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EX-31.2 - SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - MUELLER INDUSTRIES INCex312.htm
EX-32.2 - SECTION 906 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - MUELLER INDUSTRIES INCex322.htm
EX-32.1 - SECTION 906 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - MUELLER INDUSTRIES INCex321.htm
EX-31.1 - SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - MUELLER INDUSTRIES INCex311.htm
EX-23.0 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - MUELLER INDUSTRIES INCex23.htm
EX-21.0 - SUBSIDIARIES OF THE REGISTRANT - MUELLER INDUSTRIES INCex21.htm
EX-10.25 - CHANGE IN CONTROL AGREEMENT - MUELLER INDUSTRIES INCex10_25.htm
EX-10.13 - SUMMARY DESCRIPTION OF THE REGISTRANT'S 2017 INCENTIVE PLAN FOR CERTAIN KEY EMPL - MUELLER INDUSTRIES INCex10_13.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016
Commission file number 1–6770

MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
25-0790410
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)

8285 Tournament Drive, Suite 150
 
Memphis, Tennessee
38125
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code: (901) 753-3200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
 
 
Common Stock, $0.01 Par Value
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

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

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter was $1,795,668,379.

The number of shares of the Registrant's common stock outstanding as of February 24, 2017 was 57,602,563 excluding 22,580,441 treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following document are incorporated by reference into this Report: Registrant's Definitive Proxy Statement for the 2017 Annual Meeting of Stockholders, scheduled to be mailed on or about March 30, 2017 (Part III).


 
MUELLER INDUSTRIES, INC.

_____________________

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

____________________

TABLE OF CONTENTS

 
 
 
Page
Part I
 
 
 
 
 
 
 
 
 
 
 
 
Part II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part III
 
 
 
 
 
 
 
 
 
 
 
Part IV
 
 
 
 
       
 
 
 
 
 

2

PART I
 
ITEM 1.
BUSINESS
 
Introduction

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

During the first quarter of 2016, we made changes to our management reporting structure as a result of a change in the way the Chief Executive Officer, who serves as the Chief Operating Decision Maker, manages and evaluates the business, makes key operating decisions, and allocates resources.  Previously, we had two reportable segments: Plumbing & Refrigeration and OEM.  During the first quarter, we realigned our operating segments into three reportable segments: Piping Systems, Industrial Metals, and Climate.  The changes to the reporting structure resulted from management's decision to operationally separate certain businesses in order to enhance the level of focus on those businesses.  This included the appointment of separate management teams.  In addition, as a result of several acquisitions, we separated certain businesses with similar characteristics to create the Industrial Metals and Climate segments.  These businesses were previously aggregated within the OEM segment.  Management has recast certain prior year amounts to conform to the current year presentation. Each of the reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered.

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

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

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

Piping Systems Segment

The Piping Systems segment is composed of Domestic Piping Systems Group, Canadian Operations, European Operations, Trading Group, Jiangsu Mueller-Xingrong Copper Industries Limited (Mueller-Xingrong), and Jungwoo Metal Ind. Co., LTD (Jungwoo-Mueller).  

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

Canadian Operations manufactures copper tube and line sets in Canada and sells the products primarily in the U.S. and Canada.  European Operations manufactures copper tube in the United Kingdom, which is sold throughout Europe.  The Trading Group manufactures steel pipe nipples and resells imported brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products to plumbing wholesalers, distributors to the manufactured housing and recreational vehicle industries, and building materials retailers in North America.
 
 
3

 
Mueller-Xingrong, our Chinese joint venture, manufactures engineered copper tube primarily for air-conditioning applications; these products are sold primarily to OEMs located in China.  Jungwoo-Mueller, our South Korean joint venture, manufactures copper-based joining products that are sold worldwide.

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

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

The total amount of order backlog for the Piping Systems segment as of December 31, 2016 was not significant.

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

Industrial Metals Segment

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

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

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

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

 
4

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

The segment sells its products primarily to domestic OEMs in the industrial, construction, HVAC, plumbing, and refrigeration markets.  The total amount of order backlog for the Industrial Metals segment as of December 31, 2016 was not significant.

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

Climate Segment

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

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

We acquired Westermeyer on August 16, 2012 and Turbotec on March 30, 2015.  The acquisitions of Westermeyer and Turbotec complement our existing refrigeration business in the Climate segment.

The segment sells its products primarily to OEMs in the HVAC and refrigeration markets in the U.S.  The total amount of order backlog for the Climate segment as of December 31, 2016 was not significant.

Labor Relations

At December 31, 2016, the Company employed approximately 4,244 employees, of which approximately 1,616 were represented by various unions.  Those union contracts will expire as follows:

Location
Expiration Date
Port Huron, Michigan (Local 218 IAM)
May 5, 2019
Port Huron, Michigan (Local 44 UAW)
July 21, 2019
Port Huron, Michigan (Local 119 SPFPA)
April 1, 2018
Belding, Michigan
September 14, 2018
Wynne, Arkansas
June 28, 2018
Fulton, Mississippi
September 30, 2018
North Wales, Pennsylvania
July 31, 2018
Washington, Pennsylvania
July 25, 2017
Waynesboro, Tennessee
November 2, 2018

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

Raw Material and Energy Availability

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

 
5

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

Our copper tube facilities can accommodate both refined copper and certain grades of copper scrap as the primary feedstock.  The Company has commitments from refined copper producers for a portion of its metal requirements for 2017.  Adequate quantities of copper are currently available.  While we will continue to react to market developments, resulting pricing volatility or supply disruptions, if any, could nonetheless adversely affect the Company.

Environmental Proceedings

Compliance with environmental laws and regulations is a matter of high priority for the Company.  Mueller's provision for environmental matters related to all properties was $0.9 million for 2016, $0.1 million for 2015, and $1.2 million for 2014.  The reserve for environmental matters was $21.9 million at December 31, 2016 and $21.7 million at December 26, 2015.  Environmental costs related to non-operating properties are classified as a component of other income, net and costs related to operating properties are included in cost of goods sold.  We do not currently anticipate that we will need to make material expenditures for compliance activities related to existing environmental matters during the next three fiscal years.

For a description of material pending environmental proceedings, see "Note 13 – Commitments and Contingencies" in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

Other Business Factors

Our business is not materially dependent on patents, trademarks, licenses, franchises, or concessions held.  In addition, expenditures for Company-sponsored research and development activities were not material during 2016, 2015, or 2014.  No material portion of our business involves governmental contracts.  Seasonality of the Company's sales is not significant.

SEC Filings

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


ITEM 1A.
RISK FACTORS

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

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

6

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

The unplanned departure of key personnel could disrupt our business.

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

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

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

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

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

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

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

7

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

The vote by the United Kingdom (U.K.) to leave the European Union (EU) could adversely affect us.
The June 2016 U.K. referendum on its membership in the EU resulted in a majority of U.K. voters voting to exit the EU ("Brexit").  As a result, we face risks associated with the potential uncertainty and consequences that may follow Brexit, including with respect to volatility in exchange rates and interest rates and disruptions affecting our relationships with our existing and future customers, suppliers and employees.  Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets.  Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, results of operations and financial condition.

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

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

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

As of December 31, 2016, approximately 1,616 of our 4,244 employees were covered by collective bargaining or similar agreements.  If we are unable to negotiate acceptable new agreements with the unions representing our employees upon expiration of existing contracts, we could experience strikes or other work stoppages.  Strikes or other work stoppages could cause a significant disruption of operations at our facilities, which could have an adverse impact on us.  New or renewal agreements with unions representing our employees could call for higher wages or benefits paid to union members, which would increase our operating costs and could adversely affect our profitability.  Higher costs and/or limitations on our ability to operate our facilities and manufacture our products resulting from increased labor costs, strikes or other work stoppages could have a material adverse effect on our results of operations.
   
In addition, unexpected interruptions in our operations or those of our customers or suppliers due to such causes as weather-related events or acts of God, such as earthquakes, could have an adverse effect on our results of operations.  For example, the Environmental Protection Agency has found that global climate change would be expected to increase the severity and possibly the frequency of severe weather patterns such as hurricanes.  Although the financial impact of such future events is not reasonably estimable at this time, should they occur, our operations in certain coastal and flood-prone areas or operations of our customers and suppliers could be adversely affected.

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

8

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

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

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

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.


ITEM 2.
PROPERTIES

Information pertaining to our major operating facilities is included below.  Except as noted, we own all of the principal properties.  In addition, we own and/or lease other properties used as distribution centers and corporate offices.  Our plants are in satisfactory condition and are suitable for the purpose for which they were designed and are now being used.
 
 
Location of Facility
 
Building Space (Sq. Ft.)
 
Primary Use
 
Owned or Leased
 
   
Piping Systems Segment
 
Fulton, MS
 
649,500
 
Manufacturing & Packaging
 
579,500 Owned; 70,000 Leased
 
New Market, VA
 
413,120
 
Manufacturing
 
Owned
 
Wynne, AR
 
400,000
 
Manufacturing & Distribution
 
Owned
 
Ontario, CA
 
211,000
 
Manufacturing & Distribution
 
Leased
 
Ansonia, CT
 
89,396
 
Manufacturing & Distribution
 
Owned
 
 
 
 
9

 
Location of Facility
 
Building Space (Sq. Ft.)
 
Primary Use
 
Owned or Leased
 
               
Piping Systems Segment (cont.)
             
Covington, TN
 
159,500
 
Manufacturing
 
Owned
 
Phoenix, AZ
 
61,000
 
Manufacturing
 
Leased
 
Lawrenceville, GA
 
56,000
 
Manufacturing
 
Leased
 
North Wales, PA
 
174,000
 
Manufacturing
 
Owned
 
Cedar City, UT
 
260,000
 
Manufacturing & Distribution
 
Owned
 
Bilston, England
 
402,500
 
Manufacturing
 
Owned
 
London, Ontario, Canada
 
200,400
 
Manufacturing
 
Leased
 
Monterrey, Mexico
 
152,000
 
Manufacturing
 
Leased
 
Jintan City, Jiangsu Province,
China
 
322,580
 
Manufacturing
 
Owned
 
Yangju City, Gyeonggi Province,
South Korea
 
343,909
 
Manufacturing
 
Owned
 
               
Industrial Metals Segment
 
Port Huron, MI
 
450,000
 
Manufacturing
 
Owned
 
Belding, MI
 
293,068
 
Manufacturing
 
Owned
 
Brighton, MI
 
65,000
 
Machining
 
Leased
 
Marysville, MI
 
81,500
 
Manufacturing
 
Owned
 
Brooklyn, OH
 
75,000
 
Manufacturing
 
Leased
 
Valley View, OH
 
65,400
 
Manufacturing & Distribution
 
Leased
 
Middleton, OH
 
55,000
 
Manufacturing
 
Owned
 
Washington, PA
 
108,275
 
Manufacturing
 
Owned
 
Waynesboro, TN
 
57,000
 
Manufacturing
 
Leased
 
               
Climate Segment
             
Hartsville, TN
 
78,000
 
Manufacturing
 
Owned
 
Carthage, TN
 
67,520
 
Manufacturing
 
Owned
 
Bluffs, IL
 
107,000
 
Manufacturing
 
Owned
 
Gordonsville, TN
 
54,000
 
Manufacturing
 
Leased
 
Bloomfield, CT
 
26,900
 
Manufacturing
 
Leased
 
Carrolton, TX
 
9,230
 
Manufacturing
 
Leased
 
Hickory, NC
 
100,000
 
Manufacturing
 
Owned
 
Guadalupe, Mexico
 
130,110
 
Manufacturing
 
Leased
 
Xinbei District, Changzhou,
China
 
33,940
 
Manufacturing
 
Leased
 
               
 
 
 
               
ITEM 3.
LEGAL PROCEEDINGS

The Company is involved in certain litigation as a result of claims that arose in the ordinary course of business.  Additionally, we may realize the benefit of certain legal claims and litigation in the future; these gain contingencies are not recognized in the Consolidated Financial Statements.
For a description of material pending legal proceedings, see "Note 13 – Commitments and Contingencies" in the Notes to Consolidated Financial Statements, which is incorporated herein by reference.

10

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


PART II

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

Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol "MLI."  As of February 24, 2017, the number of holders of record of Mueller's common stock was 770.  The following table sets forth, for the periods indicated, the high and low sales prices as reported by the NYSE and the cash dividends paid per share of common stock.

   
Sales Prices
       
 
 
High
   
Low
   
Dividend
 
2016
                 
 
                 
Fourth quarter
 
$
41.27
   
$
29.52
   
$
0.100
 
Third quarter
   
35.52
     
31.38
     
0.100
 
Second quarter
   
32.74
     
28.01
     
0.100
 
First quarter
   
29.86
     
23.09
     
0.075
 
 
                       
 
2015
                       
 
                       
Fourth quarter
 
$
33.04
   
$
26.86
   
$
0.075
 
Third quarter
   
35.65
     
28.94
     
0.075
 
Second quarter
   
37.18
     
34.57
     
0.075
 
First quarter
   
36.47
     
31.34
     
0.075
 
 
Payment of dividends in the future is dependent upon the Company's financial condition, cash flows, capital requirements, earnings, and other factors.


















11

 
Issuer Purchases of Equity Securities

The Company's Board of Directors has extended, until October 2017, the authorization to repurchase up to 20 million shares of the Company's common stock through open market transactions or through privately negotiated transactions.  The Company has no obligation to purchase any shares and may cancel, suspend, or extend the time period for the purchase of shares at any time.  Any purchases will be funded primarily through existing cash and cash from operations.  The Company may hold any shares purchased in treasury or use a portion of the repurchased shares for its stock-based compensation plans, as well as for other corporate purposes.  From its initial authorization in 1999 through December 31, 2016, the Company had repurchased approximately 4.7 million shares under this authorization.  Below is a summary of the Company's stock repurchases for the quarter ended December 31, 2016.

 
 
 
(a)
       
(b)
   
(c)
   
(d)
     
 
 
Total Number of Shares Purchased
       
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
     
 
                         
15,287,060
 
(1
)
  October 2 – October 29, 2016
   
       
$
     
             
 
                                       
  October 30 – November 26, 2016
   
         
     
             
 
                                       
  November 27 – December 31, 2016
   
17,036
 
(2
)
   
37.93
     
             
 
                                       
 (1)  Shares available to be purchased under the Company's 20 million share repurchase authorization until October 2017. The extension of the authorization was announced on October 27, 2016.
 
   
 (2)  Shares tendered to the Company by holders of stock-based awards in payment of purchase price and/or withholding taxes upon exercise and/or vesting. Also includes shares resulting from restricted stock forfeitures.
 


















12



Company Stock Performance

The following graph compares total stockholder return since December 31, 2011 to the Dow Jones U.S. Total Return Index (Total Return Index) and the Dow Jones U.S. Building Materials & Fixtures Index (Building Materials Index).  Total return values for the Total Return Index, the Building Materials Index and the Company were calculated based on cumulative total return values assuming reinvestment of dividends.  
 
    
       
 
 
2011
 
 
2012
 
 
2013
 
 
2014
 
 
2015
 
 
2016
 
Mueller Industries, Inc.
 
 
100.00
     
129.43
     
166.33
     
183.01
     
151.28
     
218.39
 
Dow Jones U.S. Total Return Index
 
 
100.00
     
116.32
     
154.68
     
174.71
     
175.81
     
197.35
 
Dow Jones U.S. Building Materials & Fixtures Index
 
 
100.00
     
152.21
     
195.14
     
215.75
     
246.75
     
292.28
 
 
13

ITEM 6.
SELECTED FINANCIAL DATA

(In thousands, except per share data)
2016
   
2015
   
2014
   
2013
   
2012
   
   
 
                             
For the fiscal year: (1)
                             
   
 
                             
   
Net sales
$
2,055,622
   
$
2,100,002
   
$
2,364,227
   
$
2,158,541
   
$
2,189,938
   
   
 
                                       
   
Operating income
 
152,713
     
137,268
     
153,996
     
270,937
(5
)
 
126,705
(6
)
   
 
                                       
   
Net income attributable to Mueller Industries, Inc.
 
99,727
(2
)
 
87,864
(3
)
 
101,560
(4
)
 
172,600
     
82,395
   
   
 
                                       
   
Diluted earnings per share (8)
 
1.74
     
1.54
     
1.79
     
3.06
     
1.16
(7
)
   
 
                                       
   
Cash dividends per share (8)
 
0.375
     
0.30
     
0.30
     
0.25
     
0.2125
   
   
 
                                       
At year-end:
                                       
   
 
                                       
   
Total assets
 
1,447,476
     
1,338,801
     
1,328,096
     
1,247,767
     
1,104,155
   
   
 
                                       
   
Long-term debt
 
213,709
     
204,250
     
205,250
     
206,250
     
207,300
   
   
 
                                       
   
 
                                       
 
(1
)
  Includes activity of acquired businesses from the following purchase dates: Jungwoo Metal Ind. Co., LTD, April 26, 2016;  Great Lakes
  Copper Ltd., July 31, 2015; Sherwood Valve Products, LLC, June 18, 2015; Turbotec Products, Inc., March 30, 2015; Yorkshire Copper
  Tube, February 28, 2014; Howell Metal Company, October 17, 2013; and Westermeyer Industries, Inc., August 16, 2012.
 
         
 
(2
)
  Includes pre-tax impairment charges of $6.8 million on fixed assets.
 
         
 
(3
)
  Includes $15.4 million pre-tax gain from the sale of certain assets, severance charges of $3.4 million and a permanent  
  adjustment to a deferred tax liability of $4.2 million.
 
         
 
(4
)
  Includes $6.3 million pre-tax gain on sale of assets, reversal of valuation allowance of $5.7 million, and $7.3 million of pre-tax charges
  related to severance.
 
         
 
(5
)
  Includes $106.3 million pre-tax gain from settlement of insurance claims, $39.8 million pre-tax gain from the sale of the Company's
  Schedule 40 pressure plastic fittings business along with the sale of certain other plastic fittings manufacturing assets, and pre-tax
  impairment charges of $4.3 million primarily related to real property associated with the aforementioned plastics sale transaction.
 
         
 
(6
)
  Includes deferred recognition of $8.0 million gain from liquidation of LIFO inventory layers, $4.1 million net gain from settlement of
  litigation, $1.5 million gain from settlement of insurance claims, and severance charges of $3.4 million.
 
         
 
(7
)
  Includes the impact of 10.4 million shares repurchased from Leucadia National Corporation in September 2012.
 
         
 
(8
)
  Adjusted retroactively to reflect the two-for-one stock split that occurred on March 14, 2014.
 


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

Management's discussion and analysis of financial condition and results of operations is contained under the caption "Financial Review" submitted as a separate section of this Annual Report on Form 10-K commencing on page F-2.
 
 
14

 
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements required by this item are contained in a separate section of this Annual Report on Form 10-K commencing on page F-18.


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

None.
 
 
ITEM 9A.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

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

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act as of December 31, 2016.  Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of December 31, 2016 to ensure that information required to be disclosed in Company reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to management, including the Company's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.  Pursuant to the rules and regulations of the SEC, internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the  Company's assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of the Company's management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.  Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
 
 
15

 
 
The Company acquired a 60 percent equity interest in Jungwoo Metal Ind. Co., LTD during 2016 and has excluded this business from management's assessment of internal controls.  The total value of assets for this business at year-end was $49.7 million, which represents 3.4 percent of the Company's consolidated total assets at December 31, 2016.  Net sales from the date of acquisition represents 1.1 percent of the consolidated net sales of the Company for 2016.  Operating income from the date of acquisition represents 0.1 percent of the consolidated operating income of the Company for 2016.  Accordingly, this acquired business is not included in the scope of this report.

As required by Rule 13a-15(c) under the Exchange Act, the Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2016 based on the control criteria established in a report entitled Internal Control—Integrated Framework, (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on such evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2016.
 
Ernst & Young LLP, the independent registered public accounting firm that audited the Company's financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company's internal control over financial reporting, which is included herein.

Changes in Internal Control Over Financial Reporting
 
There were no changes in the Company's internal control over financial reporting during the Company's fiscal quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
 
16

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Mueller Industries, Inc.

We have audited Mueller Industries, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Mueller Industries, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Jungwoo Metal Ind. Co., LTD, which is included in the 2016 consolidated financial statements of Mueller Industries, Inc. and constituted $49.7 million and $32.7 million of total and net assets, respectively, as of December 31, 2016, and $22.0 million and $0.2 million of net sales and operating income, respectively, for the year then ended.  Our audit of internal control over financial reporting of Mueller Industries, Inc. also did not include an evaluation of the internal control over financial reporting of Jungwoo Metal Ind. Co., LTD.

In our opinion, Mueller Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mueller Industries, Inc. as of December 31, 2016 and December 26, 2015, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2016 and our report dated March 1, 2017 expressed an unqualified opinion thereon.
 
 
 
 
 
 
 
 
 
                      

 
Memphis, Tennessee
 
 
March 1, 2017
 
 
 
 
 
 
17

ITEM 9B.
OTHER INFORMATION

None.


PART III

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by Item 10 is contained under the captions "Ownership of Common Stock by Directors and Executive Officers and Information about Director Nominees," "Corporate Governance," "Report of the Audit Committee of the Board of Directors," and "Section 16(a) Beneficial Ownership Compliance Reporting" in the Company's Proxy Statement for its 2017 Annual Meeting of Stockholders to be filed with the SEC on or about March 30, 2017, which is incorporated herein by reference.

The Company has adopted a Code of Business Conduct and Ethics that applies to its chief executive officer, chief financial officer, and other financial executives.  We have also made the Code of Business Conduct and Ethics available on the Company's website at www.muellerindustries.com.
 

ITEM 11.
EXECUTIVE COMPENSATION
 
The information required by Item 11 is contained under the caption "Compensation Discussion and Analysis," "Summary Compensation Table for 2016," "2016 Grants of Plan Based Awards Table," "Outstanding Equity Awards at Fiscal 2016 Year-End," "2016 Option Exercises and Stock Vested," "Potential Payments Upon Termination of Employment or Change in Control as of the End of 2016," "2016 Director Compensation," "Report of the Compensation Committee of the Board of Directors on Executive Compensation" and "Corporate Governance" in the Company's Proxy Statement for its 2017 Annual Meeting of Stockholders to be filed with the SEC on or about March 30, 2017, which is incorporated herein by reference.
 
18

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

Equity Compensation Plan Information

The following table discloses information regarding the securities to be issued and the securities remaining available for issuance under the Registrant's stock-based incentive plans as of December 31, 2016 (shares in thousands):

 
(a)
 
(b)
 
(c)
 
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants, and rights
 
Weighted average exercise price of outstanding options, warrants, and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
 
           
Equity compensation plans approved by security holders
   
1,034
   
$
21.24
     
1,017
 
 
                       
Equity compensation plans not approved by security holders
   
     
     
 
 
                       
Total
   
1,034
   
$
21.24
     
1,017
 
 
Other information required by Item 12 is contained under the captions "Principal Stockholders" and "Ownership of Common Stock by Directors and Executive Officers and Information about Director Nominees" in the Company's Proxy Statement for its 2017 Annual Meeting of Stockholders to be filed with the SEC on or about March 30, 2017, which is incorporated herein by reference.


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

The information required by Item 13 is contained under the caption "Corporate Governance" in the Company's Proxy Statement for its 2017 Annual Meeting of Stockholders to be filed with the SEC on or about March 30, 2017, which is incorporated herein by reference.
 
 
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
       
The information required by Item 14 is contained under the caption "Appointment of Independent Registered Public Accounting Firm" in the Company's Proxy Statement for its 2017 Annual Meeting of Stockholders to be filed with the SEC on or about March 30, 2017, which is incorporated herein by reference.
 
19

PART IV


ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)
The following documents are filed as part of this report:
 
 
 
 
1.
Financial Statements: the financial statements, notes, and report of independent registered public accounting firm described in Item 8 of this Annual Report on Form 10-K are contained in a separate section of this Annual Report on Form 10-K commencing on page F-1.
 
 
 
 
2.
Financial Statement Schedule: the financial statement schedule described in Item 8 of this report is contained in a separate section of this Annual Report on Form 10-K commencing on page F-1.
 
 
 
 
3.
Exhibits:
 
 
 
3.1
Restated Certificate of Incorporation of the Registrant dated February 8, 2007 (Incorporated herein by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K, dated February 28, 2007, for the fiscal year ended December 30, 2006).
 
 
 
 
 
 
3.2
Amended and Restated By-laws of the Registrant, effective as of January 15, 2016 (Incorporated herein by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K, dated January 19, 2016).
 
 
 
 
 
 
4.1
Certain instruments with respect to long-term debt of the Registrant have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instruments does not exceed 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis.  The Registrant agrees to furnish a copy of each such instrument upon request of the SEC.
 
 
 
 
 
 
10.1
Amended and Restated Consulting Agreement, dated October 25, 2007, by and between the Registrant and Harvey Karp (Incorporated herein by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K, dated October 25, 2007).
 
 
 
 
 
 
10.2
Amendment No. 1, dated December 2, 2008, to the Amended and Restated Consulting Agreement, dated October 25, 2007, by and between the Registrant and Harvey Karp (Incorporated herein by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K, dated February 24, 2009, for the fiscal year ended December 27, 2008).
 
 
 
 
 
 
10.3
Letter Agreement with Harvey Karp, dated as of May 11, 2011 (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, dated May 16, 2011).
 
 
 
 
 
 
10.4
Amended and Restated Employment Agreement, effective October 30, 2008, by and between the Registrant and Gregory L. Christopher (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, dated December 26, 2008).
 
 
 
 
 
 
10.5
Amendment No. 1 to Amended and Restated Employment Agreement by and between the Registrant and Gregory L. Christopher, dated February 14, 2013 (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, dated February 14, 2013).
 
 
 
 
10.6
 
 
 
Amendment No. 2 to Amended and Restated Employment Agreement by and between the Registrant and Gregory L. Christopher, dated July 26, 2016 (Incorporated herein by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q, for the period ended July 2, 2016, dated July 28, 2016).
 
 
 
20

 
       
 
10.7
Mueller Industries, Inc. 2002 Stock Option Plan Amended and Restated as of February 16, 2006 (Incorporated herein by reference to Exhibit 10.20 of the Registrant's Annual Report on Form 10-K, dated February 28, 2007, for the fiscal year ended December 30, 2006).
 
 
 
 
 
 
10.8
Mueller Industries, Inc. 2009 Stock Incentive Plan (Incorporated by reference from Appendix I to the Company's 2009 Definitive Proxy Statement with respect to the Company's 2009 Annual Meeting of Stockholders, as filed with the Securities and Exchange Commission on March 26, 2009).
 
 
 
 
 
 
10.9
Mueller Industries, Inc. 2014 Stock Incentive Plan (Incorporated by reference from Appendix I to the Company's 2014 Definitive Proxy Statement with respect to the Company's 2014 Annual Meeting of Stockholders, as filed with the Securities and Exchange Commission on March 19, 2014).
 
 
 
 
 
 
10.10
Amendment to the Mueller Industries, Inc. 2002 Stock Option Plan, dated July 11, 2011 (Incorporated herein by reference to Exhibit 10.16 of the Registrant's Annual Report on Form 10-K, dated February 28, 2012, for the fiscal year ended December 31, 2011).
 
       
 
10.11
Amendment to the Mueller Industries, Inc. 2009 Stock Incentive Plan, dated July 11, 2011 (Incorporated herein by reference to Exhibit 10.17 of the Registrant's Annual Report on Form 10-K, dated February 28, 2012, for the fiscal year ended December 31, 2011).
 
 
 
 
 
 
10.12
Mueller Industries, Inc. 2011 Annual Bonus Plan (Incorporated herein by reference to Exhibit 10.18 of the Registrant's Annual Report on Form 10-K, dated February 28, 2012, for the fiscal year ended December 31, 2011).
 
 
 
 
 
 
10.13
Summary description of the Registrant's 2017 incentive plan for certain key employees.
 
 
 
 
 
 
10.14
Amended Credit Agreement, dated as of March 7, 2011, among the Registrant (as Borrower) and Bank of America, N.A. (as agent), and certain lenders named therein, following adoption of Amendment No. 2 dated December 11, 2012 (Incorporated herein by reference to Exhibit 10.20 of the Registrant's Annual Report on Form 10-K, dated February 27, 2013, for the fiscal year ended December 29, 2012).
 
 
 
 
 
 
10.15
Amendment No. 1 to Credit Agreement among the Registrant (as borrower), Bank of America, N.A. (as agent), and certain lenders named therein dated August 12, 2011 (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q, for the Quarterly period ended October 1, 2011, dated October 27, 2011).
 
 
 
 
 
 
10.16
Amendment No. 2 to Credit Agreement among the Registrant (as borrower), Bank of America, N.A. (as agent), and certain lenders named therein dated December 11, 2012  (Incorporated herein by reference to Exhibit 10.22 of the Registrant's Annual Report on Form 10-K, dated February 27, 2013, for the fiscal year ended December 29, 2012).
 
 
 
 
 
 
10.17
Amendment No. 3 to Credit Agreement among the Registrant (as borrower), Bank of America, N.A. (as agent), and certain lenders named therein dated July 26, 2016  (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q, for the period ended July 2, 2016, dated July 28, 2016).
 
       
 
10.18
Credit Agreement, dated as of December 6, 2016 among the Registrant (as borrower), Bank of America (as agent), and certain lenders named therein (Incorporated herein by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K, dated December 12, 2016).
 
       
 
10.19
Change in Control Agreement, effective July 26, 2016 by and between the Registrant and Brian K. Barksdale (Incorporated herein by reference to Exhibit 10.3 of the Registrant's Quarterly Report on Form 10-Q, for the period ended July 2, 2016, dated July 28, 2016).
 
 
 
 
 
21

       
 
10.20
Change in Control Agreement, effective July 26, 2016 by and between the Registrant and Daniel R. Corbin (Incorporated herein by reference to Exhibit 10.4 of the Registrant's Quarterly Report on Form 10-Q, for the period ended July 2, 2016, dated July 28, 2016).
 
       
 
10.21
Change in Control Agreement, effective July 26, 2016 by and between the Registrant and Jeffrey A. Martin (Incorporated herein by reference to Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q, for the period ended July 2, 2016, dated July 28, 2016).
 
       
 
10.22
Change in Control Agreement, effective July 26, 2016 by and between the Registrant and Mark Millerchip (Incorporated herein by reference to Exhibit 10.6 of the Registrant's Quarterly Report on Form 10-Q, for the period ended July 2, 2016, dated July 28, 2016).
 
       
 
10.23
Change in Control Agreement, effective July 26, 2016 by and between the Registrant and Nicholas W. Moss (Incorporated herein by reference to Exhibit 10.7 of the Registrant's Quarterly Report on Form 10-Q, for the period ended July 2, 2016, dated July 28, 2016).
 
       
 
10.24
Change in Control Agreement, effective July 26, 2016 by and between the Registrant and Steffen Sigloch (Incorporated herein by reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q, for the period ended July 2, 2016, dated July 28, 2016).
 
       
  10.25  Change in Control Agreement, effective January 3, 2017 by and between the Registrant and Christopher J. Miritello.  
       
 
21.0
Subsidiaries of the Registrant.
 
 
 
 
 
 
23.0
Consent of Independent Registered Public Accounting Firm.
 
 
 
 
 
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
 
 
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
 
 
 
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
       
 
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase 
 
 
 
 
 
 
101.INS
XBRL Instance Document
 
 
 
 
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase 
 
 
 
 
 
 
101.PRE
XBRL Presentation Linkbase Document
 
 
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema 
 
 

ITEM 16.
Form 10-K Summary

None.

22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 1, 2017.

MUELLER INDUSTRIES, INC.

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

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

Signature
Title
Date
 
 
 
/s/ Gregory L. Christopher
    Gregory L. Christopher
Chief Executive Officer (Principal Executive Officer) and Chairman of the Board
March 1, 2017
   
 
 
 
 
/s/ Gary S. Gladstein
Lead Independent Director
March 1, 2017
Gary S. Gladstein
 
 
 
 
 
/s/ Paul J. Flaherty
Director
March 1, 2017
Paul J. Flaherty
 
 
 
 
 
/s/ Gennaro J. Fulvio
Director
March 1, 2017
Gennaro J. Fulvio
 
 
 
 
 
/s/ Scott J. Goldman
Director
March 1, 2017
Scott J. Goldman
 
 
 
 
 
/s/ John B. Hansen
Director
March 1, 2017
John B. Hansen
   
     
/s/ Terry Hermanson
Director
March 1, 2017
Terry Hermanson
 
 
 
 
 

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

 
Signature and Title
Date
 
 
 
 
/s/ Jeffrey A. Martin
March 1, 2017
 
Jeffrey A. Martin
 
 
Chief Financial Officer and Treasurer
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
/s/ Anthony J. Steinriede
March 1, 2017
 
Anthony J. Steinriede
 
 
Vice President – Corporate Controller
 


23

MUELLER INDUSTRIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





FINANCIAL STATEMENT SCHEDULE

 
Schedule for the years ended December 31, 2016, December 26, 2015, and December 27, 2014
 
 
 
 
 
F-1

FINANCIAL REVIEW

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

Overview

We are a leading manufacturer of copper, brass, aluminum, and plastic products.  The range of these products is broad:  copper tube and fittings; line sets; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum impact extrusions; plastic fittings and valves; refrigeration valves and fittings; fabricated tubular products; and steel nipples.  We also resell imported brass and plastic plumbing valves, 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, and China.

During the first quarter of 2016, we made changes to our management reporting structure as a result of a change in the way the Chief Executive Officer, who serves as the Chief Operating Decision Maker, manages and evaluates the business, makes key operating decisions, and allocates resources.  Previously, we had two reportable segments: Plumbing & Refrigeration and OEM.  During the first quarter, we realigned our operating segments into three reportable segments: Piping Systems, Industrial Metals, and Climate.  The changes to the reporting structure resulted from management's decision to operationally separate certain businesses in order to enhance the level of focus on those businesses.  This included the appointment of separate management teams.  In addition, as a result of several acquisitions, we separated certain businesses with similar characteristics to create the Climate and Industrial Metals segments.  These businesses were previously aggregated within the OEM segment.  Management has recast certain prior year amounts to conform to the current year presentation. 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, Canadian Operations, European Operations, Trading Group, Mueller-Xingrong (our Chinese joint venture), and Jungwoo-Mueller (our South Korean joint venture).  The Domestic Piping Systems Group manufactures copper tube and fittings,  plastic fittings, and line sets.  These products are manufactured in the U.S., sold in the U.S., and exported to markets worldwide.    The Canadian Operations manufacture copper tube and line sets in Canada and sell the products primarily in the U.S. and Canada. 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.  Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications; these products are sold primarily to OEMs located in China.  Jungwoo-Mueller manufactures copper-based joining products that are sold worldwide.  The Piping Systems segment sells products to wholesalers in the plumbing and refrigeration markets, distributors to the manufactured housing and recreational vehicle industries, building material retailers, and air-conditioning OEMs.

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

·
Climate: The Climate segment is composed of Refrigeration Products, Fabricated Tube Products, Westermeyer, and Turbotec.  The segment manufactures and sells refrigeration valves and fittings and fabricated tubular products.  The segment sells its products primarily to the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.
 
 
F-2

 
 
New housing starts and commercial construction are important determinants of the Company's 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.  

Residential construction activity has shown improvement in recent years, but remains at levels below long-term historical averages.  Continued improvement is expected, but may be tempered by continuing low labor participation rates, the pace of household formations, and tighter lending standards.  Per the U.S. Census Bureau, actual housing starts in the U.S. were 1.2 million in 2016, which compares to 1.1 million in 2015 and 1.0 million in 2014.  Mortgage rates remain at historically low levels, as the average 30-year fixed mortgage rate was approximately 3.65 percent in 2016 and 3.85 percent in 2015.  

The private nonresidential construction sector, which includes offices, industrial, health care, and retail projects, has also shown improvement in recent years.  Per the U.S. Census Bureau, the value of private nonresidential construction put in place was $420.1 billion in 2016, $389.9 billion in 2015, and $359.7 billion in 2014.  We expect that most of these conditions will continue to improve.

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 scrap, for example, influence the selling price of copper tube, a principal product manufactured by the Company.  We attempt to minimize the effects on profitability from fluctuations in material costs by passing through these costs to our customers.  Our earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions.

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

Results of Operations

Consolidated Results

The following table compares summary operating results for 2016, 2015, and 2014:

 
             
Percent Change
 
(In thousands)
 
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
 
                     
Net sales
 
$
2,055,622
   
$
2,100,002
   
$
2,364,227
     
(2.1
)%
   
(11.2
)%
Operating income
   
152,713
     
137,268
     
153,996
     
11.3
     
(10.9
)
Net income
   
99,727
     
87,864
     
101,560
     
13.5
     
(13.5
)




F-3


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

 
 
2016 vs. 2015
 
 
2015 vs. 2014
 
 
 
 
 
 
 
 
 
 
Net selling price in core product lines
 
(9.0
)
 
 
(9.4
)
%
Unit sales volume in core product lines
 
(1.6
)
 
 
 
  (3.4
)
 
Acquisitions and new products
 
9.0
 
 
 
 
  5.8
 
 
Dispositions
 
       
(2.6
)
 
Other
 
(0.5
)
 
 
 
  (1.6
)
 
 
 
   
 
 
 
 
 
 
 
 
(2.1
)
 
 
  (11.2
)
%

The decrease in net sales in 2016 was primarily due to (i) lower net selling prices of $189.0 million in our core product lines, primarily copper tube and brass rod, and (ii) lower unit sales volume of $33.0 million in our core product lines.  The decrease in net sales resulting from lower net selling prices also reflects the impact of translating net sales of the Company's foreign operations to U.S. dollars, which was approximately $43.6 million.  These decreases were partially offset by (i) $139.4 million of incremental sales recorded by Great Lakes Copper Ltd. (Great Lakes), acquired in July 2015, (ii) $22.0 million of sales recorded by Jungwoo-Mueller, acquired in April 2016, (iii) $19.2 million of incremental sales recorded by Sherwood Valve LLC (Sherwood), acquired in June 2015, and (iv) $3.5 million of incremental sales recorded by Turbotec Products, Inc. (Turbotec), acquired in March 2015.

The decrease in net sales in 2015 was primarily due to (i) lower net selling prices of $218.3 million in our core product lines, primarily copper tube and brass rod, (ii) lower unit sales volume of $79.9 million in our core product lines, primarily in the Industrial Metals segment, and (iii) the absence of sales of $57.5 million recorded by Primaflow, a business we sold during November 2014.  These decreases were offset by (i) $90.5 million of sales recorded by Great Lakes, (ii) $20.8 million of sales recorded by Sherwood, and (iii) $16.8 million of sales recorded by Turbotec, all of which were businesses acquired during 2015.

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:






F-4


 
The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2016, 2015, and 2014:

(In thousands)
 
2016
   
2015
   
2014
 
 
                 
Cost of goods sold
 
$
1,723,499
   
$
1,809,702
   
$
2,043,719
 
Depreciation and amortization
   
35,133
     
34,608
     
33,735
 
Selling, general, and administrative expense
   
137,499
     
130,358
     
131,740
 
Gain on sale of assets
   
     
(15,376
)
   
(6,259
)
Impairment charges
   
6,778
     
     
 
Severance
   
     
3,442
     
7,296
 
 
                       
Operating expenses
 
$
1,902,909
   
$
1,962,734
   
$
2,210,231
 

 
 
Percent of Net Sales
 
 
 
2016
 
 
2015
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
 
83.9
%
 
 
86.2
%
 
 
86.4
%
Depreciation and amortization
 
 
1.7
 
 
 
1.6
 
 
 
1.4
 
Selling, general, and administrative expense
 
 
6.7
 
 
 
6.2
 
 
 
5.7
 
Gain on sale of assets
 
 
 
 
 
(0.7
)
 
 
(0.3
Impairment charges
 
 
0.3
 
 
 
 
 
 
 
Severance
 
 
 
 
 
0.2
 
 
 
0.3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
92.6
%
 
 
93.5
%
 
 
93.5
%

The decrease in cost of goods sold in 2016 and 2015 was primarily due to the decrease in the average cost of copper, our principal raw material, largely offset by the increase in sales volume related to businesses acquired during 2015 and 2016.  Depreciation and amortization increased in 2016 and 2015 primarily as a result of depreciation and amortization of long-lived assets for businesses acquired.

Selling, general, and administrative expenses increased in 2016, primarily due to (i) incremental expenses of $8.9 million associated with businesses acquired in 2015 and 2016 and (ii) an increase in employment costs, including incentive compensation and net periodic pension costs, of $1.6 million.  This was partially offset by a reduction in foreign currency exchange losses of $0.9 million.  In addition, there was $1.9 million of equipment relocation costs and losses on the sale of assets related to the rationalization of Yorkshire Copper Tube (Yorkshire) in 2015.  The decrease in 2015 was primarily due to (i) a decrease of $10.2 million in selling, general, and administrative expenses related to the sale of Primaflow, (ii) lower employment costs, including incentive compensation, of $5.4 million, and (iii) a decrease of $1.6 million in agent commissions as a result of lower sales.  These decreases were offset by (i) selling, general, and administrative expenses of $6.6 million associated with businesses acquired in 2015, (ii) higher net periodic pension costs of $5.1 million, and (iii) increased professional fees of $1.6 million related to the upgrade of our ERP system.  Lastly, during 2014 there was a reduction in accruals related to legal matters of $0.5 million. 

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

During 2015, our operating results were positively impacted by a net gain of $15.4 million recorded on the sale of certain assets.  This was offset by $3.4 million of severance charges related to the rationalization of Yorkshire.

Our operating results in 2014 were positively impacted by a net gain of $6.3 million recorded for the sale of our plastic pipe manufacturing assets, the land and building in Portage, Michigan, and our United Kingdom based import distribution business.  This was offset by $7.3 million in severance charges related to the rationalization of Yorkshire.

Interest expense decreased slightly in 2016 primarily as a result of decreased borrowing costs at Mueller-Xingrong.  This was offset by (i) increased borrowing costs and the amortization of debt issuance costs on our Credit Agreement, (ii) borrowing costs associated with revolving credit arrangements at Jungwoo-Mueller, and (iii) lower capitalized interest.  The increase of $1.9 million in 2015 was a result of additional costs of $2.3 million due to the terms of our interest rate swap agreements that became effective in January 2015, offset by decreased borrowing costs of $0.3 million at Mueller-Xingrong to fund working capital.

F-5

 
 
Other income, net, was $0.7 million in 2016 compared to other income, net, of $2.2 million in 2015 and other expense, net, of $0.2 million in 2014.  The change in 2016 was primarily attributable to higher environmental costs of $1.2 million.  The change in 2015 was primarily related to lower postretirement benefit costs of $1.4 million, lower environmental costs of $0.8 million, and higher interest income of $0.5 million.

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

Income tax expense was $43.4 million in 2015, for an effective tax rate of 32.9 percent.  This rate was lower than what would be computed using the U.S. statutory federal rate primarily due to reductions to the Company's deferred tax liabilities of $4.2 million resulting from the acquisition of a foreign subsidiary and the U.S. production activities deduction of $3.5 million.  These reductions were partially offset by the provision for state income taxes, net of federal benefit, of $2.7 million and $2.3 million of other adjustments.

Income tax expense was $45.5 million in 2014, for an effective tax rate of 30.7 percent.  This rate was lower than what would be computed using the U.S. statutory federal rate primarily due to decreases in valuation allowances of $5.7 million; the U.S. production activities deduction benefit of $4.0 million; and the effect of lower foreign tax rates and other foreign adjustments of $1.1 million.  These decreases were partially offset by the provision for state income taxes, net of federal benefit, of $3.3 million and $1.2 million of other adjustments.

During 2016, we recognized $1.9 million of income on our investment in unconsolidated affiliates.  This included a gain that resulted from the allocation of the purchase price recorded by our equity method investees, which was offset by restructuring and impairment charges and net losses during the year.

Piping Systems Segment

The following table compares summary operating results for 2016, 2015, and 2014 for the businesses comprising our Piping Systems segment:

 
           
Percent Change
 
(In thousands)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
 
                     
Net sales
 
$
1,429,589
   
$
1,436,689
   
$
1,622,921
     
(0.5
)%
   
(11.5
)%
Operating income
   
103,886
     
113,232
     
118,558
     
(8.3
)
   
(4.5
)

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

 
 
2016 vs. 2015
 
 
2015 vs. 2014
 
 
 
 
 
 
 
 
Net selling price in core product lines
 
(10.0
)
 
(9.8
)
%
Unit sales volume in core product lines
 
(1.3
)
 
 
(1.4
)
 
Acquisitions
 
11.5
 
 
 
5.6
   
Dispositions
 
     
(3.9
)
 
Other
 
(0.7
)
 
 
(2.0
)
 
 
 
   
 
 
 
   
 
 
(0.5
)
%
 
  (11.5
)
%

F-6

 
 
The decrease in net sales in 2016 was primarily attributable to (i) lower net selling prices of $144.4 million in the segment's core product lines, primarily copper tube, (ii) lower unit sales volume of $18.8 million in the segment's core product lines, and (iii) a decrease in sales of $5.3 million in the segment's non-core product lines.  The decrease in net sales resulting from lower net selling prices also reflects the impact of translating net sales of the segment's foreign operations to U.S. dollars, which was approximately $43.6 million.  These decreases were partially offset by (i) $139.4 million of incremental sales recorded by Great Lakes and (ii) $22.0 million of sales recorded by Jungwoo-Mueller.

The decrease in net sales during 2015 was primarily due to (i) lower net selling prices of $158.4 million in the segment's core product lines, primarily copper tube, (ii) the absence of sales of $57.5 million recorded by Primaflow, (iii) lower unit sales volume of $23.4 million in the segment's core product lines, and (iv) a decrease in sales of $37.4 million in the segment's non-core product lines.  These decreases were offset by $90.5 million of sales recorded by Great Lakes.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2016, 2015, and 2014:

(In thousands)
 
2016
   
2015
   
2014
 
 
                 
Cost of goods sold
 
$
1,228,949
   
$
1,245,929
   
$
1,409,581
 
Depreciation and amortization
   
22,421
     
22,559
     
22,221
 
Selling, general, and administrative expense
   
68,218
     
66,903
     
71,524
 
Gain on sale of assets
   
     
(15,376
)
   
(6,259
)
Impairment charges
   
6,115
     
     
 
Severance
   
     
3,442
     
7,296
 
 
                       
Operating expenses
 
$
1,325,703
   
$
1,323,457
   
$
1,504,363
 

 
 
Percent of Net Sales
 
 
 
2016
 
 
2015
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
 
86.0
%
 
 
86.7
%
 
 
86.9
%
Depreciation and amortization
 
 
1.5
 
 
 
1.6
 
 
 
1.4
 
Selling, general, and administrative expense
 
 
4.8
 
 
 
4.7
 
 
 
4.4
 
Gain on sale of assets
 
 
 
 
 
(1.1
)
 
 
(0.4
Impairment charges
 
 
0.4
 
 
 
 
 
 
 
Severance
 
 
 
 
 
0.2
 
 
 
0.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
92.7
%
 
 
92.1
%
 
 
92.7
%

The decrease in cost of goods sold in 2016 was primarily due to the decrease in the average cost of copper, largely offset by the increase in sales volume related to businesses acquired during 2015 and 2016.  The decrease in 2015 was primarily due to the decrease in the average cost of copper and the decrease in unit sales volume related to businesses disposed, slightly offset by the increase in sales volume related to businesses acquired during 2015.  Depreciation and amortization in 2016, 2015, and 2014 was consistent.  This was a result of several assets becoming fully depreciated, offset by depreciation and amortization of the long-lived assets acquired at Great Lakes and Jungwoo-Mueller.

Selling, general, and administrative expenses increased for 2016, primarily due to incremental expenses associated with Great Lakes and Jungwoo-Mueller of $5.7 million.  This was offset by a reduction in (i) foreign currency exchange losses of $0.8 million and (ii) a decrease in employment costs, including incentive compensation, of $0.3 million.  In addition, there was $1.9 million of equipment relocation costs and losses on the sale of assets related to the rationalization of Yorkshire recognized in 2015.  The decrease in 2015 was primarily due to (i) a decrease of $10.2 million in selling, general, and administrative expenses related to the sale of Primaflow and (ii) a decrease of $1.5 million in agent commissions as a result of lower sales.  These decreases were offset by (i) selling, general, and administrative expenses of $3.6 million associated with Great Lakes and (ii) higher net periodic pension costs of $1.9 million.  Lastly, during 2014 there was a reduction in accruals related to legal matters of $0.5 million. 
 
 
F-7

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

During 2015, our operating results were positively impacted by a net gain of $15.4 million recorded on the sale of certain assets.  This was offset by $3.4 million of severance charges related to the rationalization of Yorkshire.

Our operating results in 2014 were positively impacted by a net gain of $6.3 million recorded for the sale of our plastic pipe manufacturing assets, the land and building in Portage, Michigan, and our United Kingdom based import distribution business.  This was offset by $7.3 million in severance charges related to the rationalization of Yorkshire.
  
Industrial Metals Segment

The following table compares summary operating results for 2016, 2015, and 2014 for the businesses comprising our Industrial Metals segment:

 
           
Percent Change
 
(In thousands)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
 
                     
Net sales
 
$
521,060
   
$
567,467
   
$
659,847
     
(8.2
)%
   
(14.0
)%
Operating income
   
78,168
     
57,442
     
72,210
     
36.1
     
(20.5
)

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

 
 
2016 vs. 2015
 
 
2015 vs. 2014
 
 
 
 
 
 
 
 
 
 
Net selling price in core product lines
 
(8.0
)
%
 
 
(9.3
)
%
Unit sales volume in core product lines
 
(2.6
)
 
 
 
(8.8
)
 
Acquisitions & new products
 
3.5
 
 
 
 
4.7
 
 
Other
 
(1.1
)
 
 
 
(0.6
)
 
 
 
   
 
 
 
   
 
 
 
(8.2
)
 
 
(14.0
)
%

The decrease in net sales during 2016 was primarily due to (i) lower net selling prices of $44.5 million in the segment's core product lines, primarily brass rod, and (ii) lower unit sales volume of $14.2 million in the segment's core product lines.  These decreases were partially offset by $19.2 million of incremental sales recorded by Sherwood.

The decrease in net sales in 2015 was primarily due to (i) lower net selling prices of $60.0 million in the segment's core product lines, primarily brass rod and forgings, and (ii) lower unit sales volume of $56.5 million in the segment's core product lines.  These decreases were offset by and $20.8 million of sales recorded by Sherwood.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2016, 2015, and 2014:

(In thousands)
 
2016
   
2015
   
2014
 
 
                 
Cost of goods sold
 
$
420,905
   
$
491,567
   
$
572,979
 
Depreciation and amortization
   
8,162
     
7,503
     
6,998
 
Selling, general, and administrative expense
   
13,162
     
10,955
     
7,660
 
Impairment charges
   
663
     
     
 
 
                       
Operating expenses
 
$
442,892
   
$
510,025
   
$
587,637
 



F-8


 
 
Percent of Net Sales
 
 
 
2016
 
 
2015
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
 
80.8
%
 
 
86.6
%
 
 
86.8
%
Depreciation and amortization
 
 
1.6
 
 
 
1.3
 
 
 
1.1
 
Selling, general, and administrative expense
 
 
2.5
 
 
 
2.0
 
 
 
1.2
 
Impairment charges
   
0.1
     
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
85.0
%
 
 
89.9
%
 
 
89.1
%

The decrease in cost of goods sold in 2016 was primarily related to the decrease in the average cost of copper.  The decrease in cost of goods sold in 2015 was primarily due to the decrease in the average cost of copper and the decrease in sales volume in the segment's core product lines, partially offset by the increase in sales volume related to the acquisition of Sherwood.  A sharp decline in copper prices during 2015 put pressure on margins of our businesses accounting for inventory on a FIFO basis.  Depreciation and amortization increased in 2016 and 2015 as a result of depreciation and amortization of long-lived assets for the Sherwood business and recent capital expenditures. Selling, general, and administrative expenses increased in 2016 primarily due to incremental expenses associated with Sherwood of $2.7 million, offset by a decrease in net periodic pension costs of $0.7 million.  The increase in 2015 was a result of higher net periodic pension costs of $3.0 million, as well as incremental selling, general, and administrative expenses of $1.2 million for Sherwood.  This was offset by lower employment costs, including incentive compensation, of $0.4 million. 

During 2016, we recognized fixed asset impairment charges for certain manufacturing equipment of $0.7 million.

Climate Segment

The following table compares summary operating results for 2016, 2015, and 2014 for the businesses comprising our Climate segment:

 
           
Percent Change
 
(In thousands)
2016
 
2015
 
2014
 
2016 vs. 2015
 
2015 vs. 2014
 
 
                     
Net sales
 
$
119,758
   
$
110,727
   
$
99,336
     
8.2
%
   
11.5
%
Operating income
   
17,733
     
12,459
     
11,029
     
42.3
     
13.0
 

Net sales for 2016 increased primarily as a result of incremental sales recorded by Turbotec of $3.5 million and an increase in volume in the segment's other businesses.  Net sales for 2015 increased due to $16.8 million of sales recorded by Turbotec, offset by lower volumes for Refrigeration Products and Fabricated Tube Products.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for 2016, 2015, and 2014:

(In thousands)
 
2016
   
2015
   
2014
 
 
                 
Cost of goods sold
 
$
89,927
   
$
86,894
   
$
79,099
 
Depreciation and amortization
   
2,437
     
2,257
     
1,845
 
Selling, general, and administrative expense
   
9,661
     
9,117
     
7,363
 
 
                       
Operating expenses
 
$
102,025
   
$
98,268
   
$
88,307
 



F-9



 
 
Percent of Net Sales
 
 
 
2016
 
 
2015
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
 
75.1
%
 
 
78.5
%
 
 
79.6
%
Depreciation and amortization
 
 
2.0
 
 
 
2.0
 
 
 
1.9
 
Selling, general, and administrative expense
 
 
8.1
 
 
 
8.2
 
 
 
7.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
 
85.2
%
 
 
88.7
%
 
 
88.9
%

The changes in cost of goods sold in 2016 and 2015 were related to factors consistent with those noted regarding changes in net sales.  Depreciation and amortization increased in 2016 and 2015 as a result of depreciation and amortization of long-lived assets for the business acquired at Turbotec. Selling, general, and administrative expenses increased in 2016 and 2015 primarily due to incremental expenses associated with Turbotec of $0.5 million and $1.8 million, respectively. 

Liquidity and Capital Resources

The following table presents selected financial information for 2016, 2015, and 2014:

(In thousands)
 
2016
   
2015
   
2014
 
 
                 
Increase (decrease) in:
                 
Cash and cash equivalents
 
$
76,473
   
$
(77,290
)
 
$
40,334
 
Property, plant, and equipment, net
   
15,007
     
34,314
     
1,453
 
Total debt
   
11,354
     
(25,434
)
   
6,111
 
Working capital, net of cash and current debt
   
9,781
     
(59,316
)
   
14,460
 
                         
Cash provided by operating activities
   
157,777
     
159,609
     
90,605
 
Cash used in investing activities
   
(53,057
)
   
(190,807
)
   
(38,424
)
Cash used in financing activities
   
(22,561
)
   
(41,258
)
   
(10,551
)

Cash Provided by Operating Activities

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

During 2015, net cash provided by operating activities was primarily attributable to consolidated net income of $88.4 million, depreciation and amortization of $34.6 million, a decrease in receivables of $51.7 million, and a decrease in inventories of $41.1 million.  These cash increases were offset by a decrease in current liabilities of $54.2 million.  These changes were primarily due to decreases in the price of copper and an overall decrease in working capital needs.

During 2014, net cash provided by operating activities was primarily attributable to consolidated net income of $102.5 million and depreciation and amortization of $34.1 million.  These cash increases were offset by increased receivables of $21.4 million, an increase in other assets of $23.7 million, and a decrease in other liabilities of $2.2 million.  These changes were primarily due to increased sales volume in certain businesses and additional working capital needs of acquired businesses.

Cash Used in Investing Activities

The major components of net cash used in investing activities in 2016 included capital expenditures of $37.5 million and $20.5 million for the purchase of a 60.0 percent equity interest in Jungwoo-Mueller, net of cash acquired, and net deposits into restricted cash balances of $5.3 million. These were offset by $10.3 million in proceeds from the sale of assets.

F-10

 
 
The major components of net cash used in investing activities in 2015 included $105.9 million for the acquisition of Turbotec, Sherwood, and Great Lakes, $65.9 million for our investment in MA Industrial JV LLC, the joint venture that acquired Tecumseh Products Company, and capital expenditures of $28.8 million. These cash decreases were offset by $5.5 million in proceeds from the sale of certain assets and net withdrawals from restricted cash balances of $4.3 million.

The major components of net cash used in investing activities in 2014 included $30.1 million for the acquisition of Yorkshire, capital expenditures of $39.2 million, and deposits into restricted cash of $2.9 million.  These decreases were partially offset by $33.8 million proceeds from the sales of assets.

Cash Used in Financing Activities

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

For 2015, net cash used in financing activities consisted primarily of $23.6 million used for the repayment of debt by Mueller-Xingrong and $16.9 million used for payment of regular quarterly dividends to stockholders of the Company.

For 2014, net cash used in financing activities consisted primarily of $16.8 million for payment of regular quarterly dividends to stockholders of the Company, offset by $7.3 million received for the issuance of debt by Mueller-Xingrong.  

Liquidity and Outlook

Management believes that cash provided by operations, funds available under the credit agreement, and cash and cash equivalents on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.  Our current ratio was 4.1 to 1 as of December 31, 2016.

As of December 31, 2016, $73.9 million of our cash and cash equivalents were held by foreign subsidiaries.  All earnings of the foreign subsidiaries are considered to be permanently reinvested, and it is not practicable to compute the potential deferred tax liability associated with these undistributed foreign earnings.  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 $2.20 in 2016, $2.51 in 2015, and $3.12 in 2014.

We have significant environmental remediation obligations which we expect to pay over future years.  Approximately $0.7 million was spent during 2016 for environmental matters.  As of December 31, 2016, we expect to spend $0.7 million in 2017, $0.6 million in 2018, $0.6 million in 2019, $0.7 million in 2020, $0.7 million in 2021, and $18.6 million thereafter for ongoing projects.  

Cash used to fund pension and other postretirement benefit obligations was $3.4 million in 2016 and $2.6 million in 2015.  We anticipate making contributions of approximately $2.1 million to these plans in 2017.

The Company declared and paid a quarterly cash dividend of 10.0 cents per common share in the second, third, and fourth quarters of 2016, and 7.5 cents per share for the first quarter of 2016 and each quarter of fiscal 2015 and 2014.  Payment of dividends in the future is dependent upon our financial condition, cash flows, capital requirements, and other factors.

On January 25, 2017, we announced a special dividend on our common stock payable on March 9, 2017 to stockholders of record on February 28, 2017.  The special dividend will consist of $3.00 in cash and $5.00 in principal amount of the Company's 6% Subordinated Debentures due 2027 for each share of common stock (less any applicable withholding tax).

F-11

 
 
The Debentures will be subordinated to all other funded debt of the Company and will be 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 will also grant each holder of the Debentures the right to require the Company to repurchase such holder's Debentures in the event of a change of control, at declining repurchase premiums during the first five years. Interest will be payable semiannually on September 1 and March 1, commencing September 1, 2017.

The effect of the special dividend will be to decrease stockholders' equity by approximately $460.0 million, increase long-term debt by approximately $287.0 million, and decrease cash by approximately$173.0 million.

Capital Expenditures

During 2016 our capital expenditures were $37.5 million and related primarily to upgrading equipment and implementing new manufacturing technologies in our copper tube mills and the acquisition of a copper tube mill in Cedar City, Utah.  We anticipate investing approximately $25.0-35.0 million for capital expenditures in 2017.

Long-Term Debt

On December 6, 2016, the Company entered into a credit agreement (Credit Agreement) providing for an unsecured $350.0 million revolving credit facility which matures on December 6, 2021.  Funds borrowed under the Credit Agreement may be used for working capital purposes and other general corporate purposes.  In addition, the Credit Agreement provides a sublimit of $50.0 million for the issuance of letters of credit, a sublimit of $25.0 million for loans and letters of credit made in certain foreign currencies, and a swing  line loan sublimit of $15.0 million.  Outstanding letters of credit and foreign currency loans reduce borrowing availability under the Credit Agreement.  Total borrowings under the Credit Agreement were $200.0 million at December 31, 2016.

On March 23, 2016, Mueller-Xingrong entered into a new secured revolving credit arrangement with a total borrowing capacity of RMB 150 million (or approximately $21.7 million).  In addition, Mueller-Xingrong occasionally finances working capital through various accounts receivable and bank draft discount arrangements.  Borrowings are secured by the real property and equipment and bank draft receivables of Mueller-Xingrong and bear interest at the latest base-lending rate published by the People's Bank of China, which was 4.35 percent as of December 31, 2016.  Total borrowings at Mueller-Xingrong were $7.9 million as of December 31, 2016.

Jungwoo-Mueller has several secured revolving credit arrangements with a total borrowing capacity of KRW 35.7 billion (or approximately $30.3 million).  Borrowings are secured by the real property and equipment of Jungwoo-Mueller and were bearing interest at an average rate of 3.05 percent as of December 31, 2016.  Total borrowings at Jungwoo-Mueller were $12.7 million as of December 31, 2016.

As of December 31, 2016, the Company's total debt was $227.4 million or 19.5 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 31, 2016, we were in compliance with all of our debt covenants.

Share Repurchase Program
The Company's Board of Directors has extended, until October 2017, its authorization to repurchase up to 20 million shares of the Company's common stock through open market transactions or through privately negotiated transactions.  The Company has no obligation to repurchase any shares and 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 31, 2016, the Company had repurchased approximately 4.7 million shares under this authorization.  

F-12

 
 
Contractual Cash Obligations

The following table presents payments due by the Company under contractual obligations with minimum firm commitments as of December 31, 2016:

         
Payments Due by Year
 
(In millions)
 
Total
   
2017
     
2018-2019
     
2020-2021
   
Thereafter
 
                                   
Total debt
   
$
228.3
   
$
13.7
   
$
10.4
   
$
201.7
   
$
2.5
 
Consulting agreement
     
0.7
     
0.7
     
     
     
 
Operating leases
     
31.0
     
7.4
     
8.9
     
5.2
     
9.5
 
Heavy machinery and equipment commitments
     
1.7
     
1.7
     
     
     
 
Purchase commitments (1)
     
598.4
     
597.8
     
0.3
     
0.3
     
 
Interest payments (2)
     
28.5
     
5.8
     
10.6
     
12.1
     
 
                                           
Total contractual cash obligations
   
$
888.6
   
$
627.1
   
$
30.2
   
$
219.3
   
$
12.0
 
                                           
(1)  The Company has contractual supply commitments for raw materials totaling $572.6 million at year-end prices; these contracts contain variable pricing based on Comex and the London Metals Exchange. These commitments are for purchases of raw materials that are expected to be consumed in the ordinary course of business. 
       
(2)  These payments represent interest on variable-rate debt based on rates in effect at December 31, 2016.
 
 
 

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

Market Risks

The Company is exposed to market risks from changes in raw material and energy costs, interest rates, and foreign currency exchange rates.  To reduce such risks, we may periodically use financial instruments.  Hedging transactions are authorized and executed pursuant to policies and procedures.  Further, we do not buy or sell financial instruments for trading purposes.  A discussion of the Company's accounting for derivative instruments and hedging activities is included in "Note 1 - Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements.

Cost and Availability of Raw Materials and Energy

Raw materials, primarily copper and brass, represent the largest component of the Company's variable costs of production.  The cost of these materials is subject to global market fluctuations caused by factors beyond our control.  Significant increases in the cost of metal, to the extent not reflected in prices for our finished products, or the lack of availability could materially and adversely affect our business, results of operations and financial condition.

The Company occasionally enters into forward fixed-price arrangements with certain customers.  We may utilize futures contracts to hedge risks associated with these forward fixed-price arrangements.  We may also utilize futures contracts to manage price risk associated with inventory.  Depending on the nature of the hedge, changes in the fair value of the futures contracts will either be offset against the change in fair value of the inventory through earnings or recognized as a component of accumulated other comprehensive income (AOCI) 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 31, 2016, we held open futures contracts to purchase approximately $10.2 million of copper over the next 12 months related to fixed-price sales orders and to sell approximately $28.7 million of copper over the next three months related to copper inventory.
 
 

 
F-13

 
 
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 31, 2016.

Interest Rates

The Company had variable-rate debt outstanding of $212.2 million at December 31, 2016 and $216.0 million at December 26, 2015.  At these borrowing levels, 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 exposures on floating-rate debt are based on LIBOR and the base-lending rate published by the People's Bank of China.  There was $15.2 million of fixed-rate debt outstanding as of December 31, 2016, and no fixed-rate debt outstanding as of December 26, 2015.

Included in the variable-rate debt outstanding is the Company's $200.0 million Credit Agreement which bears interest based on LIBOR.  We have reduced our exposure to increases in LIBOR by entering into interest rate swap contracts.  The fair value of these contracts has been recorded in the Consolidated Balance Sheets, and a portion of the related gains and losses on the contracts are deferred in stockholders' equity as a component of AOCI.  Deferred gains or losses on the contracts will be recognized in interest expense in the period in which the related interest payment being hedged is expensed.  The interest rate swap agreement had an effective date of January 12, 2015.

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 31, 2016, we had open forward contracts with a financial institution to sell approximately 3.2 million euros, 15.6 million Swedish kronor, 7.6 million Norwegian kroner, and 1.2 million U.S. dollars through April 2017.

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, the South Korean won, and the Chinese renminbi.  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 $271.6 million at December 31, 2016 and $249.5 million at December 26, 2015.  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 31, 2016 and December 26, 2015 amounted to $27.2 million and $25.0 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, the Chinese renminbi, and the South Korean won.  During 2016, the value of the British pound decreased approximately 17 percent, the Mexican peso decreased approximately 16 percent, the Canadian dollar increased approximately three percent, the Chinese renminbi decreased approximately seven percent, and the South Korean won remained consistent, relative to the U.S. dollar.  The resulting net foreign currency translation losses were recorded as a component of AOCI.
 
 

 
F-14

 
 
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 31, 2016 and December 26, 2015, our inventory valuation reserves were $6.9 million and $6.2 million, respectively.  The expense recognized in each of these periods was immaterial to our Consolidated Financial Statements.

Impairment of Goodwill

As of December 31, 2016, we had $124.0 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 2016 we recorded $0.4 million in additional goodwill associated with our Jungwoo-Mueller acquisition and $4.1 million in additional goodwill associated with a deferred tax liability resulting from a basis difference in the long-lived assets acquired from Great Lakes.
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, we proceed to a two-step process to test goodwill for impairment.  The first step is to compare the fair value of the reporting unit to its carrying value (including attributable goodwill).  If this process indicates that the fair value is less than the carrying value, a second step of impairment testing is performed to measure the potential amount of goodwill impairment loss.  In step two, we allocate the fair value of the reporting unit determined in step one to its assets and liabilities as if it had just been acquired in a business combination and the purchase price was equivalent to the fair value of the reporting unit.  The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is referred to as the implied fair value of goodwill.  The implied fair value of goodwill is then compared to the actual carrying value of goodwill.  If the implied fair value is less than the carrying value, we would be required to recognize an impairment loss for that excess.
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, Canadian Operations, European Operations, Jungwoo-Mueller, Westermeyer, and Turbotec.
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.
 
F-15

 
 
We evaluated each reporting unit during the fourth quarters of 2016 and 2015, as applicable. The estimated fair value of each of these reporting units exceeded its carrying values in 2016 and 2015, and we do not believe that any of these reporting units were at risk of impairment as of December 31, 2016.

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 analyses of cleanup 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.  Accrued environmental liabilities are not reduced by potential insurance reimbursements.

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 included in other income, net 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

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

Cautionary Statement Regarding Forward-Looking Information

This Annual Report contains various forward-looking statements and includes assumptions concerning the Company's operations, future results, and prospects.  These forward-looking statements are based on current expectations and are subject to risk and uncertainties, and may be influenced by factors that could cause actual outcomes and results to be materially different from those predicted.  The forward-looking statements reflect knowledge and information available as of the date of preparation of the Annual Report, and the Company undertakes no obligation to update these forward-looking statements.  We identify the forward-looking statements by using the words "anticipates," "believes," "expects," "intends" or similar expressions in such statements.

F-16

 
 
In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important economic, political, and technological factors, among others, which could cause actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions.  In addition to those factors discussed under "Risk Factors" in this Annual Report on Form 10-K, such factors include: (i) the current and projected future business environment, including interest rates and capital and consumer spending; (ii) the domestic housing and commercial construction industry environment; (iii) availability and price fluctuations in commodities (including copper, natural gas, and other raw materials, including crude oil that indirectly affects plastic resins); (iv) competitive factors and competitor responses to the Company's initiatives; (v) stability of government laws and regulations, including taxes; (vi) availability of financing; and (vii) continuation of the environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates.
 
F-17

MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2016, December 26, 2015, and December 27, 2014

(In thousands, except per share data)
 
2016
   
2015
   
2014
 
 
                 
Net sales
 
$
2,055,622
   
$
2,100,002
   
$
2,364,227
 
 
                       
Cost of goods sold
   
1,723,499
     
1,809,702
     
2,043,719
 
Depreciation and amortization
   
35,133
     
34,608
     
33,735
 
Selling, general, and administrative expense
   
137,499
     
130,358
     
131,740
 
Gain on sale of assets
   
     
(15,376
)
   
(6,259
)
Impairment charges
   
6,778
     
     
 
Severance
   
     
3,442
     
7,296
 
 
                       
Operating income
   
152,713
     
137,268
     
153,996
 
 
                       
Interest expense
   
(7,387
)
   
(7,667
)
   
(5,740
)
Other income (expense), net
   
704
     
2,188
     
(243
)
 
                       
Income before income taxes
   
146,030
     
131,789
     
148,013
 
 
                       
Income tax expense
   
(48,137
)
   
(43,382
)
   
(45,479
)
Income from unconsolidated affiliates, net of tax
   
1,861
     
     
 
 
                       
Consolidated net income
   
99,754
     
88,407
     
102,534
 
 
                       
Less net income attributable to noncontrolling interests
   
(27
)
   
(543
)
   
(974
)
 
                       
Net income attributable to Mueller Industries, Inc.
 
$
99,727
   
$
87,864
   
$
101,560
 
 
                       
Weighted average shares for basic earnings per share
   
56,572
     
56,316
     
56,042
 
Effect of dilutive stock-based awards
   
597
     
652
     
726
 
 
                       
Adjusted weighted average shares for diluted earnings per share
   
57,169
     
56,968
     
56,768
 
 
                       
Basic earnings per share
 
$
1.76
   
$
1.56
   
$
1.81
 
 
                       
Diluted earnings per share
 
$
1.74
   
$
1.54
   
$
1.79
 
 
                       
Dividends per share
 
$
0.375
   
$
0.300
   
$
0.300
 
 
                       
See accompanying notes to consolidated financial statements.
 
 
F-18


MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2016, December 26, 2015, and December 27, 2014


(In thousands)
 
2016
   
2015
   
2014
 
 
                 
Consolidated net income
 
$
99,754
   
$
88,407
   
$
102,534
 
 
                       
Other comprehensive (loss) income, net of tax:
                       
Foreign currency translation
   
(27,767
)
   
(19,108
)
   
(6,766
)
Net change with respect to derivative instruments and hedging activities (1)
   
1,709
     
(1,056
)
   
(2,499
)
Net change in minimum pension and postretirement obligation adjustments (2)
   
5,383
     
6,735
     
(23,006
)
Attributable to unconsolidated affiliates (3)
   
5,975
     
     
 
Other, net
   
159
     
(49
)
   
15
 
 
                       
Total other comprehensive loss
   
(14,541
)
   
(13,478
)
   
(32,256
)
 
                       
Consolidated comprehensive income
   
85,213
     
74,929
     
70,278
 
Comprehensive loss (income) attributable to noncontrolling interests
   
2,548
     
867
     
(822
)
 
                       
Comprehensive income attributable to Mueller Industries, Inc.
 
$
87,761
   
$
75,796
   
$
69,456
 
 
                       
See accompanying notes to consolidated financial statements.
 
   
(1) Net of taxes of $(917) in 2016, $575 in 2015, and $1,362 in 2014
 
   
(2) Net of taxes of $(2,606) in 2016, $(3,221) in 2015, and $10,180 in 2014
 
   
(3) Net of taxes of $(3,375) in 2016
 

 
F-19

MUELLER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2016 and December 26, 2015

(In thousands, except share data)
2016
 
2015
 
Assets
       
Current assets:
       
Cash and cash equivalents
 
 
$
351,317
 
 
 
$
274,844
 
Accounts receivable, less allowance for doubtful accounts of $637 in 2016 and $623 in 2015
 
   
256,291
 
 
   
251,571
 
Inventories
 
   
242,013
 
 
   
239,378
 
Other current assets
 
   
44,702
 
 
   
34,608
 
 
 
       
 
       
Total current assets
 
   
894,323
 
 
   
800,401
 
 
 
       
 
       
Property, plant, and equipment, net
 
   
295,231
 
 
   
280,224
 
Goodwill, net
 
   
123,993
 
 
   
120,252
 
Intangible assets, net
     
36,168
       
40,636
 
Investment in unconsolidated affiliates
     
77,110
       
65,900
 
Other noncurrent assets
 
   
20,651
 
 
   
31,388
 
 
 
       
 
       
Total Assets
 
 
$
1,447,476
 
 
 
$
1,338,801
 
 
 
       
 
       
Liabilities
               
Current liabilities:
               
Current portion of debt
 
 
$
13,655
 
 
 
$
11,760
 
Accounts payable
 
   
103,175
 
 
   
88,051
 
Accrued wages and other employee costs
 
   
35,121
 
 
   
35,636
 
Other current liabilities
 
   
67,041
 
 
   
73,982
 
 
 
       
 
       
Total current liabilities
 
   
218,992
 
 
   
209,429
 
 
 
       
 
       
Long-term debt, less current portion
 
   
213,709