Company Quick10K Filing
Quick10K
Mueller Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$32.17 57 $1,820
10-K 2018-12-29 Annual: 2018-12-29
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-02-24 Annual: 2016-02-24
10-Q 2015-09-26 Quarter: 2015-09-26
10-Q 2015-06-27 Quarter: 2015-06-27
10-Q 2015-03-28 Quarter: 2015-03-28
10-K 2014-12-27 Annual: 2014-12-27
10-Q 2014-09-27 Quarter: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-K 2013-12-28 Annual: 2013-12-28
8-K 2019-02-25 Other Events, Exhibits
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-11-21 Officers
8-K 2018-11-09 Other Events, Exhibits
8-K 2018-10-23 Earnings, Exhibits
8-K 2018-08-06 Other Events, Exhibits
8-K 2018-08-02 Other Events, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-07-02 Enter Agreement, Other Events, Exhibits
8-K 2018-05-03 Shareholder Vote, Other Events, Exhibits
8-K 2018-04-24 Earnings, Exhibits
8-K 2018-03-29 Regulation FD, Exhibits
8-K 2018-03-15 Officers, Exhibits
8-K 2018-02-26 Other Events, Exhibits
8-K 2018-02-06 Earnings, Exhibits
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NAVG Navigators Group 2,080
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MLI 2018-12-29
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Note 1 - Summary of Significant Accounting Policies
Note 2 - Acquisitions and Dispositions
Note 3 -Segment Information
Note 4 - Inventories
Note 5 - Consolidated Financial Statement Details
Note 6 - Derivative Instruments and Hedging Activities
Note 7 - Property, Plant, and Equipment, Net
Note 8 - Goodwill and Other Intangible Assets
Note 9 - Investments in Unconsolidated Affiliates
Note 10 - Debt
Note 11 - Benefit Plans
Note 12 - Commitments and Contingencies
Note 13 - Income Taxes
Note 14 - Equity
Note 15 - Stock-Based Compensation
Note 16 - Accumulated Other Comprehensive Income (Loss)
Note 17 - Quarterly Financial Information (Unaudited) (1)
EX-10.7 q42018exhibit1012.htm
EX-21 q42018exhibit21.htm
EX-23 q42018exhibit23.htm
EX-31.1 q42018exhibit311.htm
EX-31.2 q42018exhibit312.htm
EX-32.1 q42018exhibit321.htm
EX-32.2 q42018exhibit322.htm

Mueller Industries Earnings 2018-12-29

MLI 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 mli12291810-k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 29, 2018
Commission file number 1–6770
mlilogocopper.jpg
MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
25-0790410
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
150 Schilling Boulevard, Suite 100
 
Collierville, Tennessee
38017
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (901) 753-3200

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 Par Value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☒  No  ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐  No  ☒

Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes  ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ☒
Accelerated filer   ☐
Non-accelerated filer   ☐
Smaller reporting company   ☐
Emerging growth company   ☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ☐  No  ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter was $1,675,560,572.

The number of shares of the Registrant’s common stock outstanding as of February 22, 2019 was 56,624,284 excluding 23,558,720 treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into this Report: Registrant’s Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders, scheduled to be mailed on or about March 28, 2019 (Part III).





MUELLER INDUSTRIES, INC.

_____________________

As used in this report, the terms “we,” “us,” “our,” “Company,” “Mueller,” and “Registrant” mean Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole, unless the context indicates otherwise.

____________________

TABLE OF CONTENTS

 
 
 
Page
Part I
 
 
 
 
 
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part III
 
 
 
 
 
 
 
 
 
 
 
Part IV
 
 
 
 
 
 
 
 
 
 
 
 
 

 

2




PART I

ITEM 1.
BUSINESS
 
Introduction

Mueller Industries, Inc. (the Company) is a leading manufacturer of copper, brass, aluminum, and plastic products.  The range of products we manufacture is broad:  copper tube and fittings; line sets; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum impact extrusions; PEX plastic tube and fittings; refrigeration valves and fittings; compressed gas valves; fabricated tubular products; pressure vessels; steel nipples; and insulated flexible duct systems.  We also resell brass and plastic plumbing valves, plastic fittings, malleable iron fittings, faucets, and plumbing specialty products.  Our operations are located throughout the United States and in Canada, Mexico, Great Britain, South Korea, the Middle East, and China.  The Company was incorporated in Delaware on October 3, 1990.

Each of our reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered. These are the Piping Systems, Industrial Metals, and Climate segments.

Certain administrative expenses and expenses related primarily to retiree benefits at inactive operations are combined into the Corporate and Eliminations classification.  

Financial information concerning segments and geographic information appears under “Note 3 – Segment Information” in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

New housing starts and commercial construction are important determinants of our sales to the heating, ventilation, and air-conditioning (HVAC), refrigeration, and plumbing markets because the principal end use of a significant portion of our products is in the construction of single and multi-family housing and commercial buildings.  Repairs and remodeling projects are also important drivers of underlying demand for these products.  In addition, our products are used in various transportation, automotive, and industrial applications.

Piping Systems Segment

The Piping Systems segment is composed of Domestic Piping Systems Group, Great Lakes Copper (Great Lakes), Pexcor Manufacturing Company and Heatlink Group Inc. (collectively, Heatlink Group), Die-Mold Tool Limited (Die-Mold), European Operations, Trading Group, and Jungwoo Metal Ind. Co., LTD (Jungwoo-Mueller).  

The Domestic Piping Systems Group manufactures copper tube, fittings, and line sets.  These products are manufactured in the U.S., sold in the U.S., and exported to markets worldwide.  Our copper tube ranges in size from 1/8 inch to 8 1/8 inch diameter and is sold in various straight lengths and coils.  We are a market leader in the air-conditioning and refrigeration service tube markets and we also supply a variety of water tube in straight lengths and coils used for plumbing applications in virtually every type of construction project.  Our copper fittings, line sets, and related components are produced for the plumbing and heating industry to be used in water distribution systems, heating systems, air-conditioning, and refrigeration applications, and drainage, waste, and vent systems.  

Great Lakes manufactures copper tube and line sets in Canada and sells the products primarily in the U.S. and Canada.  Heatlink Group manufactures a complete line of products for PEX plumbing and radiant systems in Canada and sells these products in Canada and the U.S. Die-Mold manufactures PEX and other plumbing-related fittings and plastic injection tooling in Canada and sells these products in Canada and the U.S. European Operations manufactures copper tube in the United Kingdom, which is sold throughout Europe.  The Trading Group manufactures steel pipe nipples and resells brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products to plumbing wholesalers, distributors to the manufactured housing and recreational vehicle industries, and building materials retailers in North America. Jungwoo-Mueller, our South Korean joint venture, manufactures copper-based joining products that are sold worldwide.

We acquired Howell Metal Company (Howell) on October 17, 2013, Yorkshire Copper Tube (Yorkshire) on February 28, 2014, Great Lakes on July 31, 2015, a 60 percent equity interest in Jungwoo-Mueller on April 26, 2016, Heatlink Group on May 31, 2017, and Die-Mold on March 31, 2018.  Howell manufactures copper tube and line sets for U.S. distribution, while Yorkshire produces European standard copper distribution tubes.  These acquisitions complement our existing copper tube, line sets, copper fittings, and plastics businesses in the Piping Systems segment.


3




We disposed of Mueller Primaflow Limited (Primaflow), our U.K. based plumbing and heating systems import distribution business, on November 21, 2014.  This business was part of European Operations in the Piping Systems segment. We also disposed of Jiangsu Mueller-Xingrong Copper Industries Limited (Mueller-Xingrong), the Company’s Chinese joint venture, on June 21, 2017. This business manufactured engineered copper tube primarily for air-conditioning applications in China.
 
The segment sells products to wholesalers in the plumbing and refrigeration markets, distributors to the manufactured housing and recreational vehicle industries, building material retailers, and air-conditioning original equipment manufacturers (OEMs).  It markets primarily through its own sales and distribution organization, which maintains sales offices and distribution centers throughout the United States and in Canada, Mexico, Europe, China, and South Korea.  Additionally, products are sold and marketed through a complement of agents, which, when combined with our sales organization, provide the Company broad geographic market representation.

The total amount of order backlog for the Piping Systems segment as of December 29, 2018 was not significant.

We compete with various companies, depending on the product line.  In the U.S. copper tube business, domestic competition includes Cerro Flow Products LLC, Cambridge-Lee Industries LLC (a subsidiary of Industrias Unidas S.A. de C.V.), and Wieland Copper Products LLC, as well as many actual and potential foreign competitors.  In the European copper tube business, we compete with several European-based manufacturers of copper tube as well as other foreign-based manufacturers.  In the Canadian copper tube business, our competitors include foreign-based manufacturers.  In the copper fittings market, our domestic competitors include Elkhart Products Company (a subsidiary of Aalberts Industries N.V.) and NIBCO, Inc.  We also compete with several foreign manufacturers.  Additionally, our copper tube and fittings businesses compete with a large number of manufacturers of substitute products made from other metals and plastic.  

Industrial Metals Segment

The Industrial Metals segment is composed of Brass Rod & Copper Bar Products, Impacts & Micro Gauge, and Brass Value-Added Products.  

Brass Rod & Copper Bar Products manufactures a broad range of brass rod, copper bar, and copper alloy shapes, as well as a wide variety of end products including plumbing brass, valves, and fittings sold primarily to OEMs in the industrial, HVAC, plumbing, and refrigeration industries.  We extrude brass, bronze, and copper alloy rod in sizes ranging from 3/8 inches to 4 inches in diameter.  These alloys are used in applications that require a high degree of machinability, wear and corrosion resistance, as well as electrical conductivity.  

Impacts & Micro Gauge manufactures cold-form aluminum and copper products for automotive, industrial, and recreational components, as well as high-volume machining of aluminum, steel, brass, and cast iron impacts and castings for automotive applications. It sells its products primarily to OEMs in the U.S., serving the automotive, military ordnance, aerospace, and general manufacturing industries.  Typical applications for impacts are high strength ordnance, high-conductivity electrical components, builders’ hardware, hydraulic systems, automotive parts, and other uses where toughness must be combined with varying complexities of design and finish.

Brass Value-Added Products manufactures brass and aluminum forgings; brass, aluminum, and stainless steel valves; fluid control solutions; and gas train assembles. Our forgings are used in a wide variety of products, including automotive components, brass fittings, industrial machinery, valve bodies, gear blanks, and computer hardware.  Our valves, fluid control systems, and gas train assemblies are used in the compressed gas, pharmaceutical, construction, and gas appliance markets.

On June 18, 2015, we acquired Sherwood Valve Products, LLC (Sherwood), which manufactures valves and fluid control solutions for the HVAC, refrigeration, and compressed gas markets.  The acquisition of Sherwood complements our existing brass businesses in the Industrial Metals segment.  

The segment sells its products primarily to domestic OEMs in the industrial, construction, HVAC, plumbing, and refrigeration markets.  The total amount of order backlog for the Industrial Metals segment as of December 29, 2018 was not significant.

Competitors, primarily in the brass rod market, include Chase Brass and Copper Company  LLC, a subsidiary of Global Brass and Copper Holdings, Inc., and others, both domestic and foreign.  


4




Climate Segment

The Climate segment is composed of Refrigeration Products, Fabricated Tube Products, Westermeyer Industries, Inc. (Westermeyer), Turbotec Products, Inc. (Turbotec), and ATCO Rubber Products, Inc. (ATCO).

Refrigeration Products designs and manufactures valves, protection devices, and brass fittings for various OEMs in the commercial HVAC and refrigeration markets. Fabricated Tube Products manufactures tubular assemblies and fabrications for OEMs in the HVAC and refrigeration markets. Westermeyer designs, manufactures, and distributes high-pressure components and accessories for the air-conditioning and refrigeration markets.  Turbotec manufactures coaxial heat exchangers and twisted tubes for the HVAC, geothermal, refrigeration, swimming pool heat pump, marine, ice machine, commercial boiler, and heat reclamation markets. ATCO manufactures and distributes insulated HVAC flexible duct systems.

We acquired Turbotec on March 30, 2015 and ATCO on July 2, 2018.  These acquisitions complement our existing businesses in the Climate segment.

The segment sells its products primarily to OEMs in the HVAC and refrigeration markets in the U.S.  The total amount of order backlog for the Climate segment as of December 29, 2018 was not significant.

Labor Relations

At December 29, 2018, the Company employed approximately 5,134 employees, of which approximately 1,883 were represented by various unions.  Those union contracts will expire as follows:

Location
Expiration Date
Port Huron, Michigan (Local 218 IAM)
May 5, 2019
Wynne, Arkansas (MCTP)
June 28, 2019
Port Huron, Michigan (Local 44 UAW)
July 21, 2019
Wynne, Arkansas (B&K LLC)
June 28, 2021
North Wales, Pennsylvania
July 31, 2021
Belding, Michigan
September 17, 2021
Fulton, Mississippi
October 2, 2021
Waynesboro, Tennessee
November 3, 2021

The union agreements at the Company’s U.K. and Mexico operations are renewed annually.  The Company expects to renew its union contracts without material disruption to its operations.

Raw Material and Energy Availability

A substantial portion of our base metal requirements (primarily copper) is normally obtained through short-term supply contracts with competitive pricing provisions (for cathode) and the open market (for scrap).  Other raw materials used in the production of brass, including brass scrap, zinc, tin, and lead are obtained from zinc and lead producers, open-market dealers, and customers with brass process scrap.  Raw materials used in the fabrication of aluminum and plastic products are purchased in the open market from major producers.

Adequate supplies of raw material have historically been available to us from primary producers, metal brokers, and scrap dealers.  Sufficient energy in the form of natural gas, fuel oils, and electricity is available to operate our production facilities.  While temporary shortages of raw material and fuels may occur occasionally, to date they have not materially hampered our operations.

Our copper tube facilities can accommodate both refined copper and certain grades of copper scrap as the primary feedstock.  The Company has commitments from refined copper producers for a portion of its metal requirements for 2019.  Adequate quantities of copper are currently available.  While we will continue to react to market developments, resulting pricing volatility or supply disruptions, if any, could nonetheless adversely affect the Company.


5




Environmental Proceedings

Compliance with environmental laws and regulations is a matter of high priority for the Company.  Mueller’s provision for environmental matters related to all properties was $2.0 million for 2018, $7.5 million for 2017, and $0.9 million for 2016.  The reserve for environmental matters was $23.6 million at December 29, 2018 and $28.0 million at December 30, 2017.  Environmental expenses related to non-operating properties are presented below operating income in the Consolidated Statements of Income, and costs related to operating properties are included in cost of goods sold.  We currently anticipate that we will need to make expenditures of approximately $4.8 million for compliance activities related to existing environmental matters during the next three fiscal years.

For a description of material pending environmental proceedings, see “Note 12 – Commitments and Contingencies” in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

Other Business Factors

Our business is not materially dependent on patents, trademarks, licenses, franchises, or concessions held.  In addition, expenditures for Company-sponsored research and development activities were not material during 2018, 2017, or 2016.  No material portion of our business involves governmental contracts.  

Seasonality

Our net sales typically moderate in the fourth quarter as a result of the seasonal construction markets and customer shutdowns for holidays, year-end plant maintenance, and physical inventory counts. Also, our working capital typically increases in the first quarter in preparation for the construction season.

SEC Filings

We make available through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC).  To retrieve any of this information, you may access our internet home page at www.muellerindustries.com, select Investors, and then select SEC Filings.

ITEM 1A.
RISK FACTORS

The Company is exposed to risk as it operates its businesses.  To provide a framework to understand our operating environment, we are providing a brief explanation of the more significant risks associated with our businesses.  Although we have tried to identify and discuss key risk factors, others could emerge in the future.  These risk factors should be considered carefully when evaluating the Company and its businesses.

Increases in costs and the availability of energy and raw materials used in our products could impact our cost of goods sold and our distribution expenses, which could have a material adverse impact on our operating margins.

Both the costs of raw materials used in our manufactured products (copper, brass, zinc, aluminum, and plastic resins) and energy costs (electricity, natural gas and fuel) have been volatile during the last several years, which has resulted in changes in production and distribution costs.  For example, recent and pending climate change regulation and initiatives on the state, regional, federal, and international levels that have focused on reducing greenhouse gas (GHG) emissions from the energy and utility sectors may affect energy availability and costs in the near future.  While we typically attempt to pass costs through to our customers or to modify or adapt our activities to mitigate the impact of increases, we may not be able to do so successfully.  Failure to fully pass increases to our customers or to modify or adapt our activities to mitigate the impact could have a material adverse impact on our operating margins.  Additionally, if we are for any reason unable to obtain raw materials or energy, our ability to manufacture our products would be impacted, which could have a material adverse impact on our operating margins.

The unplanned departure of key personnel could disrupt our business.

We depend on the continued efforts of our senior management.  The unplanned loss of key personnel, or the inability to hire and retain qualified executives, could negatively impact our ability to manage our business.


6




Economic conditions in the housing and commercial construction industries, as well as changes in interest rates, could have a material adverse impact on our business, financial condition, and results of operations.

Our business is sensitive to changes in general economic conditions, particularly in the housing and commercial construction industries.  Prices for our products are affected by overall supply and demand in the market for our products and for our competitors’ products.  In particular, market prices of building products historically have been volatile and cyclical, and we may be unable to control the timing and extent of pricing changes for our products.  Prolonged periods of weak demand or excess supply in any of our businesses could negatively affect our revenues and margins and could result in a material adverse impact on our business, financial condition, and results of operations.

The markets that we serve, including, in particular, the housing and commercial construction industries, are significantly affected by movements in interest rates and the availability of credit.  Significantly higher interest rates could have a material adverse effect on our business, financial condition, and results of operations.  Our businesses are also affected by a variety of other factors beyond our control, including, but not limited to, employment levels, foreign currency exchange rates, unforeseen inflationary pressures, and consumer confidence.  Since we operate in a variety of geographic areas, our businesses are subject to the economic conditions in each such area.  General economic downturns or localized downturns in the regions where we have operations could have a material adverse effect on our business, financial condition, and results of operations.

The impact of economic conditions on the operations or liquidity of any party with which we conduct our business, including our suppliers and customers, may adversely impact our business.
 
Competitive conditions, including the impact of imports and substitute products and technologies, could have a material adverse effect on the demand for our products as well as our margins and profitability.

The markets we serve are competitive across all product lines.  Some consolidation of customers has occurred and may continue, which could shift buying power to customers.  In some cases, customers have moved production to low-cost countries such as China, or sourced components from there, which has reduced demand in North America for some of the products we manufacture.  These conditions could have a material adverse impact on our ability to maintain margins and profitability.  The potential threat of imports and substitute products is based upon many factors, including raw material prices, distribution costs, foreign exchange rates, production costs, and the development of emerging technologies and applications.  The end use of alternative import and/or substitute products could have a material adverse effect on our business, financial condition, and results of operations.  Likewise, the development of new technologies and applications could result in lower demand for our products and have a material adverse effect on our business.

Our exposure to exchange rate fluctuations on cross border transactions and the translation of local currency results into U.S. dollars could have an adverse impact on our results of operations or financial position.

We conduct our business through subsidiaries in several different countries and export our products to many countries.  Fluctuations in currency exchange rates could have a significant impact on the competitiveness of our products as well as the reported results of our operations, which are presented in U.S. dollars.  A portion of our products are manufactured in or acquired from suppliers located in lower cost regions.  Cross border transactions, both with external parties and intercompany relationships, result in increased exposure to foreign exchange fluctuations.  The strengthening of the U.S. dollar could expose our U.S. based businesses to competitive threats from lower cost producers in other countries such as China.  Lastly, our sales are translated into U.S. dollars for reporting purposes.  The strengthening of the U.S. dollar could result in unfavorable translation effects when the results of foreign operations are translated into U.S. dollars.  Accordingly, significant changes in exchange rates, particularly the British pound sterling, Mexican peso, Canadian dollar, and South Korean won, could have an adverse impact on our results of operations or financial position.

The vote by the United Kingdom (U.K.) to leave the European Union (EU) and implementation of Brexit could adversely affect us.

Through a June 2016 U.K. referendum on its membership in the EU, a majority of U.K. voters voted to exit the EU (Brexit).  As a result, we face risks and uncertainty regarding the form and consequences of the implementation of Brexit, including the possibility that the U.K. and the EU could fail to come to an agreement on the terms of the U.K. exit. In particular, we may be negatively impacted by increased volatility in exchange rates and interest rates and disruptions affecting our relationships with our existing and future customers, suppliers and employees.  Brexit and its implementation could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets.  Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, results of operations and financial condition.

7





We are subject to claims, litigation, and regulatory proceedings that could have a material adverse effect on us.

We are, from time-to-time, involved in various claims, litigation matters, and regulatory proceedings.  These matters may include contract disputes, personal injury claims, environmental claims and administrative actions, Occupational Safety and Health Administration inspections or proceedings, other tort claims, employment and tax matters and other litigation including class actions that arise in the ordinary course of our business.  Although we intend to defend these matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and there can be no assurance as to the ultimate outcome of any litigation or regulatory proceeding.  Litigation and regulatory proceedings may have a material adverse effect on us because of potential adverse outcomes, defense costs, the diversion of our management’s resources, availability of insurance coverage and other factors.

A strike, other work stoppage or business interruption, or our inability to renew collective bargaining agreements on favorable terms, could impact our cost structure and our ability to operate our facilities and produce our products, which could have an adverse effect on our results of operations.

We have a number of employees who are covered by collective bargaining or similar agreements.  If we are unable to negotiate acceptable new agreements with the unions representing our employees upon expiration of existing contracts, we could experience strikes or other work stoppages.  Strikes or other work stoppages could cause a significant disruption of operations at our facilities, which could have an adverse impact on us.  New or renewal agreements with unions representing our employees could call for higher wages or benefits paid to union members, which would increase our operating costs and could adversely affect our profitability.  Higher costs and/or limitations on our ability to operate our facilities and manufacture our products resulting from increased labor costs, strikes or other work stoppages could have a material adverse effect on our results of operations.
   
In addition, unexpected interruptions in our operations or those of our customers or suppliers due to such causes as weather-related events or acts of God, such as earthquakes, could have an adverse effect on our results of operations.  For example, the Environmental Protection Agency has found that global climate change would be expected to increase the severity and possibly the frequency of severe weather patterns such as hurricanes.  Although the financial impact of such future events is not reasonably estimable at this time, should they occur, our operations in certain coastal and flood-prone areas or operations of our customers and suppliers could be adversely affected.

We are subject to environmental, health, and safety laws and regulations and future compliance may have a material adverse effect on our results of operations, financial position, or cash flows.

The nature of our operations exposes us to the risk of liabilities and claims with respect to environmental, health, and safety matters.  While we have established accruals intended to cover the cost of environmental remediation at contaminated sites, the actual cost is difficult to determine and may exceed our estimated reserves.  Further, changes to, or more rigorous enforcement or stringent interpretation of environmental or health and safety laws could require significant incremental costs to maintain compliance.  Recent and pending climate change regulation and initiatives on the state, regional, federal, and international levels may require certain of our facilities to reduce GHG emissions.  While not reasonably estimable at this time, this could require capital expenditures for environmental control facilities and/or the purchase of GHG emissions credits in the coming years.  In addition, with respect to environmental matters, future claims may be asserted against us for, among other things, past acts or omissions at locations operated by predecessor entities, or alleging damage or injury or seeking other relief in connection with environmental matters associated with our operations.  Future liabilities, claims, and compliance costs may have a material adverse effect on us because of potential adverse outcomes, defense costs, diversion of our resources, availability of insurance coverage, and other factors.  The overall impact of these requirements on our operations could increase our costs and diminish our ability to compete with products that are produced in countries without such rigorous standards; the long run impact could negatively impact our results and have a material adverse effect on our business.

If we do not successfully execute or effectively operate, integrate, leverage and grow acquired businesses, our financial results may suffer.

Our strategy for long-term growth, productivity and profitability depends in part on our ability to make prudent strategic acquisitions and to realize the benefits we expect when we make those acquisitions. In furtherance of this strategy, over the past several years, we have acquired businesses in Europe, Canada, South Korea, the Middle East, and the United States.
While we currently anticipate that our past and future acquisitions will enhance our value proposition to customers and improve our long-term profitability, there can be no assurance that we will realize our expectations within the time frame we have established,

8




if at all, or that we can continue to support the value we allocate to these acquired businesses, including their goodwill or other intangible assets.

We may be subject to risks relating to our information technology systems.

We rely on information technology systems to process, transmit and store electronic information and manage and operate our business. The incidence of cyber attacks, computer hacking, computer viruses, worms, and other disruptive software, denial of service attacks, and other malicious cyber activities are on the rise worldwide. A breach of our information technology systems or those of our commercial partners could expose us, our customers, our suppliers, and our employees to risks of misuse or improper disclosure of data, business information (including intellectual property) and other confidential information. We operate globally, and the legal rules governing data storage and transfers are often complex, unclear, and changing. A breach could also result in manipulation and destruction of data, production downtimes and operations disruptions. Any such breaches or events could expose us to legal liability and adversely affect our reputation, competitive position, business or results of operations.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.


9




ITEM 2.
PROPERTIES

Information pertaining to our major operating facilities is included below.  Except as noted, we own all of the principal properties.  In addition, we own and/or lease other properties used as distribution centers and corporate offices.  Our plants are in satisfactory condition and are suitable for the purpose for which they were designed and are now being used.

Location of Facility
 
Building Space
(Sq. Ft.)
 
Primary Use
 
Owned or Leased
 
 
 
 
 
 
 
Piping Systems Segment
Fulton, MS
 
778,065
 
Manufacturing, Packaging, & Distribution
 
Owned
New Market, VA
 
413,120
 
Manufacturing & Distribution
 
Owned
Cedar City, UT
 
260,000
 
Manufacturing & Distribution
 
Owned
North Wales, PA
 
174,000
 
Manufacturing
 
Owned
Covington, TN
 
159,500
 
Manufacturing
 
Owned
Ansonia, CT
 
89,396
 
Manufacturing & Distribution
 
Owned
Phoenix, AZ
 
61,000
 
Manufacturing
 
Leased
Lawrenceville, GA
 
42,000
 
Manufacturing
 
Leased
Bilston, England
 
402,500
 
Manufacturing
 
Owned
London, Ontario, Canada
 
200,400
 
Manufacturing
 
Owned
Georgetown, Ontario, Canada
 
20,000
 
Manufacturing
 
Leased
Calgary, Alberta, Canada
 
21,117
 
Manufacturing
 
Leased
Calgary, Alberta, Canada
 
20,000
 
Manufacturing
 
Leased
Calgary, Alberta, Canada
 
6,600
 
Manufacturing
 
Leased
Monterrey, Mexico
 
152,000
 
Manufacturing
 
Leased
Yangju City, Gyeonggi Province, South Korea
 
343,909
 
Manufacturing
 
Owned
 
 
 
 
 
 
 
Industrial Metals Segment
 
 
 
 
 
 
Port Huron, MI
 
450,000
 
Manufacturing
 
Owned
Belding, MI
 
293,068
 
Manufacturing
 
Owned
Marysville, MI
 
81,500
 
Manufacturing
 
Owned
Brooklyn, OH
 
75,000
 
Manufacturing
 
Leased
Valley View, OH
 
65,400
 
Manufacturing & Distribution
 
Leased
Brighton, MI
 
65,000
 
Machining
 
Leased
Waynesboro, TN
 
57,000
 
Manufacturing
 
Leased
Middletown, OH
 
55,000
 
Manufacturing
 
Owned
 
 
 
 
 
 
 
Climate Segment
 
 
 
 
 
 
Plainville, GA
 
313,835
 
Manufacturing & Distribution
 
Owned
Fort Worth, TX
 
266,485
 
Manufacturing
 
Owned
Cartersville, GA
 
260,924
 
Manufacturing
 
Owned
Phoenix, AZ
 
250,250
 
Manufacturing & Distribution
 
Owned
Tampa , FL
 
202,614
 
Manufacturing & Distribution
 
Owned
Crawsfordville, IN
 
153,600
 
Manufacturing & Distribution
 
Owned
Fort Worth, TX
 
153,374
 
Manufacturing
 
Owned
Vineland, NJ
 
136,000
 
Manufacturing & Distribution
 
Owned
Sacramento, CA
 
121,240
 
Manufacturing & Distribution
 
Owned
Bluffs, IL
 
107,000
 
Manufacturing
 
Owned
Fort Worth, TX
 
103,125
 
Manufacturing & Distribution
 
Owned
Hickory, NC
 
100,000
 
Manufacturing
 
Owned

10




Location of Facility
 
Building Space
(Sq. Ft.)
 
Primary Use
 
Owned or Leased
Hartsville, TN
 
78,000
 
Manufacturing
 
Owned
Houston, TX
 
72,000
 
Manufacturing & Distribution
 
Owned
Carthage, TN
 
67,520
 
Manufacturing
 
Owned
Baltimore, MD
 
62,500
 
Manufacturing & Distribution
 
Owned
Springdale, AR
 
57,600
 
Manufacturing & Distribution
 
Owned
Gordonsville, TN
 
54,000
 
Manufacturing
 
Leased
Carrollton, TX
 
9,230
 
Manufacturing
 
Leased
Guadalupe, Mexico
 
130,110
 
Manufacturing
 
Leased
Xinbei District, Changzhou, China
 
33,940
 
Manufacturing
 
Leased

ITEM 3.
LEGAL PROCEEDINGS

The Company is involved in certain litigation as a result of claims that arose in the ordinary course of business.  Additionally, we may realize the benefit of certain legal claims and litigation in the future; these gain contingencies are not recognized in the Consolidated Financial Statements.

For a description of material pending legal proceedings, see “Note 12 – Commitments and Contingencies” in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


11




PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “MLI.”  As of February 22, 2019, the number of holders of record of Mueller’s common stock was 707.  The following table sets forth, for the periods indicated, the high and low sales prices as reported by the NYSE and the cash dividends paid per share of common stock.

 
 
Sales Prices
 
 
 
 
 
High
 
Low
 
Dividend
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fourth quarter
 
$
29.27

 
$
21.49

 
$
0.10

 
Third quarter
 
33.89

 
27.92

 
0.10

 
Second quarter
 
31.94

 
25.26

 
0.10

 
First quarter
 
37.57

 
25.50

 
0.10

 
2017
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Fourth quarter
 
$
37.53

 
$
32.88

 
$
0.10

 
Third quarter
 
35.02

 
28.49

 
0.10

 
Second quarter
 
35.82

 
27.72

 
0.10

 
First quarter
 
43.96

(1)
30.93

 
3.10

(2)

(1) On March 9, 2017, the Company distributed a special dividend of $3.00 in cash and $5.00 in principal amount of the Company’s 6% Subordinated Debentures per share of outstanding common stock, which resulted in a commensurate decrease in sales price per share.
(2) Does not include the $5.00 in principal amount of the Company’s 6% Subordinated Debentures per share of outstanding common stock issued as part of our special dividend.

Payment of dividends in the future is dependent upon the Company’s financial condition, cash flows, capital requirements, earnings, and other factors.


12




Issuer Purchases of Equity Securities

The Company’s Board of Directors has extended, until August 2019, the authorization to repurchase up to 20 million shares of the Company’s common stock through open market transactions or through privately negotiated transactions.  The Company may cancel, suspend, or extend the time period for the purchase of shares at any time.  Any repurchases will be funded primarily through existing cash and cash from operations.  The Company may hold any shares repurchased in treasury or use a portion of the repurchased shares for its stock-based compensation plans, as well as for other corporate purposes.  From its initial authorization in 1999 through December 29, 2018, the Company has repurchased approximately 6.1 million shares under this authorization.  Below is a summary of the Company’s stock repurchases for the quarter ended December 29, 2018.

 
 
(a)
Total Number of Shares Purchased
 
(b)
Average Price Paid per Share
 
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d)
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1)
 
 
 
 
 
 
 
 
 
September 30, 2018 – October 27, 2018
 
300,166

 
$
25.35

 
300,166

 
14,736,894

October 28, 2018 – November 24, 2018
 

 

 

 
14,736,894

November 25, 2018 – December 29, 2018
 
836,890

 
23.15

 
836,890

 
13,900,004

Total
 
1,137,056

 
 
 
1,137,056

 
 
(1)  Shares available to be purchased under the Company’s 20 million share repurchase authorization until August 2019. The extension of the authorization was announced on October 24, 2018.


13




Company Stock Performance

The following graph compares total stockholder return since December 28, 2013 to the Dow Jones U.S. Total Return Index (Total Return Index) and the Dow Jones U.S. Building Materials & Fixtures Index (Building Materials Index).  Total return values for the Total Return Index, the Building Materials Index and the Company were calculated based on cumulative total return values assuming reinvestment of (i) regular quarterly dividends paid by the Company, (ii) the cash paid by the Company in conjunction with the special dividend and (iii) the proceeds of an assumed sale at par of the Debentures paid by the Company in connection with the special dividend.  

stockgraph2018.jpg
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Mueller Industries, Inc.
 
100.00

 
110.03

 
90.95

 
131.30

 
128.47

 
86.12

Dow Jones U.S. Total Return Index
 
100.00

 
112.95

 
113.66

 
127.59

 
155.01

 
147.30

Dow Jones U.S. Building Materials & Fixtures Index
 
100.00

 
110.56

 
126.45

 
149.78

 
176.52

 
139.86



14




ITEM 6.
SELECTED FINANCIAL DATA

(In thousands, except per share data)
2018
 
2017
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
For the fiscal year: (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
2,507,878

 
$
2,266,073

 
$
2,055,622

 
$
2,100,002

 
$
2,364,227

 
 
 
 
 
 
 
 
 
 
 
 
Operating income (2)
172,969

 
150,807

 
154,401

 
138,704

 
150,143

 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Mueller Industries, Inc.
104,459

(3)
85,598

(4)
99,727

(5)
87,864

(6)
101,560

(7)
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per
    share (8)
1.82

 
1.49

 
1.74

 
1.54

 
1.79

 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends per
    share (8)
0.40

 
3.40

 
0.38

 
0.30

 
0.30

 
 
 
 
 
 
 
 
 
 
 
 
At year-end:
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
1,369,549

 
1,320,173

 
1,447,476

 
1,338,801

 
1,328,096

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
489,597

 
448,592

 
213,709

 
204,250

 
205,250

 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Includes activity of acquired businesses from the following purchase dates: ATCO Rubber Products, Inc., July 2, 2018; Die-Mold Tool Limited, March 31, 2018; Pexcor Manufacturing Company Inc. and Heatlink Group Inc., May 31, 2017; Jungwoo Metal Ind. Co., LTD, April 26, 2016; Great Lakes Copper Ltd., July 31, 2015; Sherwood Valve Products, LLC, June 18, 2015; Turbotec Products, Inc., March 30, 2015; and Yorkshire Copper Tube, February 28, 2014.
(2) 
Adjusted retroactively to reflect adoption of ASU 2017-07 that occurred during 2018. The components of net periodic benefit cost (income) other than the service cost component are included in other income (expense), net in the Consolidated Statements of Income.
(3) 
Includes a pre-tax insurance recovery gain of $3.7 million related to the losses incurred due to the 2017 fire at the brass rod mill in Port Huron, Michigan.
(4) 
Includes interest expense of $13.8 million on the Company’s Subordinated Debentures and pre-tax environmental expense for non-operating properties of $7.3 million.
(5) 
Includes pre-tax impairment charges of $6.8 million on fixed assets.
(6) 
Includes $15.4 million pre-tax gain from the sale of certain assets, severance charges of $3.4 million and a permanent adjustment to a deferred tax liability of $4.2 million.
(7) 
Includes $6.3 million pre-tax gain on sale of assets, reversal of valuation allowance of $5.7 million, and $7.3 million of pre-tax charges related to severance.
(8) 
Adjusted retroactively to reflect the two-for-one stock split that occurred on March 14, 2014.

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations is contained under the caption “Financial Review” submitted as a separate section of this Annual Report on Form 10-K commencing on page F-2.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk are contained under the caption “Financial Review” submitted as a separate section of this Annual Report on Form 10-K commencing on page F-2.


15




ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements required by this item are contained in a separate section of this Annual Report on Form 10-K commencing on page F-17.

ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act as of December 29, 2018.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of December 29, 2018 to ensure that information required to be disclosed in Company reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Pursuant to the rules and regulations of the SEC, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the  Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.  Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.

The Company acquired ATCO Rubber Products, Inc. and Die-Mold Tool Limited during 2018 and has excluded these businesses from management’s assessment of internal controls.  The total value of assets for these businesses at year-end represents 14 percent of the Company’s consolidated total assets at December 29, 2018.  Net sales and operating income from the dates of acquisition represent four percent of the consolidated net sales and operating income of the Company for 2018.  Accordingly, these acquired businesses are not included in the scope of this report.

As required by Rule 13a-15(c) under the Exchange Act, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s internal control over financial reporting as of December 29, 2018 based on the control criteria established in a report entitled Internal Control—Integrated

16




Framework, (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on such evaluation, management has concluded that our internal control over financial reporting was effective as of December 29, 2018.

Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting, which is included herein.

Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended December 29, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

17




Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Mueller Industries, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Mueller Industries, Inc.’s internal control over financial reporting as of December 29, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Mueller Industries, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 29, 2018, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of ATCO Rubber Products, Inc. and Die-Mold Tool Limited, which are included in the 2018 consolidated financial statements of the Company and constituted 14% of total assets as of December 29, 2018 and 4% of both net sales and operating income for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of ATCO Rubber Products, Inc. and Die-Mold Tool Limited.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 29, 2018 and December 30, 2017, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 29, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 27, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.







18




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

    mlisiga01.jpg

Memphis, Tennessee
 
February 27, 2019
 

19




ITEM 9B.
OTHER INFORMATION

None.

PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by Item 10 is contained under the captions “Ownership of Common Stock by Directors and Executive Officers and Information about Director Nominees,” “Corporate Governance,” “Report of the Audit Committee of the Board of Directors,” and “Section 16(a) Beneficial Ownership Compliance Reporting” in the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders to be filed with the SEC on or about March 28, 2019, which is incorporated herein by reference.

The Company has adopted a Code of Business Conduct and Ethics that applies to its chief executive officer, chief financial officer, and other financial executives.  We have also made the Code of Business Conduct and Ethics available on the Company’s website at www.muellerindustries.com.
 
ITEM 11.
EXECUTIVE COMPENSATION
 
The information required by Item 11 is contained under the caption “Compensation Discussion and Analysis,” “Summary Compensation Table for 2018,” “2018 Grants of Plan Based Awards Table,” “Outstanding Equity Awards at Fiscal 2018 Year-End,” “2018 Option Exercises and Stock Vested,” “Potential Payments Upon Termination of Employment or Change in Control as of the End of 2018,” “2018 Director Compensation,” “Report of the Compensation Committee of the Board of Directors on Executive Compensation” and “Corporate Governance” in the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders to be filed with the SEC on or about March 28, 2019, which is incorporated herein by reference.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The following table discloses information regarding the securities to be issued and the securities remaining available for issuance under the Registrant’s stock-based incentive plans as of December 29, 2018 (shares in thousands):

 
 
(a)
 
(b)
 
(c)
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants, and rights
 
Weighted average exercise price of outstanding options, warrants, and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
 
 
 
 
 
 
Equity compensation plans approved by security holders
 
1,014

 
$
23.90

 
344

 
 
 
 
 
 
 
Equity compensation plans not approved by security holders
 

 

 

 
 
 
 
 
 
 
Total
 
1,014

 
$
23.90

 
344

 
Other information required by Item 12 is contained under the captions “Principal Stockholders” and “Ownership of Common Stock by Directors and Executive Officers and Information about Director Nominees” in the Company’s Proxy Statement for its

20




2019 Annual Meeting of Stockholders to be filed with the SEC on or about March 28, 2019, which is incorporated herein by reference.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is contained under the caption “Corporate Governance” in the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders to be filed with the SEC on or about March 28, 2019, which is incorporated herein by reference.

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
       
The information required by Item 14 is contained under the caption “Appointment of Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for its 2019 Annual Meeting of Stockholders to be filed with the SEC on or about March 28, 2019, which is incorporated herein by reference.


21




PART IV

ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)
The following documents are filed as part of this report:

1.
Financial Statements: the financial statements, notes, and report of independent registered public accounting firm described in Item 8 of this Annual Report on Form 10-K are contained in a separate section of this Annual Report on Form 10-K commencing on page F-1.

2.
Financial Statement Schedule: the financial statement schedule described in Item 8 of this report is contained in a separate section of this Annual Report on Form 10-K commencing on page F-1.

3.
Exhibits:
Certificate of Incorporation and Bylaws
3.1
3.2
Long-Term Debt Instruments
4.1
4.2
4.3
Certain instruments with respect to long-term debt of the Registrant have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instruments does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis.  The Registrant agrees to furnish a copy of each such instrument upon request of the SEC.
Consulting, Employment, and Compensatory Plan Agreements
10.1
10.2
10.3
10.4
10.5
10.6

22




10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Financing Agreements
10.16
10.17
10.18
10.19
10.20
Purchase Agreements
10.21

23




10.22
Other Exhibits
21.0
23.0
31.1
31.2
32.1
32.2
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase 
101.INS
XBRL Instance Document
101.LAB
XBRL Taxonomy Extension Label Linkbase 
101.PRE
XBRL Presentation Linkbase Document
101.SCH
XBRL Taxonomy Extension Schema 

ITEM 16.
Form 10-K Summary

None.


24




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2019.

MUELLER INDUSTRIES, INC.

 
/s/ Gregory L. Christopher
 
 
Gregory L. Christopher, Chief Executive Officer
(Principal Executive Officer) and Chairman of the Board
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Signature
Title
Date
 
 
 
/s/ Gregory L. Christopher
     Gregory L. Christopher
Chief Executive Officer (Principal Executive Officer) and Chairman of the Board
February 27, 2019
 
 
 
/s/ Terry Hermanson
Lead Independent Director
February 27, 2019
Terry Hermanson
 
 
 
 
 
/s/ Elizabeth Donovan
Director
February 27, 2019
Elizabeth Donovan
 
 
 
 
 
/s/ Gary S. Gladstein
Director
February 27, 2019
Gary S. Gladstein
 
 
 
 
 
/s/ Paul J. Flaherty
Director
February 27, 2019
Paul J. Flaherty
 
 
 
 
 
/s/ Gennaro J. Fulvio
Director
February 27, 2019
Gennaro J. Fulvio
 
 
 
 
 
/s/ Scott J. Goldman
Director
February 27, 2019
Scott J. Goldman
 
 
 
 
 
/s/ John B. Hansen
Director
February 27, 2019
John B. Hansen
 
 
 
 
 
/s/ Charles P. Herzog, Jr.
Director
February 27, 2019
Charles P. Herzog, Jr.
 
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 
Signature and Title
Date
 
 
 
 
/s/ Jeffrey A. Martin
February 27, 2019
 
Jeffrey A. Martin
 
 
Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
/s/ Anthony J. Steinriede
February 27, 2019
 
Anthony J. Steinriede
 
 
Vice President – Corporate Controller
 

25




MUELLER INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





FINANCIAL STATEMENT SCHEDULE

 
Schedule for the years ended December 29, 2018, December 30, 2017, and December 31, 2016
 
 
 
 


F-1




FINANCIAL REVIEW

The Financial Review section of our Annual Report on Form 10-K consists of the following: Management’s Discussion and Analysis of Results of Operations and Financial Condition (MD&A), the Consolidated Financial Statements, and Other Financial Information, all of which include information about our significant accounting policies, practices, and the transactions that impact our financial results.  The following MD&A describes the principal factors affecting the results of operations, liquidity and capital resources, contractual cash obligations, and the critical accounting estimates of the Company.  The discussion in the Financial Review section should be read in conjunction with the other sections of this Annual Report, particularly “Item 1: Business” and our other detailed discussion of risk factors included in this MD&A.

OVERVIEW

We are a leading manufacturer of copper, brass, aluminum, and plastic products.  The range of products we manufacture is broad:  copper tube and fittings; line sets; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum impact extrusions; PEX plastic tube and fittings; refrigeration valves and fittings; compressed gas valves; fabricated tubular products; pressure vessels; steel nipples; and insulated flexible duct systems.  We also resell brass and plastic plumbing valves, plastic fittings, malleable iron fittings, faucets and plumbing specialty products.  Mueller’s operations are located throughout the United States and in Canada, Mexico, Great Britain, South Korea, the Middle East, and China.

Each of the reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered as follows:

Piping Systems:  The Piping Systems segment is composed of Domestic Piping Systems Group, Great Lakes Copper, Heatlink Group, Die-Mold, European Operations, Trading Group, and Jungwoo-Mueller (our South Korean joint venture).  The Domestic Piping Systems Group manufactures copper tube, fittings, and line sets.  These products are manufactured in the U.S., sold in the U.S., and exported to markets worldwide. Great Lakes Copper manufactures copper tube and line sets in Canada and sells the products primarily in the U.S. and Canada.  Heatlink Group manufactures a complete line of products for PEX plumbing and radiant systems in Canada and sells these products in Canada and the U.S. Die-Mold manufactures PEX and other plumbing-related fittings and plastic injection tooling in Canada and sells these products in Canada and the U.S. European Operations manufacture copper tube in the United Kingdom, which is sold throughout Europe.  The Trading Group manufactures pipe nipples and sources products for import distribution in North America.  Jungwoo-Mueller manufactures copper-based joining products that are sold worldwide.  The Piping Systems segment sells products to wholesalers in the plumbing and refrigeration markets, distributors to the manufactured housing and recreational vehicle industries, building material retailers, and air-conditioning original equipment manufacturers (OEMs).

The Company disposed of Mueller-Xingrong (the Company’s Chinese joint venture) on June 21, 2017. This business manufactured engineered copper tube primarily for air-conditioning applications in China.

Industrial Metals:  The Industrial Metals segment is composed of Brass Rod & Copper Bar Products, Impacts & Micro Gauge, and Brass Value-Added Products.  The segment manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum impact extrusions; and gas valves and assemblies.   The segment manufactures and sells its products primarily to domestic OEMs in the industrial, transportation, construction, heating, ventilation, and air-conditioning, plumbing, refrigeration, and energy markets.

Climate: The Climate segment is composed of Refrigeration Products, Fabricated Tube Products, Westermeyer, Turbotec, and ATCO.  The segment manufactures and sells refrigeration valves and fittings, fabricated tubular products, high pressure components, coaxial heat exchangers, and insulated HVAC flexible duct systems.  The segment sells its products primarily to the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.

New housing starts and commercial construction are important determinants of our sales to the heating, ventilation, and air-conditioning, refrigeration, and plumbing markets because the principal end use of a significant portion of our products is in the construction of single and multi-family housing and commercial buildings.  Repairs and remodeling projects are also important drivers of underlying demand for these products.  In addition, our products are used in various transportation, automotive, and industrial applications.

Residential construction activity has shown improvement in recent years, but remains at levels below long-term historical averages.  Per the U.S. Census Bureau, the November 2018 seasonally adjusted annual rate of new housing starts in the U.S. was 1.26 million in 2018, which compares to 1.20 million in 2017 and 1.17 million in 2016.  Mortgage rates remain at historically low levels, as

F-2




the average 30-year fixed mortgage rate was approximately 4.54 percent in 2018 and 3.99 percent in 2017.  The private nonresidential construction sector, which includes offices, industrial, health care, and retail projects, has also shown improvement in recent years.  Per the U.S. Census Bureau, the seasonally adjusted value of private nonresidential construction put in place was $450.8 billion in November 2018, $439.4 billion in 2017, and $452.9 billion in 2016

Profitability of certain of our product lines depends upon the “spreads” between the cost of raw material and the selling prices of our products.  The open market prices for copper cathode and copper and brass scrap, for example, influence the selling price of copper tube and brass rod, two principal products manufactured by the Company.  We attempt to minimize the effects on profitability from fluctuations in material costs by passing through these costs to our customers.  Our earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions.

Earnings and profitability are also impacted by unit volumes that are subject to market trends, such as substitute products, imports, technologies, and market share.  In our core product lines, we intensively manage our pricing structure while attempting to maximize profitability.  From time-to-time, this practice results in lost sales opportunities and lower volume.  For plumbing systems, plastics are the primary substitute product; these products represent an increasing share of consumption.  For certain air-conditioning and refrigeration applications, aluminum based systems are the primary substitution threat.  We cannot predict the acceptance or the rate of switching that may occur.  U.S. consumption of copper tube and brass rod is still predominantly supplied by U.S. manufacturers.  In recent years, brass rod consumption in the U.S. has declined due to the outsourcing of many manufactured products from offshore regions.

RESULTS OF OPERATIONS

Consolidated Results

The following table compares summary operating results for 2018, 2017, and 2016:

 
 
 
 
 
 
 
 
Percent Change
(In thousands)
 
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,507,878

 
$
2,266,073

 
$
2,055,622

 
10.7
%
 
10.2
 %
Operating income
 
172,969

 
150,807

 
154,401

 
14.7

 
(2.3
)
Net income
 
104,459

 
85,598

 
99,727

 
22.0

 
(14.2
)

The following are components of changes in net sales compared to the prior year:

 
 
2018 vs. 2017
 
2017 vs. 2016
 
 
 
 
 
Net selling price in core product lines
 
4.4
 %
 
13.0
 %
Unit sales volume in core product lines
 
3.6

 
(1.3
)
Acquisitions and new products
 
4.7

 
1.5

Dispositions
 
(3.0
)
 
(2.6
)
Other
 
1.0

 
(0.4
)
 
 
 
 
 
 
 
10.7
 %
 
10.2
 %

The increase in net sales in 2018 was primarily due to (i) higher unit sales volume of $126.2 million in our domestic core product lines, primarily copper tube and brass rod, (ii) higher net selling prices of $99.8 million in our core product lines, (iii) sales of $90.0 million recorded by ATCO, acquired in July 2018, (iv) an increase in sales in our non-core product lines of $21.2 million, (v) incremental sales of $9.6 million of recorded by Heatlink Group, acquired in May 2017, and (vi) sales of $6.8 million recorded by Die-Mold, acquired in March 2018. These increases were partially offset by (i) the absence of sales of $67.3 million recorded by Mueller-Xingrong, a business we sold during June 2017, and (ii) lower unit sales volume of $44.5 million in our non-domestic core product lines.

The increase in net sales in 2017 was primarily due to (i) higher net selling prices of $266.9 million in our core product lines, (ii) incremental sales of $16.4 million recorded by Jungwoo-Mueller, acquired in April 2016, and (iii) sales of $14.4 million recorded

F-3




by Heatlink Group. These increases were partially offset by (i) the absence of sales of $54.2 million recorded by Mueller-Xingrong and (ii) lower unit sales volume of $27.3 million in our core product lines.

Net selling prices generally fluctuate with changes in raw material costs.  Changes in raw material costs are generally passed through to customers by adjustments to selling prices.  The following graph shows the Comex average copper price per pound by quarter for the most recent three-year period:
chart-7c72b19b033958eca6a.jpg
The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2018, 2017, and 2016:

(In thousands)
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Cost of goods sold
 
$
2,150,400

 
$
1,940,617

 
$
1,723,499

Depreciation and amortization
 
39,555

 
33,944

 
35,133

Selling, general, and administrative expense
 
148,888

 
140,730

 
135,811

Gain on sale of assets
 
(253
)
 
(1,491
)
 

Impairment charges
 

 
1,466

 
6,778

Insurance recovery
 
(3,681
)
 

 

 
 
 
 
 
 
 
Operating expenses
 
$
2,334,909

 
$
2,115,266


$
1,901,221


 
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Cost of goods sold
 
85.7
 %
 
85.6
 %
 
83.8
%
Depreciation and amortization
 
1.6

 
1.5

 
1.7

Selling, general, and administrative expense
 
5.9

 
6.2

 
6.7

Gain on sale of assets
 

 
(0.1
)
 

Impairment charges
 

 
0.1

 
0.3

Insurance recovery
 
(0.1
)
 

 

 
 
 
 
 
 
 
Operating expenses
 
93.1
 %
 
93.3
 %
 
92.5
%

The increase in cost of goods sold in 2018 was primarily due to the increase in the average cost of copper, our principal raw material, and the increase in sales volume in our domestic core product lines and related to businesses acquired. This was partially

F-4




offset by the decrease in sales volume resulting from the sale of Mueller-Xingrong and lower sales volume in our non-domestic core product lines. The increase in cost of goods sold in 2017 was primarily due to the increase in the average cost of copper, partially offset by the decrease in sales volume resulting from the sale of Mueller-Xingrong.

Depreciation and amortization increased in 2018 as a result of long-lived assets of businesses acquired as well as several new long-lived assets being placed into service, partially offset by the impact of the sale of long-lived assets at Mueller-Xingrong. Depreciation and amortization decreased in 2017 primarily due to several long-lived assets becoming fully depreciated and amortized, as well as the sale of long-lived assets at Mueller-Xingrong.

Selling, general, and administrative expenses increased in 2018, primarily due to (i) incremental expenses of $9.8 million associated with ATCO, Heatlink Group, and Die-Mold and (ii) an increase in employment costs, including incentive compensation, of $4.7 million. These increases were partially offset by (i) fees of $3.5 million received for services provided under certain third-party sales and distribution arrangements, (ii) a reduction in product liability costs of $2.1 million, and (iii) the absence of expenses associated with Mueller-Xingrong of $1.2 million. The increase in selling, general, and administrative expenses in 2017 was primarily due to (i) incremental expenses of $5.5 million associated with Heatlink Group and Jungwoo-Mueller, (ii) higher environmental remediation and product liability costs of $1.0 million, and (iii) an increase in foreign currency exchange rate losses of $0.6 million. These increases were partially offset by a reduction in employment costs of $1.8 million, including incentive compensation of $1.1 million.

During 2018, we recognized a gain of $2.7 million on the sale of real property and a gain of $0.7 million on the sale of manufacturing equipment, which were offset by a loss of $3.1 million on the sale of a corporate aircraft. We also recognized an insurance recovery gain of $3.7 million related to the losses incurred due to the 2017 fire at our brass rod mill in Port Huron, Michigan.

During 2017, we recognized fixed asset impairment charges for certain copper fittings manufacturing equipment of $1.5 million and a gain of $1.5 million on the sale of our interest in Mueller-Xingrong.

During 2016, we recognized fixed asset impairment charges for certain manufacturing equipment of $6.8 million.

Interest expense increased in 2018 primarily as a result of interest associated with the 6% Subordinated Debentures issued during the first quarter of 2017 as part of our special dividend, as well as increased borrowing costs associated with our unsecured $350.0 million revolving credit facility. The increase in 2017 was primarily due to interest associated with the 6% Subordinated Debentures.

Environmental expense for our non-operating properties was significantly higher in 2017 than in 2018 or 2016 primarily as a result of ongoing remediation activities related to the Lead Refinery site.

Other income, net, was significantly higher in 2018 and 2017 primarily as a result of higher net periodic benefit income for our benefit plans.

Income tax expense was $31.0 million in 2018, representing an effective tax rate of 20.6 percent.  This rate was lower than what would be computed using the U.S. statutory federal rate primarily due to (i) a reduction of the calculation of federal tax on the Company’s accumulated foreign earnings under the Tax Cuts and Jobs Act (the Act) of $4.4 million and (ii) a reduction for the impact of investments in unconsolidated affiliates of $3.9 million. These reductions were partially offset by (i) the provision for state and local income taxes, net of the federal benefit, of $3.5 million, (ii) an increase in valuation allowances of $1.1 million, and (iii) other adjustments of $3.1 million.

Income tax expense was $37.9 million in 2017, representing an effective tax rate of 29.8 percent.  This rate was lower than what would be computed using the U.S. statutory federal rate primarily due to (i) reductions for the effect of lower foreign tax rates when compared to the U.S. statutory rate and other foreign adjustments of $6.0 million, (ii) the U.S. production activities deduction of $1.6 million, (iii) the benefit of stock-based compensation deductions of $2.2 million, and (iv) the impact of the change in the federal tax rate under the Act on deferred taxes of $12.1 million.  These reductions were partially offset by (i) the accrual of federal tax on the Company’s accumulated foreign earnings under the Act of $12.9 million, (ii) the provision for state and local income taxes, net of the federal benefit, of $1.1 million, and (iii) other adjustments of $1.2 million.

Income tax expense was $48.1 million in 2016, representing an effective tax rate of 33.0 percent.  This rate was lower than what would be computed using the U.S. statutory federal rate primarily due to (i) reductions for the effect of lower foreign tax rates when compared to the U.S. statutory rate and other foreign adjustments of $4.1 million and (ii) the U.S. production activities deduction of $3.1 million.  These reductions were partially offset by (i) the provision for state and local income taxes, net of the federal benefit, of $2.0 million and (ii) $2.2 million of other adjustments.


F-5




During 2018, we recognized losses of $12.6 million on our investments in unconsolidated affiliates, net of foreign tax, compared to losses of $2.1 million in 2017. The loss on these investments for 2018 included net losses of $14.0 million and charges of $3.0 million related to certain labor claim contingencies, offset by a gain of $7.0 million related to a settlement with the Brazilian Federal Revenue Agency for Tecumseh. It also includes net losses of $2.6 million for Mueller Middle East. During 2017, the loss on these investments included net losses of $2.1 million for Tecumseh. During 2016, we recognized income of $1.9 million on these investments, which included the gain that resulted from the allocation of the purchase price recorded by our equity method investees, but was offset by restructuring and impairment charges and net losses during the year for Tecumseh.

Piping Systems Segment

The following table compares summary operating results for 2018, 2017, and 2016 for the businesses comprising our Piping Systems segment:

 
 
 
 
 
 
 
 
Percent Change
(In thousands)
 
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,645,633

 
$
1,564,950

 
$
1,429,589

 
5.2
%
 
9.5
 %
Operating income
 
122,829

 
99,596

 
104,926

 
23.3

 
(5.1
)

The following are components of changes in net sales compared to the prior year:

 
 
2018 vs. 2017
 
2017 vs. 2016
 
 
 
 
 
Net selling price in core product lines
 
4.5
 %
 
13.1
 %
Unit sales volume in core product lines
 
3.4

 
(2.3
)
Acquisitions
 
1.1

 
2.2

Dispositions
 
(4.3
)
 
(3.8
)
Other
 
0.5

 
0.3

 
 
 
 
 
 
 
5.2
 %
 
9.5
 %

The increase in net sales in 2018 was primarily attributable to (i) higher unit sales volume of $96.6 million in the segment’s domestic core product lines, primarily copper tube, (ii) higher net selling prices of $69.7 million in the segment’s core product lines, (iii) an increase in sales of $13.3 million in the segment’s non-core product lines, (iv) incremental sales of $9.6 million recorded by Heatlink Group, and (v) sales of $6.8 million recorded by Die-Mold. These increases were partially offset by (i) the absence of sales of $67.3 million recorded by Mueller-Xingrong and (ii) lower unit sales volume of $44.5 million in the segment’s non-domestic core product lines.

The increase in net sales in 2017 was primarily attributable to (i) higher net selling prices of $186.5 million in the segment’s core product lines, (ii) incremental sales of $16.4 million recorded by Jungwoo-Mueller and (iii) sales of $14.4 million recorded by Heatlink Group. These increases were partially offset by (i) the absence of sales of $54.2 million recorded by Mueller-Xingrong and (ii) lower unit sales volume of $33.1 million in the segment’s core product lines.


F-6




The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2018, 2017, and 2016:

(In thousands)
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Cost of goods sold
 
$
1,426,729

 
$
1,369,161

 
$
1,228,949

Depreciation and amortization
 
23,304

 
21,777

 
22,421

Selling, general, and administrative expense
 
74,864

 
74,441

 
67,178

Gain on sale of assets
 
(2,093
)
 
(1,491
)
 

Impairment charges
 

 
1,466

 
6,115

 
 
 
 
 
 
 
Operating expenses
 
$
1,522,804

 
$
1,465,354

 
$
1,324,663


 
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Cost of goods sold
 
86.7
 %
 
87.5
 %
 
86.0
%
Depreciation and amortization
 
1.4

 
1.4

 
1.6

Selling, general, and administrative expense
 
4.5

 
4.7

 
4.7

Gain on sale of assets
 
(0.1
)
 
(0.1
)
 

Impairment charges
 

 
0.1

 
0.4

 
 
 
 
 
 
 
Operating expenses
 
92.5
 %
 
93.6
 %
 
92.7
%

The increase in cost of goods sold in 2018 was primarily due to the increase in the average cost of copper and the increase in sales volume in the segment’s domestic core product lines and related to the acquisitions of Heatlink Group and Die-Mold, partially offset by the decrease in sales volume resulting from the sale of Mueller-Xingrong. The increase in cost of goods sold in 2017 was primarily due to the increase in the average cost of copper and the increase in sales volume related to the acquisition of Jungwoo-Mueller and Heatlink Group, partially offset by the decrease in sales volume resulting from the sale of Mueller-Xingrong and in certain other businesses.

Depreciation and amortization increased in 2018 as a result of several new long-lived assets being placed into service as well as long-lived assets of Heatlink Group and Die-Mold, partially offset by the impact of the sale of long-lived assets at Mueller-Xingrong. The decrease in 2017 was a result of the sale of long-lived assets at Mueller-Xingrong as well as several long-lived assets becoming fully depreciated and amortized, partially offset by depreciation and amortization of long-lived assets for businesses acquired.

Selling, general, and administrative expenses increased slightly for 2018, primarily due to (i) incremental expenses associated with Die-Mold and Heatlink Group of $2.5 million, (ii) an increase in legal and professional fees of $1.6 million, (iii) an increase in foreign currency exchange rate losses of $0.6 million, and (iv) an increase in agent commissions of $0.5 million.  These increases were partially offset by (i) fees of $3.5 million received for services provided under certain third-party sales and distribution arrangements and (ii) the absence of expenses associated with Mueller-Xingrong of $1.2 million. The increase in 2017 was primarily due to (i) incremental expenses associated with Jungwoo-Mueller and Heatlink Group of $5.5 million, (ii) an increase in employment costs of $0.6 million, (iii) an increase in agent commissions of $0.4 million, and (iv) an increase in foreign currency exchange rate losses of $0.3 million.  

During 2018, we recognized a gain of $1.4 million on the sale of real property and a gain of $0.7 million on the sale of manufacturing equipment.

During 2017, we recognized fixed asset impairment charges for certain copper fittings manufacturing equipment of $1.5 million and a gain of $1.5 million on the sale of our interest in Mueller-Xingrong.

During 2016, we recognized fixed asset impairment charges for certain manufacturing equipment of $6.1 million.
  

F-7




Industrial Metals Segment

The following table compares summary operating results for 2018, 2017, and 2016 for the businesses comprising our Industrial Metals segment:

 
 
 
 
 
 
 
 
Percent Change
(In thousands)
 
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
651,061

 
$
602,131

 
$
521,060

 
8.1
%
 
15.6
 %
Operating income
 
75,607

 
74,364

 
77,387

 
1.7

 
(3.9
)

The following are components of changes in net sales compared to the prior year:

 
 
2018 vs. 2017
 
2017 vs. 2016
 
 
 
 
 
Net selling price in core product lines
 
5.2
 %
 
15.7
 %
Unit sales volume in core product lines
 
5.1

 
1.1

Other
 
(2.2
)
 
(1.2
)
 
 
 
 
 
 
 
8.1
 %
 
15.6
 %

The increase in net sales in 2018 was primarily due to (i) higher net selling prices of $30.0 million in the segment’s core product lines, primarily brass rod, and (ii) higher unit sales volume of $29.6 million in the segment’s core product lines.

The increase in net sales during 2017 was primarily due to higher net selling prices of $80.1 million in the segment’s core product lines.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2018, 2017, and 2016:

(In thousands)
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Cost of goods sold
 
$
559,367

 
$
506,973

 
$
420,905

Depreciation and amortization
 
7,568

 
7,516

 
8,162

Selling, general, and administrative expense
 
13,501

 
13,278

 
13,943

Gain on sale of assets
 
(1,301
)
 

 

Impairment charges
 

 

 
663

Insurance recovery
 
(3,681
)
 

 

 
 
 
 
 
 
 
Operating expenses
 
$
575,454

 
$
527,767

 
$
443,673



F-8




 
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Cost of goods sold
 
85.9
 %
 
84.2
%
 
80.8
%
Depreciation and amortization
 
1.2

 
1.2

 
1.6

Selling, general, and administrative expense
 
2.1

 
2.2

 
2.6

Gain on sale of assets
 
(0.2
)
 

 

Impairment charges
 

 

 
0.1

Insurance recovery
 
(0.6
)
 

 

 
 
 
 
 
 
 
Operating expenses
 
88.4
 %
 
87.6
%
 
85.1
%

The increase in cost of goods sold in 2018 was primarily due to the increase in the average cost of copper and the increase in sales volume in the segment’s core product lines. The increase in cost of goods sold in 2017 was primarily related to the increase in the average cost of copper. 

Depreciation and amortization in 2018 was consistent with 2017. Depreciation and amortization decreased slightly in 2017 as a result of several long-lived assets becoming fully depreciated. 

Selling, general, and administrative expenses increased slightly in 2018 primarily due to an increase in legal fees of $0.2 million. The decrease in 2017 was primarily a result of a reduction in employment costs, including incentive compensation, of $0.5 million.

During 2018, we recognized a gain of $1.3 million on the sale of real property and an insurance recovery gain of $3.7 million related to the losses incurred due to the 2017 fire at our brass rod mill in Port Huron, Michigan. During 2016, we recognized fixed asset impairment charges of $0.7 million on fixed assets related to the rationalization of Sherwood.

Climate Segment

The following table compares summary operating results for 2018, 2017, and 2016 for the businesses comprising our Climate segment:

 
 
 
 
 
 
 
 
Percent Change
(In thousands)
 
2018
 
2017
 
2016
 
2018 vs. 2017
 
2017 vs. 2016
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
229,069

 
$
131,448

 
$
119,758

 
74.3
%
 
9.8
%
Operating income
 
24,118

 
20,325

 
17,733

 
18.7

 
14.6


Net sales for 2018 increased primarily as a result of sales of $90.0 million recorded by ATCO, as well as an increase in volume and improved product mix.  Net sales for 2017 increased due to an increase in volume and improved product mix.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2018, 2017, and 2016:

(In thousands)
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Cost of goods sold
 
$
182,456

 
$
98,851

 
$
89,927

Depreciation and amortization
 
5,569

 
2,513

 
2,437

Selling, general, and administrative expense
 
16,926

 
9,759

 
9,661

 
 
 
 
 
 
 
Operating expenses
 
$
204,951

 
$
111,123

 
$
102,025



F-9




 
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Cost of goods sold
 
79.7
%
 
75.2
%
 
75.1
%
Depreciation and amortization
 
2.4

 
1.9

 
2.0

Selling, general, and administrative expense
 
7.4

 
7.4

 
8.1

 
 
 
 
 
 
 
Operating expenses
 
89.5
%
 
84.5
%
 
85.2
%

Cost of goods sold increased in 2018 due to the increase in volume and change in product mix within the segment primarily resulting from the ATCO acquisition. In addition, it included additional expense of $2.2 million to adjust ATCO’s inventory to fair value as part of purchase price accounting during 2018. The increase in cost of goods sold in 2017 was related to factors consistent with those noted regarding changes in net sales.  Depreciation and amortization increased in 2018 primarily as a result of depreciation and amortization of the long-lived assets acquired at ATCO. Depreciation and amortization was consistent in 2017 and 2016. Selling, general, and administrative expenses increased in 2018 as a result of incremental expenses associated with ATCO. Selling, general, and administrative expenses were consistent in 2017 and 2016

LIQUIDITY AND CAPITAL RESOURCES

The following table presents selected financial information for 2018, 2017, and 2016:

(In thousands)
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
Increase (decrease) in:
 
 
 
 
 
 
Cash, cash equivalents, and restricted cash
 
$
(49,425
)
 
$
(233,906
)
 
$
81,805

Property, plant, and equipment, net
 
66,312

 
9,090

 
15,007

Total debt
 
31,626

 
237,708

 
11,354

Working capital, net of cash and current debt
 
11,228

 
55,405

 
9,781

 
 
 
 
 
 
 
Net cash provided by operating activities
 
167,892

 
43,995

 
157,778

Net cash used in investing activities
 
(187,096
)
 
(36,280
)
 
(47,726
)
Net cash used in financing activities
 
(28,269
)
 
(244,566
)
 
(22,561
)

Cash Provided by Operating Activities

During 2018, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $106.8 million, (ii) depreciation and amortization of $39.9 million, (iii) a decrease in inventories of $27.5 million, (iv) a decrease in other assets of $14.4 million, (v) losses from unconsolidated affiliates of $12.6 million, and (vi) stock-based compensation expense of $8.0 million. These cash increases were offset by (i) a decrease in current liabilities of $15.7 million, (ii) a decrease in other liabilities of $14.8 million, and (iii) an increase in accounts receivable of $11.3 million. The decrease in inventories was primarily driven by the use of excess inventory built at the end of 2017 due to a casting outage in our brass rod mill that impaired our ability to melt scrap returns. The fluctuations in accounts receivable and current liabilities were primarily due to increased selling prices and sales volume in certain businesses and additional working capital needs in 2018. The changes in other assets and liabilities are primarily attributable to the change in estimate of the one-time transition tax liability on accumulated foreign earnings under the the Act.

During 2017, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $87.0 million, (ii) depreciation and amortization of $34.2 million, and (iii) an increase in current liabilities of $10.7 million. These cash increases were offset by an increase in inventories of $86.3 million, primarily driven by the increase in the price of copper and an excess inventory build of $38.9 million at the end of 2017 due to a casting outage in our brass rod mill that impaired our ability to melt scrap returns.

During 2016, net cash provided by operating activities was primarily attributable to consolidated net income of $99.8 million plus the addition of non-cash charges to income.


F-10




Cash Used in Investing Activities

The major components of net cash used in investing activities in 2018 included (i) $167.7 million for the purchases of ATCO and Die-Mold, net of cash acquired, and (ii) capital expenditures of $38.5 million. These uses of cash were offset by proceeds on the sale of properties of $18.7 million.

The major components of net cash used in investing activities in 2017 included (i) capital expenditures of $46.1 million, (ii) $18.4 million for the purchase of Heatlink Group, net of cash acquired, and (iii) investments in our joint venture in Bahrain of $3.3 million. These uses of cash were offset by (i) $17.5 million of proceeds from the sale of our 50.5 percent equity interest in Mueller-Xingrong, net of cash sold, (ii) proceeds from the sale of properties of $12.3 million, and (iii) proceeds from the sale of securities of $1.8 million.

The major components of net cash used in investing activities in 2016 included (i) capital expenditures of $37.5 million and (ii) $20.5 million for the purchase of a 60.0 percent equity interest in Jungwoo-Mueller, net of cash acquired. These uses of cash were offset by $10.3 million in proceeds from the sale of properties.

Cash Used in Financing Activities

For 2018, net cash used in investing activities consisted primarily of (i) $165.0 million used to reduce the debt outstanding under our Credit Agreement, (ii) $33.6 million used to repurchase common stock, (iii) $22.7 million used for the payment of regular quarterly dividends to stockholders of the Company, and (iv) $2.9 million used for repayment of debt by Jungwoo-Mueller. These uses of cash were offset by the issuance of debt under our Credit Agreement of $200.0 million.

For 2017, net cash used in investing activities consisted primarily of (i) $196.9 million used for the payment of the special dividend and the regular quarterly dividends to stockholders of the Company, (ii) $110.0 million used to reduce the debt outstanding under our Credit Agreement, (iii) $3.4 million used for repayment of debt by Jungwoo-Mueller and Mueller-Xingrong, and (iv) $2.9 million used for payment of dividends to noncontrolling interests.  These uses of cash were partially offset by the issuance of debt of $70.0 million under our Credit Agreement.

For 2016, net cash used in investing activities consisted primarily of (i) $21.2 million used for payment of regular quarterly dividends to stockholders of the Company and (ii) $3.8 million used for payment of dividends to noncontrolling interests.  This was partially offset by the issuance of debt of $3.5 million.

Liquidity and Outlook

We believe that cash provided by operations, funds available under the Credit Agreement, and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.  Our current ratio was 3.0 to 1 as of December 29, 2018.

As of December 29, 2018, $52.1 million of our cash and cash equivalents were held by foreign subsidiaries.  The undistributed earnings of most of the foreign subsidiaries are considered to be permanently reinvested.  Accordingly, no additional income tax liability has been accrued with respect to these earnings. If these undistributed earnings were remitted to the U.S., we would pay additional tax of approximately $4.0 million. No additional income taxes have been provided for any additional outside basis differences that may exist with respect to these entities, as these amounts continue to be indefinitely reinvested in foreign operations and the calculation of such taxes is not practicable. 

The Act imposed a one-time transition tax based on our total post-1986 earnings and profits for which the accrual of U.S. income taxes has previously been deferred.  As of December 29, 2018, our remaining transition tax liability is $2.5 million, which will be paid in various amounts over eight years beginning in 2019.

We expect the reduction in the U.S. federal tax rate from 35 percent to 21 percent under the Act to provide ongoing benefits to liquidity.  For 2019, we expect our effective tax rate on consolidated earnings to be in the range of 22 to 26 percent.  We believe that cash held domestically, funds available through the Credit Agreement, and cash generated from U.S. based operations will be adequate to meet the future needs of our U.S. based operations.

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, accounts receivable, and accounts payable.  The price of copper has fluctuated significantly and averaged approximately $2.93 in 2018, $2.80 in 2017, and $2.20 in 2016.


F-11




We have significant environmental remediation obligations which we expect to pay over future years.  Approximately $6.4 million was spent during 2018 for environmental matters.  As of December 29, 2018, we expect to spend $3.6 million in 2019, $0.6 million in 2020, $0.6 million in 2021, $0.6 million in 2022, $0.7 million in 2023, and $17.5 million thereafter for ongoing projects.  

Cash used to fund pension and other postretirement benefit obligations was $1.9 million in 2018 and $3.2 million in 2017.  We anticipate making contributions of approximately $1.2 million to these plans in 2019.

Beginning in the second quarter of 2016, the Company declared and paid a quarterly cash dividend of 10.0 cents per common share during each quarter of 2016, 2017, and 2018, and 7.5 cents per common share for the first quarter of 2016.  Additionally, during the first quarter of 2017 the Company distributed a special dividend composed of $3.00 in cash and $5.00 in principal amount of the Company’s 6% Subordinated Debentures (Debentures) due 2027 for each share of common stock outstanding. Payment of dividends in the future is dependent upon our financial condition, cash flows, capital requirements, and other factors.

Capital Expenditures

During 2018 our capital expenditures were $38.5 million.   We anticipate investing approximately $25.0 million to $30.0 million for capital expenditures in 2019.

Long-Term Debt

The Company’s Credit Agreement provides for an unsecured $350.0 million revolving credit facility which matures on December 6, 2021.  Funds borrowed under the Credit Agreement may be used for working capital purposes and other general corporate purposes.  In addition, the Credit Agreement provides a sublimit of $50.0 million for the issuance of letters of credit, a sublimit of $25.0 million for loans and letters of credit made in certain foreign currencies, and a swing  line loan sublimit of $15.0 million.  Outstanding letters of credit and foreign currency loans reduce borrowing availability under the Credit Agreement.  Total borrowings under the Credit Agreement were $195.0 million at December 29, 2018.

The Debentures distributed as part of our special dividend are subordinated to all other funded debt of the Company and are callable, in whole or in part, at any time at the option of the Company, subject to declining call premiums during the first five years. The Debentures also grant each holder the right to require the Company to repurchase such holder’s Debentures in the event of a change in control at declining repurchase premiums during the first five years. Interest is payable semiannually on September 1 and March 1. Total Debentures outstanding as of December 29, 2018 were $284.5 million.

Jungwoo-Mueller has several secured revolving credit arrangements with a total borrowing capacity of KRW 28.8 billion (or approximately $25.3 million).  Borrowings are secured by the real property and equipment of Jungwoo-Mueller and were bearing interest at an average rate of 3.16 percent as of December 29, 2018.  Total borrowings at Jungwoo-Mueller were $10.4 million as of December 29, 2018.

As of December 29, 2018, the Company’s total debt was $496.7 million or 46.9 percent of its total capitalization.

Covenants contained in the Company’s financing obligations require, among other things, the maintenance of minimum levels of tangible net worth and the satisfaction of certain minimum financial ratios.  As of December 29, 2018, we were in compliance with all of our debt covenants.

Share Repurchase Program
The Company’s Board of Directors has extended, until August 2019, its authorization to repurchase up to 20 million shares of the Company’s common stock through open market transactions or through privately negotiated transactions. We may cancel, suspend, or extend the time period for the repurchase of shares at any time.  Any repurchases will be funded primarily through existing cash and cash from operations.  The Company may hold any shares repurchased in treasury or use a portion of the repurchased shares for stock-based compensation plans, as well as for other corporate purposes.  From its initial authorization in 1999 through December 29, 2018, the Company had repurchased approximately 6.1 million shares under this authorization.  

Subsequent to year-end and as of February 22, 2019, the Company has repurchased an additional 77 thousand shares.


F-12




CONTRACTUAL CASH OBLIGATIONS

The following table presents payments due by the Company under contractual obligations with minimum firm commitments as of December 29, 2018:

 
 
 
 
Payments Due by Year
(In millions)
 
Total
 
2019
 
2020-2021
 
2022-2023
 
Thereafter
 
 
 
 
 
 
 
 
 
 
 
Total debt
 
$
497.6

 
$
7.1

 
$
202.8

 
$
1.0

 
$
286.7

Operating and capital leases
 
38.3

 
6.6

 
10.0

 
6.3

 
15.4

Heavy machinery and equipment commitments
 
1.1

 
1.1

 

 

 

Purchase commitments (1)
 
662.2

 
660.7

 
0.8

 
0.7

 

Environmental remediation at Lead Refinery Site
 
2.5

 
2.5

 

 

 

Transition tax on accumulated foreign earnings
 
2.5

 
0.1

 
0.2

 
0.2

 
2.0

Interest payments (2)
 
156.4

 
24.8

 
42.0

 
34.1

 
55.5

 
 
 
 
 
 
 
 
 
 
 
Total contractual cash obligations
 
$
1,360.6

 
$
702.9

 
$
255.8

 
$
42.3

 
$
359.6

 
 
 
 
 
 
 
 
 
 
 
(1) 
This includes contractual supply commitments totaling $614.0 million at year-end prices; these contracts contain variable pricing based on Comex and the London Metals Exchange quoted prices. These commitments are for purchases of raw materials that are expected to be consumed in the ordinary course of business. 
(2) 
These payments represent interest on long-term debt based on rates in effect at December 29, 2018.

The above obligations will be satisfied with existing cash, funds available under the Credit Agreement, and cash generated by operations.  The Company has no off-balance sheet financing arrangements except for the operating leases identified above.

MARKET RISKS

The Company is exposed to market risks from changes in raw material and energy costs, interest rates, and foreign currency exchange rates.  To reduce such risks, we may periodically use financial instruments.  Hedging transactions are authorized and executed pursuant to policies and procedures.  Further, we do 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 “Note 1 - Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Cost and Availability of Raw Materials and Energy

Raw materials, primarily 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 our control.  Significant increases in the cost of metal, to the extent not reflected in prices for our finished products, or the lack of availability could materially and adversely affect our business, results of operations and financial condition.

The Company occasionally enters into forward fixed-price arrangements with certain customers.  We may utilize futures contracts to hedge risks associated with these forward fixed-price arrangements.  We may also utilize futures contracts to manage price risk associated with inventory.  Depending on the nature of the hedge, changes in the fair value of the futures contracts will either be offset against the change in fair value of the inventory through earnings or recognized as a component of accumulated other comprehensive income (AOCI) in equity 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 December 29, 2018, we held open futures contracts to purchase approximately $59.4 million of copper over the next 12 months related to fixed-price sales orders and to sell approximately $3.1 million of copper over the next five months related to copper inventory.

We may enter into futures contracts or forward fixed-price arrangements with certain vendors to manage price risk associated with natural gas purchases.  The effective portion of gains and losses with respect to positions are deferred in equity as a component of AOCI and reflected in earnings upon consumption of natural gas.  Periodic value fluctuations of the futures contracts generally offset the value fluctuations of the underlying natural gas prices.  There were no open futures contracts to purchase natural gas at December 29, 2018.


F-13




Interest Rates

The Company had variable-rate debt outstanding of $202.6 million at December 29, 2018 and $169.9 million at December 30, 2017.  At this borrowing level, a hypothetical 10 percent increase in interest rates would have had an insignificant unfavorable impact on our pre-tax earnings and cash flows.  The primary interest rate exposure on variable-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.  We may utilize certain futures or forward contracts with financial institutions to hedge foreign currency transactional exposures.  Gains and losses with respect to these positions are deferred in equity as a component of AOCI and reflected in earnings upon collection of receivables or payment of commitments.  At December 29, 2018, we had open forward contracts with a financial institution to sell approximately 4.1 million euros, 27.4 million Swedish kronor, and 7.7 million Norwegian kroner through April 2019.

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 we are exposed include the Canadian dollar, the British pound sterling, the Mexican peso, and the South Korean won.  The Company generally views its investments in foreign subsidiaries with a functional currency other than the U.S. dollar as long-term.  As a result, we generally do not hedge these net investments.  The net investment in foreign subsidiaries translated into U.S. dollars using the year-end exchange rates was $376.6 million at December 29, 2018 and $360.7 million at December 30, 2017.  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 29, 2018 and December 30, 2017 amounted to $37.7 million and $36.1 million, respectively.  This change would be reflected in the foreign currency translation component of AOCI in the equity section of our Consolidated Balance Sheets until the foreign subsidiaries are sold or otherwise disposed.

We have significant investments in foreign operations whose functional currency is the British pound sterling, the Mexican peso, the Canadian dollar, and the South Korean won.  During 2018, the value of the British pound decreased approximately six percent, the Mexican peso remained consistent with prior year, the Canadian dollar decreased approximately eight percent, and the South Korean won decreased approximately four percent, relative to the U.S. dollar.  The resulting net foreign currency translation losses were included in calculating net other comprehensive loss for the year ended December 29, 2018 and were recorded as a component of AOCI.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s accounting policies are more fully described in “Note 1 - Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.  As disclosed in Note 1, the preparation of financial statements in conformity with general accepted accounting principles in the United States requires management to make estimates and assumptions about future events that affect amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates.  Management believes the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective, and complex judgments.

Inventory Valuation Reserves

Our inventories are valued at the lower-of-cost-or-market.  The market price of copper cathode and scrap are subject to volatility.  During periods when open market prices decline below net realizable value, the Company may need to provide an allowance to reduce the carrying value of its inventory.  In addition, certain items in inventory may be considered excess or obsolete and, as such, we may establish an allowance to reduce the carrying value of those items to their net realizable value.  Changes in these estimates related to the value of inventory, if any, may result in a materially adverse impact on our 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 they are determined.
 
As of December 29, 2018 and December 30, 2017, our inventory valuation reserves were $7.0 million and $6.8 million, respectively.  The expense recognized in each of these periods was immaterial to our Consolidated Financial Statements.


F-14




Impairment of Goodwill

As of December 29, 2018, we had $150.3 million of recorded goodwill from our business acquisitions, representing the excess of the purchase price over the fair value of the net assets we have acquired.  During 2018 we recorded $20.0 million in additional goodwill associated with our ATCO and Die-Mold acquisitions.
Goodwill is subject to impairment testing, which is performed annually as of the first day of the fourth quarter unless circumstances indicate the need to accelerate the timing of the tests.  These circumstances include a significant change in the business climate, operating performance indicators, competition, or sale or disposition of a significant portion of one of our businesses.  In our evaluation of goodwill impairment, we perform a qualitative assessment at the reporting unit level that requires management judgment and the use of estimates to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If the qualitative assessment is not conclusive, management compares the fair value of a reporting unit with its carrying amount and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
We identify reporting units by evaluating components of our operating segments and combining those components with similar economic characteristics.  Reporting units with significant recorded goodwill include Domestic Piping Systems, B&K LLC, Great Lakes, Heatlink Group, Die-Mold, European Operations, Jungwoo-Mueller, Westermeyer, Turbotec, and ATCO.
The fair value of each reporting unit is estimated using a combination of the income and market approaches, incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, discount rates and expected capital expenditures. Estimates used by management can significantly affect the outcome of the impairment test.  Changes in forecasted operating results and other assumptions could materially affect these estimates.
We evaluated each reporting unit during the fourth quarters of 2018 and 2017, as applicable. The estimated fair value of each of these reporting units exceeded its carrying values in 2018 and 2017, and we do not believe that any of these reporting units were at risk of impairment as of December 29, 2018.

Environmental Reserves

We recognize an environmental reserve when it is probable that a loss is likely to occur and the amount of the loss is reasonably estimable.  We estimate the duration and extent of our remediation obligations based upon reports of outside consultants, internal and third party estimates and analyses of cleanup costs and ongoing monitoring costs, communications with regulatory agencies, and changes in environmental law.  If we were to determine that our estimates of the duration or extent of our environmental obligations were no longer accurate, we would adjust our environmental reserve accordingly in the period that such determination is made.  Estimated future expenditures for environmental remediation are not discounted to their present value.  

Environmental expenses that relate to ongoing operations are included as a component of cost of goods sold.  Environmental expenses related to non-operating properties are presented below operating income in the Consolidated Statements of Income.

Income Taxes

We estimate total income tax expense based on domestic and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting, and available credits and incentives.

Deferred income tax assets and liabilities are recognized for the future tax effects of temporary differences between the treatment of certain items for financial statement and tax purposes using tax rates in effect for the years in which the differences are expected to reverse.  Realization of certain components of deferred tax assets is dependent upon the occurrence of future events.  

Valuation allowances are recorded when, in the opinion of management, it is more likely than not that all or a portion of the deferred tax assets will not 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 our judgment, estimates, and assumptions.  In the event we were to determine that we would not be able to realize all or a portion of the net deferred tax assets in the future, we would increase the valuation allowance through a charge to income tax expense in the period that such determination is made.  Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future, in excess of the net carrying amounts, we would decrease the recorded valuation allowance through a decrease to income tax expense in the period that such determination is made.

We record liabilities for known or anticipated tax issues based on our analysis of whether, and the extent to which, additional taxes will be due.  These unrecognized tax benefits are retained until the associated uncertainty is resolved.  Tax benefits for uncertain tax positions that are recognized in the Consolidated Financial Statements are measured as the largest amount of benefit, determined

F-15




on a cumulative probability basis, that is more likely than not to be realized upon ultimate settlement.  To the extent we prevail in matters for which a liability for an uncertain tax position is established or are required to pay amounts in excess of the liability, our effective tax rate in a given period may be materially affected.

New Accounting Pronouncements

See “Note 1 – Summary of Significant Accounting Policies” in our Consolidated Financial Statements.

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, and may be influenced by factors that could cause actual outcomes and results to be materially different from those predicted.  The forward-looking statements reflect knowledge and information available as of the date of preparation of the Annual Report, and the Company undertakes no obligation to update these forward-looking statements.  We identify the forward-looking statements by using the words “anticipates,” “believes,” “expects,” “intends” or similar expressions in such statements.

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, 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.  In addition to those factors discussed under “Risk Factors” in this Annual Report on Form 10-K, such factors include: (i) the current and projected future business environment, including interest rates and capital and consumer spending; (ii) the domestic housing and commercial construction industry environment; (iii) availability and price fluctuations in commodities (including copper, natural gas, and other raw materials, including crude oil that indirectly affects plastic resins); (iv) competitive factors and competitor responses to the Company’s initiatives; (v) stability of government laws and regulations, including taxes; (vi) availability of financing; and (vii) continuation of the environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates.

F-16




MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 29, 2018, December 30, 2017, and December 31, 2016

(In thousands, except per share data)
 
2018
 
2017 (1)
 
2016 (1)
 
 
 
 
 
 
 
Net sales
 
$
2,507,878

 
$
2,266,073

 
$
2,055,622

 
 
 
 
 
 
 
Cost of goods sold
 
2,150,400