Mueller Industries(MLI) - 2019 Q4 - Annual Report

Part I Business The company manufactures and sells copper, brass, aluminum, and plastic products through its Piping Systems, Industrial Metals, and Climate segments - The company's operations are organized into three reportable segments: Piping Systems, Industrial Metals, and Climate[16] - The Piping Systems segment manufactures and sells copper tube, fittings, and PEX plastic products for plumbing, refrigeration, and HVAC markets globally[19][20][21] - The Industrial Metals segment produces brass rod, copper bar, aluminum/brass forgings, and other value-added products for OEMs[27][28][30] - The Climate segment manufactures refrigeration valves, fabricated tube products, heat exchangers, and insulated HVAC flexible duct systems for OEMs[33][34] - As of December 28, 2019, the company employed approximately 4,964 people, with 1,579 represented by various unions[36] - The company's primary raw material is copper, sourced through short-term supply contracts and the open market[37][39] Environmental Reserves and Provisions | Year | Provision for Environmental Matters | Reserve at Year-End | | :--- | :--- | :--- | | 2019 | $1.7 million | $20.9 million | | 2018 | $2.0 million | $23.6 million | | 2017 | $7.5 million | Not specified | - The business experiences seasonality, with net sales typically moderating in the fourth quarter due to seasonal construction markets[43] Risk Factors The company faces risks from raw material costs, economic dependency on construction, competition, and various operational challenges - Volatility in the costs of raw materials and energy could adversely impact operating margins if not passed on to customers[46] - The business is sensitive to economic conditions in the housing and commercial construction industries and changes in interest rates[48][49] - Competitive pressures from imports and substitute products could negatively affect demand, margins, and profitability[51] - Fluctuations in foreign currency exchange rates could impact competitiveness and reported results[52] - The implementation of Brexit creates uncertainty and risks related to exchange rates, interest rates, and customer relationships[53] - Potential strikes or work stoppages from collective bargaining agreement renewals could disrupt operations and increase costs[56] - Compliance with environmental, health, and safety laws could require significant costs and materially affect operations[58] - Failure to successfully execute and integrate acquisitions could negatively impact financial results[59][60] - The company is subject to cybersecurity risks, including data breaches and operational disruptions[61][62] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[63] Properties The company owns and leases numerous manufacturing and distribution facilities across its segments in multiple countries Major Operating Facilities by Segment | Segment | Location Examples | Primary Use | Ownership | | :--- | :--- | :--- | :--- | | Piping Systems | Fulton, MS; Wynne, AR; Bilston, England; Yangju City, South Korea | Manufacturing & Distribution | Mostly Owned | | Industrial Metals | Port Huron, MI; Belding, MI; Marysville, MI | Manufacturing | Mostly Owned | | Climate | Plainville, GA; Fort Worth, TX; Phoenix, AZ; Guadalupe, Mexico | Manufacturing & Distribution | Mostly Owned | Legal Proceedings The company is involved in litigation arising in the ordinary course of business, with details provided in financial statement notes - The company is involved in litigation from claims arising in the ordinary course of business, with details in "Note 14 – Commitments and Contingencies"[69][70] Mine Safety Disclosures This item is not applicable to the company - Not applicable[71] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, it pays a quarterly dividend, and maintains an active share repurchase program - The company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol 'MLI'[74] - A quarterly cash dividend of $0.10 per share was paid during fiscal years 2018 and 2019[75] - The Board extended the authorization to repurchase up to 20 million shares until August 2020, with approximately 6.2 million shares repurchased since inception[77] Issuer Purchases of Equity Securities (Quarter Ended Dec 28, 2019) | Period | Total Shares Purchased | Average Price Paid per Share | Max Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | | Oct 27 - Nov 23, 2019 | 10,109 | $32.09 | 13,822,567 | | Nov 24 - Dec 28, 2019 | 5,128 | $32.34 | 13,822,567 | | Total | 15,237 | | | Company Stock Performance (Total Return Index) | Year | Mueller Industries, Inc. | Dow Jones U.S. Total Return Index | Dow Jones U.S. Building Materials & Fixtures Index | | :--- | :--- | :--- | :--- | | 2014 | 100.00 | 100.00 | 100.00 | | 2015 | 82.67 | 100.63 | 114.37 | | 2016 | 119.33 | 112.96 | 135.47 | | 2017 | 132.90 | 137.24 | 159.65 | | 2018 | 89.09 | 130.42 | 126.50 | | 2019 | 122.49 | 171.04 | 185.11 | Selected Financial Data The company presents a five-year summary of key financial data, showing net sales of $2.43 billion for fiscal year 2019 Selected Financial Data (2015-2019) | (In thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,430,616 | $2,507,878 | $2,266,073 | $2,055,622 | $2,100,002 | | Operating income | $191,403 | $172,969 | $150,807 | $154,401 | $138,704 | | Net income | $100,972 | $104,459 | $85,598 | $99,727 | $87,864 | | Diluted EPS | $1.79 | $1.82 | $1.49 | $1.74 | $1.54 | | Cash dividends per share | $0.40 | $0.40 | $3.40 | $0.375 | $0.30 | | Total assets | $1,370,940 | $1,369,549 | $1,320,173 | $1,447,476 | $1,338,801 | | Long-term debt | $378,724 | $489,597 | $448,592 | $213,709 | $204,250 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales decreased in 2019, but operating income grew, driven by segment performance and strong operating cash flow Results of Operations Consolidated net sales decreased 3.1% in 2019, while operating income grew 10.7% due to improved cost management Consolidated Operating Results (2017-2019) | (In thousands) | 2019 | 2018 | 2017 | % Change 2019 vs 2018 | % Change 2018 vs 2017 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,430,616 | $2,507,878 | $2,266,073 | (3.1)% | 10.7% | | Operating income | $191,403 | $172,969 | $150,807 | 10.7% | 14.7% | | Net income | $100,972 | $104,459 | $85,598 | (3.3)% | 22.0% | Components of Net Sales Change | Component | 2019 vs. 2018 | 2018 vs. 2017 | | :--- | :--- | :--- | | Net selling price in core product lines | (3.7)% | 4.4% | | Unit sales volume in core product lines | (4.4)% | 3.6% | | Acquisitions | 4.2% | 4.7% | | Dispositions | — | (3.0)% | | Other | 0.8% | 1.0% | | Total | (3.1)% | 10.7% | - Cost of goods sold as a percentage of net sales decreased to 83.7% in 2019 from 85.7% in 2018, contributing to higher operating income[146] - The company recognized losses of $24.6 million on its investments in unconsolidated affiliates in 2019[158] Liquidity and Capital Resources The company generated strong operating cash flow in 2019, which was used for capital expenditures, debt reduction, and dividends Selected Cash Flow and Balance Sheet Changes | (In thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $200,544 | $167,892 | $43,995 | | Net cash used in investing activities | ($40,457) | ($187,096) | ($36,280) | | Net cash used in financing activities | ($139,694) | ($28,269) | ($244,566) | | Increase (decrease) in Total debt | ($110,444) | $31,626 | $237,708 | - Key drivers of operating cash flow in 2019 included net income ($106.2M), depreciation & amortization ($43.0M), and a decrease in inventories ($39.6M)[176] - Financing activities in 2019 were dominated by a $205.0 million reduction in debt and $22.3 million in dividend payments[182] - The company anticipates capital expenditures of approximately $45.0 million to $50.0 million in 2020[192] - Total debt was $386.3 million as of December 28, 2019, representing 36.8% of total capitalization[196] Contractual Cash Obligations The company's contractual cash obligations total approximately $1.27 billion, primarily driven by raw material purchase commitments Contractual Cash Obligations as of December 28, 2019 | (In millions) | Total | 2020 | 2021-2022 | 2023-2024 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Total debt | $386.8 | $7.5 | $91.0 | $1.4 | $286.9 | | Operating and capital leases | $35.7 | $6.6 | $10.0 | $5.3 | $13.8 | | Purchase commitments | $687.5 | $686.4 | $0.8 | $0.3 | — | | Interest payments | $129.5 | $20.0 | $37.0 | $34.1 | $38.4 | | Total | $1,265.7 | $742.2 | $141.4 | $41.1 | $341.0 | Market Risks The company is exposed to market risks from commodity prices, interest rates, and foreign currency, which it manages through hedging - The company uses commodity futures contracts to hedge risks associated with forward fixed-price sales and inventory[202] - The company had $97.0 million in variable-rate debt outstanding at year-end 2019, with primary exposure to LIBOR[204] - The net investment in foreign subsidiaries was $397.1 million at year-end 2019, with a hypothetical 10% adverse change in exchange rates resulting in a potential loss of $39.7 million[206] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment, particularly for inventory valuation, goodwill, pensions, and environmental reserves - Inventory Valuation: Inventories are valued at lower-of-cost-or-market, with reserves of $6.3 million at year-end 2019 for obsolete items[209][210] - Goodwill Impairment: Goodwill of $153.3 million is tested annually, with no impairment indicated in 2019 or 2018[211][215] - Pension and Other Postretirement Benefit Plans: Obligations are actuarially determined using assumptions for discount rates and expected return on plan assets[216] - Environmental Reserves: Liabilities for environmental remediation are recognized when probable and reasonably estimable[218] - Income Taxes: The company estimates income tax expense and assesses the realizability of deferred tax assets[220][222] Quantitative and Qualitative Disclosures About Market Risk Disclosures about market risk are contained within the "Financial Review" section of the report - Quantitative and qualitative disclosures about market risk are contained under the caption "Financial Review" commencing on page F-2[85] Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements, notes, and the independent auditor's report Consolidated Financial Statements The financial statements present the company's financial position, showing net sales of $2.43 billion and net income of $101.0 million in 2019 Key Financial Statement Data (Fiscal Year 2019) | Metric | Amount (in thousands) | | :--- | :--- | | Income Statement: | | | Net Sales | $2,430,616 | | Operating Income | $191,403 | | Net Income (attributable to Mueller) | $100,972 | | Diluted EPS | $1.79 | | Balance Sheet (Year-End): | | | Total Assets | $1,370,940 | | Total Liabilities | $708,804 | | Total Equity | $662,136 | | Cash Flow Statement: | | | Net Cash from Operating Activities | $200,544 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, acquisitions, segment data, debt, and other key financial items - Note 1: The company adopted the new lease accounting standard (ASC 842) in 2019, recognizing right-of-use assets of $29.5 million[289] - Note 2: The 2018 acquisition of ATCO Rubber Products, Inc. for approximately $158.1 million is detailed[294][296] - Note 3: Provides disaggregation of revenue, with the U.S. accounting for $1.78 billion of the $2.43 billion in 2019 net sales[312][313] - Note 12: Details the company's debt, including $284.5 million in 6% Subordinated Debentures due 2027[348] - Note 14: Environmental reserves totaled $20.9 million at year-end 2019, with significant obligations related to specific sites[384][385][390] - Note 19: Provides unaudited quarterly financial data for 2019 and 2018[433] Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on the financial statements and internal controls, identifying two Critical Audit Matters - Ernst & Young LLP expressed an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[440][441] - Critical Audit Matters highlighted were the Defined Benefit Pension Obligation and the Valuation of Goodwill for the Heatlink Group reporting unit[444][446][451] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[89] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2019 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 28, 2019[91] - Management concluded that the company's internal control over financial reporting was effective as of December 28, 2019[93] - Ernst & Young LLP issued an unqualified attestation report on the company's internal control over financial reporting[94][98] - There were no material changes in internal control over financial reporting during the fourth quarter of 2019[95] Other Information The company reports no other information for this item - None[106] Part III Directors, Executive Officers, and Corporate Governance Required information on directors, officers, and governance is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the Company's Proxy Statement for its 2020 Annual Meeting of Stockholders[108] Executive Compensation Required information on executive compensation is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the Company's Proxy Statement for its 2020 Annual Meeting of Stockholders[110] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans, with other ownership details incorporated by reference Equity Compensation Plan Information (as of Dec 28, 2019) | Plan category | Securities to be issued upon exercise (thousands) | Weighted average exercise price | Securities remaining available for future issuance (thousands) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 939 | $25.05 | 1,900 | | Total | 939 | $25.05 | 1,900 | - Other information regarding security ownership is incorporated by reference from the Company's 2020 Proxy Statement[111][112] Certain Relationships and Related Transactions, and Director Independence Required information on related transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the Company's Proxy Statement for its 2020 Annual Meeting of Stockholders[113] Principal Accountant Fees and Services Required information on principal accountant fees is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the Company's Proxy Statement for its 2020 Annual Meeting of Stockholders[114] 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 item lists all financial statements, schedules, and exhibits filed with the Form 10-K[117][120] - Key exhibits include the Restated Certificate of Incorporation, By-laws, Indenture for 6% Subordinated Debentures, and various incentive plans[120][121] - Certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 are also filed as exhibits[122] Form 10-K Summary The company reports no Form 10-K summary for this item - None[123]