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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
March 28, 2020
Commission file number
1-6770
mlilogocoppera04.jpg
MUELLER INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware
25-0790410
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
150 Schilling Boulevard
Suite 100
 
Collierville
Tennessee
38017
(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
Common Stock
MLI
NYSE

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.
Yes      No  

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).  
Yes      No  

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.
Large accelerated filer
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



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
 
$
602,919

 
$
611,781

 
 
 
 
 
Cost of goods sold
 
508,715

 
511,393

Depreciation and amortization
 
11,039

 
10,555

Selling, general, and administrative expense
 
42,752

 
40,653

Asset impairments
 
3,035

 

Litigation settlement, net
 
(21,933
)
 

 
 
 
 
 
Operating income
 
59,311

 
49,180

 
 
 
 
 
Interest expense
 
(5,379
)
 
(6,954
)
Other income (expense), net
 
278

 
(172
)
 
 
 
 
 
Income before income taxes
 
54,210

 
42,054

 
 
 
 
 
Income tax expense
 
(14,144
)
 
(9,546
)
Loss from unconsolidated affiliates, net of foreign tax
 
(6,115
)
 
(15,369
)
 
 
 
 
 
Consolidated net income
 
33,951

 
17,139

 
 
 
 
 
Net income attributable to noncontrolling interests
 
(1,536
)
 
(1,416
)
 
 
 
 
 
Net income attributable to Mueller Industries, Inc.
 
$
32,415

 
$
15,723

 
 
 
 
 
Weighted average shares for basic earnings per share
 
55,875

 
55,728

Effect of dilutive stock-based awards
 
583

 
526

 
 
 
 
 
Adjusted weighted average shares for diluted earnings per share
 
56,458

 
56,254

 
 
 
 
 
Basic earnings per share
 
$
0.58

 
$
0.28

 
 
 
 
 
Diluted earnings per share
 
$
0.57

 
$
0.28

 
 
 
 
 
Dividends per share
 
$
0.10

 
$
0.10


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
 
$
33,951

 
$
17,139

 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 

 
 

Foreign currency translation
 
(21,255
)
 
6,057

Net change with respect to derivative instruments and hedging activities, net of tax of $960 and $(343)
 
(3,357
)
 
1,257

Net change in pension and postretirement obligation adjustments, net of tax of $(243) and $107
 
739

 
(246
)
Attributable to unconsolidated affiliates, net of tax of $(548) and $(13)
 
1,887

 
47

 
 
 
 
 
Total other comprehensive (loss) income, net
 
(21,986
)
 
7,115

 
 
 
 
 
Consolidated comprehensive income
 
11,965

 
24,254

Comprehensive income attributable to noncontrolling interests
 
(945
)
 
(1,620
)
 
 
 
 
 
Comprehensive income attributable to Mueller Industries, Inc.
 
$
11,020

 
$
22,634


See accompanying notes to condensed consolidated financial statements.





4



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
 
$
154,283

 
$
97,944

Accounts receivable, less allowance for doubtful accounts of $1,613 in 2020 and $770 in 2019
 
308,836

 
269,943

Inventories
 
270,119

 
292,107

Other current assets
 
40,888

 
33,778

 
 
 
 
 
Total current assets
 
774,126

 
693,772

 
 
 
 
 
Property, plant, and equipment, net
 
366,828

 
363,128

Operating lease right-of-use assets
 
18,632

 
26,922

Goodwill, net
 
160,820

 
153,276

Intangible assets, net
 
56,582

 
60,082

Investments in unconsolidated affiliates
 
44,683

 
48,363

Other assets
 
24,268

 
25,397

 
 
 
 
 
Total assets
 
$
1,445,939

 
$
1,370,940

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of debt
 
$
7,591

 
$
7,530

Accounts payable
 
94,251

 
85,644

Accrued wages and other employee costs
 
33,103

 
41,673

Current portion of operating lease liabilities
 
5,047

 
5,250

Other current liabilities
 
89,907

 
94,190

 
 
 
 
 
Total current liabilities
 
229,899

 
234,287

 
 
 
 
 
Long-term debt, less current portion
 
468,234

 
378,724

Pension liabilities
 
6,756

 
9,126

Postretirement benefits other than pensions
 
12,437

 
13,082

Environmental reserves
 
19,875

 
19,972

Deferred income taxes
 
19,513

 
21,094

Noncurrent operating lease liabilities
 
14,124

 
22,388

Other noncurrent liabilities
 
9,801

 
10,131

 
 
 
 
 
Total liabilities
 
780,639

 
708,804

 
 
 
 
 
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
 
802

 
802

Additional paid-in capital
 
280,197

 
278,609

Retained earnings
 
929,810

 
903,070

Accumulated other comprehensive loss
 
(90,165
)
 
(68,770
)
Treasury common stock, at cost
 
(474,957
)
 
(470,243
)
 
 
 
 
 
Total Mueller Industries, Inc. stockholders' equity
 
645,687

 
643,468

Noncontrolling interests
 
19,613

 
18,668

 
 
 
 
 
Total equity
 
665,300

 
662,136

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Total liabilities and equity
 
$
1,445,939

 
$
1,370,940


See accompanying notes to condensed consolidated financial statements.

5


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
 
$
33,951

 
$
17,139

Reconciliation of consolidated net income to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
11,119

 
10,635

Stock-based compensation expense
 
1,985

 
2,007

Provision for doubtful accounts receivable
 
1,100

 
(38
)
Loss from unconsolidated affiliates
 
6,115

 
15,369

Loss on disposals of properties
 
32

 
37

Impairment charges
 
3,035

 

Deferred income tax expense (benefit)
 
213

 
(225
)
Changes in assets and liabilities, net of effects of business acquired:
 
 

 
 

Receivables
 
(46,291
)
 
(34,029
)
Inventories
 
17,450

 
(13,335
)
Other assets
 
8,010

 
(7,530
)
Current liabilities
 
(10,821
)
 
(15,885
)
Other liabilities
 
(1,643
)
 
741

Other, net
 
3,796

 
441

 
 
 
 
 
Net cash provided by (used in) operating activities
 
28,051

 
(24,673
)
 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(17,094
)
 
(6,834
)
Acquisition of business, net of cash acquired
 
(15,407
)
 

Investments in unconsolidated affiliates
 

 
(8,000
)
Proceeds from sales of assets
 

 
4

 
 
 
 
 
Net cash used in investing activities
 
(32,501
)
 
(14,830
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Dividends paid to stockholders of Mueller Industries, Inc.
 

 
(5,574
)
Repurchase of common stock
 
(5,574
)
 
(1,763
)
Issuance of long-term debt
 
110,000

 
100,557

Repayments of long-term debt
 
(20,572
)
 
(30,472
)
Issuance (repayment) of debt by consolidated joint ventures, net
 
189

 
(2,121
)
Net cash received (used) to settle stock-based awards
 
464

 
(175
)
 
 
 
 
 
Net cash provided by financing activities
 
84,507

 
60,452

 
 
 
 
 
Effect of exchange rate changes on cash
 
(6,135
)
 
919

 
 
 
 
 
Increase in cash, cash equivalents, and restricted cash
 
73,922

 
21,868

Cash, cash equivalents, and restricted cash at the beginning of the period
 
98,042

 
77,138

 
 
 
 
 
Cash, cash equivalents, and restricted cash at the end of the period
 
$
171,964

 
$
99,006


See accompanying notes to condensed consolidated financial statements.

6


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
 
$
802

 
$
802

 
 
 
 
 
Balance at end of period
 
$
802

 
$
802

 
 
 
 
 
Additional paid-in capital:
 
 
 
 
Balance at beginning of period
 
$
278,609

 
$
276,849

Issuance of shares under incentive stock option plans
 
(397
)
 
(56
)
Stock-based compensation expense
 
1,985

 
2,007

 
 
 
 
 
Balance at end of period
 
$
280,197

 
$
278,800

 
 
 
 
 
Retained earnings: 
 
 
 
 
Balance at beginning of period
 
$
903,070

 
$
824,737

Net income attributable to Mueller Industries, Inc.
 
32,415

 
15,723

Dividends paid or payable to stockholders of Mueller Industries, Inc.
 
(5,675
)
 
(5,662
)
 
 
 
 
 
Balance at end of period
 
$
929,810

 
$
834,798

 
 
 
 
 
Accumulated other comprehensive loss:
 
 
 
 
Balance at beginning of period
 
$
(68,770
)
 
$
(79,792
)
Total other comprehensive (loss) income attributable to Mueller Industries, Inc.
 
(21,395
)
 
6,911

 
 
 
 
 
Balance at end of period
 
$
(90,165
)
 
$
(72,881
)

7


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
 
$
(470,243
)
 
$
(474,240
)
Issuance of shares under incentive stock option plans
 
860

 
(118
)
Repurchase of common stock
 
(5,574
)
 
(1,763
)
 
 
 
 
 
Balance at end of period
 
$
(474,957
)
 
$
(476,121
)
 
 
 
 
 
Noncontrolling interests:
 
 
 
 

Balance at beginning of period
 
$
18,668

 
$
14,904

Net income attributable to noncontrolling interests
 
1,536

 
1,416

Foreign currency translation
 
(591
)
 
204

 
 
 
 
 
Balance at end of period
 
$
19,613

 
$
16,524


See accompanying notes to condensed consolidated financial statements.


8



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.


9



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.


10



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
 
$
385,013

 
$
131,202

 
$
93,272

 
$
(6,568
)
 
$
602,919

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
319,164

 
114,797

 
71,093

 
3,661

 
508,715

Depreciation and amortization
 
5,699

 
2,002

 
2,466

 
872

 
11,039

Selling, general, and administrative expense
 
20,439

 
3,221

 
6,699

 
12,393

 
42,752

Asset impairments
 
3,035

 

 

 

 
3,035

Litigation settlement, net
 

 

 

 
(21,933
)
 
(21,933
)
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
36,676

 
11,182

 
13,014

 
(1,561
)
 
59,311

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(5,379
)
Other income (expense), net
 
 

 
 

 
 

 
 

 
278

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
54,210


 
 
For the Quarter Ended March 30, 2019
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
376,492

 
$
150,875

 
$
89,834

 
$
(5,420
)
 
$
611,781

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
324,796

 
126,699

 
66,829

 
(6,931
)
 
511,393

Depreciation and amortization
 
5,550

 
1,844

 
2,313

 
848

 
10,555

Selling, general, and administrative expense
 
17,897

 
3,145

 
8,306

 
11,305

 
40,653

 
 
 
 
 
 
 
 
 
 
 
Operating income
 
28,249

 
19,187

 
12,386

 
(10,642
)
 
49,180

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(6,954
)
Other loss, net
 
 

 
 

 
 

 
 

 
(172
)
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
42,054



11



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
 
$
302,129

 
$

 
$

 
$
302,129

Brass rod and forgings
 

 
99,670

 

 
99,670

OEM components, tube & assemblies
 
25,295

 
10,882

 
36,573

 
72,750

Valves and plumbing specialties
 
57,589

 

 

 
57,589

Other
 

 
20,650

 
56,699

 
77,349

 
 
 
 
 
 
 
 
 
 
 
385,013

 
131,202

 
93,272

 
609,487

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(6,568
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
602,919


 
 
For the Quarter Ended March 30, 2019
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
307,521

 
$

 
$

 
$
307,521

Brass rod and forgings
 

 
115,924

 

 
115,924

OEM components, tube & assemblies
 
7,283

 
13,037

 
37,243

 
57,563

Valves and plumbing specialties
 
61,688

 

 

 
61,688

Other
 

 
21,914

 
52,591

 
74,505

 
 
 
 
 
 
 
 
 
 
 
376,492

 
150,875

 
89,834

 
617,201

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(5,420
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
611,781




Note 5 – Cash, Cash Equivalents, and Restricted Cash

(In thousands)
 
March 28,
2020
 
December 28,
2019
 
 
 
 
 
Cash & cash equivalents
 
$
154,283

 
$
97,944

Restricted cash included within other current assets
 
17,579

 

Restricted cash included within other assets
 
102

 
98

 
 
 
 
 
Total cash, cash equivalents, and restricted cash
 
$
171,964

 
$
98,042



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.


12



Note 6 – Inventories

(In thousands)
 
March 28,
2020
 
December 28,
2019
 
 
 
 
 
Raw materials and supplies
 
$
75,407

 
$
85,769

Work-in-process
 
47,309

 
48,814

Finished goods
 
154,913

 
163,842

Valuation reserves
 
(7,510
)
 
(6,318
)
 
 
 
 
 
Inventories
 
$
270,119

 
$
292,107



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
 
$
276

 
$
1,435

 
Other current liabilities
 
$
16

 
$
50

Commodity contracts - losses
 
Other current assets
 
(237
)
 
(12
)
 
Other current liabilities
 
(12,558
)
 
(159
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives (1)
 
 
 
$
39

 
$
1,423

 
 
 
$
(12,542
)
 
$
(109
)
(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
 
(9,476
)
 
1,442



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
 
$
(3,706
)
 
Cost of goods sold
 
$
378

Other
 
(29
)
 
Other
 

 
 
 
 
 
 
 
Total
 
$
(3,735
)
 
Total
 
$
378



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
 
$
1,352

 
Cost of goods sold
 
$
(79
)
Other
 
(16
)
 
Other
 

 
 
 
 
 
 
 
Total
 
$
1,336

 
Total
 
$
(79
)


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

The fair value of long-term debt at March 28, 2020 approximates the carrying value on that date.  The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities.  The fair value of long-term debt is classified as level 2 within the fair value hierarchy.  This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.  

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. 


15



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
 
$
195,030

 
$
198,559

Noncurrent assets
 
94,650

 
87,218

Current liabilities
 
145,153

 
147,801

Noncurrent liabilities
 
55,644

 
51,219


 
 
For the Quarter Ended
(In thousands)
 
March 28, 2020
 
March 30, 2019
 
 
 
 
 
Net sales
 
$
106,998

 
$
113,327

Gross profit 
 
13,486

 
8,006

Net loss
 
(12,685
)
 
(29,207
)


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
 
858

 
1,467

Expected return on plan assets
 
(1,495
)
 
(2,076
)
Amortization of net loss
 
460

 
530

 
 
 
 
 
Net periodic benefit income
 
$
(177
)
 
$
(79
)
 
 
 
 
 
Other benefits:
 
 

 
 

Service cost
 
$
61

 
$
64

Interest cost
 
109

 
153

Amortization of prior service credit
 
(226
)
 
(226
)
Amortization of net gain
 
(53
)
 
(8
)
 
 
 
 
 
Net periodic benefit income
 
$
(109
)
 
$
(17
)


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

18



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