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 26, 2020.28, 2023.
MUELLER INDUSTRIES, INC.
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.
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.
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), and Mueller Middle East (our Bahraini joint venture). The Domestic Piping Systems Group manufactures and distributes 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. Mueller Middle East manufactures copper tube and serves markets in the Middle East and Northern Africa. 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.Products, and Precision Tube. 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.assemblies; and specialty copper, copper alloy, and aluminum tube. 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, ATCO,Flex Duct (ATCO and H&C Flex), and Linesets, Inc. The segment manufactures and sells refrigeration valves and fittings, line sets, fabricated tubular products, high pressure components, coaxial heat exchangers, and insulated HVAC flexible duct systems.systems, and line sets. 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. PerAccording to the U.S. Census Bureau, actual housing starts in the U.S. were 1.29 1.55 million in 2019,2022, which compares to 1.251.60 million in 20182021
and 1.20 million1.38 million in 2017. Mortgage rates remain at historically low levels, as the2020. The average 30-year fixed mortgage rate was approximately 3.945.34 percent in 20192022 and 4.542.96 percent in 2018.2021. The private nonresidential construction sector, which includes offices, industrial, health care, and retail projects, has also shown improvement in recent years. Perprojects. According to the U.S. Census Bureau, the value of private nonresidential construction put in place was $450.5was $530.1 billion in 2019, $450.92022, $485.8 billion in 2021, and $479.0 billion in 2018, and $444.0 billion in 2017. 2020.
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.customers; however margins of our businesses that account for inventory on a FIFO basis may be impacted in periods of significant fluctuations in material costs. 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, weWe 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 basedaluminum-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 fromto offshore regions.
RESULTS OF OPERATIONS
Consolidated Results
The following table compares summary operating results for 2019, 2018,2022, 2021, and 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Percent Change |
(In thousands) | | 2022 | | 2021 | | 2020 | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | |
Net sales | | $ | 3,982,455 | | | $ | 3,769,345 | | | $ | 2,398,043 | | | 5.7 | % | | 57.2 | % |
Operating income | | 877,149 | | | 655,845 | | | 245,838 | | | 33.7 | | | 166.8 | |
Net income | | 658,316 | | | 468,520 | | | 139,493 | | | 40.5 | | | 235.9 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Percent Change |
(In thousands) | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 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 |
|
The following are components of changes in net sales compared to the prior year:
| | | | | | | | | | | | | | |
| | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | |
Net selling price in core product lines | | 6.1 | % | | 37.0 | % |
Unit sales volume in core product lines | | (5.9) | | | 6.4 | |
Acquisitions | | 1.9 | | | 8.6 | |
Dispositions | | (2.2) | | | (0.7) | |
Other | | 5.8 | | | 5.9 | |
| | | | |
| | 5.7 | % | | 57.2 | % |
|
| | | | | | |
| | 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 |
|
| | | | |
| | (3.1 | )% | | 10.7 | % |
The decreaseincrease in net sales in 20192022 was primarily due to (i) lower unit sales volumehigher net selling prices of $110.3$228.5 million in our core product lines, primarily brass rod and copper tube, (ii) an increase in sales of $217.0 million in our other product lines, (iii) incremental sales of $38.6 million recorded by Mueller Middle East, acquired in December 2021, and (ii)(iv) incremental sales of $33.3 million recorded by H&C Flex, acquired in January 2021. These increases were slightly offset by (i) lower net selling pricesunit sales volume of $91.7$222.0 million in our core product lines. These decreases were partially offset by (i) incrementallines, primarily non-U.S. copper tube and brass rod, and (ii) a decrease in sales of $100.1$82.7 million recorded by ATCO, acquired in July 2018, (ii) an increase in sales in our non-core product linesas a result of $22.4 million,the dispositions of Die-Mold, Copper Bar, FTP, and (iii) incremental sales of $4.0 million recorded by Die-Mold, acquired in March 2018.STI during 2021.
The increase in net sales in 20182021 was primarily due to (i) higher unit sales volumenet selling prices of $126.2$886.5 million in our domestic core product lines, primarily copper tube and brass rod, (ii) higher net selling pricesunit sales volume of $99.8$154.4 million in our core product lines, (iii) incremental sales of $90.0$152.7 million recordedrecorded by ATCO,Kessler, acquired in July 2018, August 2020, (iv) an increase in sales of $140.6 million in our non-core product lines, of $21.2 million,
(v) incremental sales of $9.6$48.9 million of recorded by Heatlink Group, acquired in May 2017,H&C Flex, and (vi) sales of $6.8$4.6 million recorded by Die-Mold, acquired in March 2018.Mueller Middle East. These increases were partiallyslightly offset by (i) the absence ofa decrease in sales of $67.3$16.5 million recorded by Mueller-Xingrong,as a business we soldresult of the dispositions of Die-Mold, FTP, and STI during June 2017, and (ii) lower unit sales volume of $44.5 million in our non-domestic core product lines.2021.
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:
The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2019, 2018,2022, 2021, and 2017:2020:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2022 | | 2021 | | 2020 |
| | | | | | |
Cost of goods sold | | $ | 2,864,862 | | | $ | 2,938,989 | | | $ | 1,966,161 | |
Depreciation and amortization | | 43,731 | | | 45,390 | | | 44,843 | |
Selling, general, and administrative expense | | 203,086 | | | 184,052 | | | 159,483 | |
Litigation settlement, net | | — | | | — | | | (22,053) | |
Gain on sale of businesses | | — | | | (57,760) | | | — | |
Gain on sale of assets, net | | (6,373) | | | — | | | — | |
Impairment charges | | — | | | 2,829 | | | 3,771 | |
| | | | | | |
| | | | | | |
Operating expenses | | $ | 3,105,306 | | | $ | 3,113,500 | | | $ | 2,152,205 | |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Cost of goods sold | | 71.9 | % | | 78.0 | % | | 82.0 | % |
Depreciation and amortization | | 1.1 | | | 1.2 | | | 1.9 | |
Selling, general, and administrative expense | | 5.1 | | | 4.9 | | | 6.6 | |
Litigation settlement, net | | — | | | — | | | (0.9) | |
Gain on sale of businesses | | — | | | (1.5) | | | — | |
Gain on sale of assets, net | | (0.2) | | | — | | | — | |
Impairment charges | | — | | | — | | | 0.1 | |
| | | | | | |
| | | | | | |
Operating expenses | | 77.9 | % | | 82.6 | % | | 89.7 | % |
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Cost of goods sold | | $ | 2,035,610 |
| | $ | 2,150,400 |
| | $ | 1,940,617 |
|
Depreciation and amortization | | 42,693 |
| | 39,555 |
| | 33,944 |
|
Selling, general, and administrative expense | | 162,358 |
| | 148,888 |
| | 140,730 |
|
Gain on sale of assets, net | | (963 | ) | | (253 | ) | | (1,491 | ) |
Impairment charges | | — |
| | — |
| | 1,466 |
|
Insurance recovery | | (485 | ) | | (3,681 | ) | | — |
|
| | | | | | |
Operating expenses | | $ | 2,239,213 |
| | $ | 2,334,909 |
|
| $ | 2,115,266 |
|
|
| | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Cost of goods sold | | 83.7 | % | | 85.7 | % | | 85.6 | % |
Depreciation and amortization | | 1.8 |
| | 1.6 |
| | 1.5 |
|
Selling, general, and administrative expense | | 6.6 |
| | 5.9 |
| | 6.2 |
|
Gain on sale of assets, net | | — |
| | — |
| | (0.1 | ) |
Impairment charges | | — |
| | — |
| | 0.1 |
|
Insurance recovery | | — |
| | (0.1 | ) | | — |
|
| | | | | | |
Operating expenses | | 92.1 | % | | 93.1 | % | | 93.3 | % |
The decrease in cost of goods sold in 20192022 was primarily due to the decrease in sales volume in our core product lines and thea decrease in the average cost of copper our principal raw material. This was partially offset by the increase inand lower sales volume resulting fromin certain core product lines. Gross margin as a percentage of sales was 28.1 percent compared with 22.0 percent in the acquisitionprior year. The combination of ATCO.strong demand for our products, inflationary pressures, and industry wide supply constraints contributed to an environment of higher selling prices and improved margins for the majority of our businesses. The increase in cost of goods sold in 20182021 was primarily due to the increase in the average cost of copper, as well as thean increase in sales volume in our domestic coreacross all product lines, and related to businesses acquired. This was partially offset by the decreasean increase in sales volume resulting from the saleacquisitions of Mueller-XingrongKessler, H&C Flex, and lower sales volume in our non-domestic core product lines.Mueller Middle East.
Depreciation and amortization increaseddecreased slightly in 20192022 as a result of long-lived assets of businesses acquired. Depreciationsold and amortization increased slightly in 20182021 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.acquired.
Selling, general, and administrative expenses increased in 20192022 primarily due to (i) expense recognized for contingent consideration arrangements associated with businesses acquired of $5.7 million, (ii) an increase in employment costs, including employee healthcare,incentive compensation, of $4.9$13.3 million, (iii)(ii) incremental expenses of $4.7$3.2 million associated with ATCOH&C Flex and Die-Mold,Mueller Middle East, (iii) the absence of fees of $2.6 million received as a settlement of preexisting relationships recognized in the prior year, and (iv) a reductionhigher travel and entertainment expense of $3.5 million in fees received for services provided under certain third-party sales and distribution arrangements, and (v) an increase in product liability costs of $1.6$1.2 million. These increases were partially offset by (i) incomethe absence of $2.1 million recognized as a result of the reduction of contingent consideration arrangementsexpenses associated with businesses acquired, (ii) a decrease in legalFTP, STI, and professional feesDie-Mold of $1.4 million, (iii) higher foreign currency transaction gains of $1.4 million, (iv) a reduction of $0.8 million in fees received for services provided under certain equipment transfer and licensing agreements, and (v) a decrease in supplies and utilities of $0.5$2.9 million. The increase in selling, general, and administrative expenses in 20182021 was 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.$11.4 million, (ii) an increase in agent commissions of $8.7 million, (iii) incremental expenses of $6.1 million associated with Kessler and H&C Flex, (iv) an increase of $1.4 million in professional fees, and (v) expenses of $1.3 million associated with the write-off of vendor deposits. These increases were partially offset by (i) fees of $3.5$2.6 million received for services provided under certain third-party sales and distribution arrangements in 2018 (fees from these arrangements are classified as a componentsettlement of net sales in 2019),preexisting relationships and (ii) a reduction in product liability costs of $2.1 million, and (iii) the absence of expenses associated with Mueller-XingrongFTP, STI, and Die-Mold of $1.2$1.8 million.
During 2019,2022, we recognized a net gaingains of $1.0$6.4 million on the sale of real property. We alsoassets within Corporate and Eliminations.
During 2021, we recognized an insurance recovery gaingains of $0.5$46.6 million on the sale of the FTP and STI businesses, $4.7 million on the disposition of the Die-Mold business, and $6.5 million on the sale of the Copper Bar business, as well as asset impairment charges of $2.8 million related to goodwill and fixed assets. The gain on the losses incurred duesale of FTP and STI and the deconsolidation of Die-Mold were reported within Corporate and Eliminations and the gain on the sale of Copper Bar was recorded in the Industrial Metals segment. Prior to the 2017 fire at our brass rod mill in Port Huron, Michigan.dispositions, the results of FTP and STI were included within the Climate segment, the results of Die-Mold were included within the Piping Systems segment, and the results of Copper Bar were included within the Industrial Metals segment.
During 2018,2020, we recognized a gain of $2.7$22.1 million onfor the salesettlement of real propertyour claim under the Deepwater Horizon Economic and a gainProperty Damage Settlement Program and asset impairment charges 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$3.8 million related to the losses incurred due to the 2017 fire at our brass rod mill in Port Huron, Michigan.production equipment that was idled.
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.
Interest expense increaseddecreased in 20192022 primarily as a result of increased borrowing costs associated withthe redemption of our unsecured $350.0 million revolving credit facility.Subordinated Debentures during the second quarter of 2021 and there being no borrowings outstanding under the Credit Agreement during 2022. The increasedecrease in 20182021 was primarily as a result of interest associated with the 6%redemption of our Subordinated Debentures issued during the firstsecond quarter of 2017 as part2021.
During 2021, we recognized expense of $5.7 million for a redemption premium related to our special dividend, as well as increased borrowing costs associated with our unsecured $350.0 million revolving credit facility.Subordinated Debentures redeemed.
Environmental expense for our non-operating properties was significantly higherlower in 20172022 and 2021 than in 2019 or 20182020 primarily as a result of ongoinglower remediation activitiescosts.
During 2022, we recognized a $13.1 million expense related to the Lead Refinery site.complete withdrawal from a multiemployer pension plan. During 2020, we recognized a $17.8 million expense to terminate our U.S. defined benefit pension plan, which consisted of an $11.6 million non-cash charge and $6.2 million in federal excise tax on surplus assets returned to the Company.
Other income, net, was higher in 2022 primarily as a result of (i) higher interest income on short-term investments, (ii) a gain on the sale of securities, and (iii) a curtailment gain related to our other postemployment benefit plans. It was lower in 20192021 primarily as a result of lower net periodic benefit income for our benefit plans, and higher in 2018 primarily as a result of higher net periodic benefit income forfrom our benefit plans.
Income tax expense was $35.3$223.3 million in 2019,2022, representing an effective tax rate of 21.225.5 percent. This rate was higher than what would be computed using the U.S. statutory federal rate primarily due to (i) the provision for state and local income taxes, net of the federal benefit, of $3.2$32.2 million, (ii) the effect of foreign statutory rates different from the U.S. federal rate and other foreign adjustments of $7.4 million, and (ii)(iii) the impact of investments in unconsolidated affiliates of $0.5$0.2 million. These increases were partially offset by other adjustments of $3.3$0.5 million.
Income tax expense was $31.0$165.9 million in 2018,2021, representing an effective tax rate of 20.625.9 percent. This rate was lowerhigher than what would be computed using the U.S. statutory federal rate primarily due to (i) a reductionthe provision for state and local income taxes, net of the calculationfederal benefit, of federal tax on the Company’s accumulated foreign earnings under the Tax Cuts and Jobs Act (the Act) of $4.4$21.1 million and (ii) a reduction forthe effect of foreign statutory rates different from the U.S. federal rate and other foreign adjustments of $11.2 million. These increases were partially offset by (i) the impact of investments in unconsolidated affiliates of $2.8$0.7 million and (ii) other adjustments of $0.4 million. These reductions were partially offset by
Income tax expense was $55.3 million in 2020, representing an effective tax rate of 26.4 percent. This rate was higher than what would be computed using the U.S. statutory federal rate primarily due to (i) the provision for state and local income taxes, net of the federal benefit, of $3.5$5.9 million, and (ii) 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 taxstatutory rates when compared todifferent from the U.S. statutoryfederal 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$2.8 million, and (iii) other adjustments of $1.2$3.0 million. These increases were partially offset by the impact of investments in unconsolidated affiliates of $0.4 million.
During 2019,2022, we recognized lossesincome of $24.6$10.1 million on our investments in unconsolidated affiliates, net of foreign tax, compared to losses of $12.6$0.2 million in 2018.2021. The lossincome on these investments for 20192022 included net lossesgains of $22.0$5.2 million for Tecumseh and net lossesgains of $2.6$4.9 million for Mueller Middle East. Included in the losses for Tecumseh are $6.4 million of severance and restructuring expenses and a product liability settlement of $3.4 million. These expenses were offset by a gain on the sale of land of $1.8 million.retail distribution business.
During 2018,2021, we recognized losses of $12.6$0.2 million on our investments in unconsolidated affiliates, net of foreign tax, compared to losses of $2.1$10.2 million in 2017.2020. The loss on these investments for 20182021 included net losses of $14.0$1.7 million for Tecumseh, partially offset by net gains of $0.8 million for the retail distribution business and charges of $3.0 milliona gain on fair value recognition related to certain labor claim contingencies, offset by a gainour investment in Mueller Middle East of $7.0$0.7 million.
During 2020, we recognized losses of $10.2 million related to a settlement with the Brazilian Federal Revenue Agencyon our investments in unconsolidated affiliates, net of foreign tax. The loss of these investments for Tecumseh. It also includes2020 included net losses of $2.6$10.4 million for Tecumseh and net gains of $0.2 million for Mueller Middle East.
During 2017, the loss on these investments included net losses of $2.1 million for Tecumseh.
Piping Systems Segment
The following table compares summary operating results for 2019, 2018,2022, 2021, and 20172020 for the businesses comprising our Piping Systems segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Percent Change |
(In thousands) | | 2022 | | 2021 | | 2020 | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | |
Net sales | | $ | 2,730,084 | | | $ | 2,600,030 | | | $ | 1,583,002 | | | 5.0 | % | | 64.2 | % |
Operating income | | 671,062 | | | 486,287 | | | 165,719 | | | 38.0 | | | 193.4 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Percent Change |
(In thousands) | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| | | | | | | | | | |
Net sales | | $ | 1,542,456 |
| | $ | 1,645,633 |
| | $ | 1,564,950 |
| | (6.3 | )% | | 5.2 | % |
Operating income | | 131,879 |
| | 122,829 |
| | 99,596 |
| | 7.4 |
| | 23.3 |
|
The following are components of changes in net sales compared to the prior year:
| | | | | | | | | | | | | | |
| | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | |
Net selling price in core product lines | | 8.4 | % | | 45.7 | % |
Unit sales volume in core product lines | | (6.6) | | | 6.8 | |
Acquisitions | | 1.5 | | | 10.0 | |
Dispositions | | (0.4) | | | (0.2) | |
Other | | 2.1 | | | 1.9 | |
| | | | |
| | 5.0 | % | | 64.2 | % |
|
| | | | | | |
| | 2019 vs. 2018 | | 2018 vs. 2017 |
| | | | |
Net selling price in core product lines | | (4.4 | )% | | 4.5 | % |
Unit sales volume in core product lines | | (2.3 | ) | | 3.4 |
|
Acquisitions | | 0.3 |
| | 1.1 |
|
Dispositions | | — |
| | (4.3 | ) |
Other | | 0.1 |
| | 0.5 |
|
| | | | |
| | (6.3 | )% | | 5.2 | % |
The decreaseincrease in net sales in 20192022 was primarily attributable to (i) lowerhigher net selling prices of $70.6$219.6 million in the segment’s core product lines, primarily copper tube, (ii) an increase in sales of $61.1 million in the segment’s other product lines, and (ii)(iii) incremental sales of $38.6 million recorded by Mueller Middle East. These increases were partially offset by (i) lower unit sales volume of $37.3$172.3 million in the segment’s core product lines. These decreases were partially offset by incrementallines, primarily non-U.S. copper tube, and (ii) a decrease in sales of $4.0$10.9 million recorded byas a result of the disposition of Die-Mold.
The increase in net sales in 20182021 was primarily attributable to (i) higher unit sales volumenet selling prices of $96.6$719.0 million in the segment’s domestic core product lines, primarily copper tube, (ii) incremental sales of $152.7 million recorded by Kessler, (iii) higher net selling pricesunit sales volume of $69.7$107.6 million in the segment’s core product lines, (iii)(iv) an increase in sales of $13.3$44.6 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$4.6 million recorded by Die-Mold.Mueller Middle East. These increases were partiallyslightly offset by (i) the absence ofa decrease in sales of $67.3$2.6 million recorded by Mueller-Xingrong and (ii) lower unit sales volumeas a result of $44.5 million in the segment’s non-domestic core product lines.disposition of Die-Mold.
The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2019, 2018,2022, 2021, and 2017:2020:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2022 | | 2021 | | 2020 |
| | | | | | |
Cost of goods sold | | $ | 1,943,174 | | | $ | 1,996,610 | | | $ | 1,311,697 | |
Depreciation and amortization | | 22,193 | | | 23,384 | | | 23,071 | |
Selling, general, and administrative expense | | 93,655 | | | 93,749 | | | 78,744 | |
| | | | | | |
Impairment charges | | — | | | — | | | 3,771 | |
| | | | | | |
| | | | | | |
Operating expenses | | $ | 2,059,022 | | | $ | 2,113,743 | | | $ | 1,417,283 | |
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Cost of goods sold | | $ | 1,313,980 |
| | $ | 1,426,729 |
| | $ | 1,369,161 |
|
Depreciation and amortization | | 22,621 |
| | 23,304 |
| | 21,777 |
|
Selling, general, and administrative expense | | 75,170 |
| | 74,864 |
| | 74,441 |
|
Gain on sale of assets, net | | (1,194 | ) | | (2,093 | ) | | (1,491 | ) |
Impairment charges | | — |
| | — |
| | 1,466 |
|
| | | | | | |
Operating expenses | | $ | 1,410,577 |
| | $ | 1,522,804 |
| | $ | 1,465,354 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Cost of goods sold | | 71.2 | % | | 76.8 | % | | 82.9 | % |
Depreciation and amortization | | 0.8 | | | 0.9 | | | 1.5 | |
Selling, general, and administrative expense | | 3.4 | | | 3.6 | | | 4.9 | |
| | | | | | |
Impairment charges | | — | | | — | | | 0.2 | |
| | | | | | |
| | | | | | |
Operating expenses | | 75.4 | % | | 81.3 | % | | 89.5 | % |
|
| | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Cost of goods sold | | 85.2 | % | | 86.7 | % | | 87.5 | % |
Depreciation and amortization | | 1.5 |
| | 1.4 |
| | 1.4 |
|
Selling, general, and administrative expense | | 4.9 |
| | 4.5 |
| | 4.7 |
|
Gain on sale of assets, net | | (0.1 | ) | | (0.1 | ) | | (0.1 | ) |
Impairment charges | | — |
| | — |
| | 0.1 |
|
| | | | | | |
Operating expenses | | 91.5 | % | | 92.5 | % | | 93.6 | % |
Gross margin as a percentage of sales was 28.8 percent compared with 23.2 percent in the prior year. The increase in gross margin percent reflects effective price management in response to significant inflation in wages, consumable, freight, and distribution costs, as well as fluctuating material costs. The decrease in cost of goods sold in 20192022 was primarily due to thea decrease in the average cost of copper and the decrease inlower sales volume in the segment’scertain core product lines. The increase in cost of goods sold in 20182021 was primarily due to the increase in the average cost of copper, and thean 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 decreasean increase in sales volume resulting from the saleacquisitions of Mueller-Xingrong.Kessler and Mueller Middle East.
Depreciation and amortization decreased slightly in 20192022 and 2021, compared to 2020, as a result of several long-lived assets becoming fully depreciated. The increase in 2018 was a result of several new long-lived assets being placed into service as well as long-lived assets of Heatlink Group and Die-Mold,businesses sold, partially offset by the impactdepreciation and amortization of the sale of long-lived assets at Mueller-Xingrong.of Mueller Middle East.
Selling, general, and administrative expenses increased slightlyexpense for 2019, primarily due to (i) a reduction of $3.5 million in fees received for services provided under certain third-party sales and distribution arrangements, (ii) higher employment costs, including employee healthcare, of $0.9 million, and (iii) incremental expenses associated2022 was consistent with Die-Mold of $0.6 million. These increases were partially offset by (i) income of $2.1 million recognized as a result of the reduction of contingent consideration arrangements associated with businesses acquired, (ii) higher foreign currency transaction gains of $1.4 million, and (iii) a decrease in supplies and utilities of $0.6 million.2021. The increase in 20182021 was primarily due to (i) higher employment costs, including incentive compensation, of $6.1 million, (ii) incremental expenses of $4.3 million associated with Die-Mold and Heatlink Group of $2.5 million, (ii) an increase in legal and professional fees of $1.6 million,Kessler, (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$2.0 million, (iv) expenses of $3.5$1.3 million received for services provided under certain third-party salesassociated with the write-off of vendor deposits, and distribution arrangements in 2018 (fees from these arrangements are classified as a component of net sales in 2019) and (ii)(v) the absence of expenses associated with Mueller-Xingrong$1.3 million of $1.2 million. government subsidies provided to certain businesses related to the COVID-19 pandemic recorded in 2020.
During 2019,2020, we recognized a gain of $1.2 million on the sale of real property.
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 manufacturingof $3.8 million related to production equipment of $1.5 million and a gain of $1.5 million on the sale of our interest in Mueller-Xingrong.that was idled.
Industrial Metals Segment
The following table compares summary operating results for 2019, 2018,2022, 2021, and 20172020 for the businesses comprising our Industrial Metals segment:
| | | | | | | | | | Percent Change | | | | | | | | | Percent Change |
(In thousands) | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 | (In thousands) | | 2022 | | 2021 | | 2020 | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 554,372 |
| | $ | 651,061 |
| | $ | 602,131 |
| | (14.9 | )% | | 8.1 | % | Net sales | | $ | 644,689 | | | $ | 703,363 | | | $ | 472,159 | | | (8.3) | % | | 49.0 | % |
Operating income | | 61,724 |
| | 75,607 |
| | 74,364 |
| | (18.4 | ) | | 1.7 |
| Operating income | | 82,464 | | | 85,475 | | | 54,065 | | | (3.5) | | | 58.1 | |
The following are components of changes in net sales compared to the prior year:
| | | | | | | | | | | | | | |
| | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | |
Net selling price in core product lines | | 1.3 | % | | 36.7 | % |
Unit sales volume in core product lines | | (7.3) | | | 10.3 | |
| | | | |
Dispositions | | (5.3) | | | — | |
Other | | 3.0 | | | 2.0 | |
| | | | |
| | (8.3) | % | | 49.0 | % |
|
| | | | | | |
| | 2019 vs. 2018 | | 2018 vs. 2017 |
| | | | |
Net selling price in core product lines | | (3.3 | )% | | 5.2 | % |
Unit sales volume in core product lines | | (11.4 | ) | | 5.1 |
|
Other | | (0.2 | ) | | (2.2 | ) |
| | | | |
| | (14.9 | )% | | 8.1 | % |
The decrease in net sales in 20192022 was primarily due to (i) lower unit sales volume of $73.0 million and (ii) lower net selling prices of $21.0$49.2 million in the segment’s core product lines, primarily brass rod.
The increaserod, (ii) a decrease in net sales during 2018 was primarily due toof $36.2 million as a result of the disposition of Copper Bar, and (iii) lower sales of $4.4 million in the segment’s non-core product lines. These decreases were slightly offset by higher net selling prices of $30.0 million and (ii) higher unit sales volume of $29.6$8.9 million in the segment’s core product lines.
The increase in net sales in 2021 was primarily due to (i) higher net selling prices of $167.5 million in the segment’s core product lines, primarily brass rod, (ii) higher unit sales volume of $46.8 million in the segment’s core product lines, and (iii) higher sales of $8.4 million in the segment’s non-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 2019, 2018,2022, 2021, and 2017:2020:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2022 | | 2021 | | 2020 |
| | | | | | |
Cost of goods sold | | $ | 543,004 | | | $ | 605,715 | | | $ | 398,000 | |
Depreciation and amortization | | 7,647 | | | 6,929 | | | 7,528 | |
Selling, general, and administrative expense | | 11,574 | | | 11,698 | | | 12,566 | |
Gain on sale of businesses | | — | | | (6,454) | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Operating expenses | | $ | 562,225 | | | $ | 617,888 | | | $ | 418,094 | |
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Cost of goods sold | | $ | 473,010 |
| | $ | 559,367 |
| | $ | 506,973 |
|
Depreciation and amortization | | 7,489 |
| | 7,568 |
| | 7,516 |
|
Selling, general, and administrative expense | | 12,359 |
| | 13,501 |
| | 13,278 |
|
Loss (gain) on sale of assets, net | | 275 |
| | (1,301 | ) | | — |
|
Insurance recovery | | (485 | ) | | (3,681 | ) | | — |
|
| | | | | | |
Operating expenses | | $ | 492,648 |
| | $ | 575,454 |
| | $ | 527,767 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Cost of goods sold | | 84.2 | % | | 86.1 | % | | 84.3 | % |
Depreciation and amortization | | 1.2 | | | 1.0 | | | 1.6 | |
Selling, general, and administrative expense | | 1.8 | | | 1.6 | | | 2.6 | |
Gain on sale of businesses | | — | | | (0.9) | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Operating expenses | | 87.2 | % | | 87.8 | % | | 88.5 | % |
|
| | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Cost of goods sold | | 85.3 | % | | 85.9 | % | | 84.2 | % |
Depreciation and amortization | | 1.4 |
| | 1.2 |
| | 1.2 |
|
Selling, general, and administrative expense | | 2.3 |
| | 2.1 |
| | 2.2 |
|
Loss (gain) on sale of assets, net | | — |
| | (0.2 | ) | | — |
|
Insurance recovery | | (0.1 | ) | | (0.6 | ) | | — |
|
| | | | | | |
Operating expenses | | 88.9 | % | | 88.4 | % | | 87.6 | % |
Gross margin as a percentage of sales was 15.8 percent compared with 13.9 percent in the prior year. The decrease in cost of goods sold in 20192022 was primarily due to the decrease in the average cost of brass scrap and lower sales volume in the segment’s core product lines and the decrease in the average costdisposition of copper. TheCopper Bar. The increase in cost of goods sold in 20182021 was primarily relateddue to the increase in the average cost of copperselling prices and the increase in sales volume in the segment’s core product lines.. lines.
Depreciation and amortization increased slightly in 2019 was consistent with 20182022 as a result of long-lived assets placed into service. Depreciation and 2017.amortization decreased slightly in 2021 as a result of several long-lived assets becoming fully depreciated.
Selling, general, and administrative expenses decreased slightlyexpense in 2019 primarily due to lower employment costs, including incentive compensation, of $0.7 million. The increase in 20182022 was primarily due to an increase in legal fees of $0.2 million.consistent with 2021 and 2020.
During 2019,2021, we recognized a lossgain of $0.3$6.5 million on the sale of real property and an insurance recovery gain of $0.5 million related to the losses incurred due to the 2017 fire at our brass rod mill in Port Huron, Michigan.Copper Bar business.
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.
Climate Segment
The following table compares summary operating results for 2019, 2018,2022, 2021, and 20172020 for the businesses comprising our Climate segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Percent Change |
(In thousands) | | 2022 | | 2021 | | 2020 | | 2022 vs. 2021 | | 2021 vs. 2020 |
| | | | | | | | | | |
Net sales | | $ | 650,307 | | | $ | 495,414 | | | $ | 370,131 | | | 31.3 | % | | 33.8 | % |
Operating income | | 188,067 | | | 85,536 | | | 56,802 | | | 119.9 | | | 50.6 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Percent Change |
(In thousands) | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
| | | | | | | | | | |
Net sales | | $ | 356,216 |
| | $ | 229,069 |
| | $ | 131,448 |
| | 55.5 | % | | 74.3 | % |
Operating income | | 42,727 |
| | 24,118 |
| | 20,325 |
| | 77.2 |
| | 18.7 |
|
Net sales for 20192022 increased primarily as a result of an increase in volume and price in certain product lines, as well as incremental sales of $100.1$33.3 million recorded by ATCO. H&C Flex. These increases were partially offset by a decrease in sales of $35.6 million as a result of the dispositions of FTP and STI in 2021. Net sales for 20182021 increased primarily as a result of sales of $90.0 million recorded by ATCO, as well as an increase in volume and improvedprice in certain product mix.lines, as well as sales of $48.9 million recorded by H&C Flex. These increases were partially offset by a decrease in sales of $13.8 million as a result of the dispositions of FTP and STI in 2021.
The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2019, 2018,2022, 2021, and 2017:2020:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2022 | | 2021 | | 2020 |
| | | | | | |
Cost of goods sold | | $ | 416,953 | | | $ | 367,343 | | | $ | 276,274 | |
Depreciation and amortization | | 9,174 | | | 10,379 | | | 10,249 | |
Selling, general, and administrative expense | | 36,113 | | | 29,327 | | | 26,806 | |
| | | | | | |
Impairment charges | | $ | — | | | $ | 2,829 | | | $ | — | |
| | | | | | |
| | | | | | |
Operating expenses | | $ | 462,240 | | | $ | 409,878 | | | $ | 313,329 | |
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Cost of goods sold | | $ | 273,850 |
| | $ | 182,456 |
| | $ | 98,851 |
|
Depreciation and amortization | | 9,298 |
| | 5,569 |
| | 2,513 |
|
Selling, general, and administrative expense | | 30,385 |
| | 16,926 |
| | 9,759 |
|
Gain on sale of assets, net | | (44 | ) | | — |
| | — |
|
| | | | | | |
Operating expenses | | $ | 313,489 |
| | $ | 204,951 |
| | $ | 111,123 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Cost of goods sold | | 64.1 | % | | 74.1 | % | | 74.6 | % |
Depreciation and amortization | | 1.4 | | | 2.1 | | | 2.8 | |
Selling, general, and administrative expense | | 5.6 | | | 6.0 | | | 7.3 | |
| | | | | | |
Impairment charges | | — | | | 0.6 | | | — | |
| | | | | | |
| | | | | | |
Operating expenses | | 71.1 | % | | 82.8 | % | | 84.7 | % |
|
| | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Cost of goods sold | | 76.9 | % | | 79.7 | % | | 75.2 | % |
Depreciation and amortization | | 2.6 |
| | 2.4 |
| | 1.9 |
|
Selling, general, and administrative expense | | 8.5 |
| | 7.4 |
| | 7.4 |
|
Gain on sale of assets, net | | — |
| | — |
| | — |
|
| | | | | | |
Operating expenses | | 88.0 | % | | 89.5 | % | | 84.5 | % |
Cost of goods sold increased in 2019 due to2022, consistent with the increase in volume and changenet sales. Gross margin as a percentage of sales was 35.9 percent compared with 25.9 percent in product mix within the segment primarily resulting from the ATCO acquisition.prior year. The increase in costgross margin percent reflects effective price management in response to significant inflation in wages, consumable, freight, and distribution costs, as well as fluctuations in material costs. Cost of goods sold increased in 2018 was related to2021, consistent with 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.net sales. Depreciation and amortization increaseddecreased in 2019 and 2018 primarily2022 as a result of depreciationlong-lived assets of businesses sold. Depreciation and amortization of the long-lived assets acquired at ATCO.in 2021 was consistent with 2020. Selling, general, and administrative expenses increased in 20192022 as a result of (i) expensehigher agent commissions of $5.7$4.6 million, recognized for a contingent consideration arrangement associated with an acquired business, (ii) incremental expenses of $4.6 million associated with ATCO,H&C Flex of $2.1 million, and (iii) an increase inhigher employment costs, including incentive compensation, of $1.7 million, (iv) an increase in agent commissions$1.8 million. These were partially offset by the absence of $0.5 million,expenses associated with FTP and (v) an increase in supplies, utilities, and rent costsSTI of $0.4$2.4 million. Selling, general, and administrative expenses increased in 20182021 as a result of incremental(i) higher employment costs of $2.7
million and (ii) expenses associated with ATCO. H&C Flex of $1.8 million. These were partially offset by the absence of expenses associated with FTP and STI of $1.4 million.
During 2021, the segment recognized impairment charges on goodwill and long-lived assets of $2.8 million.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial information for 2019, 2018,2022, 2021, and 2017:2020:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2022 | | 2021 | | 2020 |
| | | | | | |
Increase (decrease) in: | | | | | | |
Cash, cash equivalents, and restricted cash | | $ | 374,920 | | | $ | (37,000) | | | $ | 29,334 | |
Short-term investments | | 217,863 | | | — | | | — | |
Property, plant, and equipment, net | | (5,612) | | | 8,990 | | | 13,444 | |
Total debt | | 154 | | | (326,001) | | | (58,378) | |
Working capital, net of cash and current debt | | 176,700 | | | 141,525 | | | 38,855 | |
| | | | | | |
Net cash provided by operating activities | | 723,943 | | | 311,701 | | | 245,073 | |
Net cash (used in) provided by investing activities | | (242,003) | | | 29,073 | | | (125,622) | |
Net cash used in financing activities | | (102,655) | | | (376,722) | | | (92,264) | |
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Increase (decrease) in: | | | | | | |
Cash, cash equivalents, and restricted cash | | $ | 20,904 |
| | $ | (49,425 | ) | | $ | (233,906 | ) |
Property, plant, and equipment, net | | (7,505 | ) | | 66,312 |
| | 9,090 |
|
Total debt | | (110,444 | ) | | 31,626 |
| | 237,708 |
|
Working capital, net of cash and current debt | | (35,231 | ) | | 11,228 |
| | 55,405 |
|
| | | | | | |
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 | ) |
Cash Provided by Operating Activities
During 2019,2022, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $106.2$662.8 million, (ii) depreciation and amortization of $43.0 million, (iii) a decrease in inventories of $39.6 million, (iv) losses from unconsolidated affiliates of $24.6 million, (v) stock-based compensation expense of $8.7 million, and (vi) a decrease in accounts receivable of $6.5$82.7 million, (iii) depreciation and amortization of $44.1 million, and (iv) stock-based compensation expense of $17.8 million. These cash increases were partially offset by (i) a decrease in current liabilities of $26.6 million, (ii) an increase in inventories of $24.2 million, (iii) an increase in other assets of $15.6 million, (ii) a decrease in other liabilities of $7.9$9.0 million, and (iii) a decrease in current liabilities(iv) income from unconsolidated affiliates of $7.1$10.1 million. The fluctuations in accounts receivable and inventories were primarily due to decreased selling prices and sales volume in certain businesses and changes working capital needs in 2019.
During 2018,2021, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $106.8$475.1 million, (ii) an increase in current liabilities of $73.8 million, (iii) 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$45.7 million, and (vi)(iv) stock-based compensation expense of $8.0$9.8 million. These cash increases were partially 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$124.7 million, (ii) an increase in inventories was primarily driven byof $119.5 million, and (iii) gains of $57.8 million recorded on the usesales 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.FTP, STI, Die-Mold, and Copper Bar businesses. The fluctuations inof accounts receivable, inventories, 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.higher material costs during 2021.
During 2017,2020, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $87.0$143.6 million, (ii) depreciation and amortization of $34.2 million, and (iii) an increase in current liabilities of $10.7$74.1 million, (iii) depreciation and amortization of $45.2 million, (iv) a decrease in other assets of $20.6 million, (v) a non-cash charge related to the termination of the U.S. pension plan of $11.6 million, (vi) losses from unconsolidated affiliates of $10.2 million, (vii) stock-based compensation expense of $8.6 million, and (viii) a decrease in inventories of $5.2 million. These cash increases were partially offset by an increase in inventoriesaccounts receivable 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.$76.4 million.
Cash Used in(Used in) Provided by Investing Activities
The major components of net cash used in investing activities in 20192022 included (i) the purchase of short-term investments of $217.9 million and (ii) capital expenditures of $31.2 million and (ii) investments in our unconsolidated affiliates, Tecumseh and Mueller Middle East, of $16.0$37.6 million. These uses of cash were partially offset by (i) the $3.5 million working capital settlement receivedproceeds from the previous owners for the ATCO acquisition and (ii) proceeds on the sale of properties of $3.2$7.9 million, (ii) insurance proceeds for property and equipment of $3.4 million, and (iii) dividends received from unconsolidated affiliates of $2.3 million.
The major components of net cash provided by investing activities in 2021 included (i) proceeds of $81.9 million from the sale of the FTP, STI, and Copper Bar businesses, net of cash sold, and (ii) payments received on notes receivable of $8.5 million. These sources were partially offset by (i) capital expenditures of $31.8 million and (ii) $30.2 million for the purchases of H&C Flex and Mueller Middle East, net of cash acquired.
The major components of net cash used in investing activities in 20182020 included (i) $167.7$72.6 million for the purchases of ATCOKessler and Die-Mold,STI, 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$43.9 million, and (iii) proceeds from the saleissuance of securitiesnotes receivable of $1.8$9.3 million.
Cash Used in Financing Activities
For 2019,2022, net cash used in financing activities consisted primarily of (i) $205.0$55.8 million used for the payment of regular quarterly dividends to stockholders of the Company, (ii) $38.1 million used for the repurchase of common stock, and (iii) $7.2 million used for the payment of dividends to noncontrolling interests.
For 2021, net cash used in financing activities consisted primarily of (i) $630.0 million used to reduce the debt outstanding under our Credit Agreement, (ii) $290.2 million used for the redemption of the Subordinated Debentures, (iii) $29.1 million used for the payment of regular quarterly dividends to stockholders of the Company, (iv) $9.7 million used for the payment of dividends to noncontrolling interests, (v) $5.1 million used for repayment of debt by Jungwoo-Mueller, and (vi) $4.9 million used to repurchase common stock. These uses of cash were partially offset by the issuance of debt under our Credit Agreement of $595.0 million.
For 2020, net cash used in financing activities consisted primarily of (i) $245.0 million used to reduce the debt outstanding under our Credit Agreement, (ii) $22.3 million used for the payment of regular quarterly dividends to stockholders of the Company, (iii) $4.3$7.0 million used for repayment of debt by Jungwoo-Mueller, (iv) $3.2 million used forthe payment of contingent consideration related to ATCO, and (v) $1.8(iv) $5.6 million used to repurchase common stock. These uses of cash were offset by the issuance of debt under our Credit Agreement of $100.0 million.
For 2018, net cash used in financing 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 financing 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.Agreement of $190.0 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 3.04.4 to 1 as of December 28, 2019.31, 2022.
As of December 28, 2019, $65.331, 2022, $82.0 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. These earnings could be remitted to the U.S. with a minimal tax cost. Accordingly, no additional income tax liability has been accrued with respect to these earnings or on any additional outside basis differences that may exist with respect to these entities.
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 2020, 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 $2.72$4.01 in 2019, $2.932022, $4.24 in 2018,2021, and $2.80 in 2017.2020.
We have significant environmental remediation obligations which we expect to pay over future years. Approximately $4.4$8.3 million was spent during 20192022 for environmental matters. As of December 28, 2019,31, 2022, we expect to spend $4.0 million in 2023, $2.0 million in 2024, $0.8 million in 2020,2025, $0.7 million in 2021, $0.6 million in 2022, $0.8 million in 2023,2026, $0.7 million in 2024,2027, and $17.3$12.3 million thereafter for ongoing projects.
Cash used to fund pension and other postretirement benefit obligations was $0.8$0.5 million in 20192022 and $1.9$0.6 million in 2018.2021. We anticipate making contributions of approximately $1.0$1.1 million to these plans in 2020.2023.
The Company declared and paid a quarterly cash dividend of 10.0 cents per common share during each quarter of 2017, 2018, and 2019. Additionally,2020, 13.0 cents per common share during the firsteach quarter of 2017 the Company distributed a special dividend composed2021, and 25.0 cents per common share during each quarter 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.2022. Payment of dividends in the future is dependent upon our financial condition, cash flows, capital requirements, and other factors.
Capital Expenditures
During 20192022 our capital expenditures were $31.2$37.6 million. We anticipate investing approximately $45.0$35.0 million to $50.0$40.0 million for capital expenditures in 20202023.
Long-Term Debt
The Company’s Credit Agreement provides for an unsecured $350.0$400.0 million revolving credit facility, which matures on December 6, 2021.March 31, 2026. 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$35.0 million for loans and letters of credit made in certain foreign currencies, and a swing line loan sublimit of $15.0$25.0 million. Outstanding letters of credit and foreign currency loans reduce borrowing availability under the Credit Agreement. TotalThere were no borrowings outstanding under the Credit Agreement were $90.0 million at December 28, 2019.31, 2022.
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 28, 2019 were $284.5 million.
Jungwoo-Mueller has several secured revolving credit arrangements with a total borrowing capacity of KRW 25.820.0 billion (or approximately $21.9$15.0 million). Borrowings are secured by the real property and equipment of Jungwoo-Mueller andJungwoo-Mueller. There were bearing interestno borrowings outstanding at a rate of 2.55 percentJungwoo-Mueller as of December 28, 2019. Total borrowings at Jungwoo-Mueller were $5.8 million as of December 28, 2019.31, 2022.
As of December 28, 2019,31, 2022, the Company’s total debt was $386.3$2.0 million or 36.80.1 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 28, 2019,31, 2022, we were in compliance with all of our debt covenants.
Share Repurchase Program
The Company’s Board of Directors has extended, until August 2020,July 2023, 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 28, 2019,31, 2022, the Company had repurchased approximately 6.27.2 million shares under this authorization.
CONTRACTUAL CASH OBLIGATIONS
The following table presents payments due by the Company under contractual obligations with minimum firm commitments as of December 28, 2019:31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Year |
(In millions) | | Total | | 2023 | | 2024-2025 | | 2026-2027 | | Thereafter |
| | | | | | | | | | |
Total debt | | $ | 2.7 | | | $ | 0.8 | | | $ | 0.4 | | | $ | — | | | $ | 1.5 | |
Operating and capital leases | | 26.0 | | | 6.3 | | | 8.1 | | | 6.0 | | | 5.6 | |
Heavy machinery and equipment | | 12.5 | | | 12.5 | | | — | | | — | | | — | |
| | | | | | | | | | |
Purchase commitments (1) | | 984.5 | | | 984.5 | | | — | | | — | | | — | |
| | | | | | | | | | |
Transition tax on accumulated foreign earnings | | 1.9 | | | — | | | 1.9 | | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Total contractual cash obligations | | $ | 1,027.6 | | | $ | 1,004.1 | | | $ | 10.4 | | | $ | 6.0 | | | $ | 7.1 | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Year |
(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 |
|
Heavy machinery and equipment | | 13.7 |
| | 11.1 |
| | 2.6 |
| | — |
| | — |
|
Buildings | | 10.6 |
| | 10.6 |
| | — |
| | — |
| | — |
|
Purchase commitments (1) | | 687.5 |
| | 686.4 |
| | 0.8 |
| | 0.3 |
| | — |
|
Transition tax on accumulated foreign earnings | | 1.9 |
| | — |
| | — |
| | — |
| | 1.9 |
|
Interest payments (2) | | 129.5 |
| | 20.0 |
| | 37.0 |
| | 34.1 |
| | 38.4 |
|
| | | | | | | | | | |
Total contractual cash obligations | | $ | 1,265.7 |
| | $ | 742.2 |
| | $ | 141.4 |
| | $ | 41.1 |
| | $ | 341.0 |
|
| | | | | | | | | | |
(1)This includes contractual supply commitments totaling $916.1 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, primarily copper cathode and brass scrap, that are expected to be consumed in the ordinary course of business. | |
| This includes contractual supply commitments totaling $634.3 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, primarily copper cathode and brass scrap, that are expected to be consumed in the ordinary course of business. |
| |
(2)
| These payments represent interest on long-term debt based on balances and rates in effect at December 28, 2019. |
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.
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 28, 2019,31, 2022, we held open futures contracts to purchase approximately $21.3$91.8 million of copper over the next 12nine months related to fixed-price sales orders and to sell approximately $1.9$10.7 million of copper over the next sevenfive 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 28, 2019.31, 2022.
Interest Rates
The CompanyCompany had no variable-rate debt outstanding of $97.0 million at December 28, 201931, 2022 and $202.6 million at December 29, 2018.25, 2021. 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.the Secured Overnight Financing Rate (SOFR).
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 28, 2019,31, 2022, we had open forward contracts with a financial institution to sell approximately 0.14.6 million euros, 21.736.4 million Swedish kronor, and 8.112.6 million Norwegian kroner through April 2020.2023.
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.won, and the Bahraini dinar. 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 $397.1$338.6 million at December 28, 201931, 2022 and $376.6$362.1 million at December 29, 2018.25, 2021. The potential loss in value of the Company’s net investment in foreign subsidiaries resulting from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates at December 28, 201931, 2022 and December 29, 201825, 2021 amounted to $39.7$33.9 million and $37.7$36.2 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 2019,won, and the Bahraini dinar. In 2022, the value of the British pound increaseddecreased approximately threeeleven percent, the Mexican peso increased approximately 4six percent, the Canadian dollar increaseddecreased approximately foursix percent, and the South Korean won decreased approximately fourseven percent, and the Bahraini dinar remained consistent, relative to the U.S. dollar. The resulting net foreign currency translation gainslosses were included in calculating net other comprehensive loss for the year ended December 28, 201931, 2022 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 28, 201931, 2022 and December 29, 2018,25, 2021, our inventory valuation reserves were $6.3$14.3 million and $7.0$10.1 million, respectively. The expense recognized in each of these periods was immaterial to our Consolidated Financial Statements.
Impairment of Goodwill
As of December 28, 201931, 2022, we had $153.3$157.6 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 2019 we recorded $1.5 million in additional goodwill associated with our ATCO and Die-Mold acquisitions in conjunction with the finalization of the purchase price allocations.
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, Mueller Middle East, Westermeyer, Turbotec, and ATCO.Flex Duct.
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 20192022 and 2018,2021, as applicable. TheWith the exception of the Turbotec reporting unit, the estimated fair value of each of these reporting units exceeded its carrying values in 20192022 and 2018,2021, and we do not believe that any of these reporting units were at risk of impairment as of December 28, 2019.31, 2022. During the third quarter of 2021, the Company recognized an impairment charge of $2.1 million related to Turbotec, reported within the Climate segment.
Pension and Other Postretirement Benefit Plans
We sponsor several qualified and nonqualified pension and other postretirement benefit plans in the U.S. and certain foreign locations. We recognize the overfunded or underfunded status of the plans as an asset or liability in the Consolidated Balance Sheets with changes in the funded status recorded through comprehensive income in the year in which those changes occur. The obligations for these plans are actuarially determined and affected by assumptions, including discount rates, expected long-term return on plan assets for defined benefit pension plans, and certain employee-related factors, such as retirement age and mortality. We evaluate the assumptions periodically and makes adjustments as necessary.
The expected return on plan assets is determined using the market value of plan assets. Differences between assumed and actual returns are amortized to the market value of assets on a straight-line basis over the average remaining service period of the plan participants using the corridor approach. The corridor approach defers all actuarial gains and losses resulting from variances between actual results and actuarial assumptions. These unrecognized gains and losses are amortized when the net gains and losses exceed 10 percent of the greater of the market value of the plan assets or the projected benefit obligation. The amount in excess of the corridor is amortized over the average remaining service period of the plan participants. For 2019,2022, the average remaining service period for the pension plans was nine11.5 years.
We determine the discount rate (which is required to be the rate at which the projected benefit obligation could be effectively settled as of the measurement date) with the assistance of actuaries, who calculate the yield available on high quality corporate bonds of a term that reflects the maturity and duration of expected benefit payments.
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 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
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.
See accompanying notes to consolidated financial statements.