Exhibit 13.0
MUELLER INDUSTRIES
2002 ANNUAL REPORT
Mueller Industries, Inc. (NYSE: MLI) is the leading U.S. 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 was once again recognized by "Forbes" magazine,
appearing on it's "Platinum List: Best Big Companies." The Company's
operations are located throughout the United States, and in the United
Kingdom, Canada and Mexico.
Table of Contents:
Financial and Operating Highlights 2
Letter to Stockholders, Customers, and Employees 4
Ten-Year Review 7
Standard Products Division Overview 9
Industrial Products Division Overview 10
Operational Overview 11
Selected Financial Data 13
Financial Review 14
Consolidated Statements of Income 25
Consolidated Balance Sheets 27
Consolidated Statements of Cash Flows 29
Consolidated Statements of Stockholders' Equity 31
Notes to Consolidated Financial Statements 33
Report of Independent Auditors 58
Directors and Officers 59
Stockholder and Capital Stock Information 61
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MUELLER INDUSTRIES, INC.
2002 Financial Highlights
(In thousands, except per share data)
2002 2001 2000 1999 1998
Summary of Operations
Net sales $ 952,983 $ 969,106 $ 1,157,660 $ 1,110,361 $ 854,030
Product shipments
(in millions of pounds) 694.0 649.9 732.5 759.9 589.5
Net income $ 77,992 $ 66,955 $ 92,690 $ 99,279 $ 75,445
Diluted earnings per share $ 2.11 $ 1.80 $ 2.43 $ 2.51 $ 1.90
Significant Year-End Data
Cash and cash equivalents $ 217,601 $ 121,862 $ 100,268 $ 149,454 $ 80,568
Ratio of current assets to current liabilities 4.7 to 1 4.0 to 1 3.4 to 1 2.9 to 1 2.7 to 1
Long-term debt (including current portion) $ 18,166 $ 50,973 $ 106,884 $ 149,870 $ 194,549
Debt as a percent of total capitalization 2.4% 7.0% 14.8% 20.8% 27.9%
Stockholders' equity $ 753,523 $ 672,933 $ 614,105 $ 569,430 $ 502,122
Book value per share $ 22.00 $ 20.11 $ 18.41 $ 16.31 $ 14.02
Capital expenditures $ 23,265 $ 46,624 $ 62,876 $ 38,272 $ 45,639
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[GRAPH]
Stockholders' Equity
(Dollars in millions)
1998 1999 2000 2001 2002
Stockholders'
Equity $502 $569 $614 $673 $754
[GRAPH]
Debt as a Percent of Total Capitalization
(in %)
1998 1999 2000 2001 2002
Debt as a Percent
of Total
Capitalization 27.9% 20.8% 14.8% 7.0% 2.4%
2002 Operating Highlights
Strengthened Financial Position in 2002
Increased cash to $218 million
Reduced debt by $34 million
No net debt at year-end
Stockholders' equity rose 12% to a record $754 million
$200 million line-of-credit, fully available
Expanded Market Penetration
Acquired manufacturer of pressure plastic fittings
Acquired minority interest in manufacturer of flow control valves
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To Our Stockholders, Customers, and Employees
Mueller's net sales for 2002 totaled $953 million compared with $969
million in 2001. Income from continuing operations was $71.2 million in 2002
versus $65.4 million for the prior year. Earnings per diluted share from
continuing operations for 2002 were $1.92 compared with $1.76 for the year
before. And pounds of product shipped increased to 694 million pounds from
650 million pounds in 2001.
The reference above to "continuing operations" reflects the fact that
in 2002 Mueller sold the Utah Railway and also made the decision to sell or
liquidate its manufacturing operation in France. These two events, when taken
together, had a positive net effect on earnings of 19 cents per diluted
share. In total, earnings from combined continuing and discontinued
operations were $2.11 per diluted share in 2002 compared with $1.80 in 2001.
Importantly, the sale of the Utah Railway allowed Mueller to utilize tax
benefits, which increased earnings per diluted share by 34 cents, and as
required by Generally Accepted Accounting Principles, was incorporated in
income from continuing operations.
The housing and construction industry, the most significant market for
Mueller's products, had a good year in 2002. However, Mueller did not realize
the full benefits from this vibrant market because our profit margins,
particularly in the copper tube business, were compressed by market
conditions.
Mueller is Financially Strong
Mueller ended 2002 with $218 million in cash. Cash flow from continuing
operations during the year was $124.2 million. In addition, cash received
from the sale of the Utah Railway totaled $55.4 million. Also, in 2002,
Mueller paid down debt by $34.1 million, to a remaining balance of $18.2
million. Consequently, our debt-to-total capitalization level is virtually
nil and, in fact, we currently have no net debt as cash on hand far exceeds
total debt.
Our current ratio is a favorable 4.7 to 1. And stockholders' equity
climbed during 2002 by 12 percent to an all-time high of $754 million. We
have available a $200 million line-of-credit provided by a syndicate of banks
that has no outstanding borrowings. The terms of the credit facility are
comparable to a single "A" credit rating which reflects the underlying
strength of our financial condition.
Mueller's depreciation provision is approximately $37 million annually.
In the past, we re-invested this amount, and more, in capital improvement
projects. However, given the fact that we aggressively pursued improvements
over the past seven years, it is likely that capital spending will be less
than depreciation for the next several years. Of course, this will have a
further positive effect on cash flow.
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Mueller's financial strength should enable us to grow and expand our
business as opportunities arise. For example, late in 2002 we acquired a
minority stake in Conbraco Industries, Inc., a North Carolina based
manufacturer of flow control products including Apollo(r) ball valves,
butterfly valves, check valves, and other products for commercial and
industrial applications. Early in 2003, we increased our ownership in
Conbraco to approximately 34 percent by acquiring an additional 45,000 shares
for approximately $10.8 million. We look forward to working with Conbraco's
management to achieve mutual benefits for our companies.
Domestic Copper Tube Operations
We encountered pricing pressures in our domestic copper tube business
during 2002. Volumes were slightly below 2001, but margins were depressed for
much of the year, accounting for the majority of the Company's decline in
operating income. We will continue our emphasis on being the low cost
manufacturer and vigorously defend our market position.
Fittings Operations
Our copper fittings operations had an excellent year. Both volume and
margins were solid.
In plastic fittings, we acquired a manufacturer of pressure fittings in
Fort Pierce, Florida. In the coming years, we will modernize and upgrade this
operation. By broadening our plastic product line, we now offer customers a
single, hassle-free source for their copper and plastic fittings
requirements.
B&K Industries
B&K, our subsidiary that imports residential and commercial plumbing
products, enjoyed an outstanding year. B&K's import business exceeded all
sales and profit expectations. Additionally, we have leveraged our
manufacturing and distribution efforts through increased sales to the big box
retailers. We will continue our focus on expanding our product offering
through this growth channel while implementing initiatives to minimize the
costs related thereto.
European Operations
Late in 2002, we made the difficult decision to liquidate our interests
in the French manufacturing activity. We continued to encounter difficult
business conditions. Our efforts to improve this operation have been
frustrating. By exiting this activity, we will have more management resources
devoted to our promising U.K. operation. While the U.K. operations were
profitable during 2002, we expect better results in 2003. After completing
the modernization of our operation in Bilston, England in 2001, we have a
world-class copper tube mill with the potential to provide excellent returns
for years to come.
In January 2003, Mr. Pat Donovan was appointed managing director of our
European Operations. Pat has been in the industry for 30 years and brings a
wealth of knowledge to us as we begin to leverage our investment in the U.K.
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Industrial Products
Brass rod consumption in the U.S. was up 6 percent in 2002 after a 20
percent decline in 2001. Margins have improved somewhat, but remain lower
than previous levels.
We combined our Micro Gauge and Impacts businesses and, working together
to meet customer needs, they enjoyed an excellent year. We also benefited
from additional business as automotive customers launched several new parts
programs.
Business Outlook for 2003
The housing and construction industry was a strong contributor to our
national economy in 2002. Housing starts and new building permits were at a
16-year high. Moreover, mortgage rates declined to a 40-year low. The
demographic factors underlying the strength of the housing market are clearly
in place, as demonstrated by the increase in home ownership to 68 percent.
Looking ahead, we believe the housing market will continue its strong
performance in 2003. With 15-year mortgage rates near 5.3 percent, consumers
have a powerful inducement to purchase homes. And for most people, the
investment in their home has proven to be financially wise and personally
satisfying.
We believe that the housing and construction industry will do better
than the economy as a whole in 2003. Of equal importance to Mueller is the
potential for improvement in our profit margins but, as always, that is
subject to the vicissitudes of the marketplace.
In Closing
We are pleased to welcome Terry Hermanson as a director of our Company.
Mr. Hermanson is an experienced executive who heads an import company selling
products to mass merchandisers. As an independent director, he will serve on
the Board's Audit Committee.
Mueller's employees are talented and dedicated. They are committed to
making our Company the most successful company in our industry. We appreciate
their efforts and we are proud of them.
Sincerely,
/s/Harvey L. Karp
Harvey L. Karp
Chairman of the Board
/s/William D. O'Hagan
William D. O'Hagan
President and Chief Executive Officer
March 17, 2003
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MUELLER INDUSTRIES, INC.
Ten-Year Review
(Dollars in thousands, except per share data)
2002 2001 2000 1999 1998
INCOME STATEMENT DATA
Net sales $ 952,983 $ 969,106 $ 1,157,660 $ 1,110,361 $ 854,030
Cost of goods sold 744,781 740,366 887,635 840,364 657,664
---------- ---------- ---------- ---------- ----------
Gross profit 208,202 228,740 270,025 269,997 196,366
Depreciation and amortization 37,440 39,461 34,043 32,901 21,127
Selling, general, and administrative expense 85,006 83,750 90,344 91,420 69,784
---------- ---------- ---------- ---------- ----------
Operating income 85,756 105,529 145,638 145,676 105,455
Interest expense (1,460) (3,311) (8,623) (11,090) (5,517)
Environmental expense (1,639) (3,600) (2,049) - (2,133)
Other income, net 5,810 5,787 9,115 8,317 6,492
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income taxes 88,467 104,405 144,081 142,903 104,297
Income tax expense (17,290) (38,982) (51,096) (43,541) (30,309)
---------- ---------- ---------- ---------- ----------
Net income from continuing operations 71,177 65,423 92,985 99,362 73,988
Income (loss) from discontinued operations 6,815 1,532 (295) (83) 1,457
---------- ---------- ---------- ---------- ----------
Net income $ 77,992 $ 66,955 $ 92,690 $ 99,279 $ 75,445
========== ========== ========== ========== ==========
Adjusted weighted average shares (000) 37,048 37,245 38,096 39,605 39,644
Diluted earnings per share $ 2.11 $ 1.80 $ 2.43 $ 2.51 $ 1.90
========== ========== ========== ========== ==========
BALANCE SHEET DATA
Cash and cash equivalents $ 217,601 $ 121,862 $ 100,268 $ 149,454 $ 80,568
Current assets 500,347 403,913 405,171 440,746 382,324
Working capital 393,996 302,425 287,322 287,685 239,750
Total assets 987,947 916,065 910,276 904,080 874,694
Current liabilities 106,351 101,488 117,849 153,061 142,574
Debt 18,166 50,973 106,884 149,870 194,549
Stockholders' equity 753,523 672,933 614,105 569,430 502,122
SELECTED OPERATING DATA
Cash provided by operations $ 124,217 $ 121,453 $ 120,619 $ 164,869 $ 91,508
Capital expenditures $ 23,265 $ 46,624 $ 62,876 $ 38,272 $ 45,639
Number of employees 3,575 3,420 3,965 4,048 4,340
Current ratio 4.7 to 1 4.0 to 1 3.4 to 1 2.9 to 1 2.7 to 1
Return on average equity 10.9% 10.4% 15.7% 18.5% 16.4%
Debt to total capitalization 2.4% 7.0% 14.8% 20.8% 27.9%
Outstanding shares (000) 34,257 33,467 33,358 34,919 35,808
Book value per share $ 22.00 $ 20.11 $ 18.41 $ 16.31 $ 14.02
Historical data has been reclassified to reflect Utah Railway Company
and Mueller Europe S.A. as discontinued operations
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MUELLER INDUSTRIES, INC.
Ten-Year Review (continued)
(Dollars in thousands, except per share data)
1997 1996 1995 1994 1993
INCOME STATEMENT DATA
Net sales $ 843,545 $ 709,850 $ 670,581 $ 545,136 $ 499,542
Cost of goods sold 665,874 555,570 550,846 451,983 407,598
---------- ---------- ---------- ---------- ----------
Gross profit 177,671 154,280 119,735 93,153 91,944
Depreciation and amortization 19,311 18,317 15,308 12,456 13,917
Selling, general, and administrative expense 60,294 53,670 48,416 43,969 45,589
---------- ---------- ---------- ---------- ----------
Operating income 98,066 82,293 56,011 36,728 32,438
Interest expense (4,920) (5,153) (3,922) (4,414) (3,560)
Environmental expense (3,100) (2,045) (1,421) (2,914) (1,060)
Other income (expense), net 7,306 4,125 5,058 3,480 (353)
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income taxes 97,352 79,220 55,726 32,880 27,465
Income tax expense (28,338) (23,862) (16,441) (9,846) (9,956)
---------- ---------- ---------- ---------- ----------
Net income from continuing operations 69,014 55,358 39,285 23,034 17,509
Income (loss) from discontinued operations 756 5,815 5,538 4,892 3,627
---------- ---------- ---------- ---------- ----------
Net income $ 69,770 $ 61,173 $ 44,823 $ 27,926 $ 21,136
========== ========== ========== ========== ==========
Adjusted weighted average shares (000) 39,250 38,993 38,298 39,560 41,772
Diluted earnings per share $ 1.78 $ 1.57 $ 1.17 $ 0.71 $ 0.51
========== ========== ========== ========== ==========
BALANCE SHEET DATA
Cash and cash equivalents $ 69,978 $ 96,956 $ 48,357 $ 34,492 $ 77,336
Current assets 309,051 274,712 211,038 183,551 194,411
Working capital 208,494 195,756 143,154 116,330 146,981
Total assets 610,776 509,357 450,835 430,755 369,743
Current liabilities 100,557 78,956 67,884 67,221 47,430
Debt 72,093 59,650 75,902 94,736 62,711
Stockholders' equity 418,040 348,082 285,875 241,948 222,114
SELECTED OPERATING DATA
Cash provided by operations $ 66,131 $ 71,631 $ 49,052 $ 15,567 $ 47,432
Capital expenditures $ 33,396 $ 17,182 $ 40,663 $ 48,097 $ 11,010
Number of employees 2,961 2,290 2,227 2,206 1,967
Current ratio 3.1 to 1 3.5 to 1 3.1 to 1 2.7 to 1 4.1 to 1
Return on average equity 18.2% 19.3% 17.0% 12.0% 9.9%
Debt to total capitalization 14.7% 14.6% 21.0% 28.1% 22.0%
Outstanding shares (000) 35,017 34,870 34,699 34,796 38,333
Book value per share $ 11.94 $ 9.98 $ 8.24 $ 6.95 $ 5.79
Historical data has been reclassified to reflect Utah Railway Company
and Mueller Europe S.A. as discontinued operations
-8-
Standard Products Division
The Standard Products Division of Mueller Industries includes nine
plants in the U.S. and one in Great Britain that manufacture a wide range of
copper tubing and copper and plastic fittings. The products are sold through
leading distributors and retailers worldwide.
The Company manufactures copper tubes in sizes from 1/8 inch to 8 inch
diameters that are used in residential, commercial, and industrial
applications. Mueller's copper and plastic fittings and related components
for the plumbing and heating industry are used in water distribution systems,
heating systems, air-conditioning, refrigeration applications, and drainage,
waste, and vent systems.
We are the leading supplier of copper tube and fittings to the air-
conditioning, compressor, and refrigeration markets. This is a market with
specialized distribution channels that differ from the plumbing market. We
have developed strong relationships with leading distributors in this market
and our products are frequently specified by name in new installations. We
have maintained our market position by providing high quality products and
leading the market with new innovations.
Mueller acquired the Fort Pierce, Florida operations of Colonial
Engineering, Inc. in September 2002, expanding the Company's product line
into the pressure plastic (PVC and CPVC) fittings business. This acquisition
was a strategic move to broaden the Company's overall product lines and to
improve sales opportunities with retail customers and distributors. The
markets for pressure plastic fittings include irrigation, potable water,
residential, and commercial applications. With the addition of the pressure
plastic product lines, Mueller enhanced its market position by becoming a
one-stop supplier for a full range of PVC, ABS, and CPVC fittings. We have
already been awarded a large volume of plastic fittings business by a major
retail customer.
Over the past five years, Mueller has invested over $150 million in new
plant and equipment upgrades in the Standard Products Division. These
investments have targeted key areas to reduce costs of production, enhance
quality, shorten lead times, and improve customer delivery. A $40 million
modernization of Mueller's U.K. copper tube mill in Bilston was completed in
late 2001. The state-of-the-art facility includes continuous casting, drawing
machinery, and finishing and packaging equipment. The Bilston investments
increase our competitiveness as one of the lowest cost producers in Europe, a
growing market for copper tube sold to builders' merchants, plumbing,
refrigeration, and heating wholesalers.
With major investments already made in our plants, our continuing focus
will be on driving down costs. Our operations are focused on reducing
conversion costs, improving yield, and reducing direct labor content to be
the low-cost producer in our industry. We are also working more closely with
our key customers to be a more valuable strategic partner. This includes
programs focused on improved inventory management to meet customer demands
and broadened product lines to increase our share of each customer's
business. We are driving towards continuous improvement in each of these
areas to make Mueller Industries the preferred supplier in our markets.
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Industrial Products Division
Mueller has ten plants in the U.S. that manufacture brass rod,
nonferrous forgings, impact extrusions, machined components, refrigeration
valves and tubular assemblies, gas valves and manifolds, and drawn tubular
products. These Industrial Products Division plants supply OEMs in the
plumbing, refrigeration, fluid power, LP gas, heating, appliance, and
automotive industries.
Brass Rod - Mueller's brass rod mill employs state-of-the-art casting,
extrusion, and finishing equipment to manufacture a broad range of rounds,
squares, hexagons, and other special shapes. Significant upgrades in the
Company's Port Huron, Michigan plant have resulted in improved quality,
higher yield, and shortened delivery times. New equipment has eliminated
production bottlenecks and enabled scheduling practices to take advantage of
new high speed drawing equipment. Several customers recognized the plant in
2002 for its service levels.
Forgings, Impacts, and Micro Gauge - Brass and aluminum hot forgings, cold-
formed aluminum products, and high volume machining operations were combined
into a single business unit during 2002 to take advantage of complementary
processes and product applications. The new unit experienced significant
sales growth of formed and machined components to the automotive industry and
other OEMs. New press and machining capabilities were added during the year
to improve efficiency and yield.
Gas Products - Mueller has three plants that manufacture valves and
assemblies for the gas appliance and barbecue grill markets. Operations at
these plants continued to focus on improving manufacturing efficiencies and
developing new products and applications.
Refrigeration - Mueller acquired Overstreet-Hughes Company in 2002, adding
capabilities in tube forming, welding, and brazing of refrigeration
components. This acquisition expands Mueller's product offering in
refrigeration and air-conditioning components, and complements the Company's
existing product line of valves and custom products.
Precision Tube - The Company makes tubing for a wide array of applications
requiring tight tolerances from medical instruments to appliances. This unit
focused on improved productivity and enhanced customer service programs
during 2002.
Mueller has made significant investments in plant and equipment in its
Industrial Products Division and has consolidated key business units to take
advantage of manufacturing and marketing synergies. The focus for 2003 will
be on continuous process improvements. These programs will focus on enhancing
manufacturing capabilities to improve yield, quality, and cycle time.
-10-
OPERATIONAL OVERVIEW
Standard Products Division
Copper Tube
PLANTS:
Fulton, Mississippi
Wynne, Arkansas
PRODUCTS AND APPLICATIONS
Water tube, in straight lengths and coils, for plumbing and
construction
Dehydrated coils and nitrogen-charged straight lengths for
refrigeration and air-conditioning
Industrial tube, in straight lengths and level-wound coils, for
fittings, redraw, etc.
Line sets for controlling the flow of refrigerant gases
CUSTOMERS
Plumbing wholesalers, home centers, and hardware wholesalers
and co-ops
Air-conditioning and refrigeration wholesalers and OEMs
Mueller's copper fittings plants and OEMs
Wholesalers and OEMs
Copper Fittings
PLANTS
Fulton, Mississippi
Covington, Tennessee
Port Huron, Michigan
PRODUCTS AND APPLICATIONS
Over 1,500 wrot copper elbows, tees and adapters, and assorted
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
Fort Pierce, Florida
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
PRODUCTS AND APPLICATIONS
Copper tube in various lengths, diameters, and hardnesses for
plumbing, refrigeration, and heating
Industrial tube for redraw, copper fittings, etc.
CUSTOMERS
Builders' merchants, plumbing, refrigeration, and heating wholesalers
OEMs
-11-
Industrial Products Division
Brass Rod
PLANTS
Port Huron, Michigan
PRODUCTS AND APPLICATIONS
A broad range of brass rod 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
Carthage, Tennessee
Jacksboro, Tennessee
Waynesboro, Tennessee
Middletown, Ohio
North Wales, Pennsylvania
PRODUCTS AND APPLICATIONS
Brass and aluminum hot forgings in various 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 valves and assemblies for the gas appliance and barbecue grill
markets
Shaped and formed tube, produced to tight tolerances, for baseboard
heating, appliances, medical instruments, etc.
CUSTOMERS
OEMs and refrigeration wholesalers
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Selected Financial Data
(In thousands, except per share data)
2002 2001 2000 1999 1998
For the fiscal year:
Net sales (1) $ 952,983 $ 969,106 $ 1,157,660 $ 1,110,361 $ 854,030
Operating income (1) 85,756 105,529 145,638 145,676 105,455
Net income from continuing operations 71,177 65,423 92,985 99,362 73,988
Diluted earnings per share
from continuing operations 1.92 1.76 2.44 2.51 1.87
At year-end:
Total assets 987,947 916,065 910,276 904,080 874,694
Long-term debt 14,005 46,977 100,975 118,858 174,569
<FN>
(1) From continuing operations
-13-
Financial Review
Overview
Mueller Industries, Inc. is a leading manufacturer of copper tube and
fittings; brass and copper alloy rod, bar and shapes; aluminum and brass
forgings; aluminum and copper impact extrusions; plastic fittings and valves;
refrigeration valves and fittings; and fabricated tubular products. Mueller's
operations are located throughout the United States and in Canada, Mexico,
and Great Britain.
The Company's businesses are managed and organized into two segments:
(i) Standard Products Division (SPD) and (ii) Industrial Products Division
(IPD). SPD manufactures and sells copper tube, and copper and plastic
fittings and valves. Outside of the United States, SPD manufactures and
sells copper tube in Europe. SPD sells these products to wholesalers in the
HVAC (heating, ventilation, and air-conditioning), plumbing and refrigeration
markets, to distributors to the manufactured housing and recreational vehicle
industries, and to building material retailers. IPD manufactures and sells
brass and copper alloy rod, bar, and shapes; aluminum and brass forgings;
aluminum and copper impact extrusions; refrigeration valves and fittings;
fabricated tubular products; and gas valves and assemblies. IPD sells its
products primarily to original equipment manufacturers (OEMs), many of which
are in the HVAC, plumbing, and refrigeration markets.
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 these costs through to its
customers. Spreads fluctuate based upon market conditions.
During 2002, the Company sold its wholly owned subsidiary, Utah Railway
Company, and initiated steps to sell or liquidate its French manufacturing
operations, Mueller Europe S.A. The operations and cash flows of these two
businesses have been eliminated from the ongoing operations of the Company,
and are reported as discontinued operations.
-14-
Results of Operations
2002 Performance Compared with 2001
Consolidated net sales in 2002 were $953 million, 1.7 percent less than
net sales of $969 million in 2001. Pounds of product sold totaled 694 million
in 2002 or 6.8 percent more than the 650 million pounds sold in 2001. This
increase in pounds sold was primarily attributable to the brass rod business.
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 2002 was approximately 1.2
percent less than the 2001 average. This change impacted the Company's net
sales and cost of goods sold.
Cost of goods sold increased $4.4 million, to $745 million in 2002. This
increase was attributable to increased volumes. Gross profit was $208
million or 21.8 percent of net sales in 2002 compared with $229 million or
23.6 percent of net sales in 2001. The decline in gross profit was due to
lower spreads in certain product lines, primarily copper tube.
Depreciation and amortization decreased to $37.4 million in 2002 from
$39.5 million in 2001. The decrease was due primarily to discontinuing
goodwill amortization, totaling $4.4 million in 2001, in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets". Selling, general, and administrative expense increased
1.5 percent to $85.0 million in 2002, reflecting increased volume.
Interest expense decreased to $1.5 million in 2002 from $3.3 million in
2001. This decrease was primarily due to debt reductions. No interest was
capitalized during 2002, whereas $1.4 million of interest was capitalized on
major capital improvement projects in 2001. Environmental expense totaled
$1.6 million in 2002 compared with $3.6 million in 2001. Other income
remained flat at $5.8 million in 2002 and 2001.
During 2002, the Company sold its wholly owned subsidiary, Utah Railway
Company, to Genessee & Wyoming Inc. Proceeds from the sale were $55.4
million. The Company recognized a gain of $21.1 million, net of income taxes
of $11.6 million, from the sale; additionally, the Company realized income
tax benefits as discussed below. Also during 2002, the Company initiated
steps to sell or liquidate its French manufacturing operations, Mueller
Europe S.A. The Company recognized a loss of $13.4 million, net of $15.2
million income tax benefit, to write-down the value of the French business to
its net realizable value.
Subsequent to year-end, on March 3, 2003, Mueller Europe S.A. filed a
petition for liquidation with the Commercial Court of Provins Province,
France and, on March 4, the Court declared the entity to be in liquidation.
The disposition of remaining assets and obligations of Mueller Europe S.A. is
under the jurisdiction of the Court. The Company will recognize operating
losses from discontinued operations incurred by Mueller Europe S.A. for the
period the business operated during 2003; however, the loss from disposition
of the entity was fully provided in 2002.
-15-
The Company provided $17.3 million for income taxes attributable to
continuing operations in 2002, of which $9.7 million was deferred. The sale
of Utah Railway Company enabled the Company to utilize previously
unrecognized capital loss carryforwards. In accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", the
recognition of this capital loss carryforward benefit of $12.7 million was
classified as a reduction to current income taxes on continuing operations.
Current income tax expense of $7.6 million reflects the benefit of
recognizing this capital loss carryforward. The 2002 effective tax rate was
19.5 percent while the 2001 rate was 37.3 percent.
The Company's employment at its ongoing operations was approximately
3,600 at the end of 2002. This compares with approximately 3,400 at the 2001
year-end. This increase is attributable to acquisitions.
Standard Products Division
Net sales by SPD were $679 million in 2002 compared with $722 million in
2001 for a 6 percent decrease. Operating income was $79.0 million in 2002
compared with $105 million in 2001. The decline in operating profit was due
to lower spreads in certain product lines, primarily copper tube. In
September 2002, the Company acquired certain assets of Colonial Engineering,
Inc.'s Fort Pierce, Florida operations. These operations manufacture injected
molded plastic pressure fittings for plumbing, agricultural, and industrial
use including a line of PVC Schedule 40 and 80 and CPVC fittings. These
operations generated sales of approximately $15 million in 2001. Total
consideration paid was approximately $14.1 million.
Industrial Products Division
IPD's net sales were $280 million in 2002 compared with $252 million in
2001. Operating income was $20.4 million in 2002 compared with $17.5 million
in 2001. Volume increases were responsible for the increase in current year
earnings. In August 2002, the Company acquired 100 percent of the outstanding
stock of Overstreet-Hughes, Co., Inc. Overstreet-Hughes, located in
Carthage, Tennessee, manufactures precision tubular components and assemblies
primarily for the OEM air-conditioning market and had sales in 2001 of
approximately $8 million. Total consideration paid at closing, including
assumption of debt, was approximately $6.3 million. A contingent payment of
up to $2 million will be paid if certain financial targets are achieved.
2001 Performance Compared with 2000
Consolidated net sales in 2001 were $969 million, 16 percent less than
net sales of $1.16 billion in 2000. Pounds of product sold totaled 650
million in 2001 or 11 percent less than the 732 million pounds sold in 2000.
This decrease in pounds sold was a result of the economic slowdown
experienced during 2001. The COMEX average copper price in 2001 was
approximately 14 percent less than the 2000 average. This change impacted the
Company's net sales and cost of goods sold.
-16-
Cost of goods sold decreased $147 million, to $740 million in 2001. This
decrease was attributable to lower raw material costs, mostly copper, and
reduced volumes. Gross profit was $229 million or 23.6 percent of net sales
in 2001 compared with $270 million or 23.3 percent of net sales in 2000. The
decline in gross profit was due to lower volumes and reduced spreads in
certain product lines, partially offset by reductions in manufacturing
conversion costs.
Depreciation and amortization increased to $39.5 million in 2001
compared with $34.0 million in 2000. This increase was due to capital
expenditures in recent years. Selling, general, and administrative expense
decreased to $83.8 million in 2001 reflecting lower volume and results of
cost containment measures.
Interest expense decreased to $3.3 million in 2001 from $8.6 million in
2000. This decrease was due to debt reductions combined with lower borrowing
rates. The Company capitalized interest of $1.4 million for major capital
improvement projects in 2001 compared with $1.2 million in 2000.
Environmental expense totaled $3.6 million in 2001 compared with $2.0 million
in 2000. Other income decreased to $5.8 million in 2001 from $9.1 million in
2000, primarily due to less interest income.
The Company provided $39.0 million for income taxes attributable to
continuing operations in 2001, of which $15.7 million was deferred. Current
income tax expense of $23.2 million decreased from 2000 primarily due to
decreased earnings. The 2001 effective tax rate of 37.3 percent compares
with the 2000 rate of 35.5 percent.
The Company's employment at its ongoing operations was approximately
3,400 at the end of 2001. This compares with approximately 4,000 at the 2000
year-end.
Standard Products Division
Net sales by SPD were $722 million in 2001 compared with $854 million in
2000 for a 15 percent decrease. Operating income was $105 million in 2001
compared with $124 million in 2000. During 2001, the Company began moving its
line set operations from Clinton, Tennessee, to its Wynne, Arkansas, copper
tube mill. Benefits from this move, including reduced in-process inventories
and reduced material handling, commenced in 2002. The Company also
discontinued manufacturing metric copper fittings at its Strathroy, Ontario,
Canada facility. Sales of metric fittings exported into the European market
totaled less than $7 million in 2001. Approximately $1.2 million was charged
to operations in 2001 for the rationalization of these two businesses.
Industrial Products Division
IPD's net sales were $252 million in 2001 compared with $307 million in
2000. Operating income was $17.5 million in 2001 compared with $30.6 million
in 2000. Volume declines, as well as reduced spreads were responsible for the
shortfall in 2001.
-17-
Liquidity and Capital Resources
The Company's cash and cash equivalents balance increased to $218
million at year-end. Major components of the 2002 change included $124
million of cash provided by operating activities, $15.0 million of cash
provided by investing activities and $45.7 million of cash used in financing
activities.
Net income from continuing operations of $71.2 million in 2002 was the
primary component of cash provided by operating activities. Depreciation and
amortization of $37.4 million and the income tax benefit from exercise of
stock options of $13.2 million were the primary non-cash adjustments. Major
changes in working capital included a $13.7 million increase in inventories.
During 2002, the Chairman of the Company's Board of Directors, Mr.
Harvey L. Karp, exercised options to purchase 1.2 million shares of Company
stock. As provided in Mr. Karp's option agreement, the Company withheld the
number of shares, at their fair market value, sufficient to cover the minimum
withholding taxes incurred by the exercise. These shares withheld have been
classified as acquisition of treasury stock on the Company's Consolidated
Statement of Cash Flows. The income tax benefit of $13.2 million from the
exercise of stock options was recognized as a direct addition to additional
paid-in capital and, therefore, had no effect on the Company's earnings.
The major components of net cash provided by investing activities during
2002 include $55.4 million of proceeds from the sale of Utah Railway Company,
offset by $23.3 million used for capital expenditures, and $20.5 million used
for business acquisitions. Also during 2002, the Company acquired a 16
percent equity interest in Conbraco Industries, Inc. for $7.3 million in
cash. Conbraco, headquartered in Matthews, North Carolina, is a manufacturer
of flow control products including Apollo(r) ball valves, automation products,
backflow preventers, butterfly valves, check valves, forged steel products,
marine valves, safety relief valves, strainers, and plumbing and heating
products for commercial and industrial applications.
Net cash used in financing activities totaled $45.7 million. During
2002, the Company used $34.1 million for debt repayments and $14.8 million to
acquire Company stock.
The Company has a $200 million unsecured line-of-credit (Credit
Facility) which expires in November 2003. At year-end, the Company had no
borrowings against the Credit Facility. Approximately $6.6 million in letters
of credit were backed by the Credit Facility at the end of 2002. At December
28, 2002, the Company's total debt was $18.2 million or 2.4 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.
-18-
The Company's major capital projects were substantially complete in
2001, including casting facilities at the Company's brass rod mill,
modernization of the European copper tube mill, and installation of an
additional extrusion press at the Company's Fulton, Mississippi copper tube
mill. The Company expects to invest between $30 and $35 million for capital
projects during 2003.
Contractual cash obligations of the Company at December 28, 2002
included the following:
(In millions)
Payments Due by Year
2004- 2006-
Total 2003 2005 2007 Thereafter
Long-term debt,
including capital
lease obligations $ 18.2 $ 4.2 $ 3.0 $ 0.7 $ 10.3
Operating leases 14.5 4.0 6.1 3.4 1.0
----- ----- ----- ----- -----
Total
contractual
cash obligations $ 32.7 $ 8.2 $ 9.1 $ 4.1 $ 11.3
===== ===== ===== ===== =====
The Company has no off-balance sheet financing arrangements except for
the operating leases identified above.
Fluctuations in the cost of copper and other raw materials affect the
Company's liquidity. Changes in material costs directly impact components of
working capital, primarily inventories and accounts receivable.
Management believes that cash provided by operations and currently
available cash of $218 million will be adequate to meet the Company's normal
future capital expenditure and operational needs. The Company's current ratio
was 4.7 to 1 at December 28, 2002.
In 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
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. During 2002, the
authorization was extended through October 2003. The Company has no
obligation to purchase any shares and may cancel, suspend, or extend the time
period for the purchase of shares at any time. 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 28, 2002, the Company had repurchased approximately 2.4 million
shares under this authorization.
-19-
Environmental Matters
The Company ended 2002 with total environmental reserves of
approximately $9.1 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 interest rates,
foreign currency exchange, raw material costs, and energy costs. To reduce
such risks, the Company may periodically use financial instruments. All
hedging transactions are authorized and executed pursuant to policies and
procedures. Further, the Company does not buy or sell financial instruments
for trading purposes. A discussion of the Company's accounting for derivative
instruments and hedging activities is included in the Summary of Significant
Accounting Policies in the Notes to the Consolidated Financial Statements.
Interest Rates
At December 28, 2002 and December 29, 2001, the fair value of the
Company's debt was estimated at $19.2 million and $51.9 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 28, 2002 by
$1.0 million and at December 29, 2001 by $0.9 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 $0.3 million at
December 28, 2002 and $0.5 million at December 29, 2001.
The Company had $0.2 million of variable-rate debt outstanding at
December 28, 2002 and $30.3 million outstanding at December 29, 2001. At
these borrowing levels, a hypothetical 10 percent increase in interest rates
would have had an insignificant unfavorable impact on the Company's pretax
earnings and cash flows. The primary interest rate exposure on floating-rate
debt is based on LIBOR.
Foreign Currency Exchange Rates
Foreign currency exposures arising from transactions include firm
commitments and anticipated transactions denominated in a currency other than
an entity's functional currency. The Company and its subsidiaries generally
enter into transactions denominated in their respective functional
currencies. Foreign currency exposures arising from transactions denominated
in currencies other than the functional currency are not material; however,
the Company may utilize certain forward fixed-rate contracts to hedge such
transactional exposures. Gains and losses with respect to these positions are
deferred in stockholders' equity as a component of comprehensive income and
reflected in earnings upon collection of receivables. At year-end, the
Company had no open forward contracts to exchange foreign currencies.
-20-
The Company's primary foreign currency exposure arises from foreign-
denominated revenues and profits and their translation into U.S. dollars. The
primary currencies to which the Company is exposed include the Canadian
dollar, the British pound sterling, the Euro, and the Mexican peso. The
Company generally views as long-term its investments in foreign subsidiaries
with a functional currency other than the U.S. dollar. As a result, the
Company generally does not hedge these net investments. The net investment in
foreign subsidiaries translated into U.S. dollars using the year-end exchange
rates was $73.6 million at December 28, 2002 and $115 million at December 29,
2001. 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 28, 2002 and December 29,
2001 amounted to $7.6 million and $11.5 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 component of the Company's
variable costs of production. The cost of these materials is subject to
global market fluctuations caused by factors beyond the Company's control.
Significant increases in the cost of metal, to the extent not reflected in
prices for the Company's finished products, could materially and adversely
affect the Company's business, results of operations, and financial
condition.
The Company occasionally enters into forward fixed-price arrangements
with certain customers. The Company may utilize forward contracts to hedge
risks associated with forward fixed-price arrangements. The Company may also
utilize forward contracts to manage price risk associated with inventory.
Gains or losses with respect to these positions are deferred in stockholders'
equity as a component of comprehensive income and reflected in earnings upon
the sale of inventory. Periodic value fluctuations of the contracts generally
offset the value fluctuations of the underlying fixed-price transactions or
inventory. At year-end, the Company held open forward contracts to purchase
approximately $0.9 million of copper over the next 12 months.
Futures contracts may also be used to manage price risk associated with
natural gas purchases. Gains and losses with respect to these positions are
deferred in stockholders' equity as a component of comprehensive income and
reflected in earnings upon consumption of natural gas. Periodic value
fluctuations of the contracts generally offset the value fluctuations of the
underlying natural gas prices. At year-end, the Company held open hedge
forward contracts to purchase approximately $0.6 million of natural gas over
the next 3 months.
-21-
Critical Accounting Policies and Estimates
The Company's Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the United
States. Application of these principles requires the Company to make
estimates and judgments that affect the amounts reported in the Consolidated
Financial Statements. Management believes the most complex and sensitive
judgments, because of their significance to the Consolidated Financial
Statements, result primarily from the need to make estimates about the
effects of matters which are inherently uncertain. The accounting policies
that are most critical to aid in understanding and evaluating the results of
operations and financial position of the Company include the following:
Inventory Valuation
Inventories are valued at the lower of cost or market. The most
significant component of the Company's inventory is copper. Open market
prices and the mix of cathode and scrap purchases determine the cost of
copper for the Company. Open market prices are subject to volatility. During
periods when open market prices decline, the Company may need to provide an
allowance to reduce the carrying value of its inventory. In order to provide
such an allowance, the Company must estimate the market price of scrap
purchases as well as the mix of cathode and scrap in its raw material, WIP,
and finished goods inventory. Changes in the Company's estimates of either
the market price of scrap inventory or the mix of cathode and scrap in its
raw material, WIP, and finished goods inventory, may result in a materially
adverse or positive impact on its reported financial position or results of
operations. In addition, certain items in inventory may be considered
obsolete and, as such, the Company may establish an allowance to reduce the
carrying value of those items to their net realizable value. Accordingly, the
Company would estimate both the volume of obsolete inventory as well as the
net realizable value of the obsolete inventory. Changes in the Company's
estimates of either the volume or the net realizable value of its obsolete
inventory may result in a materially adverse or positive impact on its
reported financial position or results of operations. The Company recognizes
the impact of any changes in estimates, assumptions, and judgments in income
in the period in which it is determined.
Deferred Taxes
Deferred tax assets and liabilities are recognized on the difference
between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon
the occurrence of future events. The Company records a valuation allowance to
reduce its deferred tax asset to the amount it believes is more likely than
not to be realized. These valuation allowances can be impacted by changes in
tax laws, changes to statutory tax rates, and future taxable income levels
and are based on the Company's judgment, estimates, and assumptions regarding
those future events. In the event the Company were to determine that it would
not be able to realize all or a portion of the net deferred tax assets in the
future, the Company would increase the valuation allowance through a charge
to income in the period that such determination is made. Conversely, if the
Company were to determine that it would be able to realize its deferred tax
assets in the future, in excess of the net carrying amounts, the Company
would decrease the recorded valuation allowance through an increase to income
in the period that such determination is made.
-22-
Environmental Reserves
The Company recognizes an environmental liability when it is probable
the liability exists and the amount is reasonably estimable. The Company
estimates the duration and extent of its remediation obligations based upon
reports of outside consultants, internal analyses of clean-up costs and
ongoing monitoring, communications with regulatory agencies, and changes in
environmental law. If the Company's estimates of the duration or extent of
its environmental obligations changes, the Company would adjust its
environmental liabilities accordingly in the period that such change in
estimates are made.
Allowance for Doubtful Accounts
The Company provides an allowance for receivables it believes it may not
collect in full. It evaluates the collectibility of its accounts based on a
combination of factors. In circumstances where it is aware of a specific
customer's inability to meet its financial obligations (i.e., bankruptcy
filings or substantial down-grading of credit ratings), it records a specific
reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount it reasonably believes will be collected. For all
other customers, the Company recognizes reserves for bad debts based on its
historical collection experience. If circumstances change (i.e., higher than
expected defaults or an unexpected material adverse change in a major
customer's ability to meet its financial obligations), the Company's
estimates of the recoverability of amounts due could be reduced by a material
amount.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143), in June 2001. SFAS No. 143 applies to legal
obligations associated with the retirement of certain tangible long-lived
assets. This statement is effective for fiscal years beginning after June 15,
2002. The adoption of SFAS No. 143 will not have a significant effect on
earnings or the financial position of the Company.
In September 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", was
issued. This statement provides guidance on the recognition and measurement
of liabilities associated with exit or disposal activities and requires that
such liabilities be recognized when incurred. This statement is effective for
exit and disposal activities initiated on or after January 1, 2003 and does
not impact recognition of costs under the Company's existing program.
Adoption of this standard may impact the timing of recognition of costs, if
any, associated with future exit and disposal activities.
-23-
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", was issued. The interpretation provides guidance on
the guarantor's accounting and disclosure requirements for guarantees,
including indirect guarantees of indebtedness of others. The Company has
adopted the disclosure requirements of the interpretation as of December 28,
2002. The accounting guidelines are applicable to guarantees issued after
December 28, 2002 and require that the Company record a liability for the
fair value of such guarantees in the balance sheet. The adoption of this
interpretation will not have a significant effect on earnings or the
financial position of the Company.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46), was issued. The interpretation provides guidance
on consolidating variable interest entities and applies immediately to
variable interest entities created after January 31, 2003. The guidelines of
the interpretation will become applicable for the Company in its third
quarter 2003 financial statements for variable interest entities created
before February 1, 2003. The interpretation requires variable interest
entities to be consolidated if the equity investment at risk is not
sufficient to permit an entity to finance its activities without support from
other parties or the equity investors lack certain specified characteristics.
The adoption of FIN 46 will not have an 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,
the Company provides the following cautionary statement identifying important
economic, political, and technological factors, among others, the absence of
which could cause actual results or events to differ materially from those
set forth in or implied by the forward-looking statements and related
assumptions. Such factors include: (i) the current and projected future
business environment, including interest rates and capital and consumer
spending; (ii) continuation of the strong domestic housing and commercial
construction industry environment; (iii) fluctuations in commodity prices
(including prices of copper and other raw materials); (iv) competitive
factors and competitor responses to the Company's 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.
-24-
Mueller Industries, Inc.
Consolidated Statements of Income
Years Ended December 28, 2002, December 29, 2001, and December 30, 2000
(In thousands, except per share data)
2002 2001 2000
Net sales $ 952,983 $ 969,106 $1,157,660
Cost of goods sold 744,781 740,366 887,635
--------- --------- ---------
Gross profit 208,202 228,740 270,025
Depreciation and amortization 37,440 39,461 34,043
Selling, general, and
administrative expense 85,006 83,750 90,344
--------- --------- ---------
Operating income 85,756 105,529 145,638
Interest expense (1,460) (3,311) (8,623)
Environmental expense (1,639) (3,600) (2,049)
Other income, net 5,810 5,787 9,115
--------- --------- ---------
Income from continuing operations
before income taxes 88,467 104,405 144,081
Income tax expense (17,290) (38,982) (51,096)
--------- --------- ---------
Income from continuing operations 71,177 65,423 92,985
Discontinued operations, net of
income taxes:
Income (loss) from operation of
discontinued operations (886) 1,532 (295)
Gain on disposition of
discontinued operations 7,701 - -
--------- --------- ---------
Net income $ 77,992 $ 66,955 $ 92,690
========= ========= =========
See accompanying notes to consolidated financial statements.
-25-
Mueller Industries, Inc.
Consolidated Statements of Income (continued)
Years Ended December 28, 2002, December 29, 2001, and December 30, 2000
(In thousands, except per share data)
2002 2001 2000
Weighted average shares for basic
earnings per share 33,993 33,409 34,305
Effect of dilutive stock options 3,055 3,836 3,791
--------- --------- ---------
Adjusted weighted average shares for
diluted earnings per share 37,048 37,245 38,096
========= ========= =========
Basic earnings (loss) per share:
From continuing operations $ 2.09 $ 1.96 $ 2.71
From discontinued operations (0.03) 0.04 (0.01)
From gain on disposition of
discontinued operations 0.23 - -
--------- --------- ---------
Basic earnings per share $ 2.29 $ 2.00 $ 2.70
========= ========= =========
Diluted earnings (loss) per share:
From continuing operations $ 1.92 $ 1.76 $ 2.44
From discontinued operations (0.02) 0.04 (0.01)
From gain on disposition of
discontinued operations 0.21 - -
--------- --------- ---------
Diluted earnings per share $ 2.11 $ 1.80 $ 2.43
========= ========= =========
See accompanying notes to consolidated financial statements.
-26-
Mueller Industries, Inc.
Consolidated Balance Sheets
As of December 28, 2002 and December 29, 2001
(In thousands)
2002 2001
Assets
Current assets
Cash and cash equivalents $ 217,601 $ 121,862
Accounts receivable, less allowance for
doubtful accounts of $6,443 in 2002
and $6,573 in 2001 132,427 148,808
Inventories 142,953 126,629
Current deferred income taxes 4,506 2,654
Other current assets 2,860 3,960
-------- --------
Total current assets 500,347 403,913
Property, plant, and equipment, net 352,469 387,533
Goodwill, net 105,551 98,749
Other assets 29,580 25,870
-------- --------
Total Assets $ 987,947 $ 916,065
======== ========
See accompanying notes to consolidated financial statements.
-27-
Mueller Industries, Inc.
Consolidated Balance Sheets (continued)
As of December 28, 2002 and December 29, 2001
(In thousands, except share data)
2002 2001
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 4,161 $ 3,996
Accounts payable 41,004 34,209
Accrued wages and other employee costs 26,199 21,349
Other current liabilities 34,987 41,934
-------- --------
Total current liabilities 106,351 101,488
Long-term debt, less current portion 14,005 46,977
Pension liabilities 22,364 9,564
Postretirement benefits other than pensions 13,186 13,182
Environmental reserves 9,110 9,203
Deferred income taxes 59,269 51,768
Other noncurrent liabilities 9,718 10,679
-------- --------
Total liabilities 234,003 242,861
-------- --------
Minority interest in subsidiaries 421 271
Stockholders' equity
Preferred stock - shares authorized 4,985,000;
none outstanding - -
Series A junior participating preferred stock -
$1.00 par value; shares authorized 15,000;
none outstanding - -
Common stock - $.01 par value; shares authorized
100,000,000; issued 40,091,502; outstanding
34,257,419 in 2002 and 33,466,512 in 2001 401 401
Additional paid-in capital, common 258,939 261,647
Retained earnings 610,114 532,122
Accumulated other comprehensive loss (21,133) (22,038)
Treasury common stock, at cost (94,798) (99,199)
-------- --------
Total stockholders' equity 753,523 672,933
-------- --------
Commitments and contingencies - -
-------- --------
Total Liabilities and Stockholders' Equity $ 987,947 $ 916,065
======== ========
See accompanying notes to consolidated financial statements.
-28-
Mueller Industries, Inc.
Consolidated Statements of Cash Flows
Years Ended December 28, 2002, December 29, 2001, and December 30, 2000
(In thousands)
2002 2001 2000
Operating activities:
Net income from continuing operations $ 71,177 $ 65,423 $ 92,985
Reconciliation of net income from
continuing operations to net cash
provided by operating activities:
Depreciation 36,979 34,539 29,345
Amortization 461 4,922 4,698
Income tax benefit from exercise
of stock options 13,243 356 1,402
Deferred income taxes 9,686 15,737 8,187
Provision for doubtful
accounts receivable 374 526 586
Minority interest in subsidiaries,
net of dividend paid 150 (26) (57)
Gain on disposal of properties (485) (249) (413)
Changes in assets and liabilities,
net of businesses acquired:
Receivables 6,021 1,293 13,851
Inventories (13,744) 13,778 (21,993)
Other assets (4,154) 1,534 464
Current liabilities 3,683 (14,591) (3,725)
Other liabilities (91) (585) (1,014)
Other, net 917 (1,204) (3,697)
--------- --------- ---------
Net cash provided by
operating activities 124,217 121,453 120,619
--------- --------- ---------
Investing activities:
Proceeds from sale of Utah
Railway Company 55,403 - -
Capital expenditures (23,265) (46,624) (62,876)
Acquisition of businesses (20,457) - (15,245)
Proceeds from sales of properties 8,165 2,715 683
Purchase of Conbraco Industries, Inc.
common stock (7,320) - -
Escrowed IRB proceeds 2,445 (2,515) -
--------- --------- ---------
Net cash provided by (used in)
investing activities 14,971 (46,424) (77,438)
--------- --------- ---------
See accompanying notes to consolidated financial statements.
-29-
Mueller Industries, Inc.
Consolidated Statements of Cash Flows (continued)
Years Ended December 28, 2002, December 29, 2001, and December 30, 2000
(In thousands)
2002 2001 2000
Financing activities:
Repayments of long-term debt $ (34,119) $ (65,911) $ (132,986)
Acquisition of treasury stock (14,754) - (48,411)
Proceeds from the sale of
treasury stock 3,204 1,729 2,708
Proceeds from issuance of
long-term debt - 10,000 90,000
--------- --------- ---------
Net cash used in financing activities (45,669) (54,182) (88,689)
--------- --------- ---------
Effect of exchange rate changes on cash 719 (1,084) (844)
--------- --------- ---------
Increase (decrease) in cash and
cash equivalents 94,238 19,763 (46,352)
Cash provided by (used in)
discontinued operations 1,501 1,831 (2,834)
Cash and cash equivalents at the
beginning of the year 121,862 100,268 149,454
--------- --------- ---------
Cash and cash equivalents at the
end of the year $ 217,601 $ 121,862 $ 100,268
========= ========= =========
For supplemental disclosures of cash flow information, see
Notes 1, 5, 7, and 13.
See accompanying notes to consolidated financial statements.
-30-
Mueller Industries, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 28, 2002, December 29, 2001, and December 30, 2000
(In thousands)
Accumulated
Common Stock Additional Other Treasury Stock
Number Paid-In Retained Comprehensive Number
of Shares Amount Capital Earnings Income (Loss) of Shares Cost Total
Balance, December 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 loss:
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
Comprehensive income:
Net income - - - 66,955 - - - 66,955
Other comprehensive
income (loss):
Foreign currency translation - - - - (4,564) - - (4,564)
Minimum pension liability
adjustment, net of
applicable income tax
benefit of $1,165 - - - - (4,370) - - (4,370)
Cumulative effect of change
in accounting for
derivative financial
instruments, net of
applicable income taxes
of $75 - - - - 122 - - 122
Change in fair value of
derivatives, net of
applicable income tax
benefit of $1,414 - - - - (2,306) - - (2,306)
See accompanying notes to consolidated financial statements.
-31-
Mueller Industries, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Years Ended December 28, 2002, December 29, 2001, and December 30, 2000
(In thousands)
Accumulated
Common Stock Additional Other Treasury Stock
Number Paid-In Retained Comprehensive Number
of Shares Amount Capital Earnings Income (Loss) of Shares Cost Total
Losses reclassified into
earnings from other
comprehensive income, net
of applicable income tax
benefit of $556 - - - - 906 - - 906
--------
Comprehensive income 56,743
Issuance of shares
under incentive
stock option plan - - 312 - - (109) 1,417 1,729
Tax benefit related to
employee stock options - - 356 - - - - 356
------- ---- -------- -------- -------- ------ -------- --------
Balance, December 29, 2001 40,092 401 261,647 532,122 (22,038) 6,625 (99,199) 672,933
Comprehensive income:
Net income - - - 77,992 - - - 77,992
Other comprehensive
income (loss):
Foreign currency translation - - - - 10,706 - - 10,706
Minimum pension liability
adjustment, net of
applicable income taxes
of $1,153 - - - - (12,747) - - (12,747)
Change in fair value of
derivatives, net of
applicable income tax
benefit of $386 - - - - (630) - - (630)
Losses reclassified into
earnings from other
comprehensive income, net
of applicable income tax
benefit of $685 - - - - 3,576 - - 3,576
--------
Comprehensive income 78,897
Issuance of shares
under incentive
stock option plan - - (15,951) - - (1,247) 19,155 3,204
Repurchase of common stock - - - - - 456 (14,754) (14,754)
Tax benefit related to
employee stock options - - 13,243 - - - - 13,243
------- ---- -------- -------- -------- ------ -------- --------
Balance, December 28, 2002 40,092 $ 401 $ 258,939 $ 610,114 $ (21,133) 5,834 $ (94,798) $ 753,523
======= ==== ======== ======== ======== ====== ======== ========
See accompanying notes to consolidated financial statements.
-32-
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The principal business of Mueller Industries, Inc. is the manufacture
and sale of copper tube and fittings; brass and copper alloy rod, bar, and
shapes; aluminum and brass forgings; aluminum and copper impact extrusions;
plastic fittings and valves; refrigeration valves and fittings; fabricated
tubular products; and gas valves and assemblies. The Company markets its
products to the HVAC, plumbing, refrigeration, hardware, and other
industries. Mueller's operations are located throughout the United States and
in Canada, Mexico, and Great Britain.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Mueller
Industries, Inc. and its 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 of
buildings, machinery, and equipment is provided on the straight-line method
over the estimated useful lives ranging from 20 to 40 years for buildings and
five to 20 years for machinery and equipment.
Goodwill and Other Intangible Assets
Goodwill represents cost in excess of fair values assigned to the
underlying net assets of acquired businesses, and was historically amortized
using the straight-line method over 20 to 25 years. Effective July 1, 2001,
the Company adopted the provisions of Statements of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS No. 141), and No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142), applicable to business
combinations completed after June 30, 2001. In accordance with these
standards, goodwill acquired after June 30, 2001 is not amortized.
At the beginning of 2002, the remaining provisions of SFAS No. 142 were
effective for the Company. This standard describes the accounting for
intangible assets and goodwill subsequent to initial recognition. Under this
standard, goodwill and intangible assets deemed to have indefinite lives are
no longer subject to amortization. Therefore, amortization of goodwill ceased
at the end of 2001. All other intangible assets are amortized over their
estimated useful lives. Goodwill is subject to impairment testing using the
guidance and criteria described in the standard. This testing compares
carrying values to fair values and, when appropriate, the carrying value of
these assets is required to be reduced to fair value.
-33-
Prior to the adoption of SFAS No. 142, the Company evaluated potential
impairment of goodwill on an ongoing basis and of other intangible assets
when appropriate. This evaluation compared the carrying value of assets to
the sum of the undiscounted expected future cash flows. If an asset's
carrying value exceeded the expected cash flows, the asset would be written-
down to fair value.
Revenue Recognition
Revenue is recognized when products are shipped. The Company classifies
the cost of shipping its product to customers as a component of cost of goods
sold.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
Interpretations. No stock-based employee compensation expense is reflected in
net income because the exercise price of the Company's incentive employee
stock options equals the market price of the underlying stock on the date of
grant. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123), to stock-based employee compensation.
(In thousands, except per share data)
2002 2001 2000
Net income $ 77,992 $ 66,955 $ 92,690
SFAS No. 123 pro forma compensation
expense, net of income taxes (2,485) (1,991) (2,257)
--------- --------- ---------
SFAS No. 123 pro forma
net income $ 75,507 $ 64,964 $ 90,433
========= ========= =========
Pro forma earnings per share:
Basic $ 2.22 $ 1.94 $ 2.64
Diluted $ 2.04 $ 1.75 $ 2.39
Earnings per share, as reported:
Basic $ 2.29 $ 2.00 $ 2.70
Diluted $ 2.11 $ 1.80 $ 2.43
-34-
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" (SFAS No. 109).
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 28, 2002 and December 29, 2001, temporary investments consisted of
certificates of deposit, commercial paper, bank repurchase agreements, and
U.S. and foreign government securities totaling $219.7 million and $122.1
million, respectively.
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.
At December 28, 2002, the Company held open forward commitments to
purchase approximately $0.9 million of copper in the next 12 months and
approximately $0.6 million of natural gas in the next 3 months.
Derivative Instruments and Hedging Activities
Effective at the beginning of fiscal 2001, the Company adopted Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), as amended by Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (SFAS No. 138), which requires
that all derivative instruments be reported on the balance sheet at fair
value and establishes criteria for designation and effectiveness of hedging
relationships. The cumulative effect of adopting SFAS No. 133 and SFAS No.
138 as of the beginning of fiscal 2001 was not material to the Company's
Consolidated Financial Statements. The amounts of gains and losses reported
in accumulated other comprehensive loss upon adoption of SFAS No. 133 and
SFAS No. 138 that were reclassified into earnings during the 12 months
following the adoption were also not material to the Company's Consolidated
Financial Statements.
-35-
The Company has utilized forward contracts to manage the volatility
related to purchases of copper and natural gas, and sales denominated in
foreign currencies. In addition, the Company has reduced its exposure to
increases in interest rates by entering into an interest rate swap contract.
These contracts have been designated as cash flow hedges. In accordance with
SFAS No. 133, the Company has recorded the fair value of these contracts in
the Consolidated Balance Sheets. The related gains and losses on the
contracts are deferred in stockholders' equity as a component of
comprehensive income. With respect to the copper and natural gas contracts,
deferred gains and losses are recognized in cost of goods sold in the period
in which the related sales or consumption of the commodities are recognized.
Deferred gains and losses on foreign currency contracts are recognized in
selling, general, and administrative expense in the period in which the
foreign sales are collected. Deferred gain or loss on the interest rate swap
contract is recognized in interest expense in the period in which the related
interest payment being hedged is expensed. As of December 28, 2002, the
Company expects to reclassify $0.2 million of net losses on derivative
instruments from accumulated other comprehensive loss into earnings during
the next 12 months. To the extent that the changes in the fair value of the
contracts do not perfectly offset the changes in the present value of the
hedged transactions, that ineffective portion is immediately recognized in
earnings. Gains and losses recognized by the Company in 2002 related to the
ineffective portion of its hedging instruments, as well as gains and losses
related to the portion of the hedging instruments excluded from the
assessment of hedge effectiveness, were not material to the Company's
Consolidated Financial Statements. Should these contracts no longer meet
hedge criteria in accordance with SFAS No. 133, either through lack of
effectiveness or because the hedged transaction is not probable of occurring,
all deferred gains and losses related to the hedge will be immediately
reclassified from accumulated other comprehensive loss into earnings.
Prior to the adoption of SFAS No. 133, the Company also used copper,
natural gas, and foreign currency forward contracts for hedging purposes.
Unrealized gains and losses on these contracts were not recognized in income.
Realized gains and losses were recognized when the related operating revenue
or expense was recognized. The Company executes derivative contracts with
counterparties that expose the Company to credit risk in the event of non-
performance. Management considers the exposure to be minimal due to the
historical limited use of derivative contracts.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts receivable,
and accounts payable approximate fair value due to the short-term maturity of
these instruments. Using a discounted cash flow analysis, the fair value of the
Company's long-term debt instruments exceeded their carrying value by $1.0
million and $0.9 million at December 28, 2002 and December 29, 2001,
respectively, based on the estimated current incremental borrowing rates for
similar types of borrowing arrangements. The fair value of the Company's
interest rate swap contract was approximately $(1.3) million at December 28,
2002. This value represents the estimated amount the Company would need to pay
if such contract is terminated before maturity, principally resulting from
market interest rate decreases. The contracted rates on committed forward
contracts do not exceed the market rates for similar term contracts at December
28, 2002. The Company estimates the fair value of contracts by obtaining quoted
market prices.
-36-
Fair value estimates are made at a specific point in time based on
relevant market information about the financial instrument. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Foreign Currency Translation
For foreign subsidiaries, the functional currency is the local currency.
Balance sheet accounts are translated at exchange rates in effect at the end
of the year and income statement accounts are translated at average exchange
rates for the year. Translation gains and losses are included in
stockholders' equity as a component of comprehensive income. Transaction
gains and losses included in the Consolidated Statements of Income were not
significant.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143), in June 2001. SFAS No. 143 applies to legal
obligations associated with the retirement of certain tangible long-lived
assets. This statement is effective for fiscal years beginning after June 15,
2002. The adoption of SFAS No. 143 will not have a significant effect on
earnings or the financial position of the Company.
In September 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", was
issued. This statement provides guidance on the recognition and measurement
of liabilities associated with exit or disposal activities and requires that
such liabilities be recognized when incurred. This statement is effective for
exit and disposal activities initiated on or after January 1, 2003 and does
not impact recognition of costs under the Company's existing program.
Adoption of this standard may impact the timing of recognition of costs, if
any, associated with future exit and disposal activities.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", was issued. The interpretation provides guidance on
the guarantor's accounting and disclosure requirements for guarantees,
including indirect guarantees of indebtedness of others. The Company has
adopted the disclosure requirements of the interpretation as of December 28,
2002. The accounting guidelines are applicable to guarantees issued after
December 28, 2002 and require that the Company record a liability for the
fair value of such guarantees in the balance sheet. The adoption of this
interpretation will not have a significant effect on earnings or the
financial position of the Company.
-37-
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46), was issued. The interpretation provides guidance
on consolidating variable interest entities and applies immediately to
variable interest entities created after January 31, 2003. The guidelines of
the interpretation will become applicable for the Company in its third
quarter 2003 financial statements for variable interest entities created
before February 1, 2003. The interpretation requires variable interest
entities to be consolidated if the equity investment at risk is not
sufficient to permit an entity to finance its activities without support from
other parties or the equity investors lack certain specified characteristics.
The adoption of FIN 46 will not have an effect on earnings or the financial
position of the Company.
Reclassifications
Certain amounts in the 2001 and 2000 Consolidated Financial Statements
have been reclassified to conform to the 2002 presentation.
Note 2 - Inventories
(In thousands)
2002 2001
Raw material and supplies $ 22,692 $ 28,185
Work-in-process 21,477 16,346
Finished goods 98,784 82,098
-------- --------
Inventories $ 142,953 $ 126,629
======== ========
Inventories valued using the LIFO method totaled $37.2 million at
December 28, 2002 and $33.7 million at December 29, 2001. At December 28,
2002 and December 29, 2001, the FIFO cost of such inventories approximates
the LIFO values.
Note 3 - Property, Plant, and Equipment, Net
(In thousands)
2002 2001
Land and land improvements $ 11,742 $ 9,266
Buildings 82,931 83,125
Machinery and equipment 444,570 458,898
Construction in progress 13,618 26,748
-------- --------
552,861 578,037
Less accumulated depreciation (200,392) (190,504)
-------- --------
Property, plant, and equipment, net $ 352,469 $ 387,533
======== ========
-38-
Note 4 - Goodwill
Effective at the beginning of 2002, the Company ceased the amortization
of goodwill in accordance with SFAS No. 142. A reconciliation of reported net
income and earnings per share to pro forma net income and earnings per share
that would have resulted if SFAS No. 142 had been adopted at the beginning of
2000 is as follows:
(In thousands, except per share data)
2002 2001 2000
Net income $ 77,992 $ 66,955 $ 92,690
Goodwill amortization, net of tax - 3,849 4,593
--------- --------- ---------
Pro forma net income $ 77,992 $ 70,804 $ 97,283
========= ========= =========
Pro forma earnings per share:
Basic $ 2.29 $ 2.12 $ 2.83
Diluted $ 2.11 $ 1.90 $ 2.55
Earnings per share, as reported:
Basic $ 2.29 $ 2.00 $ 2.70
Diluted $ 2.11 $ 1.80 $ 2.43
The changes in the carrying amount of goodwill during the year ended
December 28, 2002 were as follows:
(In thousands)
Standard Industrial
Products Products
Division Division Total
Balance at December 29, 2001 $ 90,249 $ 8,500 $ 98,749
Goodwill acquired during the year 4,610 2,192 6,802
--------- --------- ---------
Balance at December 28, 2002 $ 94,859 $ 10,692 $ 105,551
========= ========= =========
Goodwill is subject to impairment testing as required under SFAS No.
142. As of December 28, 2002, the Company was not required to recognize any
goodwill impairment. There can be no assurance that goodwill impairment will
not occur in the future.
-39-
Note 5 - Long-Term Debt
(In thousands)
2002 2001
Line-of-credit at floating rate,
matures November 2003 $ - $ 30,000
2001 Series IRBs with interest at
6.63%, due 2021 10,000 10,000
1997 Series IRBs with interest at
7.39%, due through 2014 6,625 10,125
1997 Series IRBs with interest at
3.2%, due through 2003 200 545
Other, including capitalized
lease obligations 1,341 303
-------- --------
18,166 50,973
Less current portion of long-term debt (4,161) (3,996)
-------- --------
Long-term debt $ 14,005 $ 46,977
======== ========
The Company has a Credit Agreement (the Agreement) with a syndicate of
five 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 December 28, 2002, the
premium was 25 basis points. 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 ratio. 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. Availability of funds under the Credit
Facility is reduced by the amount of certain outstanding letters of credit,
which totaled approximately $6.6 million at December 28, 2002.
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.
On February 13, 2001, the Company, through a wholly owned subsidiary,
issued $10 million of 2001 Series IRBs. The Company entered into an interest
rate swap agreement, which fixes the interest rate at 6.63 percent for seven
years. Subsequent to the seven-year period, the rate will convert to LIBOR
plus .90 percent. The IRBs call for quarterly interest payments through March
1, 2011 and for quarterly principal payments of $250 thousand plus interest
from June 1, 2011 to March 1, 2021.
-40-
Aggregate annual maturities of the Company's debt are $4.2 million, $2.7
million, $0.3 million, $0.4 million, and $0.3 million for the years 2003
through 2007 respectively, and $10.3 million thereafter. Interest paid in
2002, 2001, and 2000 was $1.6 million, $5.5 million, and $10.6 million,
respectively. During 2001 and 2000, the Company capitalized interest of $1.4
million and $1.2 million, respectively, related to its major capital
improvement programs. No interest was capitalized in 2002.
The Company has guarantees which are letters of credit issued by the
Company generally to guarantee the payment of insurance deductibles and
retiree health benefits. The terms of the Company's guarantees are generally
one year but are renewable annually as required. The maximum potential amount
of future payments the Company could be required to make under its guarantees
at December 28, 2002 is $6.6 million.
Note 6 - Stockholders' Equity
On November 10, 1994, the Company declared a dividend distribution of
one Right for each outstanding share of the Company's common stock. Each
Right entitles the holder to purchase one unit consisting of one-thousandth
of a share of Series A Junior Participating Preferred Stock at a purchase
price of $160 per unit, subject to adjustment. The Rights will not be
exercisable, or transferable apart from the Company's common stock, until 10
days following an announcement that a person or affiliated group has
acquired, or obtained the right to acquire, beneficial ownership of 15
percent or more of its common stock other than pursuant to certain offers for
all shares of the Company's common stock that have been determined to be fair
to, and in the best interest of, the Company's stockholders. The Rights,
which do not have voting rights, will be exercisable by all holders (except
for a holder or affiliated group beneficially owning 15 percent or more of
the Company's common stock, whose Rights will be void) so that each holder of
a Right shall have the right to receive, upon the exercise thereof, at the
then current exercise price, the number of shares of the Company's common
stock having a market value of two times the exercise price of the Rights.
All Rights expire on November 10, 2004, and may be redeemed by the Company at
a price of $.01 at any time prior to either their expiration or such time
that the Rights become exercisable.
In the event that the Company is acquired in a merger or other business
combination, or certain other events occur, provision shall be made so that
each holder of a Right (except Rights previously voided) shall have the right
to receive, upon exercise thereof at the then current exercise price, the
number of shares of common stock of the surviving company which at the time
of such transaction would have a market value of two times the exercise price
of the Right.
-41-
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 through open market transactions or through privately negotiated
transactions. During 2000, this authorization was expanded to purchase up to
10 million shares. During 2002, this authorization was extended through
October 2003. The Company has no obligation to purchase any shares and may
cancel, suspend, or extend the time period for the purchase of shares at any
time. 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 28, 2002, the Company had
repurchased approximately 2.4 million shares under this authorization.
Components of accumulated other comprehensive loss are as follows:
(In thousands)
2002 2001
Cumulative foreign currency translation adjustment $ (3,226) $ (16,390)
Minimum pension liability, net of income tax (17,117) (4,370)
Unrealized derivative losses, net of income tax (790) (1,278)
-------- --------
Accumulated other comprehensive loss $ (21,133) $ (22,038)
======== ========
Note 7 - Income Taxes
The components of income from continuing operations before income taxes
were taxed under the following jurisdictions:
(In thousands)
2002 2001 2000
Domestic $ 90,667 $ 114,984 $ 148,642
Foreign (2,200) (10,579) (4,561)
--------- --------- ---------
Income from continuing operations
before income taxes $ 88,467 $ 104,405 $ 144,081
========= ========= =========
-42-
Income tax expense attributable to continuing operations consists of the
following:
(In thousands)
2002 2001 2000
Current tax expense:
Federal $ 6,917 $ 21,532 $ 40,387
Foreign 287 595 816
State and local 400 1,118 1,706
--------- --------- ---------
Current tax expense 7,604 23,245 42,909
--------- --------- ---------
Deferred tax expense:
Federal 9,215 15,032 7,687
Foreign 137 (54) -
State and local 334 759 500
--------- --------- ---------
Deferred tax expense 9,686 15,737 8,187
--------- --------- ---------
Income tax expense $ 17,290 $ 38,982 $ 51,096
========= ========= =========
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.
The difference between the reported income tax expense and a tax
determined by applying the applicable U.S. federal statutory income tax rate
to income from continuing operations before income taxes is reconciled as
follows:
(In thousands)
2002 2001 2000
Expected income tax expense $ 30,964 $ 36,542 $ 50,429
State and local income tax,
net of federal benefit 594 1,542 1,500
Foreign income taxes 1,330 3,657 2,136
Valuation allowance (14,928) (284) (3,923)
Other, net (670) (2,475) 954
--------- --------- ---------
Income tax expense $ 17,290 $ 38,982 $ 51,096
========= ========= =========
-43-
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)
2002 2001
Deferred tax assets:
Accounts receivable $ 1,806 $ 1,880
Inventories 1,560 1,628
Pension, OPEB, and accrued items 10,531 11,078
Other reserves 7,905 7,365
Net operating loss carryforwards 22,043 31,775
Capital loss carryforwards 2,575 17,500
Foreign tax credits - 95
Alternative minimum tax
credit carryforwards 4,026 4,243
Other 398 3,207
-------- --------
Total deferred tax assets 50,844 78,771
Less valuation allowance (33,030) (58,535)
-------- --------
Deferred tax assets, net of
valuation allowance 17,814 20,236
-------- --------
Deferred tax liabilities:
Property, plant, and equipment 70,356 67,396
Other 2,221 1,954
-------- --------
Total deferred tax liabilities 72,577 69,350
-------- --------
Net deferred tax liability $ (54,763) $ (49,114)
======== ========
As of December 28, 2002, the Company had recognized domestic net
operating loss carryforwards (NOLs) of $32.7 million, of which $25.9 million
expire in 2005 and $6.8 million expire in 2006. During 2000, the Company
recognized $3.8 million of NOL tax attributes, reducing the deferred income
tax provision in that 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.
-44-
As of December 28, 2002, the Company had foreign net operating loss
carryforwards (foreign NOLs) available to offset $35.3 million of foreign
subsidiary income. These foreign NOLs have not been recognized, and are
available to offset foreign subsidiary income over an indefinite period. The
disposition of Mueller Europe S.A. reduced the Company's foreign NOLs by
$27.9 million, which had been entirely reserved by a valuation allowance.
The 1999 sale of a subsidiary 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.
During 2002, the Company realized capital gains totaling approximately
$41.4 million, primarily from the sale of Utah Railway Company. Existing
capital loss carryforwards, which for financial reporting purposes were
entirely reserved by a valuation allowance, were used to offset the 2002
capital gains. The income tax benefit of approximately $14.9 million
generated by eliminating this valuation allowance was recognized as a
reduction to income taxes provided for continuing operations in accordance
with SFAS No. 109. Income tax expense included in the operation of
discontinued operations was $2.7 million in 2002, $2.1 million in 2001, and
$3.1 million in 2000.
Income taxes (refunded) paid were approximately $(0.2) million in 2002,
$28.3 million in 2001, and $43.6 million in 2000.
Note 8 - Other Current Liabilities
Included in other current liabilities were accrued discounts and
allowances of $21.2 million at December 28, 2002, and $22.5 million at
December 29, 2001.
Note 9 - Employee Benefits
The Company sponsors several qualified and nonqualified pension plans
and other postretirement benefit plans for certain of its employees. The
following tables provide a reconciliation of the changes in the plans'
benefit obligations and the fair value of the plans' assets over the two-year
period ending December 28, 2002, and a statement of the plans' funded status
as of December 28, 2002 and December 29, 2001:
-45-
(In thousands)
Pension Benefits Other Benefits
2002 2001 2002 2001
Change in benefit
obligation:
Obligation at
beginning of year $ 103,008 $ 103,417 $ 8,114 $ 7,996
Service cost 1,354 1,802 5 13
Interest cost 7,407 7,222 853 702
Participant contributions 295 408 - -
Actuarial loss 11,000 943 2,527 1,659
Benefit payments (6,049) (7,324) (770) (1,365)
Curtailments - (2,429) - (891)
Settlement - (122) - -
Foreign currency
translation adjustment 3,639 (909) - -
-------- -------- -------- --------
Obligation at end of year $ 120,654 $ 103,008 $ 10,729 $ 8,114
======== ======== ======== ========
Change in fair value
of plan assets:
Fair value of plan
assets at beginning
of year $ 112,563 $ 126,683 $ - $ -
Actual return on
plan assets (13,086) (7,523) - -
Employer contributions 1,938 1,331 770 1,365
Participant contributions 295 408 - -
Benefit payments (6,049) (7,324) (770) (1,365)
Settlement - (122) - -
Foreign currency
translation adjustment 2,590 (890) - -
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 98,251 $ 112,563 $ - $ -
======== ======== ======== ========
Funded status:
Funded (underfunded)
status at end of year $ (22,403) $ 9,555 $ (10,729) $ (8,114)
Unrecognized prior
service cost 3,149 4,005 (88) (96)
Unrecognized (gain) loss 24,688 (10,331) 2,791 386
-------- -------- -------- --------
Net amount recognized $ 5,434 $ 3,229 $ (8,026) $ (7,824)
======== ======== ======== ========
-46-
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with benefit obligations in
excess of plan assets were $93.9 million, $91.8 million, and $70.2 million,
respectively, as of December 28, 2002, and $43.6 million, $42.1 million, and
$38.4 million, respectively, as of December 29, 2001.
The following table provides the amounts recognized in the Consolidated
Balance Sheets as of December 28, 2002 and December 29, 2001:
(In thousands)
Pension Benefits Other Benefits
2002 2001 2002 2001
Prepaid benefit cost $ 8,967 $ 6,956 $ - $ -
Intangible asset 1,702 - - -
Accrued benefit liability (22,365) (9,262) (8,026) (7,824)
Accumulated other
comprehensive income 17,130 5,535 - -
-------- -------- -------- --------
Net amount recognized $ 5,434 $ 3,229 $ (8,026) $ (7,824)
======== ======== ======== ========
The components of net periodic benefit cost (income) are as follows:
(In thousands)
2002 2001 2000
Pension benefits:
Service cost $ 1,354 $ 1,802 $ 2,620
Interest cost 7,407 7,222 7,193
Expected return on
plan assets (9,061) (9,794) (9,614)
Amortization of prior
service cost 856 904 875
Amortization of net gain (714) (1,749) (1,701)
--------- --------- ---------
Net periodic benefit
income $ (158) $ (1,615) $ (627)
========= ========= =========
Other benefits:
Service cost $ 5 $ 13 $ 16
Interest cost 853 702 621
Amortization of prior
service cost (8) (8) (8)
Amortization of net gain 122 - (25)
Curtailment gain - (323) -
--------- --------- ---------
Net periodic benefit cost $ 972 $ 384 $ 604
========= ========= =========
-47-
Prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10 percent of the greater of the benefit obligation and the market-
related value of assets are amortized over the average remaining service
period of active participants.
The assumptions used in the measurement of the Company's benefit
obligations are as follows:
Pension Benefits Other Benefits
2002 2001 2002 2001
Weighted average
assumptions:
Discount rate 6.42% 7.25% 6.75% 8.34%
Expected return
on plan assets 8.05% 8.10% N/A N/A
Rate of compensation
increases 4.00% 4.25% N/A N/A
Only one pension plan uses the rate of compensation increase in its
benefit formula. All other pension plans are based on length of service.
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 7.8 to
11.0 percent for 2002, gradually decrease to 6.0 percent for 2011, and remain
at that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point would increase
the accumulated postretirement benefit obligation by $896 thousand and the
service and interest cost components of net periodic postretirement benefit
costs by $76 thousand for 2002. 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 2002 by $817
thousand and $70 thousand, respectively.
The Company sponsors voluntary employee savings plans that qualify under
Section 401(k). Compensation expense for the Company's matching contribution
to the 401(k) plans was $2.0 million in 2002, $2.1 million in 2001, and $2.0
million in 2000. The Company's match is a cash contribution.
Participants direct the investment of their account balances by
allocating among a range of asset classes including mutual funds (equity,
fixed income, and balanced funds), and money market funds. The plans do not
offer direct investment in securities issued by the Company.
-48-
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.
The Company maintains a nonqualified, deferred compensation plan, which
permits certain management employees to annually elect to defer, on a pretax
basis, a portion of their compensation. The deferred benefit to be provided
is based on the amount of compensation deferred, Company match, and earnings
on the deferrals. During 2001, the Company match was discontinued. Other
expenses associated with the plan in 2002 and 2001 were insignificant.
Expenses associated with the deferred compensation plan were $0.2 million in
2000. The Company has invested in certain assets to assist in funding this
plan. The fair value of these assets, included in other assets, was $5.5
million at December 28, 2002 and December 29, 2001.
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 2002, 2001, and 2000.
Note 10 - 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 $1.6 million in 2002, $3.6 million in 2001, and $2.0
million in 2000 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 position 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 position or results
of operations.
-49-
The Company is aware of investigations of competition in markets in
which it participates, or has participated in the past, in Europe, Canada,
and the United States. No charges or allegations have been filed against the
Company, which is cooperating with the investigations. The Company does not
anticipate any material adverse effect on its business or financial condition
as a result of the investigations.
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 $4.0 million in 2003, $3.7 million in
2004, $2.4 million in 2005, $1.9 million in 2006, $1.5 million in 2007, and
$1.0 million thereafter. Total lease expense amounted to $10.6 million in
2002, $8.8 million in 2001, and $9.0 million in 2000.
Note 11 -Other Income, Net
(In thousands)
2002 2001 2000
Rent and royalties $ 2,364 $ 686 $ 791
Interest income 3,111 4,826 7,911
Gain on disposal of properties, net 485 249 413
Minority interest in income
of subsidiaries (150) 26 -
--------- --------- ---------
Other income, net $ 5,810 $ 5,787 $ 9,115
========= ========= =========
Note 12 -Stock Options
The Company follows APB No. 25 in accounting for its employee stock
options. Under APB No. 25, no compensation expense is recognized because the
exercise price of the Company's incentive employee stock options equals the
market price of the underlying stock on the date of grant.
Under existing plans, the Company may grant options to purchase shares
of common stock at prices not less than the fair market value of the stock on
the date of the grant. Generally, the options vest annually in 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.
-80-
The income tax benefit associated with the exercise of stock options
reduced income taxes payable, classified as other current liabilities, by
$13.2 million in 2002, $0.4 million in 2001, and $1.4 million in 2000. Such
benefits are reflected as additions directly to additional paid-in capital
and, therefore, have no effect on the Company earnings.
(Shares in thousands)
Weighted Average
Options Exercise Price
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
Granted 76 29.43
Exercised (120) 17.55
Expired, cancelled, or surrendered (42) 26.03
--------
Outstanding at December 29, 2001 4,936 7.15
Granted 261 31.79
Exercised (1,255) 2.80
Expired, cancelled, or surrendered (21) 30.39
--------
Outstanding at December 28, 2002 3,921 $ 10.06
========
Options exercisable at:
December 30, 2000 4,377 $ 4.75
December 29, 2001 4,462 5.24
December 28, 2002 3,410 7.24
Exercise prices for stock options outstanding at December 28, 2002,
ranged from $2.06 to $37.04. Of the 3.9 million stock options that are
outstanding at year-end, 2.4 million are owned by the Chairman of the
Company's Board of Directors, Mr. Harvey L. Karp, and expire one year after
Mr. Karp's separation from employment with the Company. Mr. Karp's options
have an exercise price of $2.06 per share. The weighted average remaining
life of the remaining 1.5 million shares is 5.9 years, and the weighted
average exercise price of these shares is $22.67. The weighted average fair
value per option granted was $12.49 in 2002, $13.58 in 2001, and $12.60 in
2000.
During the year ended December 28, 2002, Mr. Karp exercised options to
purchase 1.2 million shares of Company stock. As provided in Mr. Karp's
option agreement, the Company withheld the number of shares, at their fair
market value, sufficient to cover the minimum withholding taxes incurred by
the exercise. These shares withheld have been classified as acquisition of
treasury stock in the Company's Consolidated Financial Statements.
-51-
As of December 29, 2001, the Company had reserved 3.7 million shares of
its common stock for issuance pursuant to certain stock option plans.
Additionally, the Company had reserved 15 thousand shares of preferred stock
for issuance pursuant to the shareholder rights plan.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method. The
fair value for these options at the date of grant was estimated using the
following weighted average assumptions for the years 2002, 2001 and 2000:
weighted average expected life of the options of six years; and no dividend
payments. The weighted average risk free interest rate used in the model was
3.44 percent for 2002, 4.67 percent for 2001, and 5.00 percent for 2000. The
volatility factor of the expected market value of the Company's common stock
was 0.344 in 2002, 0.418 in 2001, and 0.479 in 2000.
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 is included in the Summary of Significant
Accounting Policies.
Note 13 - Acquisitions
On September 27, 2002, the Company acquired certain assets of Colonial
Engineering, Inc.'s Fort Pierce, Florida operations. These operations
manufacture injected molded plastic pressure fittings for plumbing,
agricultural, and industrial use including a line of PVC Schedule 40 and 80
and CPVC fittings. These operations generated sales of approximately $15
million in 2001. The purchase price was approximately $14.1 million.
On August 21, 2002, the Company acquired 100 percent of the outstanding
stock of Overstreet-Hughes, Co., Inc. Overstreet-Hughes, located in Carthage,
Tennessee, manufactures precision tubular components and assemblies primarily
for the OEM air-conditioning market and had sales in 2001 of approximately $8
million. Total consideration paid at closing, including assumption of debt,
was approximately $6.3 million. A contingent payment of up to $2 million will
be paid if certain financial targets are achieved.
On April 20, 2000, the Company 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.
-52-
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 Consolidated Financial Statements
reflect the preliminary allocation of the Colonial Engineering purchase price
since final appraisals of property are not yet complete.
The total fair value of assets acquired was $23.4 million in 2002 and
$19.1 million in 2000. Liabilities assumed in these acquisitions were $2.5
million in 2002 and $3.9 million in 2000. The excess of the purchase price
over the net assets acquired was $6.8 million in 2002 and $7.4 million in
2000.
On September 24, 2002, the Company acquired a 16 percent equity interest
in Conbraco Industries, Inc. for $7.3 million in cash. Conbraco is a
manufacturer of flow control products including ball valves, automation
products, backflow preventers, butterfly valves, check valves, forged steel
products, marine valves, safety relief valves, strainers, and plumbing and
heating products for commercial and industrial applications. This investment
is stated at cost, and is included in the other assets classification in the
Consolidated Balance Sheet.
Note 14 - Discontinued Operations
On August 28, 2002, the Company completed the sale of its wholly owned
subsidiary, Utah Railway Company, to Genessee & Wyoming Inc. Proceeds from
the sale were approximately $55.4 million. The Company recognized a gain of
$21.1 million net of income taxes of $11.6 million from the sale.
In December 2002, the Company initiated a plan to sell or liquidate its
French manufacturing operations, Mueller Europe S. A. A loss of $13.4 million
was recognized to write-down this operation to its net realizable value. This
loss is net of a $15.2 million income tax benefit related to the operation's
cumulative losses previously unrecognized for tax purposes. Included in the
loss is a provision to expense the cumulative foreign currency translation
adjustment of $2.5 million, which was previously recognized as a component of
other comprehensive loss. Major components of this operation included in the
Consolidated Balance Sheet at December 28, 2002 include current assets of
$6.3 million and current liabilities of $6.0 million. The sale or liquidation
is expected to be completed during 2003.
Operating results of both businesses, net of applicable income taxes,
are included in the Consolidated Statements of Income classified as income
(loss) from operation of discontinued operations. The Consolidated Financial
Statements and Notes for the years ended December 29, 2001 and December 30,
2000 have been restated, where applicable, to reflect these businesses as
discontinued operations.
-53-
Operating results of discontinued operations were as follows:
(In thousands)
2002 2001 2000
Net sales:
Utah Railway Company $ 15,394 $ 23,399 $ 24,667
Mueller Europe S.A. 49,767 59,940 65,158
--------- --------- ---------
$ 65,161 $ 83,339 $ 89,825
========= ========= =========
Income (loss) before income taxes:
Utah Railway Company $ 7,482 $ 5,502 $ 7,508
Mueller Europe S.A. (5,682) (1,915) (4,676)
--------- --------- ---------
$ 1,800 $ 3,587 $ 2,832
========= ========= =========
Net income (loss):
Utah Railway Company $ 4,812 $ 3,465 $ 4,411
Mueller Europe S.A. (5,698) (1,933) (4,706)
--------- --------- ---------
$ (886) $ 1,532 $ (295)
========= ========= =========
Note 15 - Industry Segments
The Company's reportable segments include its Standard Products Division
(SPD) and its Industrial Products Division (IPD). These segments are
classified primarily by the markets for their products. Performance of
segments is generally evaluated by their operating income.
SPD manufactures copper tube and fittings, plastic fittings, and line
sets. These products are manufactured in the U.S. and Europe and are sold
primarily to wholesalers.
IPD manufactures brass rod, impact extrusions, and forgings as well as a
variety of end-products including plumbing brass; automotive components;
valves and fittings; and specialty copper, copper-alloy, and aluminum tubing.
These products are sold primarily to OEM customers.
Summarized segment and geographic information is shown in the following
tables. Geographic sales data indicates the location from which products are
shipped. Unallocated expenses include general corporate expenses, plus
certain charges or credits not included in segment activity. Certain expenses
related primarily to retiree benefits at inactive operations were formerly
combined with the operations of Utah Railway Company under a third industry
segment, Other Businesses. Following the sale of Utah Railway Company and its
classification as discontinued operations, these expenses of inactive
operations have been combined into the unallocated expenses classification.
-54-
Worldwide sales to one customer from the Standard Products Division
totaled $101.0 million in 2002, $97.2 million in 2001, and $113.9 million in
2000, which represented 11 percent in 2002, and 10 percent in 2001 and 2000
of the Company's consolidated net sales. No other customer accounted for more
than 10 percent of consolidated net sales.
SEGMENT INFORMATION:
(In thousands)
2002 2001 2000
Net sales:
Standard Products Division $ 679,264 $ 721,520 $ 853,849
Industrial Products Division 279,591 251,747 307,240
Elimination of intersegment sales (5,872) (4,161) (3,429)
--------- --------- ---------
$ 952,983 $ 969,106 $1,157,660
========= ========= =========
Depreciation and amortization:
Standard Products Division $ 24,975 $ 27,588 $ 23,503
Industrial Products Division 10,539 10,098 8,791
General corporate 1,926 1,775 1,749
--------- --------- ---------
$ 37,440 $ 39,461 $ 34,043
========= ========= =========
Operating income:
Standard Products Division $ 78,964 $ 104,603 $ 124,397
Industrial Products Division 20,353 17,469 30,604
Unallocated expenses (13,561) (16,543) (9,363)
--------- --------- ---------
$ 85,756 $ 105,529 $ 145,638
========= ========= =========
Expenditures for long-lived assets:
Standard Products Division $ 27,400 $ 33,902 $ 43,581
Industrial Products Division 11,558 10,379 34,380
--------- --------- ---------
$ 38,958 $ 44,281 $ 77,961
========= ========= =========
Segment assets:
Standard Products Division $ 594,516 $ 604,099 $ 621,370
Industrial Products Division 171,315 158,659 164,210
General corporate 222,116 153,307 124,696
--------- --------- ---------
$ 987,947 $ 916,065 $ 910,276
========= ========= =========
-55-
GEOGRAPHIC INFORMATION:
(In thousands)
2002 2001 2000
Net sales:
United States $ 870,457 $ 881,357 $1,057,132
Foreign 82,526 87,749 100,528
--------- --------- ---------
$ 952,983 $ 969,106 $1,157,660
========= ========= =========
Long-lived assets:
United States $ 443,295 $ 451,231 $ 455,356
Foreign 44,305 60,921 49,749
--------- --------- ---------
$ 487,600 $ 512,152 $ 505,105
========= ========= =========
-56-
Note 16 - Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
2002
Net sales $ 249,053 $ 260,507 $ 227,294 $ 216,129
Gross profit (1) 57,247 59,156 50,992 40,807
Income from
continuing operations 17,865 18,716 25,822 8,774
Income (loss) from operations
of discontinued operations,
net of tax 71 (251) (313) (393)
Gain (loss) on disposition of
discontinued operations,
net of tax - - 21,123 (13,422)
Net income (loss) 17,936 18,465 46,632 (5,041)
Basic earnings per share:
From continuing operations 0.54 0.55 0.75 0.25
From discontinued operations - (0.01) (0.01) (0.01)
From sale of discontinued
operations - - 0.62 (0.39)
Basic earnings per share 0.54 0.54 1.36 (0.15)
Diluted earnings per share:
From continuing operations 0.48 0.50 0.70 0.24
From discontinued operations - - - (0.01)
From sale of discontinued
operations - - 0.57 (0.37)
Diluted earnings per share 0.48 0.50 1.27 (0.14)
2001
Net sales $ 254,412 $ 266,028 $ 236,871 $ 211,795
Gross profit (1) 56,017 63,712 60,994 48,017
Income from continuing
operations 15,103 19,899 19,268 11,153
Income (loss) from operations
of discontinued operations,
net of tax 366 876 (267) 557
Net income 15,469 20,775 19,001 11,710
Basic earnings per share:
From continuing operations 0.45 0.59 0.58 0.33
From discontinued operations 0.01 0.03 (0.01) 0.02
Basic earnings per share 0.46 0.62 0.57 0.35
Diluted earnings per share:
From continuing operations 0.41 0.53 0.52 0.30
From discontinued operations 0.01 0.03 (0.01) 0.01
Diluted earnings per share 0.42 0.56 0.51 0.31
<FN>
(1) Gross profit is net sales less cost of goods sold, which excludes
depreciation and amortization.
Quarterly results have been reclassified to reflect the operations of Utah
Railway Company and Mueller Europe S.A. as discontinued operations.
-57-
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 28, 2002 and December 29, 2001, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 28, 2002.
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 28, 2002 and December 29, 2001, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 28, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 4 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets in 2002".
/s/Ernst & Young LLP
Memphis, Tennessee
January 31, 2003
-58-
Directors and Officers
Board of Directors
Harvey L. Karp Chairman of the Board,
Mueller Industries, Inc.
Gennaro J. Fulvio(1)(2)(3) Member, Fulvio & Associates
Gary S. Gladstein(1)(2) Senior Consultant,
Soros Fund Management LLC
Terry Hermanson(1) President,
Mr. Christmas Incorporated
Robert B. Hodes(1)(3) Counsel, Willkie Farr & Gallagher
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
James E. Browne Assistant Secretary
Richard W. Corman Corporate Controller
Robert J. Pasquarelli Vice President
-59-
Standard Products Division
Michael L. Beasley Director of Information Systems
Gregory L. Christopher Vice President, Sales
Daniel R. Corbin Vice President, Manufacturing-Plastics
W. Christopher Crosby Vice President, Supply Chain Management
Robert L. Fleeman Vice President, Export Sales
John B. Hansen Vice President, Marketing
Tommy L. Jamison Vice President, Manufacturing-
Copper Fittings
Normand P. Lebel General Manager, Copper Tube
Robert R. Nelson Vice President, Sales-Pressure Plastic
Fittings
Brian D. Pitt Vice President, Sales-Copper Tube
William F. Shea Manager Service Operations
Peter D. Berkman President-B&K Industries
Patrick W. Donovan Vice President and General
Manager-European Operations
Industrial Products Division
James H. Rourke Group Vice President and
General Manager-Rod
Lance K. Alton General Manager-Forgings,
Impacts, Micro Gauge
John R. Brower General Manager-Precision Tube
Mark T. Lang General Manager-Gas Products
Douglas J. Murdock General Manager-Refrigeration
Products
David G. Rice Division Controller
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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 1, 2003.
Common Stock
Mueller common stock is traded on the NYSE - Symbol MLI.
Form 10-K
The Company's Annual Report on Form 10-K is available on the Company's website
at www.muellerindustries.com or 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.
17 Battery Place
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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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 2002 and 2001 were as follows:
High Low Close
2002
Fourth quarter $ 29.70 $ 24.29 $ 27.33
Third quarter 31.60 23.84 25.51
Second quarter 36.12 31.15 31.75
First quarter 35.43 30.44 34.99
2001
Fourth quarter $ 33.73 $ 27.94 $ 33.53
Third quarter 35.15 26.50 28.70
Second quarter 34.87 28.38 32.91
First quarter 32.11 25.05 30.04
As of March 7, 2003, the number of holders of record of Mueller's common
stock was approximately 2,200. On March 7, 2003, the closing price for
Mueller's common stock on the New York Stock Exchange was $23.69.
The Company has paid no cash dividends on its common stock and presently
does not anticipate paying cash dividends in the near future.
Mueller Industries, Inc.
8285 Tournament Drive, Suite 150
Memphis, TN 38125
901-753-3200
www.muellerindustries.com
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