Mueller Industries(MLI) - 2018 Q4 - Annual Report

Part I Business A leading global manufacturer of copper, brass, aluminum, and plastic products operating across three primary segments Business Overview and Segments The company manufactures diverse products for construction and industrial markets, organized into three reportable segments - Mueller Industries is a leading manufacturer of copper, brass, aluminum, and plastic products with operations across the United States, Canada, Mexico, Great Britain, South Korea, the Middle East, and China[14] - The company's business is structured into three reportable segments: Piping Systems, Industrial Metals, and Climate[15] - Key drivers for sales in the HVAC, refrigeration, and plumbing markets are new housing starts, commercial construction, and remodeling projects[17] Piping Systems Segment This segment manufactures and sells copper and plastic plumbing systems, serving wholesale, retail, and OEM customers - The Piping Systems segment produces copper tube, fittings, line sets, and PEX plumbing products across the U.S., Canada, and Europe[18][19][20] - The segment has expanded through several recent acquisitions: Jungwoo-Mueller (South Korea, 2016), Heatlink Group (Canada, 2017), and Die-Mold (Canada, 2018)[21] - Key competitors include Cerro Flow Products, Cambridge-Lee Industries, NIBCO, and various foreign manufacturers, as well as producers of substitute plastic products[25] Industrial Metals Segment This segment manufactures brass, copper, and aluminum products for various original equipment manufacturers (OEMs) - This segment produces a range of products including brass rod, copper bar, aluminum/brass forgings, and valves for OEMs in industries like HVAC, plumbing, and automotive[26][27][29] - The acquisition of Sherwood Valve Products in 2015 complemented the segment's existing brass businesses[30] - The primary competitor in the brass rod market is Chase Brass and Copper Company LLC, along with other domestic and foreign companies[31] Climate Segment This segment manufactures and distributes various components for the HVAC and refrigeration markets - This segment produces refrigeration valves, fabricated tubular products, heat exchangers, and insulated HVAC flexible duct systems for OEMs in the HVAC and refrigeration markets[32][33] - Recent acquisitions of Turbotec (2015) and ATCO (2018) have complemented the segment's existing businesses[34] Labor, Materials, and Environment The company manages a significant unionized workforce, sources key raw materials, and maintains reserves for environmental compliance - As of December 29, 2018, the Company employed approximately 5,134 people, with 1,883 represented by various unions[35] - Primary raw materials, such as copper, are obtained through short-term supply contracts and the open market, with adequate supplies historically available[36][37] Environmental Reserves and Provisions | Year | Provision for Environmental Matters | Reserve at Year-End | | :--- | :--- | :--- | | 2018 | $2.0 million | $23.6 million | | 2017 | $7.5 million | $28.0 million | | 2016 | $0.9 million | N/A | Risk Factors The company faces risks from raw material costs, economic conditions, competition, and international operations - Economic and Market Risks: Business is sensitive to economic conditions in housing and commercial construction, interest rate changes, and competitive pressures from imports and substitute products[47][50] - Operational Risks: The company is exposed to risks from volatile raw material and energy costs, potential loss of key personnel, labor disputes, and business interruptions[45][46][54] - International Risks: Operations are subject to foreign exchange rate fluctuations and uncertainties related to Brexit, which could affect competitiveness and financial results[51][52] - Legal and Regulatory Risks: The company faces risks from litigation, regulatory proceedings, and compliance with environmental, health, and safety laws, which could result in significant costs[53][56] - Strategic and IT Risks: Failure to successfully integrate acquired businesses and potential breaches of information technology systems pose risks to financial results and reputation[57][60] Properties The company owns and leases numerous operating facilities across North America, Europe, and Asia for its business segments - The company owns or leases major manufacturing and distribution facilities for its Piping Systems, Industrial Metals, and Climate segments[63] - Key locations include multiple sites in the U.S. (e.g., Mississippi, Michigan, Texas, Georgia), Canada (Ontario, Alberta), Mexico (Monterrey, Guadalupe), England (Bilston), and South Korea (Yangju City)[64][66] Legal Proceedings The company is involved in ordinary course litigation, with details on material proceedings found in the financial statement notes - The Company is involved in litigation from claims arising in the ordinary course of business[67] - A detailed description of material pending legal proceedings is incorporated by reference from "Note 12 – Commitments and Contingencies" in the Notes to Consolidated Financial Statements[68] Part II Market for Common Equity, Stockholder Matters, and Issuer Purchases The company's stock trades on the NYSE, with a regular dividend policy and an active share repurchase program 2018 Quarterly Stock Price and Dividends | Quarter | High Price | Low Price | Dividend per Share | | :--- | :--- | :--- | :--- | | Q4 2018 | $29.27 | $21.49 | $0.10 | | Q3 2018 | $33.89 | $27.92 | $0.10 | | Q2 2018 | $31.94 | $25.26 | $0.10 | | Q1 2018 | $37.57 | $25.50 | $0.10 | - In March 2017, the company distributed a special dividend consisting of $3.00 in cash and $5.00 in principal amount of 6% Subordinated Debentures per share[73] - The Board has authorized a repurchase of up to 20 million shares, extended until August 2019; approximately 13.9 million shares remained available for repurchase as of year-end 2018[76][77] - The company's stock performance in 2018 underperformed both the Dow Jones U.S. Total Return Index and the Dow Jones U.S. Building Materials & Fixtures Index[78][79] Selected Financial Data This section presents a five-year summary of key financial performance and position data Selected Financial Data (2014-2018) | (In thousands, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,507,878 | $2,266,073 | $2,055,622 | $2,100,002 | $2,364,227 | | Operating income | $172,969 | $150,807 | $154,401 | $138,704 | $150,143 | | Net income attributable to Mueller | $104,459 | $85,598 | $99,727 | $87,864 | $101,560 | | Diluted earnings per share | $1.82 | $1.49 | $1.74 | $1.54 | $1.79 | | Cash dividends per share | $0.40 | $3.40 | $0.38 | $0.30 | $0.30 | | 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 | Management's Discussion and Analysis (MD&A) The company's 2018 net sales and operating income increased due to higher volumes, prices, and acquisition contributions Results of Operations Consolidated net sales and operating income grew in 2018, driven by higher volumes, prices, and acquisition impacts Consolidated Results Summary (2016-2018) | (In thousands) | 2018 | 2017 | 2016 | % Change 2018 vs 2017 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,507,878 | $2,266,073 | $2,055,622 | 10.7% | | Operating income | $172,969 | $150,807 | $154,401 | 14.7% | | Net income | $104,459 | $85,598 | $99,727 | 22.0% | Components of Net Sales Change (2018 vs. 2017) | Component | % Change | | :--- | :--- | | Net selling price in core product lines | 4.4% | | Unit sales volume in core product lines | 3.6% | | Acquisitions and new products | 4.7% | | Dispositions | (3.0)% | | Other | 1.0% | | Total | 10.7% | - The 2018 effective tax rate was 20.6%, lower than the U.S. statutory rate primarily due to a $4.4 million reduction in the calculated tax on accumulated foreign earnings under the Tax Cuts and Jobs Act[156] Liquidity and Capital Resources The company generated strong operating cash flow, funding acquisitions and capital expenditures while maintaining a solid liquidity position Selected Cash Flow Data (2016-2018) | (In thousands) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | 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) | - Major investing activities in 2018 included $167.7 million for the acquisitions of ATCO and Die-Mold and $38.5 million in capital expenditures[179] - As of December 29, 2018, the company had total debt of $496.7 million, representing 46.9% of total capitalization, and was in compliance with all debt covenants[197] - The company anticipates capital expenditures of $25.0 million to $30.0 million in 2019[193] Market Risks The company is exposed to market risks from raw material costs, interest rates, and foreign currency fluctuations - The company uses futures contracts to hedge risks associated with forward fixed-price customer arrangements and to manage price risk for inventory; at year-end, it held contracts to purchase $59.4 million of copper[204] - Interest rate risk exists on variable-rate debt, which totaled $202.6 million at December 29, 2018; a hypothetical 10% increase in rates would have an insignificant impact on earnings[206] - The company has significant exposure to foreign currency translation risk from its operations in Canada, the U.K., Mexico, and South Korea; a hypothetical 10% adverse change in exchange rates would result in a potential loss of $37.7 million to the value of net investments in foreign subsidiaries[208] Critical Accounting Policies and Estimates Key accounting policies requiring significant management judgment include inventory valuation, goodwill impairment, and environmental reserves - Inventory Valuation: Inventories are valued at the lower-of-cost-or-market, requiring estimates for potential write-downs due to declining copper prices or obsolescence[211] - Goodwill Impairment: Goodwill of $150.3 million is tested for impairment annually; the 2018 test indicated that the fair value of each reporting unit exceeded its carrying value[213][217] - Environmental Reserves: The company maintains a reserve for environmental remediation, which was $23.6 million at year-end 2018, requiring estimation of cleanup costs[218][383] - Income Taxes: Management must make judgments regarding the realization of deferred tax assets and establish valuation allowances when it is more likely than not that assets will not be realized[220][222] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's report - The financial statements and supplementary data are located in a separate section of the report, commencing on page F-1[85][133] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements[438] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 29, 2018[88] - Management concluded that the Company's internal control over financial reporting was effective as of December 29, 2018; the assessment excluded the recently acquired businesses of ATCO and Die-Mold[90][92] - Ernst & Young LLP issued an unqualified attestation report on the Company's internal control over financial reporting[93][98] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2018[94] Part III Directors, Compensation, Ownership, and Accountant Fees Required information on governance, compensation, and ownership is incorporated by reference from the 2019 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships (Item 13), and Principal Accountant Fees (Item 14) is incorporated by reference from the Company's 2019 Proxy Statement[109][111][113] Equity Compensation Plan Information (as of Dec 29, 2018) | Plan Category | Securities to be issued upon exercise (thousands) | Weighted-average exercise price | Securities remaining for future issuance (thousands) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,014 | $23.90 | 344 | Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section lists the financial statements, schedules, and exhibits filed with the Form 10-K[118][121] - Key exhibits include the Restated Certificate of Incorporation, Amended and Restated By-laws, Indenture for the 6% Subordinated Debentures, various stock incentive plans, credit agreements, and the Stock Purchase Agreement for ATCO Rubber Products, Inc[121][123] - Certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 are also included as exhibits[125]