UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | Commission file number | ||
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) | |
(901 ) 753-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of exchange on which registered |
Indicate by 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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of the Registrant’s common stock outstanding as of April 17, 2020 was 56,772,346 .
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Quarterly Period Ended March 28, 2020
As used in this report, the terms “Company,” “Mueller,” and “Registrant” mean Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole, unless the context indicates otherwise.
INDEX
Page Number | ||
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Quarter Ended | ||||||||
(In thousands, except per share data) | March 28, 2020 | March 30, 2019 | ||||||
Net sales | $ | $ | ||||||
Cost of goods sold | ||||||||
Depreciation and amortization | ||||||||
Selling, general, and administrative expense | ||||||||
Asset impairments | ||||||||
Litigation settlement, net | ( | ) | ||||||
Operating income | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Other income (expense), net | ( | ) | ||||||
Income before income taxes | ||||||||
Income tax expense | ( | ) | ( | ) | ||||
Loss from unconsolidated affiliates, net of foreign tax | ( | ) | ( | ) | ||||
Consolidated net income | ||||||||
Net income attributable to noncontrolling interests | ( | ) | ( | ) | ||||
Net income attributable to Mueller Industries, Inc. | $ | $ | ||||||
Weighted average shares for basic earnings per share | ||||||||
Effect of dilutive stock-based awards | ||||||||
Adjusted weighted average shares for diluted earnings per share | ||||||||
Basic earnings per share | $ | $ | ||||||
Diluted earnings per share | $ | $ | ||||||
Dividends per share | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
3
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Quarter Ended | ||||||||
(In thousands) | March 28, 2020 | March 30, 2019 | ||||||
Consolidated net income | $ | $ | ||||||
Other comprehensive (loss) income, net of tax: | ||||||||
Foreign currency translation | ( | ) | ||||||
Net change with respect to derivative instruments and hedging activities, net of tax of $960 and $(343) | ( | ) | ||||||
Net change in pension and postretirement obligation adjustments, net of tax of $(243) and $107 | ( | ) | ||||||
Attributable to unconsolidated affiliates, net of tax of $(548) and $(13) | ||||||||
Total other comprehensive (loss) income, net | ( | ) | ||||||
Consolidated comprehensive income | ||||||||
Comprehensive income attributable to noncontrolling interests | ( | ) | ( | ) | ||||
Comprehensive income attributable to Mueller Industries, Inc. | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
(In thousands, except share data) | March 28, 2020 | December 28, 2019 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, less allowance for doubtful accounts of $1,613 in 2020 and $770 in 2019 | ||||||||
Inventories | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property, plant, and equipment, net | ||||||||
Operating lease right-of-use assets | ||||||||
Goodwill, net | ||||||||
Intangible assets, net | ||||||||
Investments in unconsolidated affiliates | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Current portion of debt | $ | $ | ||||||
Accounts payable | ||||||||
Accrued wages and other employee costs | ||||||||
Current portion of operating lease liabilities | ||||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt, less current portion | ||||||||
Pension liabilities | ||||||||
Postretirement benefits other than pensions | ||||||||
Environmental reserves | ||||||||
Deferred income taxes | ||||||||
Noncurrent operating lease liabilities | ||||||||
Other noncurrent liabilities | ||||||||
Total liabilities | ||||||||
Equity | ||||||||
Mueller Industries, Inc. stockholders' equity: | ||||||||
Preferred stock - $1.00 par value; shares authorized 5,000,000; none outstanding | ||||||||
Common stock - $.01 par value; shares authorized 100,000,000; issued 80,183,004; outstanding 56,752,790 in 2020 and 56,949,246 in 2019 | ||||||||
Additional paid-in capital | ||||||||
Retained earnings | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Treasury common stock, at cost | ( | ) | ( | ) | ||||
Total Mueller Industries, Inc. stockholders' equity | ||||||||
Noncontrolling interests | ||||||||
Total equity | ||||||||
Commitments and contingencies | ||||||||
Total liabilities and equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Quarter Ended | ||||||||
(In thousands) | March 28, 2020 | March 30, 2019 | ||||||
Cash flows from operating activities | ||||||||
Consolidated net income | $ | $ | ||||||
Reconciliation of consolidated net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | ||||||||
Stock-based compensation expense | ||||||||
Provision for doubtful accounts receivable | ( | ) | ||||||
Loss from unconsolidated affiliates | ||||||||
Loss on disposals of properties | ||||||||
Impairment charges | ||||||||
Deferred income tax expense (benefit) | ( | ) | ||||||
Changes in assets and liabilities, net of effects of business acquired: | ||||||||
Receivables | ( | ) | ( | ) | ||||
Inventories | ( | ) | ||||||
Other assets | ( | ) | ||||||
Current liabilities | ( | ) | ( | ) | ||||
Other liabilities | ( | ) | ||||||
Other, net | ||||||||
Net cash provided by (used in) operating activities | ( | ) | ||||||
Cash flows from investing activities | ||||||||
Capital expenditures | ( | ) | ( | ) | ||||
Acquisition of business, net of cash acquired | ( | ) | ||||||
Investments in unconsolidated affiliates | ( | ) | ||||||
Proceeds from sales of assets | ||||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities | ||||||||
Dividends paid to stockholders of Mueller Industries, Inc. | ( | ) | ||||||
Repurchase of common stock | ( | ) | ( | ) | ||||
Issuance of long-term debt | ||||||||
Repayments of long-term debt | ( | ) | ( | ) | ||||
Issuance (repayment) of debt by consolidated joint ventures, net | ( | ) | ||||||
Net cash received (used) to settle stock-based awards | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Effect of exchange rate changes on cash | ( | ) | ||||||
Increase in cash, cash equivalents, and restricted cash | ||||||||
Cash, cash equivalents, and restricted cash at the beginning of the period | ||||||||
Cash, cash equivalents, and restricted cash at the end of the period | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
For the Quarter Ended | ||||||||
(In thousands) | March 28, 2020 | March 30, 2019 | ||||||
Common stock: | ||||||||
Balance at beginning of period | $ | $ | ||||||
Balance at end of period | $ | $ | ||||||
Additional paid-in capital: | ||||||||
Balance at beginning of period | $ | $ | ||||||
Issuance of shares under incentive stock option plans | ( | ) | ( | ) | ||||
Stock-based compensation expense | ||||||||
Balance at end of period | $ | $ | ||||||
Retained earnings: | ||||||||
Balance at beginning of period | $ | $ | ||||||
Net income attributable to Mueller Industries, Inc. | ||||||||
Dividends paid or payable to stockholders of Mueller Industries, Inc. | ( | ) | ( | ) | ||||
Balance at end of period | $ | $ | ||||||
Accumulated other comprehensive loss: | ||||||||
Balance at beginning of period | $ | ( | ) | $ | ( | ) | ||
Total other comprehensive (loss) income attributable to Mueller Industries, Inc. | ( | ) | ||||||
Balance at end of period | $ | ( | ) | $ | ( | ) | ||
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MUELLER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(In thousands) | For the Quarter Ended | |||||||
March 28, 2020 | March 30, 2019 | |||||||
Treasury stock: | ||||||||
Balance at beginning of period | $ | ( | ) | $ | ( | ) | ||
Issuance of shares under incentive stock option plans | ( | ) | ||||||
Repurchase of common stock | ( | ) | ( | ) | ||||
Balance at end of period | $ | ( | ) | $ | ( | ) | ||
Noncontrolling interests: | ||||||||
Balance at beginning of period | $ | $ | ||||||
Net income attributable to noncontrolling interests | ||||||||
Foreign currency translation | ( | ) | ||||||
Balance at end of period | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
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MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K, including the annual financial statements incorporated therein.
The accompanying unaudited interim financial statements include all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented herein.
Note 1 – Recent Accounting Standards
Adopted
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Disclosure Framework- Measurement of Credit Losses on Financial Instruments. The ASU significantly changes the current incurred credit loss model under U.S. GAAP, which delays the recognition of credit losses until it is probable a loss has been incurred, to a current expected credit losses model which requires immediate recognition of management estimates of credit losses. The Company adopted the ASU during the first quarter of 2020 using a retrospective approach. The adoption of the ASU did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. For employers that sponsor defined benefit pension and/or other postretirement benefit plans, the ASU eliminates requirements for certain disclosures that are no longer considered cost beneficial, requires new disclosures related to the weighted-average interest crediting rate for cash balance plans and explanations for significant gains and losses related to changes in benefit obligations, and clarifies the requirements for entities that provide aggregate disclosures for two or more plans. The Company adopted the ASU during the first quarter of 2020 using a retrospective approach. The adoption of the ASU did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU eliminates requirements to disclose the amount and reasons for transfers between level 1 and level 2 of the fair value hierarchy, but requires public companies to disclose changes in unrealized gains and losses for the period included in other comprehensive income (OCI) for recurring level 3 fair value measurements or instruments held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements. The Company adopted the ASU during the first quarter of 2020. The guidance on changes in unrealized gains and losses for the period included in OCI for recurring level 3 measurements, the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements, and the narrative description of measurement uncertainty is applied prospectively. All other amendments are applied retrospectively. The adoption of the ASU did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Note 2 – Earnings per Common Share
Basic per share amounts have been computed based on the average number of common shares outstanding. Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options and vesting of restricted stock awards, computed using the treasury stock method.
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Note 3 – Acquisitions
Shoals Tubular, Inc.
On January 17, 2020, the Company entered into a stock purchase agreement pursuant to which the Company acquired all of the outstanding stock of Shoals Tubular, Inc. (STI) for approximately $15.4 million, net of working capital adjustments. The total purchase price consisted of $15.4 million in cash at closing. STI is a manufacturer of brazed manifolds, headers, and distributor assemblies used primarily by manufacturers of residential heating and air conditioning units. The acquired business is reported within and complements the Company’s existing businesses in the Climate segment.
The fair value of the tangible assets acquired totaled $5.5 million, consisting primarily of property, plant, and equipment of $3.2 million, inventories of $1.7 million, and accounts receivable of $0.6 million. The fair value of the liabilities assumed totaled $0.3 million, consisting primarily of accounts payable of $0.1 million and other current liabilities of $0.2 million. Of the remaining purchase price, $10.2 million was allocated to tax-deductible goodwill and intangible assets. The purchase price allocation is provisional as of March 28, 2020 and subject to change upon completion of the final valuation of the long-lived assets and working capital during the measurement period.
Note 4 – Segment Information
Each of the Company’s reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered as follows:
Piping Systems
Piping Systems is composed of the following operating segments: Domestic Piping Systems Group, Great Lakes Copper, Heatlink Group, Die-Mold, European Operations, Trading Group, and Jungwoo-Mueller (the Company’s South Korean joint venture). The Domestic Piping Systems Group manufactures copper tube, fittings, and line sets. These products are manufactured in the U.S., sold in the U.S., and exported to markets worldwide. Outside the U.S., Great Lakes Copper manufactures copper tube and line sets in Canada and sells the products primarily in the U.S. and Canada. Heatlink Group produces a complete line of products for PEX plumbing and radiant systems in Canada and sells these products in Canada and the U.S. Die-Mold manufactures PEX and other plumbing-related fittings and plastic injection tooling in Canada and sells these products in Canada and the U.S. European Operations manufacture copper tube in the U.K. which is sold primarily in Europe. The Trading Group manufactures pipe nipples and resells brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products in the U.S. and Mexico. Jungwoo-Mueller manufactures copper-based joining products that are sold worldwide. The Piping Systems segment’s products are sold primarily to plumbing, refrigeration, and air-conditioning wholesalers, hardware wholesalers and co-ops, building product retailers, and air-conditioning original equipment manufacturers (OEMs).
Industrial Metals
Industrial Metals is composed of the following operating segments: Brass Rod & Copper Bar Products, Impacts & Micro Gauge, and Brass Value-Added Products. These businesses manufacture brass rod, impact extrusions, and forgings, as well as a wide variety of end products including plumbing brass, automotive components, valves, fittings, and gas assemblies. These products are manufactured in the U.S. and sold primarily to OEMs in the U.S., many of which are in the industrial, transportation, construction, heating, ventilation, and air-conditioning, plumbing, refrigeration, and energy markets.
Climate
Climate is composed of the following operating segments: Refrigeration Products, Fabricated Tube Products, Westermeyer, Turbotec, ATCO, Linesets, Inc., and STI. These domestic businesses manufacture and fabricate valves, assemblies, high pressure components, coaxial heat exchangers, insulated HVAC flexible duct systems, line sets, brazed manifolds, headers, and distributor assemblies primarily for the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.
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Summarized segment information is as follows:
For the Quarter Ended March 28, 2020 | ||||||||||||||||||||
(In thousands) | Piping Systems | Industrial Metals | Climate | Corporate and Eliminations | Total | |||||||||||||||
Net sales | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Cost of goods sold | ||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Selling, general, and administrative expense | ||||||||||||||||||||
Asset impairments | ||||||||||||||||||||
Litigation settlement, net | ( | ) | ( | ) | ||||||||||||||||
Operating income | ( | ) | ||||||||||||||||||
Interest expense | ( | ) | ||||||||||||||||||
Other income (expense), net | ||||||||||||||||||||
Income before income taxes | $ | |||||||||||||||||||
For the Quarter Ended March 30, 2019 | ||||||||||||||||||||
(In thousands) | Piping Systems | Industrial Metals | Climate | Corporate and Eliminations | Total | |||||||||||||||
Net sales | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Cost of goods sold | ( | ) | ||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||
Selling, general, and administrative expense | ||||||||||||||||||||
Operating income | ( | ) | ||||||||||||||||||
Interest expense | ( | ) | ||||||||||||||||||
Other loss, net | ( | ) | ||||||||||||||||||
Income before income taxes | $ | |||||||||||||||||||
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The following tables represent a disaggregation of revenue from contracts with customers, along with the reportable segment for each category:
For the Quarter Ended March 28, 2020 | ||||||||||||||||
(In thousands) | Piping Systems | Industrial Metals | Climate | Total | ||||||||||||
Tube and fittings | $ | $ | $ | $ | ||||||||||||
Brass rod and forgings | ||||||||||||||||
OEM components, tube & assemblies | ||||||||||||||||
Valves and plumbing specialties | ||||||||||||||||
Other | ||||||||||||||||
Intersegment sales | ( | ) | ||||||||||||||
Net sales | $ | |||||||||||||||
For the Quarter Ended March 30, 2019 | ||||||||||||||||
(In thousands) | Piping Systems | Industrial Metals | Climate | Total | ||||||||||||
Tube and fittings | $ | $ | $ | $ | ||||||||||||
Brass rod and forgings | ||||||||||||||||
OEM components, tube & assemblies | ||||||||||||||||
Valves and plumbing specialties | ||||||||||||||||
Other | ||||||||||||||||
Intersegment sales | ( | ) | ||||||||||||||
Net sales | $ | |||||||||||||||
Note 5 – Cash, Cash Equivalents, and Restricted Cash
(In thousands) | March 28, 2020 | December 28, 2019 | ||||||
Cash & cash equivalents | $ | $ | ||||||
Restricted cash included within other current assets | ||||||||
Restricted cash included within other assets | ||||||||
Total cash, cash equivalents, and restricted cash | $ | $ | ||||||
Amounts included in restricted cash relate to required deposits in brokerage accounts that facilitate the Company’s hedging activities as well as imprest funds for the Company’s self-insured workers’ compensation program.
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Note 6 – Inventories
(In thousands) | March 28, 2020 | December 28, 2019 | ||||||
Raw materials and supplies | $ | $ | ||||||
Work-in-process | ||||||||
Finished goods | ||||||||
Valuation reserves | ( | ) | ( | ) | ||||
Inventories | $ | $ | ||||||
Note 7 – Financial Instruments
Derivative Instruments and Hedging Activities
The Company’s earnings and cash flows are subject to fluctuations due to changes in commodity prices, foreign currency exchange rates, and interest rates. The Company uses derivative instruments such as commodity futures contracts, foreign currency forward contracts, and interest rate swaps to manage these exposures.
All derivatives are recognized in the Condensed Consolidated Balance Sheets at their fair value. On the date the derivative contract is entered into, it is either a) designated as a hedge of (i) a forecasted transaction or the variability of cash flow to be paid (cash flow hedge) or (ii) the fair value of a recognized asset or liability (fair value hedge), or b) not designated in a hedge accounting relationship, even though the derivative contract was executed to mitigate an economic exposure (economic hedge), as the Company does not enter into derivative contracts for trading purposes. Changes in the fair value of a derivative that is qualified, designated, and highly effective as a cash flow hedge are recorded in stockholders’ equity within AOCI, to the extent effective, until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated, and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of undesignated derivatives executed as economic hedges are reported in current earnings.
The Company documents all relationships between derivative instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value hedges to specific assets and liabilities in the Condensed Consolidated Balance Sheets and linking cash flow hedges to specific forecasted transactions or variability of cash flow.
The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. When a derivative instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable of occurring, hedge accounting is discontinued prospectively in accordance with the derecognition criteria for hedge accounting.
Commodity Futures Contracts
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 the Company’s control. The Company occasionally enters into forward fixed-price arrangements with certain customers; the risk of these arrangements is generally managed with commodity futures contracts. These futures contracts have been designated as cash flow hedges.
At March 28, 2020, the Company held open futures contracts to purchase approximately $78.9 million of copper over the next 12 months related to fixed price sales orders. The fair value of those futures contracts was a $12.5 million net loss position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy). Undesignated derivative contracts constitute $9.5 million of this total. In the next 12 months, the Company will reclassify into earnings realized gains or losses relating to cash flow hedges. At March 28, 2020, this amount was approximately $3.0 million of deferred net losses, net of tax.
The Company may also enter into futures contracts to protect the value of inventory against market fluctuations. At March 28, 2020, the Company held open futures contracts to sell approximately $1.3 million of copper over the next 12 months related to
13
copper inventory. The fair value of those futures contracts was a $39 thousand net gain position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).
The Company presents its derivative assets and liabilities in the Condensed Consolidated Balance Sheets on a net basis by counterparty. The following table summarizes the location and fair value of the derivative instruments and disaggregates the net derivative assets and liabilities into gross components on a contract-by-contract basis:
Asset Derivatives | Liability Derivatives | |||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||
(In thousands) | Balance Sheet Location | March 28, 2020 | December 28, 2019 | Balance Sheet Location | March 28, 2020 | December 28, 2019 | ||||||||||||||
Commodity contracts - gains | Other current assets | $ | $ | Other current liabilities | $ | $ | ||||||||||||||
Commodity contracts - losses | Other current assets | ( | ) | ( | ) | Other current liabilities | ( | ) | ( | ) | ||||||||||
Total derivatives (1) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
(1) Does not include the impact of cash collateral provided to counterparties.
The following tables summarize the effects of derivative instruments on the Company’s Condensed Consolidated Statements of Income:
For the Quarter Ended | ||||||||
(In thousands) | Location | March 28, 2020 | March 30, 2019 | |||||
Undesignated derivatives: | ||||||||
(Loss) gain on commodity contracts (nonqualifying) | Cost of goods sold | ( | ) | |||||
The following tables summarize amounts recognized in and reclassified from AOCI during the period:
For the Quarter Ended March 28, 2020 | ||||||||||
(In thousands) | Loss Recognized in AOCI (Effective Portion), Net of Tax | Classification Gains (Losses) | Loss Reclassified from AOCI (Effective Portion), Net of Tax | |||||||
Cash flow hedges: | ||||||||||
Commodity contracts | $ | ( | ) | Cost of goods sold | $ | |||||
Other | ( | ) | Other | |||||||
Total | $ | ( | ) | Total | $ | |||||
14
Changes recognized in and reclassified from AOCI (continued):
For the Quarter Ended March 30, 2019 | ||||||||||
(In thousands) | Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax | Classification Gains (Losses) | Gain Reclassified from AOCI (Effective Portion), Net of Tax | |||||||
Cash flow hedges: | ||||||||||
Commodity contracts | $ | Cost of goods sold | $ | ( | ) | |||||
Other | ( | ) | Other | |||||||
Total | $ | Total | $ | ( | ) | |||||
The Company enters into futures and forward contracts that closely match the terms of the underlying transactions. As a result, the ineffective portion of the qualifying open hedge contracts through March 28, 2020 was not material to the Condensed Consolidated Statements of Income.
The Company primarily enters into International Swaps and Derivatives Association master netting agreements with major financial institutions that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company does not offset fair value amounts for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral. At March 28, 2020 and December 28, 2019, the Company had recorded restricted cash in other current assets of $16.8 million and $0.2 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.
Long-Term Debt
Note 8 – Investments in Unconsolidated Affiliates
Tecumseh
The Company owns a 50 percent interest in an unconsolidated affiliate that acquired Tecumseh Products Company LLC (Tecumseh). The Company also owns a 50 percent interest in a second unconsolidated affiliate that provides financing to Tecumseh. These investments are recorded using the equity method of accounting, as the Company can exercise significant influence but does not own a majority equity interest or otherwise control the respective entities. Under the equity method of accounting, these investments are stated at initial cost and are adjusted for subsequent additional investments and the Company’s proportionate share of earnings or losses and distributions.
The Company records its proportionate share of the investees’ net income or loss, net of foreign taxes, one quarter in arrears as income (loss) from unconsolidated affiliates, net of foreign tax, in the Condensed Consolidated Statements of Income and its proportionate share of the investees’ other comprehensive income (loss), net of income taxes, in the Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Changes in Equity. The U.S. tax effect of the Company’s proportionate share of Tecumseh’s income or loss is recorded in income tax expense in the Condensed Consolidated Statements of Income. In general, the equity investment in unconsolidated affiliates is equal to the current equity investment plus the investees’ net accumulated losses.
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The following tables present summarized financial information derived from the Company’s equity method investees’ combined consolidated financial statements, which are prepared in accordance with U.S. GAAP.
(In thousands) | March 28, 2020 | December 28, 2019 | ||||||
Current assets | $ | $ | ||||||
Noncurrent assets | ||||||||
Current liabilities | ||||||||
Noncurrent liabilities | ||||||||
For the Quarter Ended | ||||||||
(In thousands) | March 28, 2020 | March 30, 2019 | ||||||
Net sales | $ | $ | ||||||
Gross profit | ||||||||
Net loss | ( | ) | ( | ) | ||||
The Company’s loss from unconsolidated affiliates, net of foreign tax, for the quarters ended March 28, 2020 and March 30, 2019 included net losses of $6.3 million and $14.6 million, respectively, for Tecumseh.
Mueller Middle East
On December 30, 2015, the Company entered into a joint venture agreement with Cayan Ventures and Bahrain Mumtalakat Holding Company to build a copper tube mill in Bahrain. The business operates and brands its products under the Mueller Industries family of brands. The Company has invested approximately $5.0 million of cash to date and is the technical and marketing lead with a 40 percent ownership in the joint venture.
The Company’s loss from unconsolidated affiliates, net of foreign tax, for the quarters ended March 28, 2020 and March 30, 2019 included net income of $0.2 million and net losses of $0.8 million, respectively, for Mueller Middle East.
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Note 9 – Benefit Plans
The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for certain of its employees. The components of net periodic benefit cost (income) are as follows:
For the Quarter Ended | ||||||||
(In thousands) | March 28, 2020 | March 30, 2019 | ||||||
Pension benefits: | ||||||||
Service cost | $ | $ | ||||||
Interest cost | ||||||||
Expected return on plan assets | ( | ) | ( | ) | ||||
Amortization of net loss | ||||||||
Net periodic benefit income | $ | ( | ) | $ | ( | ) | ||
Other benefits: | ||||||||
Service cost | $ | $ | ||||||
Interest cost | ||||||||
Amortization of prior service credit | ( | ) | ( | ) | ||||
Amortization of net gain | ( | ) | ( | ) | ||||
Net periodic benefit income | $ | ( | ) | $ | ( | ) | ||
The components of net periodic benefit cost (income) other than the service cost component are included in other income (expense), net in the Condensed Consolidated Statements of Income.
Note 10 – Commitments and Contingencies
The Company is involved in certain litigation as a result of claims that arose in the ordinary course of business, which management believes will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company may also realize the benefit of certain legal claims and litigation in the future; these gain contingencies are not recognized in the Condensed Consolidated Financial Statements.
Environmental
Non-operating Properties
Southeast Kansas Sites
The Kansas Department of Health and Environment (KDHE) has contacted the Company regarding environmental contamination at three former smelter sites in Kansas (Altoona, East La Harpe, and Lanyon). The Company is not a successor to the companies that operated these smelter sites, but is exploring possible settlement with KDHE and other potentially responsible parties (PRP) in order to avoid litigation.
Altoona. Another PRP conducted a site investigation of the Altoona site under a consent decree with KDHE and submitted a removal site evaluation report recommending a remedy. The remedial design plan, which covers both on-site and certain off-site cleanup costs, was approved by the KDHE in 2016. Construction of the remedy was completed in 2018.
East La Harpe. At the East La Harpe site, the Company and two other PRPs conducted a site study evaluation under KDHE supervision and prepared a site cleanup plan approved by KDHE. In 2016, the corporate parent (Peabody Energy) of a third party that the Company understands may owe indemnification obligations to one of the other PRPs (Blue Tee) in connection with the East La Harpe site filed for protection under Chapter 11 of the U.S. Bankruptcy Code. KDHE has extended the deadline for the PRPs to develop a repository design plan to allow for wetlands permitting to take place. In December 2018, KDHE provided a
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draft agreement which contemplates the use of funds KDHE obtained from two other parties (Peabody Energy and Blue Tee) to fund part of the remediation, and removes Blue Tee from the PRPs’ agreement with KDHE. The Company is currently negotiating the terms of that draft agreement.
Lanyon. With respect to the Lanyon Site, in 2016, the Company received a general notice letter from the United States Environmental Protection Agency (EPA) asserting that the Company is a PRP, which the Company has denied. EPA issued an interim record of decision in 2017 and has been remediating properties at the site.
The Company’s reserve for its proportionate share of the remediation costs associated with these three Southeast Kansas sites is $5.6 million.
Shasta Area Mine Sites
Mining Remedial Recovery Company (MRRC), a wholly owned subsidiary, owns certain inactive mines in Shasta County, California. MRRC has continued a program, begun in the late 1980s, of implementing various remedial measures, including sealing mine portals with concrete plugs in portals that were discharging water. The sealing program achieved significant reductions in the metal load in discharges from these adits; however, additional reductions are required pursuant to an order issued by the California Regional Water Quality Control Board (QCB). In response to a 1996 QCB Order, MRRC completed a feasibility study in 1997 describing measures designed to mitigate the effects of acid rock drainage. In December 1998, the QCB modified the 1996 order extending MRRC’s time to comply with water quality standards. In September 2002, the QCB adopted a new order requiring MRRC to adopt Best Management Practices (BMP) to control discharges of acid mine drainage, and again extended the time to comply with water quality standards until September 2007. During that time, implementation of BMP further reduced impacts of acid rock drainage; however, full compliance has not been achieved. The QCB is presently renewing MRRC’s discharge permit and will concurrently issue a new order. It is expected that the new 10 -year permit will include an order requiring continued implementation of BMP through 2030 to address residual discharges of acid rock drainage. The Company currently estimates that it will spend between approximately $12.7 million and $17.7 million for remediation at these sites over the next 30 years.
Lead Refinery Site
U.S.S. Lead Refinery, Inc. (Lead Refinery), a non-operating wholly owned subsidiary of MRRC, has conducted corrective action and interim remedial activities (collectively, Site Activities) at Lead Refinery’s East Chicago, Indiana site pursuant to the Resource Conservation and Recovery Act since December 1996. Although the Site Activities have been substantially concluded, Lead Refinery is required to perform monitoring and maintenance-related activities pursuant to a post-closure permit issued by the Indiana Department of Environmental Management effective as of March 2, 2013. Approximate costs to comply with the post-closure permit, including associated general and administrative costs, are estimated at between $1.8 million and $2.3 million over the next 17 years.
On April 9, 2009, pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the U.S. Environmental Protection Agency (EPA) added the Lead Refinery site and surrounding properties to the National Priorities List (NPL). On July 17, 2009, Lead Refinery received a written notice from the EPA indicating that it may be a PRP under CERCLA due to the release or threat of release of hazardous substances including lead into properties surrounding the Lead Refinery NPL site. The EPA identified two other PRPs in connection with that matter. In November 2012, the EPA adopted a remedy for the surrounding properties and in September 2014, the EPA announced that it had entered into a settlement with the two other PRPs whereby they will pay approximately $26.0 million to fund the cleanup of approximately 300 properties surrounding the Lead Refinery NPL site (zones 1 and 3 of operable unit 1) and perform certain remedial action tasks.
On November 8, 2016, the Company, its subsidiary Arava Natural Resources Company, Inc. (Arava), and Arava’s subsidiary MRRC each received general notice letters from the EPA asserting that they may be PRPs in connection with the Lead Refinery NPL site. The Company, Arava, and MRRC have denied liability for any remedial action and response costs associated with the Lead Refinery NPL site. In June 2017, the EPA requested that Lead Refinery conduct, and the Company fund, a remedial investigation and feasibility study of operable unit 2 of the Lead Refinery NPL site pursuant to a proposed administrative settlement agreement and order on consent. The Company and Lead Refinery entered into that agreement in September 2017. The Company has made a capital contribution to Lead Refinery to conduct the remedial investigation and feasibility study with respect to operable unit 2 and has provided financial assurance in the amount of $1.0 million. The EPA has also asserted its position that Mueller is a responsible party for the Lead Refinery NPL site, and accordingly is responsible for a share of remedial action and response costs at the site and in the adjacent residential area.
In January 2018, the EPA issued two unilateral administrative orders (UAOs) directing the Company, Lead Refinery, and four other PRPs to conduct soil and interior remediation of certain residences at the Lead Refinery NPL site (zones 2 and 3 of operable
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unit 1). The Company and Lead Refinery have reached agreement with the four other PRPs to implement these two UAOs, with the Company agreeing to pay, on an interim basis, (i) an estimated $4.5 million (subject to potential change through a future reallocation process) of the approximately $25.0 million the PRPs currently estimate it will cost to implement the UAOs, which estimate is subject to change, and (ii) $2.0 million relating to past costs incurred by other PRPs for work conducted at the site, as well as the possibility of up to $0.7 million in further payments for ongoing work by those PRPs, $0.4 million of which has been incurred by those PRPs and paid for by the Company to date. As of March 28, 2020, the Company has made payments of approximately $7.1 million related to the aforementioned agreement with the other PRPs. The Company disputes that it was properly named in the UAOs, and has reserved its rights to petition the EPA for reimbursement of any costs incurred to comply with the UAOs upon the completion of the work required therein. In October 2017, a group of private plaintiffs sued the Company, Arava, MRRC, and Lead Refinery, along with other defendants, in a private tort action relating to the site; the Company, Arava, and MRRC were voluntarily dismissed from that litigation without prejudice in March 2018. A second civil action asserting similar claims was filed against the Company, Arava, MRRC, and Lead Refinery in September 2018. At this juncture, the Company is unable to determine the likelihood of a material adverse outcome or the amount or range of a potential loss in excess of the current reserve with respect to any remedial action or litigation relating to the Lead Refinery NPL site, either at Lead Refinery’s former operating site (operable unit 2) or the adjacent residential area (operable unit 1), including, but not limited to, EPA oversight costs for which EPA may attempt to seek reimbursement from the Company, and past costs for which other PRPs may attempt to seek contribution from the Company.
Bonita Peak Mining District
Following an August 2015 spill from the Gold King Mine into the Animas River near Silverton, Colorado, the EPA listed the Bonita Peak Mining District on the NPL. Said listing was finalized in September 2016. The Bonita Peak Mining District encompasses 48 mining sites within the Animas River watershed, including the Sunnyside Mine, the American Tunnel, and the Sunbank Group. On or about July 25, 2017, Washington Mining Company (Washington Mining) (a wholly-owned subsidiary of the Company’s wholly-owned subsidiary, Arava), received a general notice letter from the EPA stating that Washington Mining may be a PRP under CERCLA in connection with the Bonita Peak Mining District site and therefore responsible for the remediation of certain portions of the site, along with related costs incurred by the EPA. Shortly thereafter, the Company received a substantively identical letter asserting that it may be a PRP at the site and similarly responsible for the cleanup of certain portions of the site. The general notice letters identify one other PRP at the site, and do not require specific action by Washington Mining or the Company at this time. At this juncture, the Company is unable to determine the likelihood of a materially adverse outcome or the amount or range of a potential loss with respect to any remedial action related to the Bonita Peak Mining District NPL site.
Operating Properties
Mueller Copper Tube Products, Inc.
In 1999, Mueller Copper Tube Products, Inc. (MCTP), a wholly