date of SFAS No.
133 to the Company's fiscal year 2001. Additionally, in June 2000, the FASB
issued Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" (SFAS No. 138), which amends SFAS No. 133 and
must be adopted concurrently with the Company's adoption of SFAS No. 133.
The adoption of SFAS No. 133 and SFAS No. 138 will not have a significant
effect on earnings or the financial position of the Company.
Cautionary Statement Regarding Forward-Looking Information
This Annual Report contains various forward-looking statements and
includes assumptions concerning the Company's operations, future results
and prospects. These forward-looking statements are based on current
expectations and are subject to risk and uncertainties. In connection with
the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, Mueller provides the following cautionary statement
identifying important economic, political, and technological factors, among
others, the absence of which could cause actual results or events to differ
materially from those set forth in or implied by the forward-looking
statements and related assumptions.
-22-
Such factors include: (i) the current and projected future business
environment, including interest rates and capital and consumer spending;
(ii) a strong domestic housing industry environment; (iii) fluctuations in
commodity prices (including prices of copper and other raw materials); (iv)
competitive factors and competitor responses to Mueller initiatives; (v)
successful implementation and completion of major capital projects; (vi)
stability of government laws and regulations, including taxes; and (vii)
continuation of the environment to make acquisitions, domestic and foreign,
including regulatory requirements and market values of candidates.
-23-
Mueller Industries, Inc.
Consolidated Statements of Income
Years Ended December 30, 2000, December 25, 1999, and December 26, 1998
(In thousands, except per share data)
2000 1999 1998
Net sales $ 1,206,168 $ 1,168,744 $ 929,391
Cost of goods sold 925,311 886,531 720,293
---------- -------- --------
Gross profit 280,857 282,213 209,098
Depreciation and amortization 37,457 36,986 24,899
Selling, general, and administrative
expense 94,754 97,301 75,390
---------- -------- --------
Operating income 148,646 147,926 108,809
Interest expense (9,287) (11,681) (5,839)
Environmental reserves (2,049) - (2,133)
Other income, net 9,603 9,464 8,503
---------- -------- --------
Income before income taxes 146,913 145,709 109,340
Income tax expense (54,223) (46,430) (33,895)
---------- -------- --------
Net income $ 92,690 $ 99,279 $ 75,445
========== ======== ========
Weighted average shares for basic
earnings per share 34,305 35,594 35,452
Effect of dilutive stock options 3,791 4,011 4,192
---------- -------- --------
Adjusted weighted average shares for
diluted earnings per share 38,096 39,605 39,644
---------- -------- --------
Basic earnings per share $ 2.70 $ 2.79 $ 2.13
========== ======== ========
Diluted earnings per share $ 2.43 $ 2.51 $ 1.90
========== ======== ========
See accompanying notes to consolidated financial statements.
-24-
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 30, 2000 and December 25, 1999
(In thousands)
2000 1999
Assets
Current assets
Cash and cash equivalents $ 100,268 $ 149,454
Accounts receivable, less allowance for doubtful
accounts of $5,612 in 2000 and $5,367 in 1999 152,157 167,858
Inventories 142,325 119,644
Current deferred income taxes 4,101 -
Other current assets 6,320 3,790
-------- --------
Total current assets 405,171 440,746
Property, plant, and equipment, net 379,885 347,846
Goodwill, net 102,673 94,530
Other assets 22,547 20,958
-------- --------
Total Assets $ 910,276 $ 904,080
======== ========
See accompanying notes to consolidated financial statements.
-25-
Mueller Industries, Inc.
Consolidated Balance Sheets (continued)
As of December 30, 2000 and December 25, 1999
(In thousands, except share data)
2000 1999
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 5,909 $ 31,012
Accounts payable 43,733 49,958
Accrued wages and other employee costs 26,994 30,182
Other current liabilities 41,213 41,909
-------- --------
Total current liabilities 117,849 153,061
Long-term debt, less current portion 100,975 118,858
Pension liabilities 5,688 6,624
Postretirement benefits other than pensions 8,485 6,967
Environmental reserves 9,862 12,965
Deferred income taxes 39,362 24,275
Other noncurrent liabilities 13,653 11,546
-------- --------
Total liabilities 295,874 334,296
-------- --------
Minority interest in subsidiaries 297 354
Stockholders' equity
Preferred stock - shares authorized 4,985,000;
none outstanding - -
Series A junior participating preferred stock -
$1.00 par value; shares authorized 15,000;
none outstanding - -
Common stock - $.01 par value; shares authorized
100,000,000; issued 40,091,502 in 2000 and
1999; outstanding 33,358,061
in 2000 and 34,918,646 in 1999 401 401
Additional paid-in capital, common 260,979 259,977
Retained earnings 465,167 372,477
Cumulative translation adjustments (11,826) (8,112)
Treasury common stock, at cost (100,616) (55,313)
-------- --------
Total stockholders' equity 614,105 569,430
-------- --------
Commitments and contingencies - -
-------- --------
Total Liabilities and Stockholders' Equity $ 910,276 $ 904,080
======== ========
See accompanying notes to consolidated financial statements.
-26-
Mueller Industries, Inc.
Consolidated Statements of Cash Flows
Years Ended December 30, 2000, December 25, 1999, and December 26, 1998
(In thousands)
2000 1999 1998
Operating activities:
Net income $ 92,690 $ 99,279 $ 75,445
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 32,601 31,130 24,076
Amortization 4,856 5,856 823
Provision for doubtful accounts
receivable 663 1,503 556
Minority interest in subsidiaries,
net of dividend paid (57) - (337)
Deferred income taxes 8,912 31,257 4,870
Income tax benefit from exercise
of stock options 1,402 - 3,771
Gain on disposal of properties (413) (1,847) (2,156)
Changes in assets and liabilities, net
of businesses acquired:
Receivables 15,862 (15,339) 12,973
Inventories (22,835) 12,992 (4,875)
Other assets 621 14,973 (3,219)
Current liabilities (11,597) 622 (6,016)
Other liabilities (43) (14,657) (3,165)
Other, net (4,188) (1,014) (65)
-------- -------- --------
Net cash provided by operating activities 118,474 164,755 102,681
-------- -------- --------
Investing activities:
Acquisition of businesses (15,245) (675) (158,514)
Capital expenditures (63,458) (40,115) (55,440)
Proceeds from sales of properties 683 7,137 2,559
Escrowed IRB proceeds - 6,022 14,739
Note receivable - 4,484 (4,484)
-------- -------- --------
Net cash used in investing activities (78,020) (23,147) (201,140)
-------- -------- --------
Financing activities:
Proceeds from issuance of long-term debt 90,000 125,000 -
Repayments of long-term debt (132,986) (29,819) (19,396)
Proceeds from the sale of treasury stock 2,708 1,093 3,513
Acquisition of treasury stock (48,411) (29,669) -
Net (repayments) borrowings on lines
of credit - (139,840) 125,451
-------- -------- --------
Net cash (used in) provided by
financing activities (88,689) (73,235) 109,568
-------- -------- --------
See accompanying notes to consolidated financial statements.
-27-
Mueller Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Years Ended December 30, 2000, December 25, 1999, and December 26, 1998
(In thousands)
2000 1999 1998
Effect of exchange rate changes on cash (951) 513 (519)
-------- -------- --------
(Decrease) increase in cash and
cash equivalents (49,186) 68,886 10,590
Cash and cash equivalents at the
beginning of the year 149,454 80,568 69,978
-------- -------- --------
Cash and cash equivalents at the
end of the year $ 100,268 $ 149,454 $ 80,568
======== ======== ========
For supplemental disclosures of cash flow information, see
Notes 1, 4, 6, and 12.
See accompanying notes to consolidated financial statements.
-28
Mueller Industries, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 30, 2000, December 25, 1999, and December 26, 1998
(In thousands)
Common Stock Additional Cumulative Treasury Stock
Number Paid-In Retained Translation Number
of Shares Amount Capital Earnings Adjustments of Shares Cost Total
Balance, December 27, 1997 40,000 $ 200 $ 253,928 $ 197,753 $ (3,232) 4,982 $ (30,609) $ 418,040
Comprehensive income:
Net income - - - 75,445 - - - 75,445
Other comprehensive income:
Foreign currency translation - - - - (85) - - (85)
--------
Comprehensive income 75,360
Issuance of shares under
incentive stock option plan - - (765) - - (698) 4,278 3,513
Par value of shares issued in
connection with a two-for-
one stock split - 200 (200) - - - - -
Issuance of shares for
business acquisition 92 1 2,837 - - - - 2,838
Note receivable from officer - - (1,400) - - - - (1,400)
Tax benefit related to
employee stock options - - 3,771 - - - - 3,771
------- --- ------- ------- ------- ------ ------- --------
Balance, December 26, 1998 40,092 401 258,171 273,198 (3,317) 4,284 (26,331) 502,122
Comprehensive income:
Net income - - - 99,279 - - - 99,279
Other comprehensive income:
Foreign currency translation - - - - (4,795) - - (4,795)
--------
Comprehensive income 94,484
Issuance of shares under
incentive stock option plan - - 406 - - (115) 687 1,093
Repurchase of common stock - - - - - 1,004 (29,669) (29,669)
Proceeds from payment on
note receivable from officer - - 1,400 - - - - 1,400
------- --- ------- ------- ------- ------ ------- --------
Balance, December 25, 1999 40,092 401 259,977 372,477 (8,112) 5,173 (55,313) 569,430
Comprehensive income:
Net income - - - 92,690 - - - 92,690
Other comprehensive income:
Foreign currency translation - - - - (3,714) - - (3,714)
--------
Comprehensive income 88,976
Issuance of shares under
incentive stock option plan - - (400) - - (295) 3,108 2,708
Repurchase of common stock - - - - - 1,856 (48,411) (48,411)
Tax benefit related to
employee stock options - - 1,402 - - - - 1,402
------- --- ------- ------- ------- ------ ------- --------
Balance, December 30, 2000 40,092 $ 401 $ 260,979 $ 465,167 $ (11,826) 6,734 $(100,616) $ 614,105
======= === ======= ======= ======= ====== ======= ========
See accompanying notes to consolidated financial statements.
-29
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The principal business of Mueller Industries, Inc. is the manufacture
and sale of copper tube and fittings; brass and copper alloy rod, bar, and
shapes; aluminum and brass forgings; aluminum and copper impact extrusions;
plastic fittings and valves; refrigeration valves and fittings; fabricated
tubular products; and gas valves and assemblies. The Company markets its
products to the HVAC, plumbing, refrigeration, hardware, and other
industries. During 2000, the Company operated 22 factories in eight states,
Canada, Great Britain, and France and had distribution facilities
nationwide and sales representation worldwide. The Company also operates a
short line railroad through its subsidiary, Utah Railway Company.
Principles of Consolidation
The consolidated financial statements include the accounts of Mueller
Industries, Inc. and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
minority interest represents separate private ownership of 25 percent of
Ruby Hill Mining Company and 19 percent of Richmond-Eureka Mining Company.
Inventories
The Company's inventories are valued at the lower of cost or market.
The material component of its U.S. copper tube and copper fittings
inventories is valued on a last-in, first-out (LIFO) basis. Other
inventories, including the non-material components of U.S. copper tube and
copper fittings, are valued on a first-in, first-out (FIFO) basis.
Inventory costs include material, labor costs, and manufacturing overhead.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is
provided on the straight-line method over the estimated useful lives
ranging from 20 to 40 years for buildings and five to 20 years for
machinery and equipment.
Intangible Assets
The excess of the cost over the fair value of net assets of businesses
acquired is recorded as goodwill and is amortized on a straight-line basis
over 20 to 25 years. The cost of other acquired intangibles is amortized on
a straight-line basis over their estimated useful lives. Accumulated
amortization as of December 30, 2000 and December 25, 1999 was $12.6
million and $7.7 million, respectively. The Company continually evaluates
the carrying value of long-lived assets. Any impairments would be
recognized when the expected future undiscounted cash flows derived from
such long-lived assets are less than their carrying value.
-30-
Revenue Recognition
Revenue is recognized when products are shipped or services are
performed.
Stock-Based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations as permitted by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
Earnings Per Share
Basic earnings per share is computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the increase
in average common shares outstanding that would result from the assumed
exercise of outstanding stock options calculated using the treasury stock
method.
Income Taxes
The Company accounts for income taxes using the liability method
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes".
Cash Equivalents
Temporary investments with maturities of three months or less are
considered to be cash equivalents. These investments are stated at cost. At
December 30, 2000 and December 25, 1999, temporary investments consisted of
certificates of deposit, commercial paper, bank repurchase agreements, and
U.S. and foreign government securities which totaled $105.3 million and
$157.0 million, respectively. These carrying amounts approximated fair
value.
Concentrations of Credit and Market Risk
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different industries, including
HVAC, plumbing, refrigeration, hardware, automotive, OEMs, and others.
The Company minimizes its exposure to base metal price fluctuations
through various strategies. Generally, it prices an equivalent amount of
copper raw material, under flexible pricing arrangements it maintains with
its suppliers, at the time it determines the selling price of finished
products to its customers.
-31-
Forward fixed-price arrangements may be entered into with certain
customers. The Company may utilize futures or option contracts to hedge
risks associated with forward fixed-price arrangements. Also, the Company
may utilize futures or option contracts to manage price risk associated
with inventory. Gains or losses with respect to these positions are
reflected in earnings upon the sale of inventory. Periodic value
fluctuations of the contracts generally offset the value fluctuations of
the underlying fixed-price transactions or inventory. At year-end, the
Company held open hedge forward contracts to deliver approximately $0.4
million of copper.
Futures contracts may also be used to manage price risk associated
with natural gas purchases. Gains and losses with respect to these
positions are reflected in earnings upon consumption of natural gas.
Periodic value fluctuations of the contracts generally offset the value
fluctuations of the underlying natural gas prices. At year-end, the Company
held open hedge forward contracts to purchase approximately $2.8 million of
natural gas over the next 18 months.
The Company's sales are principally denominated and collected in the
U.S. dollar. Certain sales are collected in other currencies. The market
risk regarding currency exchange rate fluctuations may be hedged using
forward contracts. At year-end, the Company held open forward contracts to
deliver the equivalent of approximately $1.6 million in other currencies.
Gains and losses with respect to these positions are reflected in earnings
upon collection of receivables.
Foreign Currency Translation
For foreign subsidiaries, the functional currency is the local
currency. Balance sheet accounts are translated at exchange rates in effect
at the end of the year and income statement accounts are translated at
average exchange rates for the year. Translation gains and losses are
included as a separate component of stockholders' equity. Transaction gains
and losses included in the Consolidated Statements of Income were not
significant.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
-32-
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). This statement requires companies to record
derivative instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the value
of a derivative would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. In June 1999, the
FASB issued Statement No. 137, which delayed the effective date of SFAS No.
133 to the Company's fiscal year 2001. Additionally, in June 2000, the FASB
issued Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" (SFAS No. 138), which amends SFAS No. 133 and
must be adopted concurrently with the Company's adoption of SFAS No. 133.
The adoption of SFAS No. 133 and SFAS No. 138 will not have a significant
effect on earnings or the financial position of the Company.
Reclassifications
Certain amounts in the 1999 and 1998 consolidated financial statements
have been reclassifed to conform to the 2000 presentation.
Note 2 - Inventories
(In thousands)
2000 1999
Raw material and supplies $ 25,073 $ 28,337
Work-in-process 30,395 14,423
Finished goods 86,857 76,884
-------- --------
Inventories $ 142,325 $ 119,644
======== ========
Inventories valued using the LIFO method totaled $37.3 million at
December 30, 2000 and $29.0 million at December 25, 1999. The approximate
FIFO cost of such inventories was $39.9 million at December 30, 2000 and
$29.9 million at December 25, 1999.
-33-
Note 3 - Property, Plant, and Equipment, Net
(In thousands)
2000 1999
Land and land improvements $ 9,162 $ 8,495
Buildings 73,268 70,996
Machinery and equipment 419,290 383,164
Construction in progress 47,552 25,817
-------- --------
549,272 488,472
Less accumulated depreciation (169,387) (140,626)
-------- --------
Property, plant, and equipment, net $ 379,885 $ 347,846
======== ========
Note 4 - Long-Term Debt
(In thousands)
2000 1999
Line-of-credit at floating rate,
matures November 2003 $ 90,000 $ -
Floating rate unsecured notes,
due through 2003 - 118,421
8.38% Unsecured note payable,
due through 2000 - 3,571
7.54% Unsecured note payable,
due through 2000 - 1,000
1993 Series IRBs with interest at
6.95%, due 2000 - 2,857
1994 Series IRBs with interest at
8.825%, due through 2001 1,286 3,857
1997 Series IRBs with interest at
7.39%, due through 2014 13,625 17,125
1997 Series IRBs with interest at
7.31%, due through 2009 1,005 1,465
Other, including capitalized
lease obligations 968 1,574
-------- --------
106,884 149,870
Less current portion of long-term debt (5,909) (31,012)
-------- --------
Long-term debt $ 100,975 $ 118,858
======== ========
-34-
On November 30, 2000, the Company executed a Credit Agreement (the
Agreement) with a syndicate of six banks establishing an unsecured $200
million revolving credit facility (the Credit Facility) which matures in
November 2003. Borrowings under the Credit Facility bear interest, at the
Company's option, at (i) LIBOR plus a variable premium or (ii) the larger of
Prime, or the Federal Funds rate plus .50 percent. LIBOR advances may be
based upon the one, two, three, or six-month LIBOR. The variable premium
over LIBOR is based on certain financial ratios, and can range from 25 to
40 basis points. At year-end the premium was 32.5 basis points, but dropped
to 25 basis points subsequent to year-end. Additionally, a facility fee is
payable quarterly on the total commitment and varies from 12.5 to 22.5
basis points based upon the Company's capitalization ratios. When funded
debt is 50 percent or more of the commitment, a utilization fee is payable
quarterly on the average loan balance outstanding and varies from 0 to 20
basis points based upon the capitalization ratio. Proceeds from the initial
draw on the Credit Facility were used to pay off existing notes.
Availability of funds under the Credit Facility is reduced by the amount of
certain outstanding letters of credit, which totaled approximately $6.1
million at December 30, 2000.
Borrowings under the above Agreement require the Company, among other
things, to maintain certain minimum levels of net worth and meet certain
minimum financial ratios. The Company is in compliance with all debt
covenants.
During fiscal 1999, the Company executed an Amended and Restated
Credit Agreement (the 1999 Agreement) with its syndicate of banks, which
established an unsecured, $125 million term note. Proceeds from this note
paid down the $120 million balance under an existing line-of-credit. The
1999 Agreement required quarterly principal payments on the term note of
approximately $3.3 million plus interest. Interest on the note was based
on the 90-day LIBOR interest rate plus a premium of 110 to 130 basis points
as determined by certain financial ratios. The proceeds from the initial
draw on the Credit Facility and existing cash were used to pay off this
term note in 2000.
Aggregate annual maturities of the Company's debt are $5.9 million, $3.9
million, $93.5 million, $2.7 million, and $0.1 million for the years 2001
through 2005 respectively, and $0.8 million thereafter. Interest paid in
2000, 1999, and 1998 was $10.6 million, $12.4 million, and $6.3 million,
respectively. During 2000, 1999, and 1998, the Company capitalized interest
of $1.2 million, $0.4 million, and $0.8 million, respectively, related to
its major capital improvement programs. Using a discounted cash flow
analysis, the fair value of the Company's debt approximated book value at
the end of 2000 and 1999, based on the estimated current incremental
borrowing rates for similar types of borrowing arrangements.
Note 5 - Stockholders' Equity
In 1998, the Company declared a two-for-one stock split effected in
the form of a 100 percent stock dividend. All presentations of share data
herein, including earnings per share, have been restated to reflect the
split for all periods presented.
-35-
On November 10, 1994, the Company declared a dividend distribution of
one Right for each outstanding share of the Company's common stock. Each
Right entitles the holder to purchase one unit consisting of one-thousandth
of a share of Series A Junior Participating Preferred Stock at a purchase
price of $160 per unit, subject to adjustment. The Rights will not be
exercisable, or transferable apart from the Company's common stock, until
10 days following an announcement that a person or affiliated group has
acquired, or obtained the right to acquire, beneficial ownership of 15
percent or more of its common stock other than pursuant to certain offers
for all shares of the Company's common stock that have been determined to
be fair to, and in the best interest of, the Company's stockholders. The
Rights, which do not have voting rights, will be exercisable by all holders
(except for a holder or affiliated group beneficially owning 15 percent or
more of the Company's common stock, whose Rights will be void) so that each
holder of a Right shall have the right to receive, upon the exercise
thereof, at the then current exercise price, the number of shares of the
Company's common stock having a market value of two times the exercise
price of the Rights. All Rights expire on November 10, 2004, and may be
redeemed by the Company at a price of $0.01 at any time prior to either
their expiration or such time that the Rights become exercisable.
In the event that the Company is acquired in a merger or other
business combination, or certain other events occur, provision shall be
made so that each holder of a Right (except Rights previously voided) shall
have the right to receive, upon exercise thereof at the then current
exercise price, the number of shares of common stock of the surviving
company which at the time of such transaction would have a market value of
two times the exercise price of the Right.
On October 18, 1999, the Company's Board of Directors authorized the
repurchase of up to four million shares of the Company's common stock from
time-to-time over the next year through open market transactions or through
privately negotiated transactions. During 2000, this authorization was
expanded to purchase up to 10 million shares and extended through October
2001. The Company will have no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at
any time. The purchases will be funded primarily through existing cash and
cash from operations. The Company may hold such shares in treasury or use a
portion of the repurchased shares for employee benefit plans, as well as
for other corporate purposes. Through December 30, 2000, the Company has
repurchased approximately 2.3 million shares under this authorization.
-36-
Note 6 - Income Taxes
The components of income before income taxes were taxed under the
following jurisdictions:
(In thousands)
2000 1999 1998
Domestic $ 156,150 $ 154,765 $ 108,135
Foreign (9,237) (9,056) 1,205
-------- -------- --------
Income before income taxes $ 146,913 $ 145,709 $ 109,340
======== ======== ========
Income tax expense consists of the following:
(In thousands)
2000 1999 1998
Current tax expense:
Federal $ 42,479 $ 12,052 $ 24,882
Foreign 816 1,692 2,400
State and local 2,016 1,429 1,743
-------- -------- --------
Current tax expense 45,311 15,173 29,025
-------- -------- --------
Deferred tax expense:
Federal 8,412 30,570 4,226
Foreign - - 595
State and local 500 687 49
-------- -------- --------
Deferred tax expense 8,912 31,257 4,870
-------- -------- --------
Income tax expense $ 54,223 $ 46,430 $ 33,895
======== ======== ========
U.S. income and foreign withholding taxes are provided on the earnings
of foreign subsidiaries that are expected to be remitted to the extent that
taxes on the distribution of such earnings would not be offset by foreign
tax credits.
-37-
The difference between the reported income tax expense and a tax
determined by applying the applicable U.S. federal statutory income tax
rate to income before income taxes is reconciled as follows:
(In thousands)
2000 1999 1998
Expected income tax expense $ 51,420 $ 50,998 $ 38,269
State and local income tax,
net of federal benefit 1,810 1,616 1,182
Foreign income taxes 3,493 4,371 2,119
Valuation allowance (3,923) (8,220) (5,481)
Other, net 1,423 (2,335) (2,194)
-------- -------- --------
Income tax expense $ 54,223 $ 46,430 $ 33,895
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
(In thousands)
2000 1999
Deferred tax assets:
Accounts receivable $ 1,961 $ 1,229
Inventories 1,140 1,326
Pension, OPEB, and accrued items 9,649 9,011
Other reserves 10,392 9,679
Net operating loss carryforwards 30,653 34,137
Capital loss carryforwards 760 16,181
Foreign tax credits 359 1,109
Alternative minimum tax credit
carryforwards 4,026 4,026
-------- --------
Total deferred tax assets 58,940 76,698
Less valuation allowance (31,626) (48,652)
-------- --------
Deferred tax assets, net of
valuation allowance 27,314 28,046
-------- --------
Deferred tax liabilities:
Property, plant, and equipment 60,566 51,373
Other 2,009 1,629
-------- --------
Total deferred tax liabilities 62,575 53,002
-------- --------
Net deferred tax liability $ (35,261) $ (24,956)
======== ========
-38-
As of December 30, 2000, the Company had recognized domestic net
operating loss carryforwards (NOLs) of $50.0 million, of which $43.2
million expire in 2005 and $6.8 million expire in 2006. Annual limitations
on these NOLs are approximately $17.3 million in 2001, and approximately
$14.4 thereafter. During 2000, 1999, and 1998, the Company recognized $3.8
million, $2.3 million, and $4.1 million, respectively, of NOL tax
attributes, reducing the deferred income tax provision in each year. In
addition, the Company has alternative minimum tax credit carryforwards of
approximately $4.0 million which are available to reduce future federal
regular income taxes, if any, over an indefinite period.
As of December 30, 2000, the Company had foreign net operating loss
carryforwards (foreign NOLs) available to offset $39.7 million of foreign
subsidiary income. These foreign NOLs have not been recognized and expire
as follows: $0.7 million in 2001, $2.0 million in 2002, and $2.3 million in
2005. The remaining $34.7 million of foreign NOLs are available to offset
foreign subsidiary income over an indefinite period.
The sale of Alaska Gold Company during April 1999, resulted in the
realization of an ordinary federal tax loss of approximately $70 million of
which $45 million has been recognized. The Internal Revenue Service agreed
to allow this loss as part of the comprehensive closing agreement, which
concluded the audit of the years 1993 through 1995. For financial reporting
purposes, additional recognition may occur in future periods.
Income taxes paid were approximately $43.6 million in 2000, $13.5
million in 1999, and $26.8 million in 1998.
Note 7 - Other Current Liabilities
(In thousands)
2000 1999
Accrued discounts and allowances $ 19,956 $ 14,850
Accrued severance and related costs 2,187 1,558
Freight settlements due to other railroads 1,882 3,191
Income taxes payable 4,615 2,884
Other 12,573 19,426
-------- --------
Other current liabilities $ 41,213 $ 41,909
======== ========
-39-
Note 8 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. The
following tables provide a reconciliation of the changes in the plans'
benefit obligations and the fair value of the plans' assets over the two-
year period ending December 30, 2000, and a statement of the plans' funded
status as of December 30, 2000 and December 25, 1999:
(In thousands)
Pension Benefits Other Benefits
2000 1999 2000 1999
Change in benefit
obligation:
Obligation at
beginning of year $ 104,676 $ 80,227 $ 8,223 $ 8,041
Service cost 2,620 3,180 16 19
Interest cost 7,193 6,834 621 647
Participant
contributions 400 443 - -
Plan amendments 562 3,656 - (120)
Actuarial (gain) loss (3,970) 4,012 (359) 803
Business acquisitions 185 12,496 - -
Benefit payments (5,316) (5,371) (505) (1,167)
Settlement (55) (101) - -
Foreign currency
translation
adjustment (2,878) (700) - -
-------- -------- -------- --------
Obligation at end
of year $ 103,417 $ 104,676 $ 7,996 $ 8,223
======== ======== ======== ========
Change in fair value
of plan assets:
Fair value of
plan assets at
beginning
of year $ 123,979 $ 92,011 $ - $ -
Actual return on
plan assets 8,970 21,915 - -
Employer contributions 1,702 2,087 505 1,167
Participant contributions 400 443 - -
Business acquisitions - 13,663 - -
Benefit payments (5,316) (5,371) (505) (1,167)
Settlement (55) (101) - -
Foreign currency
translation adjustment (2,997) (668) - -
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 126,683 $ 123,979 $ - $ -
======== ======== ======== ========
-40-
(In thousands)
Pension Benefits Other Benefits
2000 1999 2000 1999
Funded status:
Funded (underfunded)
status at end of year $ 23,266 $ 19,303 $ (7,996) $ (8,223)
Unrecognized prior
service cost 4,909 5,176 (104) (112)
Unrecognized gain (28,604) (26,348) (705) (370)
-------- -------- -------- --------
Net amount recognized $ (429) $ (1,869) $ (8,805) $ (8,705)
======== ======== ======== ========
The following table provides the amounts recognized in the Consolidated
Balance Sheets as of December 30, 2000 and December 25, 1999:
(In thousands)
Pension Benefits Other Benefits
2000 1999 2000 1999
Prepaid benefit cost $ 4,809 $ 3,697 $ - $ -
Accrued benefit
liability (5,238) (5,566) (8,805) (8,705)
-------- -------- -------- --------
Net amount recognized $ (429) $ (1,869) $ (8,805) $ (8,705)
======== ======== ======== ========
The components of net periodic benefit costs are as follows:
(In thousands)
2000 1999 1998
Pension Benefits:
Service cost $ 2,620 $ 3,180 $ 2,384
Interest cost 7,193 6,834 5,305
Expected return on
plan assets (9,614) (8,146) (6,838)
Amortization of prior
service cost 875 869 568
Amortization of net gain (1,701) (933) (1,462)
-------- -------- --------
Net periodic benefit
cost (income) $ (627) $ 1,804 $ (43)
======== ======== ========
-41-
(In thousands)
2000 1999 1998
Other Benefits:
Service cost $ 16 $ 19 $ 14
Interest cost 621 647 633
Amortization of prior
service cost (8) (8) -
Amortization of net gain (25) (23) (34)
-------- -------- --------
Net periodic benefit cost $ 604 $ 635 $ 613
======== ======== ========
The prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10 percent of the greater of the benefit obligation or the
market-related value of assets are amortized over the average remaining
service period of active participants.
The assumptions used in the measurement of the Company's benefit
obligations are as follows:
Pension Benefits Other Benefits
2000 1999 2000 1999
Weighted average
assumptions:
Discount rate 6.50%-7.75% 6.50%-7.75% 7.5%-8.50% 7.5%-8.50%
Expected return on
plan assets 7.00%-9.00% 7.25%-8.50% N/A N/A
Rate of compensation
increases 3.25% 3.50% N/A N/A
Only one pension plan uses the rate of compensation increase in its
benefit formula. All other pension plans are based on length of service.
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) is assumed to range from 7.7
to 8.1 percent for 2001, gradually decrease to 6.25 percent for 2003, and
remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example, increasing
the assumed health care cost trend rates by one percentage point would
increase the accumulated postretirement benefit obligation by $559 thousand
and the service and interest cost components of net periodic postretirement
benefit costs by $48 thousand for 2000. Decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation and the service and interest
cost components of net periodic postretirement benefit costs for 2000 by
$509 thousand and $43 thousand, respectively.
-42-
The Company sponsors voluntary employee savings plans that qualify
under Section 401(k). Compensation expense for the Company's matching
contribution to the 401(k) plans was $2.0 million in 2000, $1.5 million in
1999, and $1.2 million in 1998.
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992
(the Act) was enacted. The Act mandates a method of providing for
postretirement benefits to UMWA current and retired employees, including
some retirees who were never employed by the Company. In October 1993,
beneficiaries were assigned to the Company and the Company began its
mandated contributions to the UMWA Combined Benefit Fund, a multiemployer
trust. Beginning in 1994, the Company was required to make contributions
for assigned beneficiaries under an additional multiemployer trust created
by the Act, the UMWA 1992 Benefit Plan. The ultimate amount of the
Company's liability under the Act will vary due to factors which include,
among other things, the validity, interpretation, and regulation of the
Act, its joint and several obligation, the number of valid beneficiaries
assigned, and the extent to which funding for this obligation will be
satisfied by transfers of excess assets from the 1950 UMWA pension plan and
transfers from the Abandoned Mine Reclamation Fund. Nonetheless, the
Company believes it has an adequate reserve for this liability, which is
classified as other noncurrent liabilities.
The Company maintains a nonqualified, deferred compensation plan,
which permits certain management employees to annually elect to defer, on a
pretax basis, a portion of their compensation. The deferred benefit to be
provided is based on the amount of compensation deferred, Company match,
and earnings on the deferrals. The expense associated with the deferred
compensation plan was $0.2 million, $0.5 million, and $0.5 million in 2000,
1999, and 1998, respectively. The Company has invested in certain assets to
assist in funding this plan. The fair value of these assets, included in
other assets, was $5.1 million and $3.8 million at December 30, 2000 and
December 25, 1999, respectively.
The Company makes contributions to certain multiemployer defined
benefit pension plan trusts that cover union employees based on collective
bargaining agreements. Contributions by employees are not required nor are
they permitted. Pension expense under the multiemployer defined benefit
pension plans was $0.3 million for 2000, 1999, and 1998.
Note 9 - Commitments and Contingencies
The Company is subject to environmental standards imposed by federal,
state, local, and foreign environmental laws and regulations. It has
provided and charged to income $2.0 million in 2000 and $2.1 million in
1998 for pending environmental matters. The basis for the provision is
updated information and results of ongoing remediation and monitoring
programs. Management believes that the outcome of pending environmental
matters will not materially affect the financial condition or results of
operations of the Company.
The Company is involved in certain litigation as a result of claims
that arise in the ordinary course of business, which management believes
will not have a material adverse effect on the Company's financial
condition or results of operations.
-43-
The Company leases certain facilities and equipment under operating
leases expiring on various dates through 2008. The lease payments under
these agreements aggregate to approximately $4.7 million in 2001, $3.5
million in 2002, $3.2 million in 2003, $3.1 million in 2004, $2.0 million
in 2005, and $4.4 million thereafter. Total lease expense amounted to $9.2
million in 2000, $11.3 million in 1999 and $8.8 million in 1998.
Note 10 - Other Income, Net
(In thousands)
2000 1999 1998
Rent and royalties $ 799 $ 1,026 $ 1,420
Interest income 8,391 6,591 5,127
Gain on disposal of properties, net 413 1,847 2,156
Minority interest in income of
subsidiaries - - (200)
-------- -------- --------
Other income, net $ 9,603 $ 9,464 $ 8,503
======== ======== ========
Note 11 - Stock Options
The Company follows APB No. 25 in accounting for its employee stock
options. Under APB No. 25, no compensation expense is recognized because
the exercise price of the Company's incentive employee stock options equals
the market price of the underlying stock on the date of grant.
Under existing plans, the Company may grant options to purchase shares
of common stock at prices not less than the fair market value of the stock
on the date of the grant. Generally, the options vest annually in 20
percent increments over a five-year period beginning one year from the date
of the grant. Any unexercised options expire after not more than ten years.
No options may be granted after ten years from the date of plan adoption.
Additionally, the Company has granted stock options to key executives
as retention incentives and inducements to enter into employment agreements
with the Company. Generally, these special grants have terms and conditions
similar to those granted under the Company's other stock option plans.
On June 15, 1998, the Company loaned $4.5 million, on a full recourse
basis, to an officer. The officer used $1.4 million of the proceeds to
exercise options to purchase Company stock. That portion of the loan was
classified as a reduction of additional paid-in capital, while the
remaining balance of the loan was included in other assets in the Company's
1998 consolidated financial statements. The loan was paid in full during
1999. The loan was secured by common stock of the Company.
The income tax benefit associated with the exercise of stock options
reduced income taxes payable, classified as other current liabilities, by
$1.4 million in 2000 and $3.8 million in 1998. Such benefits are reflected
as additions directly to additional paid-in capital.
-44-
A summary of the Company's stock option activity and related
information follows:
(Shares in thousands)
Weighted Average
Options Exercise Price
Outstanding at December 27, 1997 5,521 $ 5.11
Granted 403 20.62
Exercised (698) 5.05
Expired, cancelled, or surrendered (54) 15.20
--------
Outstanding at December 26, 1998 5,172 6.22
Granted 158 34.25
Exercised (121) 10.60
Expired, cancelled, or surrendered (10) 19.65
--------
Outstanding at December 25, 1999 5,199 6.94
Granted 150 24.42
Exercised (311) 10.07
Expired, cancelled, or surrendered (16) 24.70
--------
Outstanding at December 30, 2000 5,022 $ 7.22
========
(Shares in thousands)
Weighted Average
Options Exercise Price
Options exercisable at:
December 26, 1998 4,194 $ 3.46
December 25, 1999 4,410 4.17
December 30, 2000 4,377 4.75
Exercise prices for stock options outstanding at December 30, 2000,
ranged from $2.06 to $37.04. Of the 5.0 million stock options that are
outstanding at year-end, 3.6 million are owned by Mr. Harvey L. Karp and
expire one year after Mr. Karp's separation from employment with the
Company. Mr. Karp's options have an exercise price of $2.06 per share. The
weighted average remaining life of the remaining 1.4 million shares is 6.91
years, and the weighted average exercise price of these shares is $20.27.
The weighted average fair value per option granted was $12.60 in 2000,
$17.71 in 1999, and $8.69 in 1998.
As of December 30, 2000, the Company had reserved 3.8 million shares
of its common stock for issuance pursuant to certain stock option plans.
Additionally, the Company had reserved 15 thousand shares of preferred
stock for issuance pursuant to the shareholder rights plan.
-45-
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method. The
fair value for these options at the date of grant was estimated using the
following weighted average assumptions for the years 2000, 1999, and 1998:
weighted average expected life of the options of six years; and no dividend
payments. The weighted average risk free interest rate used in the model
was 5.00 percent for 2000, 6.84 percent for 1999, and 4.85 percent for
1998. The volatility factor of the expected market value of the Company's
common stock was 0.479 in 2000, 0.433 in 1999, and 0.344 in 1998.
The pro forma information is determined using the Black-Scholes option
valuation model. Option valuation models require highly subjective
assumptions including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information follows:
(In thousands, except per share data)
2000 1999 1998
Net income $ 92,690 $ 99,279 $ 75,445
SFAS No. 123 pro forma
compensation expense (2,257) (1,879) (1,316)
-------- -------- --------
SFAS No. 123 pro forma net income $ 90,433 $ 97,400 $ 74,129
======== ======== ========
Pro forma earnings per share:
Basic $ 2.64 $ 2.74 $ 2.09
Diluted $ 2.39 $ 2.47 $ 1.88
======== ======== ========
Because SFAS No. 123 applies only to stock-based compensation awards
for 1995 and later years, the pro forma disclosures under SFAS No. 123 are
not likely to be indicative of future disclosures until the disclosures
reflect all outstanding, nonvested awards.
Note 12 - Acquisitions
On April 20, 2000, Mueller acquired Micro Gauge, Inc. and a related
business, Microgauge Machining Inc., (collectively Micro Gauge) for
approximately $9.1 million. These acquisitions bring to our Industrial
Products Division specialized machining capabilities which were previously
outsourced to Micro Gauge. In addition, on June 28, 2000, the Company
acquired Propipe Technologies, Inc., a fabricator of gas train manifold
systems, for approximately $6.1 million.
-46-
On September 30, 1999, the Company's subsidiary, Utah Railway Company,
purchased the stock of the Salt Lake City Southern Railroad Company, Inc.
(SLCS) for $675 thousand. SLCS operates pursuant to an easement on
approximately 25 miles of track, owned by the Utah Transit Authority, from
downtown Salt Lake City to near Draper, Utah.
During the second half of 1998, the Company completed three
acquisitions. Halstead Industries, Inc. (Halstead), which operates a copper
tube mill in Wynne, Arkansas, and a line sets facility in Clinton,
Tennessee, was acquired for approximately $95 million cash. The Company
also paid off existing bank debt of Halstead for approximately $24.8
million. The Company acquired B&K Industries, Inc., an importer and
distributor of residential and commercial plumbing products, for
approximately $33.5 million, of which approximately 90 percent was paid in
cash and the remainder paid in shares of Mueller common stock. Also, the
Company acquired Lincoln Brass Works, Inc. (Lincoln), which produces custom
control valve assemblies, as well as custom metal assemblies, gas delivery
systems, and tubular products primarily for the gas appliance market with
manufacturing facilities in Jacksboro, Tennessee and Waynesboro, Tennessee,
for a nominal consideration plus the pay off of existing bank debt of
approximately $7.5 million.
Each of the acquisitions was accounted for using the purchase method
of accounting. Therefore, the results of operations of the acquired
businesses were included in the consolidated financial statements of the
Company from their respective acquisition dates. The purchase price for
these acquisitions, which was financed by available cash balances and
credit facilities, has been allocated to the assets of the acquired
businesses based on their respective fair market values.
The total fair value of assets acquired in 2000 and 1998 was $19.1
million and $240.1 million, respectively. Liabilities assumed in these
acquisitions were $3.9 million in 2000 and $78.7 million in 1998. The
excess of the purchase price over the net assets acquired in 2000 and 1998
was $7.4 million and $99.3 million, respectively, which is being amortized
over 25 years. The final assessment of fair values of the assets and
reserves associated with the Halstead and Lincoln acquisitions was
completed during 1999. The determination of final fair values resulted in
adjustments consisting of changes from initially recorded values. These
adjustments increased working capital by $0.9 million and goodwill and
other assets by $16.4 million, and decreased property, plant, and equipment
by $30.4 million and other liabilities by $13.0 million.
Pro forma consolidated results of operations as if the 1998
acquisitions had occurred at the beginning of 1998 include net sales of
$1,168.1 million, net income of $71.4 million, basic earnings per share of
$2.01, and diluted earnings per share of $1.80. This information combines
the historical results of operations of the Company and the acquired
businesses after the effects of estimated purchase accounting adjustments.
The pro forma information does not purport to be indicative of the results
that would have been obtained if the operations had actually been combined
during the period presented and is not necessarily indicative of operating
results to be expected in future periods. The effects of the 2000 and 1999
acquisitions on the consolidated financial statements are not significant
and have been excluded from the pro forma presentation.
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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 is comprised primarily of a short line
railroad.
Summarized segment and geographic information is shown in the
following tables. Geographic sales data indicates the location from which
products are shipped. Unallocated expenses include general corporate
expenses, plus certain charges or credits not included in segment activity.
Segment Information:
(In thousands)
2000 1999 1998
Net sales:
Standard Products Division $ 882,407 $ 858,525 $ 624,437
Industrial Products Division 302,523 290,270 274,597
Other Businesses 24,667 22,263 31,637
Elimination of intersegment sales (3,429) (2,314) (1,280)
---------- ---------- ----------
$ 1,206,168 $ 1,168,744 $ 929,391
========== ========== ==========
Depreciation and amortization:
Standard Products Division $ 26,246 $ 26,495 $ 15,713
Industrial Products Division 8,791 7,936 5,948
Other Businesses 783 787 1,699
General corporate 1,637 1,768 1,539
---------- ---------- ----------
$ 37,457 $ 36,986 $ 24,899
========== ========== ==========
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Segment Information (continued):
(In thousands)
2000 1999 1998
Operating income:
Standard Products Division $ 128,466 $ 129,141 $ 83,010
Industrial Products Division 30,604 29,935 28,325
Other Businesses 3,377 3,297 5,661
Unallocated expenses (13,801) (14,447) (8,187)
---------- ---------- ----------
$ 148,646 $ 147,926 $ 108,809
========== ========== ==========
Expenditures for long-lived assets:
Standard Products Division $ 43,581 $ 31,089 $ 198,135
Industrial Products Division 34,380 5,063 16,735
Other Businesses 74 960 4,782
---------- ---------- ----------
$ 78,035 $ 37,112 $ 219,652
========== ========== ==========
Segment assets:
Standard Products Division $ 621,370 $ 599,596 $ 610,914
Industrial Products Division 164,210 136,586 144,004
Other Businesses 30,014 40,088 50,446
General corporate 94,682 127,810 69,330
---------- ---------- ----------
$ 910,276 $ 904,080 $ 874,694
========== ========== ==========
Geographic Information:
(In thousands)
2000 1999 1998
Net sales:
United States $ 1,053,399 $ 1,015,968 $ 754,024
Foreign 152,769 152,776 175,367
---------- ---------- ----------
$ 1,206,168 $ 1,168,744 $ 929,391
========== ========== ==========
Long-lived assets:
United States $ 455,356 $ 425,214 $ 448,852
Foreign 49,749 38,120 43,518
---------- ---------- ----------
$ 505,105 $ 463,334 $ 492,370
========== ========== ==========
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Note 14 - Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2000
Net sales $ 302,350 $ 328,583 $ 295,979 $ 279,256
Gross profit (1) 75,836 80,790 61,916 62,315
Net income 26,566 29,762 19,307 17,055
Basic earnings per share 0.76 0.86 0.56 0.51
Diluted earnings per share 0.69 0.78 0.50 0.46
1999
Net sales $ 287,840 $ 293,342 $ 287,880 $ 299,682
Gross profit (1) 66,100 73,002 71,539 71,572
Net income 21,683 25,445 26,340 25,811
Basic earnings per share 0.61 0.71 0.74 0.74
Diluted earnings per share 0.55 0.64 0.66 0.66
<FN>
(1) Gross profit is net sales less cost of goods sold, which excludes
depreciation and amortization.
-50-
Report of Independent Auditors
The Stockholders of Mueller Industries, Inc.
We have audited the accompanying consolidated balance sheets of Mueller
Industries, Inc. as of December 30, 2000 and December 25, 1999, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 30, 2000.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Mueller Industries, Inc. at December 30, 2000 and December 25, 1999, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 30, 2000, in conformity with
accounting principles generally accepted in the United States.
/S/ERNST & YOUNG LLP
Memphis, Tennessee
February 9, 2001
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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 2000 and 1999 were as
follows:
High Low Close
2000
Fourth quarter $ 26.938 $ 20.063 $ 26.813
Third quarter 32.250 22.063 22.563
Second quarter 34.250 26.000 26.500
First quarter 36.625 26.188 28.313
1999
Fourth quarter $ 36.938 $ 28.313 $ 32.875
Third quarter 35.625 28.000 28.375
Second quarter 33.875 21.125 32.500
First quarter 27.000 19.375 22.625
As of March 6, 2001, the number of holders of record of Mueller's common
stock was approximately 2,800. On March 6, 2001, the closing price for
Mueller's common stock on the New York Stock Exchange was $31.55.
The Company has paid no cash dividends on its common stock and presently does
not anticipate paying cash dividends in the near future.
-52-
Selected Financial Data
(In thousands, except per share data)
2000 (1) 1999 (1) 1998 (1) 1997 1996
For the fiscal year:
Net sales $ 1,206,168 $ 1,168,744 $ 929,391 $ 888,997 $ 718,312
Operating income 148,646 147,926 108,809 99,709 90,462
Net income 92,690 99,279 75,445 69,770 61,173
Diluted earnings
per share (2) 2.43 2.51 1.90 1.78 1.57
At year-end:
Total assets 910,276 904,080 874,694 610,776 509,357
Long-term debt 100,975 118,858 174,569 53,113 44,806
<FN>
(1) Includes the effects of acquisitions described in Note 12 to the
consolidated financial statements.
(2) In 1998, the Company declared a two-for-one stock split
effected in the form of a 100 percent dividend. Diluted earnings per
share has been restated to reflect the split for all periods presented.
-53-
CORPORATE INFORMATION
Board of Directors
Harvey L. Karp Chairman of the Board,
Mueller Industries, Inc.
Gary S. Gladstein (1)(2) Senior Consultant,
Soros Fund Management LLC
Robert B. Hodes(1)(3) Counsel, Willkie Farr & Gallagher
G.E. Manolovici(1)(2)(3) Private Investor
William D. O'Hagan President and Chief Executive Officer,
Mueller Industries, Inc.
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
Executive Officers
Harvey L. Karp Chairman of the Board
William D. O'Hagan President and Chief Executive Officer
Lee R. Nyman Senior Vice President
Manufacturing/Engineering
Kent A. McKee Vice President and
Chief Financial Officer
Roy C. Harris Vice President and
Chief Information Officer
John P. Fonzo Vice President, General Counsel
and Secretary
Other Officers and Management
Robert L. Fleeman Vice President, International Sales
Tommy L. Jamison Vice President,
Strategic Engineering Service
Michael E. Stoll Vice President, Purchasing
Richard W. Corman Corporate Controller
James E. Browne Assistant Secretary
-54-
Standard Products Division
Larry D. Birch Vice President, Sales-Corporate Accounts
Gregory L. Christopher Vice President,
Sales and Supply Chain Management
Bruce R. Clements Vice President, Manufacturing,
Copper Tube
Daniel R. Corbin Vice President, Manufacturing, Plastics
John B. Hansen Vice President, Marketing
Robert A. Haskins Vice President, Sales
Louis F. Pereira General Manager, Canadian Operations
Peter D. Berkman President, B&K Industries
Robert J. Pasquarelli Vice President and General Manager,
European Operations
Industrial Products Division
James H. Rourke Group Vice President
and General Manager
Gerald J. Leary Vice President and General Manager,
Engineered Products
William F. Navarre Vice President, Manufacturing
Other Businesses
Gary L. Barker President, Utah Railway Company
-55-
Stockholder Information
Annual Meeting
The Annual Meeting of Stockholders will be held at the Company's
Headquarters at 8285 Tournament Drive, Suite 150,
Memphis, TN 38125, 10:00 a.m. local time, May 10, 2001.
Common Stock
Mueller common stock is traded on the NYSE - Symbol MLI.
Form 10-K
Copies of the Company's Annual Report on Form 10-K are available upon
written request:
c/o Mueller Industries, Inc.
8285 Tournament Drive, Suite 150
Memphis, TN 38125
Attention: Investor Relations
Independent Auditors
Ernst & Young LLP
Memphis, Tennessee
Transfer Agent and Registrar
Continental Stock Transfer & Trust Co.
2 Broadway
New York, NY 10004
Stockholder Inquiries
To notify the Company of address changes or lost certificates,
stockholders can call Continental Stock Transfer & Trust Co. at
(212) 509-4000.
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