Mueller Industries(MLI) - 2020 Q4 - Annual Report

Part I Business Mueller Industries manufactures copper, brass, aluminum, and plastic products across three segments, driven by construction markets - The company manufactures a broad range of products including copper tube and fittings, brass and copper alloy rod, aluminum forgings, and plastic PEX tube and fittings[13] - Business operations are organized into three reportable segments: Piping Systems, Industrial Metals, and Climate[14] - Key market drivers for the company's products are new housing starts, commercial construction, and repair and remodeling projects[16] Piping Systems Segment The Piping Systems segment manufactures and distributes copper tube, fittings, and PEX plumbing systems for plumbing, refrigeration, and HVAC markets - This segment manufactures and distributes a wide range of products including copper tube, fittings, line sets, PEX plumbing systems, and steel pipe nipples[17][18][19] - Products are sold to plumbing and refrigeration wholesalers, manufactured housing and RV distributors, building material retailers, and air-conditioning OEMs[22] - Major competitors in the U.S. copper tube market include Cerro Flow Products LLC and Cambridge-Lee Industries LLC, alongside foreign competitors and plastic substitute products[24] Industrial Metals Segment The Industrial Metals segment produces brass rod, copper bar, and forgings for OEMs in industrial, construction, HVAC, plumbing, and refrigeration markets - This segment manufactures brass rod, copper bar, aluminum and brass forgings, and fluid control solutions for OEMs in various industrial markets[25][26][27][28] - The primary competitor in the brass rod market is Wieland Chase, LLC, a subsidiary of Wieland-Werke AG, along with other domestic and foreign companies[29] Climate Segment The Climate segment manufactures HVAC and refrigeration components like valves, fabricated tube products, and heat exchangers for OEM and wholesale channels - This segment produces components like refrigeration valves, fabricated tubular products, coaxial heat exchangers, and insulated HVAC flexible duct systems[30][31] - The segment's sales are divided approximately evenly between OEM and wholesale channels within the U.S. HVAC and refrigeration markets[32] Human Capital Resources As of December 26, 2020, Mueller Industries employed approximately 5,007 people, with good employee relations and a focus on health and safety Union Contract Expiration Dates | Location | Expiration Date | | :--- | :--- | | Port Huron, Michigan (Local 218 IAM) | May 7, 2023 | | Wynne, Arkansas (MCTP) | November 30, 2024 | | Port Huron, Michigan (Local 44 UAW) | June 26, 2022 | | Wynne, Arkansas (B&K LLC) | June 28, 2021 | | North Wales, Pennsylvania | July 31, 2021 | | Belding, Michigan | September 17, 2021 | | Fulton, Mississippi | October 2, 2021 | | Waynesboro, Tennessee | November 3, 2021 | - The company employed approximately 5,007 people as of year-end 2020, with about 1,678 being union members[33] Raw Material and Energy Availability The company sources primary raw materials through short-term contracts, acknowledging pricing volatility or supply disruptions could affect operations - A substantial portion of base metal requirements (primarily copper) is obtained through short-term supply contracts and the open market[36] - The company has commitments from refined copper producers for a portion of its 2021 metal requirements[38] Environmental Proceedings The company maintains a $24.0 million reserve for environmental matters, anticipating $4.3 million in compliance spending over three years Environmental Provisions and Reserves | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Provision for environmental matters | $4.2 million | $1.7 million | $2.0 million | | Reserve for environmental matters (Year-End) | $24.0 million | $20.9 million | N/A | Risk Factors The company faces risks from raw material and energy cost volatility, economic conditions, intense competition, foreign currency fluctuations, and the COVID-19 pandemic - Increases in the cost of raw materials (copper, brass, zinc, aluminum) and energy could negatively impact operating margins if not successfully passed on to customers[45] - The business is sensitive to economic conditions in the housing and commercial construction industries, as well as changes in interest rates and credit availability[47][48] - Competitive pressures from imports, substitute products (e.g., plastics), and new technologies could adversely affect demand and profitability[50] - Fluctuations in foreign exchange rates (particularly the British pound, Mexican peso, Canadian dollar, and South Korean won) could impact competitiveness and reported results[51] - The COVID-19 pandemic poses risks including decreased product demand, manufacturing disruptions, and supply chain interruptions[64][66] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Properties The company owns and leases numerous manufacturing, distribution, and office properties globally, reported to be in satisfactory condition - The company's major operating facilities are located in the U.S., Canada, Mexico, England, and South Korea, with a mix of owned and leased properties[68][69][70] Legal Proceedings The company is involved in litigation arising in the ordinary course of business, with material details in Note 14 of the financial statements - The company is involved in litigation from claims arising in the ordinary course of business[71] Mine Safety Disclosures This item is not applicable to the company - Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Mueller Industries' common stock trades on the NYSE, with quarterly dividends and an extended share repurchase program - The company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol "MLI"[76] - A quarterly cash dividend of $0.10 per share was paid throughout fiscal 2019 and 2020[77] - The Board of Directors extended the authorization to repurchase up to 20 million shares of common stock until July 2021. As of December 26, 2020, approximately 6.4 million shares have been repurchased under this authorization since its inception in 1999[78] Selected Financial Data This section provides a five-year summary of key financial data, including 2020 net sales of $2.40 billion and net income of $139.5 million Five-Year Selected Financial Data (In thousands, except per share data) | | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $2,398,043 | $2,430,616 | $2,507,878 | $2,266,073 | $2,055,622 | | Operating income | $245,838 | $191,403 | $172,969 | $150,807 | $154,401 | | Net income | $139,493 | $100,972 | $104,459 | $85,598 | $99,727 | | Diluted EPS | $2.47 | $1.79 | $1.82 | $1.49 | $1.74 | | Cash dividends per share | $0.40 | $0.40 | $0.40 | $3.40 | $0.38 | | Total assets | $1,528,568 | $1,370,940 | $1,369,549 | $1,320,173 | $1,447,476 | | Long-term debt | $286,593 | $378,724 | $489,597 | $448,592 | $213,709 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, net sales decreased 1.3% to $2.4 billion, while operating income increased 28.4% to $245.8 million, driven by improved mix and a litigation settlement Results of Operations Consolidated net sales for 2020 decreased 1.3% to $2.40 billion, while operating income increased 28.4% to $245.8 million due to improved mix and a litigation gain Consolidated Results Summary (2020 vs. 2019) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,398.0M | $2,430.6M | (1.3)% | | Operating Income | $245.8M | $191.4M | 28.4% | | Net Income | $139.5M | $101.0M | 38.2% | - The decrease in 2020 net sales was primarily caused by lower unit sales volume ($130.9 million), partly due to COVID-19 impacts, offset by sales from acquisitions ($67.1 million) and higher selling prices ($38.1 million)[140] - Gross margin improved from 16.3% in 2019 to 18.0% in 2020, attributed to a better product sales mix, lower manufacturing costs, and reduced employee healthcare costs[143] - A significant contributor to operating income was a $22.1 million gain from the settlement of a claim under the Deepwater Horizon Economic and Property Damage Settlement Program[146] Liquidity and Capital Resources The company's liquidity remains strong with $245.1 million in operating cash flow, used for acquisitions, capital expenditures, and debt reduction Cash Flow Summary (In thousands) | Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $245,073 | $200,544 | $167,892 | | Net cash used in investing activities | $(125,622) | $(40,457) | $(187,096) | | Net cash used in financing activities | $(92,264) | $(139,694) | $(28,269) | - Investing activities in 2020 were dominated by $72.6 million for the purchases of Kessler and Shoals and $43.9 million in capital expenditures[176] - Financing activities in 2020 included net debt repayments of $55.0 million ($245.0 million repayment vs. $190.0 million issuance) and $22.3 million in dividend payments[179] - As of December 26, 2020, $92.8 million of the company's cash and cash equivalents were held by foreign subsidiaries[183] Contractual Cash Obligations As of December 26, 2020, total contractual cash obligations were $1.31 billion, with $906.5 million due in 2021, largely from purchase commitments Contractual Cash Obligations as of December 26, 2020 (In millions) | Obligation | Total | 2021 | 2022-2023 | 2024-2025 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Total debt | $328.1 | $41.3 | $0.4 | $0.4 | $286.0 | | Operating and capital leases | $34.7 | $8.3 | $12.6 | $6.4 | $7.4 | | Purchase commitments | $831.5 | $830.7 | $0.6 | $0.2 | — | | Interest payments | $107.1 | $17.6 | $34.1 | $34.1 | $21.3 | | Total | $1,311.9 | $906.5 | $47.7 | $43.0 | $314.7 | Market Risks The company is exposed to market risks from raw material costs, interest rates, and foreign currency, using derivatives to hedge these exposures - The company uses futures contracts to hedge risks associated with forward fixed-price customer arrangements and to manage price risk for its inventory[198] - At year-end 2020, the company had open futures contracts to purchase $5.4 million of copper and to sell $49.4 million of copper to manage price risks[198] - Primary foreign currency exposures are to the Canadian dollar, British pound sterling, Mexican peso, and South Korean won. The company generally does not hedge its net investments in foreign subsidiaries[202] Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Market Risks' discussion within the MD&A, detailing exposure to raw material, interest rate, and foreign currency fluctuations - Disclosures about market risk are contained under the caption "Financial Review" commencing on page F-2[85] Financial Statements and Supplementary Data The company's audited consolidated financial statements and supplementary data are included in a separate section of the Annual Report on Form 10-K - The required financial statements are contained in a separate section of this Annual Report on Form 10-K commencing on page F-17[86] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None Controls and Procedures Management concluded the company's disclosure controls and internal control over financial reporting were effective as of December 26, 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures are effective as of December 26, 2020[90] - Management concluded that internal control over financial reporting was effective as of December 26, 2020, based on the COSO framework[93] - The 2020 acquisitions of Shoals Tubular, Inc. and Kessler Sales & Distribution were excluded from the scope of management's assessment of internal controls[92] - No material changes were made to the company's internal control over financial reporting during the fourth quarter of 2020[95] Other Information The company reports no other information for this item - None Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Required information is incorporated by reference from the Company's Proxy Statement for its 2021 Annual Meeting of Stockholders[110] Executive Compensation Information concerning executive compensation is incorporated by reference from the 2021 Proxy Statement - Required information is incorporated by reference from the Company's Proxy Statement for its 2021 Annual Meeting of Stockholders[112] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides equity compensation plan information as of December 26, 2020, with other details from the 2021 Proxy Statement Equity Compensation Plan Information (as of Dec 26, 2020) | Plan Category | Securities to be issued upon exercise (thousands) | Weighted average exercise price | Securities remaining available for future issuance (thousands) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 793 | $26.81 | 1,635 | | Total | 793 | $26.81 | 1,635 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement - Required information is incorporated by reference from the Company's Proxy Statement for its 2021 Annual Meeting of Stockholders[115] Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - Required information is incorporated by reference from the Company's Proxy Statement for its 2021 Annual Meeting of Stockholders[116] Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K report, including financial statements, schedules, and various exhibits - This item lists all financial statements, schedules, and exhibits filed with the annual report[119][120] Form 10-K Summary The company provides no summary for this item - None Financial Statements and Notes Consolidated Statements of Income For 2020, net sales were $2.40 billion, operating income increased to $245.8 million, and net income rose to $139.5 million Consolidated Income Statement Highlights (In thousands) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $2,398,043 | $2,430,616 | $2,507,878 | | Operating income | $245,838 | $191,403 | $172,969 | | Net income attributable to Mueller Industries, Inc. | $139,493 | $100,972 | $104,459 | | Diluted earnings per share | $2.47 | $1.79 | $1.82 | Consolidated Balance Sheets As of December 26, 2020, total assets were $1.53 billion, total liabilities $727.5 million, and stockholders' equity increased to $776.7 million Consolidated Balance Sheet Highlights (In thousands) | Metric | Dec 26, 2020 | Dec 28, 2019 | | :--- | :--- | :--- | | Total current assets | $825,361 | $693,772 | | Total assets | $1,528,568 | $1,370,940 | | Total current liabilities | $339,643 | $234,287 | | Total liabilities | $727,508 | $708,804 | | Total Mueller Industries, Inc. stockholders' equity | $776,745 | $643,468 | Consolidated Statements of Cash Flows In 2020, net cash from operating activities was $245.1 million, with cash used for investing and financing activities, resulting in a $29.3 million cash increase Consolidated Cash Flow Highlights (In thousands) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $245,073 | $200,544 | $167,892 | | Net cash used in investing activities | $(125,622) | $(40,457) | $(187,096) | | Net cash used in financing activities | $(92,264) | $(139,694) | $(28,269) | | Increase (decrease) in cash | $29,334 | $20,904 | $(49,425) | Note 2 – Acquisitions In 2020, the company acquired Kessler for $57.2 million and Shoals Tubular for $15.4 million, reported in Piping Systems and Climate segments respectively - On August 3, 2020, the company acquired the Kessler distribution business for a total purchase price of $57.2 million in cash[288] - On January 17, 2020, the company acquired all outstanding stock of Shoals Tubular, Inc. for approximately $15.4 million in cash[289] Note 12 – Debt As of December 26, 2020, total debt was $328.1 million, primarily 6.00% Subordinated Debentures and revolving credit facility outstanding Debt Composition (In thousands) | Instrument | 2020 | 2019 | | :--- | :--- | :--- | | Subordinated Debentures (6.00%, due 2027) | $284,479 | $284,479 | | Revolving Credit Facility (1.52%, due 2021) | $35,000 | $90,000 | | Other | $8,616 | $12,313 | | Total Debt | $328,095 | $386,792 | - The company has an unsecured $350.0 million revolving credit facility that matures on December 6, 2021[340] Note 13 – Benefit Plans The company terminated its U.S. defined benefit pension plan in 2020, incurring $17.8 million in termination costs, with remaining plans underfunded - The company terminated its U.S. defined benefit pension plan in 2020, resulting in termination costs of $17.8 million, which included an $11.6 million non-cash settlement charge and $6.2 million in federal excise tax[345][346] Funded Status of Benefit Plans (In thousands) | Plan Type | Benefit Obligation (Dec 26, 2020) | Fair Value of Plan Assets (Dec 26, 2020) | Funded (Underfunded) Status | | :--- | :--- | :--- | :--- | | Pension Benefits | $90,809 | $78,480 | $(12,329) | | Other Benefits | $12,782 | $0 | $(12,782) | Note 14 – Commitments and Contingencies The company has $24.0 million in environmental reserves and collected $22.1 million from the Deepwater Horizon settlement in 2020 - Total environmental reserves were $24.0 million at December 26, 2020, up from $20.9 million at December 28, 2019[369] - The company has a reserve of $5.6 million for its share of remediation costs at three former smelter sites in Southeast Kansas[373] - In 2020, the company collected approximately $22.1 million related to its claim under the Deepwater Horizon Economic and Property Damage Settlement Program[384] Note 17 – Stock-Based Compensation Stock-based compensation expense was $8.6 million in 2020, with $20.8 million in unrecognized expense remaining for future recognition Stock-Based Compensation Expense (In millions) | Year | Expense | | :--- | :--- | | 2020 | $8.6 | | 2019 | $8.7 | | 2018 | $8.0 | - Total unrecognized compensation expense related to stock incentive awards was $20.8 million at December 26, 2020, to be recognized over an average period of 3.0 years[396]