Mueller Industries, Inc.
Annual Report 2002

Plain-text annual report

Mueller Covers 3/20/03 10:33 AM Page 2 M u e l l e r I n d u s t r i e s 2 0 0 2 A n n u a l R e p o r t Mueller Industries, Inc. 8285 Tournament Drive, Suite 150 Memphis, TN 38125 901-753-3200 www.muellerindustries.com Mueller Covers 3/20/03 10:32 AM Page 1 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 . . . . . . . . . . . . . . . . 1 Consolidated Statements of Income . . . . . . . . . . . . . . . .19 Letter to Stockholders, Customers, and Employees . . . 2 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . .20 Ten-Year Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows . . . . . . . . . . . .21 Standard Products Division Overview . . . . . . . . . . . . . . 6 Consolidated Statements of Stockholders’ Equity . . . . .22 Industrial Products Division Overview . . . . . . . . . . . . . . 8 Notes to Consolidated Financial Statements . . . . . . . . .23 Operational Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Report of Independent Auditors . . . . . . . . . . . . . . . . . . .39 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . .11 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . .40 Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Stockholder and Capital Stock Information . . . . . . . . . .41 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. Independent Auditors Ernst & Young LLP Memphis, Tennessee Common Stock Mueller common stock is traded on the NYSE – Symbol MLI. Transfer Agent and Registrar Continental Stock Transfer & Trust Co. 17 Battery Place New York, NY 10004 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: Stockholder Inquiries To notify the Company of address changes or lost certifi- cates, stockholders can call Continental Stock Transfer & Trust Co. at (212) 509-4000. c/o Mueller Industries, Inc. 8285 Tournament Drive, Suite 150 Memphis, TN 38125 Attention: Investor Relations 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: 2002 Fourth quarter Third quarter Second quarter First quarter 2001 Fourth quarter Third quarter Second quarter First quarter High Low Close $ $ $ $ 29.70 31.60 36.12 35.43 33.73 35.15 34.87 32.11 $ $ 24.29 23.84 31.15 30.44 27.94 26.50 28.38 25.05 27.33 25.51 31.75 34.99 33.53 28.70 32.91 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 1-10 3/20/03 11:37 AM Page 1 2002 Financial Highlights (In thousands, except per share data) 2002 2001 2000 1999 1998 Summary of Operations Net sales Product shipments (in millions of pounds) Net income Diluted earnings per share $ 952,983 694.0 77,992 2.11 $ $ Significant Year-End Data Cash and cash equivalents Ratio of current assets to current liabilities Long-term debt (including current portion) Debt as a percent of total capitalization Stockholders' equity Book value per share Capital expenditures $ $ 217,601 4.7 to 1 18,166 2.4% $ 753,523 22.00 $ 23,265 $ $ $ $ $ $ $ $ $ 969,106 649.9 66,955 1.80 $ 1,157,660 732.5 92,690 2.43 $ $ $ 1,110,361 759.9 99,279 2.51 $ $ $ 854,030 589.5 75,445 1.90 $ $ 121,862 4.0 to 1 50,973 7.0% 672,933 20.11 46,624 $ 100,268 3.4 to 1 $ 106,884 14.8% $ 614,105 18.41 $ 62,876 $ $ 149,454 2.9 to 1 $ 149,870 20.8% $ 569,430 16.31 $ 38,272 $ $ 80,568 2.7 to 1 $ 194,549 27.9% $ 502,122 14.02 $ 45,639 $ Stockholders’ Equity (Dollars in millions) 800 700 600 500 400 300 200 100 0 Mueller at a Glance Debt as a Percent of Total Capitalization (in %) 30 25 20 15 10 5 0 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 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 Mueller 2002 • pg 01 Mueller 1-10 3/20/03 11:38 AM Page 2 To Our Stockholders, Customers, and Employees Mueller’s net sales for 2002 totaled $953 million compared with $969 million in 2001. Income from continuing opera- tions 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. 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. Mueller’s financial strength should enable us to grow and expand our business as opportunities arise. For exam- ple, late in 2002 we acquired a minority stake in Conbraco Industries, Inc., a North Carolina based manu- facturer of flow control products including Apollo® 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. “Mueller’s financial strength should enable us to grow and expand our business as opportunities arise.” 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 manufactur- ing 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 con- tinuing and discontinued operations were $2.11 per dilut- ed 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 incorpo- rated in income from continuing operations. The housing and construction industry, the most sig- nificant 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, par- ticularly 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 provid- ed by a syndicate of banks that has no outstanding borrow- ings. The terms of the credit facility are comparable to a single "A" credit rating which reflects the underly- ing strength of our finan- cial condition. Harvey L. Karp, left and William D. O’Hagan Mueller 1-10 3/20/03 11:38 AM Page 3 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 pres- sure fittings in Fort Pierce, Florida. In the coming years, we will modernize and upgrade this operation. By broad- ening our plastic product line, we now offer customers a single, hassle-free source for their copper and plastic fit- tings 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 liqui- date 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 man- aging 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. enjoyed an excellent year. We also benefited from addi- tional 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 hous- ing 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 power- ful 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 experi- enced executive who heads an import company selling products to mass merchandisers. As an independent direc- tor, 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 success- ful company in our industry. We appreciate their efforts and we are proud of them. Sincerely, Harvey L. Karp Chairman of the Board William D. O’Hagan President and Chief Executive Officer Industrial Products Brass rod consumption in the U.S. was up 6 percent in March 17, 2003 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 business- es and, working together to meet customer needs, they Mueller 2002 • pg 03 Mueller 1-10 3/20/03 11:38 AM Page 4 Ten-Year Review (Dollars in thousands, except per share data) 2002 2001 2000 1999 INCOME STATEMENT DATA Net sales Cost of goods sold Gross profit Depreciation and amortization Selling, general, and administrative expense Operating income Interest expense Environmental expense Other income (expense), net Income from continuing operations before income taxes Income tax expense Net income from continuing operations Income (loss) from discontinued operations Net income Adjusted weighted average shares (000) Diluted earnings per share BALANCE SHEET DATA Cash and cash equivalents Current assets Working capital Total assets Current liabilities Debt Stockholders' equity SELECTED OPERATING DATA Cash provided by operations Capital expenditures Number of employees Current ratio Return on average equity Debt to total capitalization Outstanding shares (000) Book value per share $ 952,983 744,781 208,202 37,440 85,006 85,756 (1,460) (1,639) 5,810 88,467 (17,290) 71,177 6,815 77,992 37,048 2.11 $ $ $ 217,601 500,347 393,996 987,947 106,351 18,166 753,523 $ 124,217 23,265 $ 3,575 4.7 to 1 10.9% 2.4% 34,257 22.00 $ $ 969,106 740,366 228,740 39,461 83,750 105,529 (3,311) (3,600) 5,787 104,405 (38,982) 65,423 1,532 66,955 37,245 1.80 $ $ $ 121,862 403,913 302,425 916,065 101,488 50,973 672,933 $ 121,453 46,624 $ 3,420 4.0 to 1 10.4% 7.0% 33,467 20.11 $ $ 1,157,660 887,635 270,025 34,043 90,344 145,638 (8,623) (2,049) 9,115 $ 1,110,361 840,364 269,997 32,901 91,420 145,676 (11,090) – 8,317 144,081 (51,096) 92,985 (295) 92,690 38,096 2.43 100,268 405,171 287,322 910,276 117,849 106,884 614,105 120,619 62,876 3,965 3.4 to 1 15.7% 14.8% 33,358 18.41 $ $ $ $ $ $ 142,903 (43,541) 99,362 (83) 99,279 39,605 2.51 149,454 440,746 287,685 904,080 153,061 149,870 569,430 164,869 38,272 4,048 2.9 to 1 18.5% 20.8% 34,919 16.31 $ $ $ $ $ $ Historical data has been reclassified to reflect Utah Railway Company and Mueller Europe S.A. as discontinued operations. Mueller 2002 • pg 04 Mueller 1-10 3/20/03 11:38 AM Page 5 1998 1997 1996 1995 1994 1993 $ 854,030 657,664 196,366 21,127 69,784 105,455 (5,517) (2,133) 6,492 104,297 (30,309) 73,988 1,457 75,445 39,644 1.90 80,568 382,324 239,750 874,694 142,574 194,549 502,122 91,508 45,639 4,340 2.7 to 1 16.4% 27.9% 35,808 14.02 $ $ $ $ $ $ $ 843,545 665,874 177,671 19,311 60,294 98,066 (4,920) (3,100) 7,306 97,352 (28,338) 69,014 756 69,770 39,250 1.78 69,978 309,051 208,494 610,776 100,557 72,093 418,040 66,131 33,396 2,961 3.1 to 1 18.2% 14.7% 35,017 11.94 $ $ $ $ $ $ $ 709,850 555,570 154,280 18,317 53,670 82,293 (5,153) (2,045) 4,125 $ $ $ 79,220 (23,862) 55,358 5,815 61,173 38,993 1.57 96,956 274,712 195,756 509,357 78,956 59,650 348,082 $ $ $ 71,631 17,182 2,290 3.5 to 1 19.3% 14.6% 34,870 9.98 $ 670,581 550,846 119,735 15,308 48,416 56,011 (3,922) (1,421) 5,058 $ 545,136 451,983 93,153 12,456 43,969 36,728 (4,414) (2,914) 3,480 55,726 (16,441) 39,285 5,538 44,823 38,298 1.17 48,357 211,038 143,154 450,835 67,884 75,902 285,875 49,052 40,663 2,227 3.1 to 1 17.0% 21.0% 34,699 8.24 $ $ $ $ $ $ 32,880 (9,846) 23,034 4,892 27,926 39,560 0.71 34,492 183,551 116,330 430,755 67,221 94,736 241,948 15,567 48,097 2,206 2.7 to 1 12.0% 28.1% 34,796 6.95 $ $ $ $ $ $ $ 499,542 407,598 91,944 13,917 45,589 32,438 (3,560) (1,060) (353) 27,465 (9,956) 17,509 3,627 21,136 41,772 0.51 77,336 194,411 146,981 369,743 47,430 62,711 222,114 47,432 11,010 1,967 4.1 to 1 9.9% 22.0% 38,333 5.79 $ $ $ $ $ $ Mueller 2002 • pg 05 Mueller 1-10 3/20/03 11:38 AM Page 6 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 compo- nents for the plumbing and heating industry are used in water distribution systems, heating systems, air-condi- tioning, 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 equip- ment. 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. Mueller 2002 • pg 06 Mueller 1-10 3/20/03 11:41 AM Page 7 Mueller 1-10 3/20/03 11:41 AM Page 8 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 manu- facture valves and assemblies for the gas appliance and barbecue grill markets. Operations at these plants contin- ued 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 refriger- ation and air-conditioning components, and comple- ments 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. Mueller 2002 • pg 08 Mueller 2002 • pg 08 Mueller 1-10 3/20/03 11:44 AM Page 9 Mueller 1-10 3/20/03 11:44 AM Page 10 Operational Overview Operational Overview Standard Products Division Plants Products and Applications Customers Fulton, Mississippi Wynne, Arkansas Fulton, Mississippi Covington, Tennessee Port Huron, Michigan Kalamazoo, Michigan Cerritos, California Upper Sandusky, Ohio Fort Pierce, Florida Bilston, Great Britain • Water tube, in straight lengths and coils, for plumbing and • Plumbing wholesalers, home centers, 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 • • hardware wholesalers and co-ops • Air-conditioning and refrigeration wholesalers and OEMs • Mueller’s copper fittings plants and OEMs • Wholesalers and OEMs • Over 1,500 wrot copper elbows, tees and adapters, and assorted fittings for plumbing, heating, air-conditioning, and refrigeration • Plumbing and air-conditioning wholesalers, home centers, hardware wholesalers and co-ops, and OEMs • 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 • Plumbing wholesalers, home centers, hardware wholesalers and co-ops, and distributors to the manufactured housing and recreational vehicle industry • Copper tube in various lengths, diameters, and hardnesses for • Builders’ merchants, plumbing, refrigeration, plumbing, refrigeration, and heating Industrial tube for redraw, copper fittings, etc. • and heating wholesalers • OEMs Industrial Products Division Port Huron, Michigan • 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 • OEMs, contract machining companies and distributors • Brass and aluminum hot forgings in various alloys for • OEMs and refrigeration wholesalers 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 Port Huron, Michigan Marysville, Michigan Brighton, Michigan Hartsville, Tennessee Carthage, Tennessee Jacksboro, Tennessee Waynesboro, Tennessee Middletown, Ohio North Wales, Pennsylvania • Shaped and formed tube, produced to tight tolerances, for baseboard heating, appliances, medical instruments, etc. Mueller 2002 • pg 10 Mueller 2002AR financials 3/20/03 3:33 PM Page 1 Selected Financial Data (In thousands, except per share data) For the fiscal year: Net sales (1) Operating income (1) Net income from continuing operations Diluted earnings per share 2002 2001 2000 1999 1998 $ 952,983 85,756 $ 969,106 105,529 $ 1,157,660 145,638 $ 1,110,361 145,676 $ 854,030 105,455 71,177 65,423 92,985 99,362 73,988 from continuing operations 1.92 1.76 2.44 2.51 1.87 At year-end: Total assets Long-term debt (1) From continuing operations 987,947 14,005 916,065 46,977 910,276 100,975 904,080 118,858 874,694 174,569 Mueller 2002 • pg 11 Mueller 2002AR financials 3/20/03 3:33 PM Page 2 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. 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 Mueller 2002 • pg 12 Mueller 2002AR financials 3/20/03 3:33 PM Page 3 Financial Review 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. 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. 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. Mueller 2002 • pg 13 Mueller 2002AR financials 3/20/03 3:33 PM Page 4 Financial Review 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. 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® 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. Mueller 2002 • pg 14 Mueller 2002AR financials 3/20/03 3:33 PM Page 5 Financial Review 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. 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) Long-term debt, including capital lease obligations Operating leases Total contractual cash obligations Total 2003 Payments Due by Year 2004-2005 2006-2007 Thereafter $ $ 18.2 14.5 32.7 $ $ 4.2 4.0 8.2 $ $ 3.0 6.1 9.1 $ $ 0.7 3.4 4.1 $ 10.3 1.0 $ 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. 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. Mueller 2002 • pg 15 Mueller 2002AR financials 3/20/03 3:33 PM Page 6 Financial Review 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. 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. Mueller 2002 • pg 16 Mueller 2002AR financials 3/20/03 3:33 PM Page 7 Financial Review 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. 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 Mueller 2002 • pg 17 Mueller 2002AR financials 3/20/03 3:33 PM Page 8 Financial Review 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. 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. Mueller 2002 • pg 18 Mueller 2002AR financials 3/20/03 3:33 PM Page 9 Consolidated Statements of Income Years Ended December 28, 2002, December 29, 2001, and December 30, 2000 (In thousands, except per share data) Net sales Cost of goods sold Gross profit Depreciation and amortization Selling, general, and administrative expense Operating income Interest expense Environmental expense Other income, net Income from continuing operations before income taxes Income tax expense Income from continuing operations Discontinued operations, net of income taxes: 2002 $ 952,983 744,781 2001 $ 969,106 740,366 2000 $ 1,157,660 887,635 208,202 37,440 85,006 85,756 (1,460) (1,639) 5,810 88,467 (17,290) 228,740 39,461 83,750 105,529 (3,311) (3,600) 5,787 104,405 (38,982) 270,025 34,043 90,344 145,638 (8,623) (2,049) 9,115 144,081 (51,096) 71,177 65,423 92,985 Income (loss) from operation of discontinued operations Gain on disposition of discontinued operations (886) 7,701 1,532 – (295) – Net income $ 77,992 $ 66,955 $ 92,690 Weighted average shares for basic earnings per share Effect of dilutive stock options 33,993 3,055 33,409 3,836 34,305 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 From discontinued operations From gain on disposition of discontinued operations Basic earnings per share Diluted earnings (loss) per share: From continuing operations From discontinued operations From gain on disposition of discontinued operations Diluted earnings per share $ $ $ $ $ $ $ 2.09 (0.03) 0.23 2.29 1.92 (0.02) 0.21 $ $ $ 1.96 0.04 – 2.00 1.76 0.04 – 2.71 (0.01) – 2.70 2.44 (0.01) – 2.11 $ 1.80 $ 2.43 See accompanying notes to consolidated financial statements. Mueller 2002 • pg 19 Mueller 2002AR financials 3/20/03 3:33 PM Page 10 Consolidated Balance Sheets As of December 28, 2002 and December 29, 2001 (In thousands, except share data) Assets Current assets Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $6,443 in 2002 and $6,573 in 2001 Inventories Current deferred income taxes Other current assets Total current assets Property, plant, and equipment, net Goodwill, net Other assets 2002 2001 $ 217,601 $ 121,862 132,427 142,953 4,506 2,860 500,347 352,469 105,551 29,580 148,808 126,629 2,654 3,960 403,913 387,533 98,749 25,870 Total Assets $ 987,947 $ 916,065 Liabilities and Stockholders' Equity Current liabilities Current portion of long-term debt Accounts payable Accrued wages and other employee costs Other current liabilities Total current liabilities Long-term debt, less current portion Pension liabilities Postretirement benefits other than pensions Environmental reserves Deferred income taxes Other noncurrent liabilities Total liabilities Minority interest in subsidiaries 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 Additional paid-in capital, common Retained earnings Accumulated other comprehensive loss Treasury common stock, at cost Total stockholders' equity Commitments and contingencies $ 4,161 41,004 26,199 34,987 106,351 14,005 22,364 13,186 9,110 59,269 9,718 234,003 $ 3,996 34,209 21,349 41,934 101,488 46,977 9,564 13,182 9,203 51,768 10,679 242,861 421 271 – – – – 401 258,939 610,114 (21,133) (94,798) 753,523 401 261,647 532,122 (22,038) (99,199) 672,933 – – Total Liabilities and Stockholders' Equity $ 987,947 $ 916,065 See accompanying notes to consolidated financial statements. Mueller 2002 • pg 20 Mueller 2002AR financials 3/20/03 3:33 PM Page 11 Consolidated Statements of Cash Flows Years Ended December 28, 2002, December 29, 2001, and December 30, 2000 (In thousands) Operating activities: Net income from continuing operations Reconciliation of net income from continuing operations to net cash provided by operating activities: Depreciation Amortization Income tax benefit from exercise of stock options Deferred income taxes Provision for doubtful accounts receivable Minority interest in subsidiaries, net of dividend paid Gain on disposal of properties Changes in assets and liabilities, net of businesses acquired: Receivables Inventories Other assets Current liabilities Other liabilities Other, net Net cash provided by operating activities Investing activities: Proceeds from sale of Utah Railway Company Capital expenditures Acquisition of businesses Proceeds from sales of properties Purchase of Conbraco Industries, Inc. common stock Escrowed IRB proceeds Net cash provided by (used in) investing activities Financing activities: Repayments of long-term debt Acquisition of treasury stock Proceeds from the sale of treasury stock Proceeds from issuance of long-term debt Net cash used in financing activities 2002 2001 2000 $ 71,177 $ 65,423 $ 92,985 36,979 461 13,243 9,686 374 150 (485) 6,021 (13,744) (4,154) 3,683 (91) 917 124,217 55,403 (23,265) (20,457) 8,165 (7,320) 2,445 14,971 (34,119) (14,754) 3,204 – (45,669) 34,539 4,922 356 15,737 526 (26) (249) 1,293 13,778 1,534 (14,591) (585) (1,204) 121,453 – (46,624) – 2,715 – (2,515) (46,424) (65,911) – 1,729 10,000 (54,182) 29,345 4,698 1,402 8,187 586 (57) (413) 13,851 (21,993) 464 (3,725) (1,014) (3,697) 120,619 – (62,876) (15,245) 683 – – (77,438) (132,986) (48,411) 2,708 90,000 (88,689) Effect of exchange rate changes on cash 719 (1,084) (844) Increase (decrease) in cash and cash equivalents Cash provided by (used in) discontinued operations Cash and cash equivalents at the beginning of the year 94,238 1,501 121,862 19,763 1,831 100,268 (46,352) (2,834) 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. Mueller 2002 • pg 21 Mueller 2002AR financials 3/20/03 3:33 PM Page 12 Consolidated Statements of Stockholders’ Equity Years Ended December 28, 2002, December 29, 2001, and December 30, 2000 Common Stock Number of Shares Amount $ 401 40,092 Additional Paid-In Capital $ 259,977 – – – – – – – – – – (400) – – 40,092 – 401 1,402 260,979 – – – – – – – – – – – – – – – – – – – – 312 – 40,092 – 401 356 261,647 – – – – – – – – – – – – – – – – – – – (15,951) – (In thousands) Balance, December 25, 1999 Comprehensive income: Net income Other comprehensive loss: Foreign currency translation Comprehensive income Issuance of shares under incentive stock option plan Repurchase of common stock Tax benefit related to employee stock options Balance, December 30, 2000 Comprehensive income: Net income Other comprehensive income (loss): Foreign currency translation Minimum pension liability adjustment, net of applicable income tax benefit of $1,165 Cumulative effect of change in accounting for derivative financial instruments, net of applicable income taxes of $75 Change in fair value of derivatives, net of applicable income tax benefit of $1,414 Losses reclassified into earnings from other comprehensive income, net of applicable income tax benefit of $556 Comprehensive income Issuance of shares under incentive stock option plan Tax benefit related to employee stock options Balance, December 29, 2001 Comprehensive income: Net income Other comprehensive income (loss): Foreign currency translation Minimum pension liability adjustment, net of applicable income taxes of $1,153 Change in fair value of derivatives, net of applicable income tax benefit of $386 Losses reclassified into earnings from other comprehensive income, net of applicable income tax benefit of $685 Comprehensive income Issuance of shares under incentive stock option plan Repurchase of common stock Tax benefit related to employee stock options Balance, December 28, 2002 Accumulated Other Treasury Stock Retained Comprehensive Number Earnings Income (Loss) of Shares $ 372,477 $ (8,112) 5,173 Cost Total $ (55,313) $ 569,430 92,690 – (3,714) – – – – 92,690 (3,714) 88,976 – – – – 465,167 66,955 – – – – – – – 532,122 77,992 – – – – – – – – (295) 1,856 3,108 (48,411) 2,708 (48,411) – (11,826) – 6,734 – (100,616) 1,402 614,105 – (4,564) (4,370) 122 (2,306) 906 – – – – – – – – – – – – 66,955 (4,564) (4,370) 122 (2,306) 906 56,743 – (109) 1,417 1,729 – (22,038) – 6,625 – (99,199) 356 672,933 – 10,706 (12,747) (630) 3,576 – – – – – – – – – – 77,992 10,706 (12,747) (630) 3,576 78,897 – – (1,247) 456 19,155 (14,754) 3,204 (14,754) – 40,092 – $ 401 13,243 $ 258,939 – $ 610,114 – $ (21,133) – 5,834 – 13,243 $ (94,798) $ 753,523 See accompanying notes to consolidated financial statements. Mueller 2002 • pg 22 Mueller 2002AR financials 3/20/03 3:33 PM Page 13 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. 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 Mueller 2002 • pg 23 Mueller 2002AR financials 3/20/03 3:33 PM Page 14 Notes to Consolidated Financial Statements 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) Net income SFAS No. 123 compensation expense, net of income taxes SFAS No. 123 pro forma net income Pro forma earnings per share: Basic Diluted Earnings per share, as reported: Basic Diluted Earnings Per Share 2002 77,992 (2,485) 75,507 2.22 2.04 2.29 2.11 $ $ $ $ $ $ 2001 66,955 (1,991) 64,964 1.94 1.75 2.00 1.80 $ $ $ $ $ $ 2000 92,690 (2,257) 90,433 2.64 2.39 2.70 2.43 $ $ $ $ $ $ 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 Mueller 2002 • pg 24 Mueller 2002AR financials 3/20/03 3:33 PM Page 15 Notes to Consolidated Financial Statements 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. 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. 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. Mueller 2002 • pg 25 Mueller 2002AR financials 3/20/03 3:33 PM Page 16 Notes to Consolidated Financial Statements 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. 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) Raw material and supplies Work-in-process Finished goods Inventories $ 2002 22,692 21,477 98,784 $ 142,953 $ 2001 28,185 16,346 82,098 $ 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. Mueller 2002 • pg 26 Mueller 2002AR financials 3/20/03 3:33 PM Page 17 Notes to Consolidated Financial Statements Note 3 - Property, Plant, and Equipment, Net (In thousands) Land and land improvements Buildings Machinery and equipment Construction in progress Less accumulated depreciation Property, plant, and equipment, net Note 4 - Goodwill $ 2002 11,742 82,931 444,570 13,618 552,861 (200,392) $ 352,469 2001 $ 9,266 83,125 458,898 26,748 578,037 (190,504) $ 387,533 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) Net income Goodwill amortization, net of tax Pro forma net income Pro forma earnings per share: Basic Diluted Earnings per share, as reported: Basic Diluted 2002 77,992 – 77,992 2.29 2.11 2.29 2.11 $ $ $ $ $ $ 2001 66,955 3,849 70,804 2.12 1.90 2.00 1.80 $ $ $ $ $ $ 2000 92,690 4,593 97,283 2.83 2.55 2.70 2.43 $ $ $ $ $ $ The changes in the carrying amount of goodwill during the year ended December 28, 2002 were as follows: (In thousands) Balance at December 29, 2001 Goodwill acquired during the year Balance at December 28, 2002 Standard Products Division $ $ 90,249 4,610 94,859 Industrial Products Division 8,500 2,192 10,692 $ $ $ Total 98,749 6,802 $ 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. Mueller 2002 • pg 27 Mueller 2002AR financials 3/20/03 3:33 PM Page 18 Notes to Consolidated Financial Statements Note 5 - Long-Term Debt (In thousands) Line-of-credit at floating rate, matures November 2003 2001 Series IRBs with interest at 6.63%, due 2021 1997 Series IRBs with interest at 7.39%, due through 2014 1997 Series IRBs with interest at 3.2%, due through 2003 Other, including capitalized lease obligations Less current portion of long-term debt Long-term debt 2002 – 10,000 6,625 200 1,341 18,166 (4,161) 14,005 $ $ 2001 30,000 10,000 10,125 545 303 50,973 (3,996) 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. 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 Mueller 2002 • pg 28 Mueller 2002AR financials 3/20/03 3:33 PM Page 19 Notes to Consolidated Financial Statements common stock, whose Rights will be void) so that each holder of a Right shall have the right to receive, upon the exercise thereof, at the then current exercise price, the number of shares of the Company’s common stock having a market value of two times the exercise price of the Rights. All Rights expire on November 10, 2004, and may be redeemed by the Company at a price of $.01 at any time prior to either their expiration or such time that the Rights become exercisable. In the event that the Company is acquired in a merger or other business combination, or certain other events occur, provision shall be made so that each holder of a Right (except Rights previously voided) shall have the right to receive, upon exercise thereof at the then current exercise price, the number of shares of common stock of the surviving company which at the time of such transaction would have a market value of two times the exercise price of the Right. On October 18, 1999, the Company’s Board of Directors authorized the repurchase of up to four million shares of the Company’s common stock from time-to-time 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) Cumulative foreign currency translation adjustment Minimum pension liability, net of income tax Unrealized derivative losses, net of income tax Accumulated other comprehensive loss Note 7 - Income Taxes $ 2002 (3,226) (17,117) (790) $ (21,133) 2001 (16,390) (4,370) (1,278) (22,038) $ $ The components of income from continuing operations before income taxes were taxed under the following jurisdictions: (In thousands) Domestic Foreign Income from continuing operations before income taxes 2002 90,667 (2,200) 88,467 $ $ 2001 $ 114,984 (10,579) $ 104,405 2000 $ 148,642 (4,561) $ 144,081 Income tax expense attributable to continuing operations consists of the following: (In thousands) Current tax expense: Federal Foreign State and local Current tax expense Deferred tax expense: Federal Foreign State and local Deferred tax expense Income tax expense 2002 2001 2000 $ $ 6,917 287 400 7,604 9,215 137 334 9,686 17,290 $ $ 21,532 595 1,118 23,245 15,032 (54) 759 15,737 38,982 $ $ 40,387 816 1,706 42,909 7,687 – 500 8,187 51,096 Mueller 2002 • pg 29 Mueller 2002AR financials 3/20/03 3:33 PM Page 20 Notes to Consolidated Financial Statements 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) Expected income tax expense State and local income tax, net of federal benefit Foreign income taxes Valuation allowance Other, net Income tax expense 2002 30,964 594 1,330 (14,928) (670) 17,290 $ $ 2001 36,542 1,542 3,657 (284) (2,475) 38,982 $ $ 2000 50,429 1,500 2,136 (3,923) 954 51,096 $ $ 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) Deferred tax assets: Accounts receivable Inventories Pension, OPEB, and accrued items Other reserves Net operating loss carryforwards Capital loss carryforwards Foreign tax credits Alternative minimum tax credit carryforwards Other Total deferred tax assets Less valuation allowance Deferred tax assets, net of valuation allowance Deferred tax liabilities: Property, plant, and equipment Other Total deferred tax liabilities Net deferred tax liability 2002 2001 $ 1,806 1,560 10,531 7,905 22,043 2,575 – 4,026 398 50,844 (33,030) 17,814 $ 1,880 1,628 11,078 7,365 31,775 17,500 95 4,243 3,207 78,771 (58,535) 20,236 70,356 2,221 72,577 $ (54,763) 67,396 1,954 69,350 (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. 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. Mueller 2002 • pg 30 Mueller 2002AR financials 3/20/03 3:33 PM Page 21 Notes to Consolidated Financial Statements 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: (In thousands) Change in benefit obligation: Obligation at beginning of year Service cost Interest cost Participant contributions Actuarial loss Benefit payments Curtailments Settlement Foreign currency translation adjustment Obligation at end of year Change in fair value of plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Participant contributions Benefit payments Settlement Foreign currency translation adjustment Fair value of plan assets at end of year Funded status: Funded (underfunded) status at end of year Unrecognized prior service cost Unrecognized (gain) loss Net amount recognized Pension Benefits 2002 2001 Other Benefits 2002 2001 $ 103,008 1,354 7,407 295 11,000 (6,049) – – 3,639 $ 120,654 $ 112,563 (13,086) 1,938 295 (6,049) – 2,590 98,251 $ $ 103,417 1,802 7,222 408 943 (7,324) (2,429) (122) (909) $ 103,008 $ 126,683 (7,523) 1,331 408 (7,324) (122) (890) $ 112,563 $ $ $ $ 8,114 5 853 – 2,527 (770) – – – 10,729 – – 770 – (770) – – – $ (22,403) 3,149 24,688 5,434 $ $ $ 9,555 4,005 (10,331) 3,229 $ (10,729) (88) 2,791 (8,026) $ $ $ $ $ $ $ 7,996 13 702 – 1,659 (1,365) (891) – – 8,114 – – 1,365 – (1,365) – – – (8,114) (96) 386 (7,824) Mueller 2002 • pg 31 Mueller 2002AR financials 3/20/03 3:33 PM Page 22 Notes to Consolidated Financial Statements 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) Prepaid benefit cost Intangible asset Accrued benefit liability Accumulated other comprehensive loss Net amount recognized Pension Benefits 2002 8,967 1,702 (22,365) 17,130 5,434 $ $ The components of net periodic benefit cost (income) are as follows: (In thousands) Pension benefits: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of net gain Net periodic benefit income Other benefits: Service cost Interest cost Amortization of prior service cost Amortization of net gain Curtailment gain Net periodic benefit cost 2001 $ 6,956 $ – (9,262) 5,535 3,229 2002 1,354 7,407 (9,061) 856 (714) (158) 5 853 (8) 122 – 972 $ $ $ $ $ $ $ $ $ $ Other Benefits 2002 2001 – – (8,026) – (8,026) 2001 1,802 7,222 (9,794) 904 (1,749) (1,615) 13 702 (8) – (323) 384 $ $ $ $ $ $ – – (7,824) – (7,824) 2000 2,620 7,193 (9,614) 875 (1,701) (627) 16 621 (8) (25) – 604 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: Weighted average assumptions: Discount rate Expected return on plan assets Rate of compensation increases Pension Benefits 2002 2001 Other Benefits 2002 2001 6.42% 8.05% 4.00% 7.25% 8.10% 4.25% 6.75% N/A N/A 8.34% 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 Mueller 2002 • pg 32 Mueller 2002AR financials 3/20/03 3:33 PM Page 23 Notes to Consolidated Financial Statements 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. 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. 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. Mueller 2002 • pg 33 Mueller 2002AR financials 3/20/03 3:33 PM Page 24 Notes to Consolidated Financial Statements Note 11 -Other Income, Net (In thousands) Rent and royalties Interest income Gain on disposal of properties, net Minority interest in income of subsidiaries Other income, net Note 12 -Stock Options 2002 2001 2000 $ $ 2,364 3,111 485 (150) 5,810 $ $ 686 4,826 249 26 5,787 $ $ 791 7,911 413 – 9,115 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. 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) Outstanding at December 25, 1999 Granted Exercised Expired, cancelled, or surrendered Outstanding at December 30, 2000 Granted Exercised Expired, cancelled, or surrendered Outstanding at December 29, 2001 Granted Exercised Expired, cancelled, or surrendered Outstanding at December 28, 2002 Options exercisable at: December 30, 2000 December 29, 2001 December 28, 2002 Mueller 2002 • pg 34 Options 5,199 150 (311) (16) 5,022 76 (120) (42) 4,936 261 (1,255) (21) 3,921 4,377 4,462 3,410 $ Weighted Average Exercise Price 6.94 24.42 10.07 24.70 7.22 29.43 17.55 26.03 7.15 31.79 2.80 30.39 $ 10.06 $ 4.75 5.24 7.24 Mueller 2002AR financials 3/20/03 3:33 PM Page 25 Notes to Consolidated Financial Statements 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. 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. 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. Mueller 2002 • pg 35 Mueller 2002AR financials 3/20/03 3:33 PM Page 26 Notes to Consolidated Financial Statements 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. Operating results of discontinued operations were as follows: (In thousands) Net sales: Utah Railway Company Mueller Europe S.A. Income (loss) before income taxes: Utah Railway Company Mueller Europe S.A. Net income (loss): Utah Railway Company Mueller Europe S.A. Note 15 - Industry Segments 2002 2001 2000 $ $ $ $ $ $ 15,394 49,767 65,161 7,482 (5,682) 1,800 4,812 (5,698) (886) $ $ $ $ $ $ 23,399 59,940 83,339 5,502 (1,915) 3,587 3,465 (1,933) 1,532 $ $ $ $ $ $ 24,667 65,158 89,825 7,508 (4,676) 2,832 4,411 (4,706) (295) 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. Mueller 2002 • pg 36 Mueller 2002AR financials 3/20/03 3:33 PM Page 27 Notes to Consolidated Financial Statements 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. 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) Net sales: Standard Products Division Industrial Products Division Elimination of intersegment sales Depreciation and amortization: Standard Products Division Industrial Products Division General corporate Operating income: Standard Products Division Industrial Products Division Unallocated expenses Expenditures for long-lived assets: Standard Products Division Industrial Products Division Segment assets: Standard Products Division Industrial Products Division General corporate Geographic Information: (In thousands) Net sales: United Sates Foreign Long-lived assets: United Sates Foreign 2002 2001 2000 679,264 279,591 (5,872) 952,983 $ 721,520 251,747 (4,161) $ 969,106 $ 853,849 307,240 (3,429) $ 1,157,660 24,975 10,539 1,926 37,440 $ $ 27,588 10,098 1,775 39,461 $ $ 23,503 8,791 1,749 34,043 78,964 20,353 (13,561) 85,756 $ 104,603 17,469 (16,543) $ 105,529 $ 124,397 30,604 (9,363) $ 145,638 27,400 11,558 38,958 $ $ 33,902 10,379 44,281 $ $ 43,581 34,380 77,961 594,516 171,315 222,116 987,947 $ 604,099 158,659 153,307 $ 916,065 $ 621,370 164,210 124,696 $ 910,276 2002 2001 2000 870,457 82,526 952,983 $ 881,357 87,749 $ 969,106 $ 1,057,132 100,528 $ 1,157,660 443,295 44,305 487,600 $ 451,231 60,921 $ 512,152 $ 455,356 49,749 $ 505,105 $ $ $ $ $ $ $ $ $ $ $ $ $ $ Mueller 2002 • pg 37 Mueller 2002AR financials 3/20/03 3:33 PM Page 28 Notes to Consolidated Financial Statements Note 16 - Quarterly Financial Information (Unaudited) (In thousands, except per share data) 2002 Net sales Gross profit (1) Income from continuing operations Income (loss) from operations of discontinued operations, net of tax Gain (loss) on disposition of discontinued operations, net of tax Net income (loss) Basic earnings per share: From continuing operations From discontinued operations From sale of discontinued operations Basic earnings per share Diluted earnings per share: From continuing operations From discontinued operations From sale of discontinued operations Diluted earnings per share 2001 Net sales Gross profit (1) Income from continuing operations Income (loss) from operations of discontinued operations, net of tax Net income Basic earnings per share: From continuing operations From discontinued operations Basic earnings per share Diluted earnings per share: From continuing operations From discontinued operations Diluted earnings per share First Quarter Second Quarter Third Quarter Fourth Quarter $ 249,053 57,247 17,865 $ 260,507 59,156 18,716 $ 227,294 50,992 25,822 $ 216,129 40,807 8,774 71 (251) (313) (393) – 17,936 – 18,465 21,123 46,632 (13,422) (5,041) 0.54 – – 0.54 0.48 – – 0.48 0.55 (0.01) – 0.54 0.50 – – 0.50 0.75 (0.01) 0.62 1.36 0.70 – 0.57 1.27 0.25 (0.01) (0.39) (0.15) 0.24 (0.01) (0.37) (0.14) $ 254,412 56,017 15,103 $ 266,028 63,712 19,899 $ 236,871 60,994 19,268 $ 211,795 48,017 11,153 366 15,469 876 20,775 (267) 19,001 557 11,710 0.45 0.01 0.46 0.41 0.01 0.42 0.59 0.03 0.62 0.53 0.03 0.56 0.58 (0.01) 0.57 0.52 (0.01) 0.51 0.33 0.02 0.35 0.30 0.01 0.31 (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. Mueller 2002 • pg 38 Mueller 2002AR financials 3/20/03 3:33 PM Page 29 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. Memphis, Tennessee January 31, 2003 Mueller 2002 • pg 39 Mueller 2002AR financials 3/20/03 3:33 PM Page 30 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 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 John B. Hansen Vice President, Marketing Tommy L. Jamison Vice President, Manufacturing– Copper Fittings Normand P. Lebel General Manager, Copper Tube Kent A. McKee Vice President and Chief Financial Officer Robert R. Nelson Vice President, Sales–Pressure Plastic Fittings Robert B. Hodes(1)(3) Counsel, Willkie Farr & Gallagher Roy C. Harris Vice President and Chief Information Officer William D. O’Hagan President and Chief Executive Officer, Mueller Industries, Inc. John P. Fonzo Vice President, General Counsel and Secretary (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Nominating Committee Other Officers and Management James E. Browne Assistant Secretary Richard W. Corman Corporate Controller Robert J. Pasquarelli Vice President 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 Mueller 2002 • pg 40 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 Mueller Covers 3/20/03 10:32 AM Page 1 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 . . . . . . . . . . . . . . . . 1 Consolidated Statements of Income . . . . . . . . . . . . . . . .19 Letter to Stockholders, Customers, and Employees . . . 2 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . .20 Ten-Year Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows . . . . . . . . . . . .21 Standard Products Division Overview . . . . . . . . . . . . . . 6 Consolidated Statements of Stockholders’ Equity . . . . .22 Industrial Products Division Overview . . . . . . . . . . . . . . 8 Notes to Consolidated Financial Statements . . . . . . . . .23 Operational Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Report of Independent Auditors . . . . . . . . . . . . . . . . . . .39 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . .11 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . .40 Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Stockholder and Capital Stock Information . . . . . . . . . .41 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. Independent Auditors Ernst & Young LLP Memphis, Tennessee Common Stock Mueller common stock is traded on the NYSE – Symbol MLI. Transfer Agent and Registrar Continental Stock Transfer & Trust Co. 17 Battery Place New York, NY 10004 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: Stockholder Inquiries To notify the Company of address changes or lost certifi- cates, stockholders can call Continental Stock Transfer & Trust Co. at (212) 509-4000. c/o Mueller Industries, Inc. 8285 Tournament Drive, Suite 150 Memphis, TN 38125 Attention: Investor Relations 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: 2002 Fourth quarter Third quarter Second quarter First quarter 2001 Fourth quarter Third quarter Second quarter First quarter High Low Close $ $ $ $ 29.70 31.60 36.12 35.43 33.73 35.15 34.87 32.11 $ $ 24.29 23.84 31.15 30.44 27.94 26.50 28.38 25.05 27.33 25.51 31.75 34.99 33.53 28.70 32.91 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 Covers 3/20/03 10:33 AM Page 2 M u e l l e r I n d u s t r i e s 2 0 0 2 A n n u a l R e p o r t Mueller Industries, Inc. 8285 Tournament Drive, Suite 150 Memphis, TN 38125 901-753-3200 www.muellerindustries.com 

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