# Mueller Industries Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Mueller Industries Inc](/companies/mli.md) (CIK 89439)
- Form: 10-Q
- Filed: 2023-10-25
- Accepted by EDGAR: Oct 25, 2023, 16:16 ET
- Period: 2023-09-30
- Accession: 0000089439-23-000070
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/89439/000008943923000070/mli-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/89439/000008943923000070/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-02 to 2023-09-30 | $819.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $2.69bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Selling, general and administrative | 3 months, 2023-07-02 to 2023-09-30 | $48.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $157.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-02 to 2023-09-30 | $181.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $620.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-02 to 2023-09-30 | $230.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $508.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-02 to 2023-09-30 | $50.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $174.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-02 to 2023-09-30 | $132.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $483.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-02 to 2023-09-30 | $1.17 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $4.26 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-02 to 2023-09-30 | $1.19 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $4.34 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-02 to 2023-09-30 | 113,868,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 113,556,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $498.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $39.5m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $50.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $19.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $979.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $1.94bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $2.66bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $322.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $412.5m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $1.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-30 | $556.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $2.22bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,682 characters.

### General Overview

We are a leading manufacturer of copper, brass, aluminum, and plastic products. The range of products we manufacture is broad: copper tube and fittings; line sets; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum impact extrusions; refrigeration valves and fittings; compressed gas valves; pressure vessels; steel nipples; and insulated flexible duct systems. We also resell brass and plastic plumbing valves, plastic fittings, malleable iron fittings, faucets, and plumbing specialty products. Our operations are located throughout the United States and in Canada, Mexico, Great Britain, South Korea, the Middle East, and China.

Each of our reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered as follows:

- Piping Systems: The Piping Systems segment is composed of Domestic Piping Systems Group, Great Lakes Copper, European Operations, Trading Group, Jungwoo-Mueller (our South Korean joint venture), and Mueller Middle East (our Bahraini joint venture). The Domestic Piping Systems Group manufactures and distributes copper tube, fittings, and line sets. These products are manufactured in the U.S., sold in the U.S., and exported to markets worldwide. Great Lakes Copper manufactures copper tube and line sets in Canada and sells the products primarily in the U.S. and Canada. European Operations manufactures copper tube in the United Kingdom, which is sold throughout Europe. The Trading Group manufactures pipe nipples and sources products for import distribution in North America. Jungwoo-Mueller manufactures copper-based joining products that are sold worldwide. Mueller Middle East manufactures copper tube and serves markets in the Middle East and Northern Africa. The Piping Systems segment sells products to wholesalers in the plumbing and refrigeration markets, distributors to the manufactured housing and recreational vehicle industries, building material retailers, and air-conditioning original equipment manufacturers (OEMs).
- Industrial Metals: The Industrial Metals segment is composed of Brass Rod, Impacts & Micro Gauge, Brass Value-Added Products, and Precision Tube. The segment manufactures and sells brass rod, bar, and shapes; aluminum and brass forgings; aluminum impact extrusions; gas valves and assemblies; and specialty copper, copper alloy, and aluminum tube. The segment manufactures and sells its products primarily to domestic OEMs in the industrial, transportation, construction, heating, ventilation, and air-conditioning, plumbing, refrigeration, and energy markets.
- Climate: The Climate segment is composed of Refrigeration Products, Westermeyer, Turbotec, Flex Duct, and Linesets, Inc. The segment manufactures and sells refrigeration valves and fittings, high pressure components, coaxial heat exchangers, insulated HVAC flexible duct systems, and line sets. The segment sells its products primarily to the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.

New housing starts and commercial construction are important determinants of our sales to the heating, ventilation, and air-conditioning, refrigeration, and plumbing markets because the principal end use of a significant portion of our products is in the construction of single and multi-family housing and commercial buildings. Repairs and remodeling projects are also important drivers of underlying demand for these products. In addition, our products are used in various transportation, automotive, and industrial applications.

According to the U.S. Census Bureau, the September 2023 seasonally adjusted annual rate of new housing starts was 1.36 million, compared to the September 2022 rate of 1.46 million. The average 30-year fixed mortgage rate was 6.64 percent for the first nine months of 2023 and 5.34 percent for the twelve months ended December 2022. The private non-residential construction sector includes offices, industrial, health care, and retail projects. According to the U.S. Census Bureau, the seasonally adjusted annual value of private nonresidential construction put in place was $671.9 billion in August 2023 compared to the August 2022 rate of $561.4 billion.

Profitability of certain of our product lines depends upon the “spreads” between the cost of raw material and the selling prices of our products. The open market prices for copper cathode and copper and brass scrap, for example, influence the selling price of copper tube and brass rod, two principal products manufactured by the Company. We attempt to minimize the effects on profitability from fluctuations in material costs by passing through these costs to our customers; however, margins of our businesses that account for inventory on a FIFO basis may be impacted in periods of significant fluctuations in material costs. Our earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions.

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

### Results of Operations

#### Consolidated Results

The following table compares summary operating results for the first nine months of 2023 and 2022:

*(In thousands)*

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | Percent Change 2023 vs. 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 | Percent Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $819,792 | $944,830 | (13.2)% | $2,687,968 | $3,104,874 | (13.4)% |
| Operating income | 181,011 | 205,165 | (11.8) | 620,817 | 686,736 | (9.6) |
| Net income | 132,709 | 154,542 | (14.1) | 483,659 | 519,410 | (6.9) |

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

|  | Quarter-to- Date | Year-to- Date |
| --- | ---: | ---: |
| Net selling price in core product lines | (0.3)% | (2.1)% |
| Unit sales volume in core product lines | (4.8) | (7.1) |
| Dispositions | (1.2) | (0.4) |
| Other | (6.9) | (3.8) |
|  | (13.2)% | (13.4)% |

The decrease in net sales during the third quarter of 2023 was primarily due to (i) a decrease in sales of $66.4 million in our non-core product lines, (ii) lower unit sales volume of $45.1 million in our core product lines, primarily copper tube, line sets, and brass rod, (iii) a decrease in sales of $11.2 million as a result of the disposition of Heatlink Group during the third quarter of 2023, and (iv) lower net selling prices of $2.4 million in our core product lines, primarily copper tube and line sets.

The decrease in net sales during the first nine months of 2023 was primarily due to (i) lower unit sales volume of $219.0 million in our core product lines, (ii) a decrease in sales of $119.9 million in our non-core product lines, (iii) lower net selling prices of $64.1 million in our core product lines, and (iv) a decrease in sales of $13.8 million as a result of the disposition of Heatlink Group during the third quarter of 2023.

Net selling prices generally fluctuate with changes in raw material costs. Changes in raw material costs are generally passed through to customers by adjustments to selling prices. The following graph shows the Comex average copper price per pound by quarter for the current and prior fiscal years:

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for the first nine months of 2023 and 2022:

*(In thousands)*

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | $579,058 | $678,637 | $1,897,128 | $2,244,062 |
| Depreciation and amortization | 9,631 | 10,850 | 30,704 | 32,993 |
| Selling, general, and administrative expense | 48,295 | 50,178 | 156,988 | 146,590 |
| Gain on sale of assets | — | — | — | (5,507) |
| Gain on sale of business | (4,137) | — | (4,137) | — |
| Asset impairments | 5,934 | — | 5,934 | — |
| Gain on insurance settlement | — | — | (19,466) | — |
| Operating expenses | $638,781 | $739,665 | $2,067,151 | $2,418,138 |

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | 70.6% | 71.8% | 70.6% | 72.3% |
| Depreciation and amortization | 1.2 | 1.1 | 1.1 | 1.1 |
| Selling, general, and administrative expense | 5.9 | 5.3 | 5.8 | 4.7 |
| Gain on sale of assets | — | — | — | (0.2) |
| Gain on sale of business | (0.5) | — | (0.2) | — |
| Asset impairments | 0.7 | — | 0.2 | — |
| Gain on insurance settlement | — | — | (0.7) | — |
| Operating expenses | 77.9% | 78.2% | 76.8% | 77.9% |

29

#### Q3 2023 compared to Q3 2022

Cost of goods sold decreased in the third quarter of 2023 primarily due to the factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 29.4 percent compared with 28.2 percent in the prior year quarter. Depreciation and amortization decreased in the third quarter of 2023 primarily as a result of several long-lived assets becoming fully depreciated and as a result of long-lived assets sold with Heatlink Group. Selling, general, and administrative expense decreased in the third quarter of 2023 primarily as a result of (i) lower employment costs, including incentive compensation and agent commissions, of $6.4 million and (ii) the absence of expenses associated with Heatlink Group of $1.2 million. These decreases were largely offset by (i) higher legal and professional fees of $2.0 million, (ii) lower foreign currency transaction gains of $1.7 million, (iii) higher repair, maintenance, and supplies costs of $0.9 million, (iv) higher marketing and advertising costs of $0.3 million, and (v) higher lease and rent expense of $0.3 million. In addition, during the third quarter of 2023 we recognized fixed asset impairment charges on idled equipment of $5.9 million and a gain on the sale of Heatlink Group of $4.1 million.

Interest expense was consistent with the third quarter of 2022. Interest income was higher during the third quarter of 2023 primarily as a result of the purchase of short-term investments in the fourth quarter of 2022 and throughout 2023, and higher rates on deposits. During the third quarter of 2023, we recognized an unrealized loss on short-term investments of $2.4 million. Other expense, net, was consistent with the third quarter of 2022.

Our effective tax rate for the third quarter of 2023 was 27 percent compared with 25 percent for the same period last year. The items impacting the effective tax rate were (i) increases related to the provision for state income taxes, net of the federal benefit, of $6.5 million and (ii) the effect of foreign tax rates higher than statutory tax rates and other foreign items of $6.1 million. These were partially offset by other adjustments of $1.5 million

For the third quarter of 2022, the difference between the effective tax rate and the amount computed using the U.S. federal statutory rate was primarily attributable to the provision for state income taxes, net of the federal benefit, of $7.3 million.

During the third quarter of 2023 and 2022, we recognized losses of $2.4 million and income of $1.0 million, respectively, on our investments in unconsolidated affiliates.

#### YTD 2023 compared to YTD 2022

Cost of goods sold decreased in the first nine months of 2023 primarily due to the factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 29.4 percent compared with 27.7 percent in the prior year. Depreciation and amortization decreased in the first nine months of 2023 primarily as a result of several long-lived assets becoming fully depreciated and as a result of long-lived assets sold with Heatlink Group. Selling, general, and administrative expense increased in the first nine months of 2023 primarily as a result of (i) higher foreign currency transaction losses of $5.1 million, (ii) higher legal and professional fees of $2.9 million, (iii) higher marketing and advertising costs of $1.5 million, (iv) higher repairs and maintenance costs of $1.3 million, and (v) gains on the disposal of assets of $1.3 million recorded in the prior year. These increases were partially offset by (i) the absence of expenses associated with Heatlink Group of $1.2 million and (ii) lower employment costs of $1.0 million. In addition, during the first nine months of 2023, we settled the insurance claim related to the August 2022 fire at our Bluffs, Illinois manufacturing operation and recognized a $19.5 million gain. We also recognized fixed asset impairment charges on idled equipment of $5.9 million and a gain on the sale of Heatlink Group of $4.1 million. During the first nine months of 2022 we recognized a gain of $5.5 million on the sale of a building.

Interest expense was consistent with the first nine months of 2022. Interest income was higher during the first nine months of 2023 primarily as a result of the purchase of short-term investments in the fourth quarter of 2022 and throughout 2023, and higher rates on deposits. During the first nine months of 2023, we recognized an unrealized gain on short-term investments of $18.4 million. Other income, net, was higher during the first nine months of 2023 primarily as a result of a gain for an indemnification settlement related to one of our foreign benefit plans recognized during the first nine months of 2023.

Our effective tax rate for the first nine months of 2023 was 26 percent compared with 25 percent for the same period last year. The items impacting the effective tax rate are primarily related to (i) the provision for state income taxes, net of the federal benefit, of $21.5 million and (ii) the effect of foreign tax rates higher than statutory tax rates and other foreign items of $10.7 million. These were partially offset by other adjustments of $2.0 million.

For the first nine months of 2022, the items impacting the effective tax rate were primarily related to (i) the provision for state income taxes, net of the federal benefit, of $24.2 million and (ii) the effect of foreign tax rates higher than statutory tax rates of $4.3 million.

During the first nine months of 2023 and 2022, we recognized losses of $2.7 million and income of $6.0 million, respectively, on our investments in unconsolidated affiliates.

#### Piping Systems Segment

The following table compares summary operating results for the first nine months of 2023 and 2022 for the businesses comprising our Piping Systems segment:

*(In thousands)*

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | Percent Change 2023 vs. 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 | Percent Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $568,151 | $634,808 | (10.5)% | $1,868,635 | $2,163,045 | (13.6)% |
| Operating income | 140,609 | 167,939 | (16.3) | 455,605 | 540,006 | (15.6) |

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

|  | Quarter-to- Date | Year-to- Date |
| --- | ---: | ---: |
| Net selling price in core product lines | (1.2)% | (2.4)% |
| Unit sales volume in core product lines | (6.0) | (9.0) |
| Dispositions | (1.8) | (0.6) |
| Other | (1.5) | (1.6) |
|  | (10.5)% | (13.6)% |

The decrease in net sales during the third quarter of 2023 was primarily attributable to (i) lower unit sales volume of $37.5 million in the segment’s core product lines, primarily copper tube and line sets, (ii) a decrease in sales of $11.2 million as a result of the disposition of Heatlink Group during the third quarter of 2023, (iii) a decrease in sales of $11.1 million in the segment’s non-core product lines, and (iv) lower net selling prices in the segment’s core product lines of $7.6 million.

Net sales during the first nine months of 2023 decreased primarily as a result of (i) lower unit sales volume of $193.7 million in the segment’s core product lines, (ii) lower net selling prices in the segment’s core product lines of $50.8 million, (iii) a decrease in sales of $34.4 million in the segment’s non-core product lines, and (iv) a decrease in sales of $13.8 million as a result of the disposition of Heatlink Group during the third quarter of 2023.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for the first nine months of 2023 and 2022:

*(In thousands)*

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | $394,736 | $440,216 | $1,315,212 | $1,539,493 |
| Depreciation and amortization | 5,025 | 5,516 | 15,835 | 16,846 |
| Selling, general, and administrative expense | 21,847 | 21,137 | 76,049 | 66,700 |
| Asset impairments | 5,934 | — | 5,934 | — |
| Operating expenses | $427,542 | $466,869 | $1,413,030 | $1,623,039 |

31

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | 69.5% | 69.3% | 70.4% | 71.2% |
| Depreciation and amortization | 0.9 | 0.9 | 0.8 | 0.8 |
| Selling, general, and administrative expense | 3.8 | 3.3 | 4.1 | 3.1 |
| Asset impairments | 1.0 | — | 0.3 | — |
| Operating expenses | 75.2% | 73.5% | 75.6% | 75.0% |

The decrease in cost of goods sold during the third quarter of 2023 was primarily due to the decrease in sales volume. Gross margin as a percentage of sales was 30.5 percent compared with 30.7 percent in the prior year quarter. Depreciation and amortization decreased slightly in the third quarter of 2023 primarily as a result of long-lived assets becoming fully depreciated and as a result of long-lived assets sold with Heatlink Group. Selling, general, and administrative expense increased slightly for the third quarter of 2023 primarily as a result of (i) lower foreign currency transaction gains of $1.6 million, (ii) higher legal and professional fees of $0.6 million, (iii) higher marketing and advertising costs of $0.4 million, (iv) higher repair, maintenance, and supplies costs of $0.4 million, and (v) higher leases and rent of $0.3 million. These increases were largely offset by (i) lower employment costs, including incentive compensation and healthcare, of $1.8 million and (ii) the absence of expenses associated with Heatlink Group of $1.2 million. In addition, during the third quarter of 2023 we recognized fixed asset impairment charges on idled equipment of $5.9 million.

The decrease in cost of goods sold during the first nine months of 2023 was primarily due to the factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 29.6 percent compared with 28.8 percent in the prior year. Depreciation and amortization decreased in the first nine months of 2023 primarily as a result of depreciation and amortization of the long-lived assets becoming fully depreciated and as a result of long-lived assets sold with Heatlink Group. Selling, general, and administrative expense increased for the first nine months of 2023 primarily as a result of (i) higher foreign currency transaction losses of $4.5 million, (ii) higher marketing and advertising costs of $1.5 million, (iii) higher legal and professional fees of $1.2 million, (iv) higher product liability expense of $0.7 million, (v) higher repair, maintenance, and supplies costs of $0.7 million, (vi) higher lease and rent expense of $0.7 million, and (vii) higher employment costs of $0.6 million. These increases were partially offset by the absence of expenses associated with Heatlink Group of $1.2 million. In addition, during the first nine months of 2023 we recognized fixed asset impairment charges on idled equipment of $5.9 million.

#### Industrial Metals Segment

The following table compares summary operating results for the first nine months of 2023 and 2022 for the businesses comprising our Industrial Metals segment:

*(In thousands)*

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | Percent Change 2023 vs. 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 | Percent Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $141,012 | $144,880 | (2.7)% | $452,512 | $498,367 | (9.2)% |
| Operating income | 16,221 | 12,077 | 34.3 | 61,407 | 59,504 | 3.2 |

32

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

|  | Quarter-to- Date | Year-to- Date |
| --- | ---: | ---: |
| Net selling price in core product lines | 3.7% | (2.8)% |
| Unit sales volume in core product lines | (5.3) | (5.2) |
| Other | (1.1) | (1.2) |
|  | (2.7)% | (9.2)% |

The decrease in net sales during the third quarter of 2023 was primarily due to lower unit sales volume of $7.5 million in the segment’s core product lines, primarily brass rod, partially offset by higher net selling prices of $5.2 million in the segment’s core product lines.

The decrease in net sales during the first nine months of 2023 was primarily due to (i) lower unit sales volume of $25.3 million in the segment’s core product lines, (ii) lower net selling prices of $13.3 million in the segment’s core product lines, and (iii) decrease in sales of $3.6 million in the segment’s non-core product lines.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for the first nine months of 2023 and 2022:

*(In thousands)*

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | $119,108 | $128,152 | $375,375 | $424,802 |
| Depreciation and amortization | 1,835 | 1,846 | 5,411 | 5,636 |
| Selling, general, and administrative expense | 3,848 | 2,805 | 10,319 | 8,425 |
| Operating expenses | $124,791 | $132,803 | $391,105 | $438,863 |

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | 84.5% | 88.5% | 83.0% | 85.2% |
| Depreciation and amortization | 1.3 | 1.3 | 1.2 | 1.1 |
| Selling, general, and administrative expense | 2.7 | 2.0 | 2.3 | 1.7 |
| Operating expenses | 88.5% | 91.8% | 86.4% | 88.1% |

The decrease in cost of goods sold during the third quarter of 2023 was primarily due to the factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 15.5 percent compared with 11.5 percent in the prior year quarter. Depreciation and amortization was consistent with the third quarter of 2022. Selling, general, and administrative expense increased for the third quarter of 2023 primarily as a result of higher legal and professional fees of $0.9 million.

The decrease in cost of goods sold during the first nine months of 2023 was primarily due to the factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 17.0 percent compared with 14.8 percent in the prior year. Depreciation and amortization decreased slightly as a result of several long-lived assets becoming fully depreciated. Selling, general, and administrative expense increased during the first nine months of 2023 primarily as a result of (i) higher legal and professional fees of $1.0 million, (ii) gains on the disposal of assets of $1.0 million recorded in the prior year, and (iii) higher repair and maintenance costs of $0.4 million. These increases were partially offset by lower employment costs of $0.6 million.

#### Climate Segment

The following table compares summary operating results for the first nine months of 2023 and 2022 for the businesses comprising our Climate segment:

*(In thousands)*

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | Percent Change 2023 vs. 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 | Percent Change 2023 vs. 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $119,949 | $174,650 | (31.3)% | $396,857 | $479,756 | (17.3)% |
| Operating income | 34,846 | 47,462 | (26.6) | 145,901 | 134,909 | 8.1 |

Sales for the third quarter and first nine months of 2023 decreased primarily as a result of reduced demand, particularly for products utilized in residential construction, and a decrease in volume and price in certain product lines.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for the first nine months of 2023 and 2022:

*(In thousands)*

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | $76,133 | $114,850 | $242,009 | $311,917 |
| Depreciation and amortization | 1,618 | 2,289 | 5,973 | 6,989 |
| Selling, general and administrative expense | 7,352 | 10,049 | 22,440 | 25,941 |
| Gain on insurance settlement | — | — | (19,466) | — |
| Operating expenses | $85,103 | $127,188 | $250,956 | $344,847 |

|  | For the Quarter Ended September 30, 2023 | September 24, 2022 | For the Nine Months Ended September 30, 2023 | September 24, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Cost of goods sold | 63.5% | 65.8% | 61.0% | 65.0% |
| Depreciation and amortization | 1.3 | 1.3 | 1.5 | 1.5 |
| Selling, general and administrative expense | 6.1 | 5.8 | 5.7 | 5.4 |
| Gain on insurance settlement | — | — | (4.9) | — |
| Operating expenses | 70.9% | 72.9% | 63.3% | 71.9% |

Gross margin as a percentage of sales was 36.5 percent compared with 34.2 percent in the prior year quarter. Depreciation and amortization decreased for the third quarter of 2023 as a result of several long-lived assets becoming fully depreciated. Selling, general, and administrative expense decreased for the third quarter of 2023 primarily due to lower agent commissions of $2.4 million.

Cost of goods sold decreased during the first nine months of 2023 primarily due to factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 39.0 percent compared with 35.0 percent in the prior year. Depreciation and amortization decreased for the first nine months of 2023 as a result of several long-lived assets becoming fully depreciated. Selling, general, and administrative expense decreased slightly for the first nine months of 2023 primarily as a result of lower agent commissions of $3.8 million. In addition, during the first nine months of 2023, we settled the insurance claim related to the August 2022 fire at our Bluffs, Illinois manufacturing operation and recognized a $19.5 million gain.

### Liquidity and Capital Resources

The following table presents selected financial information for the first nine months of 2023 and 2022:

*(In thousands)*

| Increase (decrease) in: | 2023 | 2022 |
| --- | ---: | ---: |
| Cash, cash equivalents, and restricted cash | $515,920 | $409,042 |
| Short-term investments | (93,183) | — |
| Property, plant, and equipment, net | (3,272) | (11,402) |
| Total debt | (172) | 432 |
| Working capital, net of cash and current debt | (91,120) | 14,153 |
| Net cash provided by operating activities | 498,490 | 516,912 |
| Net cash provided by (used in) investing activities | 94,117 | (16,269) |
| Net cash used in financing activities | (78,999) | (81,291) |

#### Cash Flows from Operating Activities

During the nine months ended September 30, 2023, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $490.4 million, (ii) a decrease in inventories of $53.4 million, and (iii) non-capital related insurance proceeds of $9.9 million for the August 2022 fire in Bluffs, Illinois. There were also increases due to non-cash adjustments primarily consisting of (i) depreciation and amortization of $31.1 million and (ii) stock-based compensation expense of $17.3 million. These increases were largely offset by (i) an increase in accounts receivable of $36.9 million, (ii) the unrealized gain on short-term investments of $18.4 million, (iii) the gain related to the settlement of the insurance claim for the August 2022 fire in Bluffs, Illinois of $19.5 million, (iv) a decrease in current liabilities of $25.5 million, and (v) an increase in other assets of $12.9 million.

During the nine months ended September 24, 2022, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $522.6 million, (ii) depreciation and amortization of $33.3 million, (iii) a decrease in accounts receivable of $15.7 million, and (iv) stock-based compensation expense of $12.3 million. These increases were partially offset by (i) an increase in inventories of $33.8 million, (ii) an increase in other assets of $8.6 million, (iii) a decrease in other liabilities of $7.4 million, (iv) the gain of $7.1 million recognized on the sale of assets, (v) equity in earnings of unconsolidated affiliates of $6.0 million, and (vi) a decrease in current liabilities of $5.3 million.

#### Cash Flows from Investing Activities

The major components of net cash provided by investing activities during the nine months ended September 30, 2023 included (i) proceeds from the maturity of short-term investments of $217.9 million and (ii) insurance proceeds of $24.6 million for property and equipment related to the fire at our Bluffs, Illinois facility and the tornado at our Covington, Tennessee manufacturing operations. These sources were partially offset by (i) the purchase of short-term investments of $106.2 million and (ii) capital expenditures of $39.5 million.

The major component of net cash used in investing activities during the nine months ended September 24, 2022 was capital expenditures of $29.6 million. This use was partially offset by (i) proceeds from the sale of properties of $7.8 million, (ii) insurance proceeds for property and equipment of $3.4 million, and (iii) dividends received from unconsolidated affiliates of $2.1 million.

#### Cash Flows from Financing Activities

For the nine months ended September 30, 2023, net cash used in financing activities consisted primarily of (i) $50.1 million used for the payment of regular quarterly dividends to stockholders of the Company, (ii) $19.3 million used to repurchase common stock, and (iii) $9.1 million net cash used to settle stock-based awards.

For the nine months ended September 24, 2022, net cash used in financing activities consisted primarily of (i) $41.9 million used for the payment of regular quarterly dividends to stockholders of the Company and (ii) $38.1 million used to repurchase common stock.

#### Liquidity and Outlook

We believe that cash provided by operations, funds available under the Credit Agreement, and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.

As of September 30, 2023, we had $1.10 billion of cash and short-term investments on hand and $371.3 million available to be drawn under the Credit Agreement. Our current ratio was 6.0 to 1.

We have significant environmental remediation obligations which we expect to pay over future years. Cash used for environmental remediation activities was approximately $1.9 million during the first nine months of 2023. We expect to spend approximately $3.9 million over the next twelve months for ongoing environmental remediation activities.

The Company declared a quarterly cash dividend of 15.0 cents per common share during the first, second, and third quarters of 2023 and 12.5 cents per common share during the first, second, and third quarters of 2022, respectively. Payment of dividends in the future is dependent upon our financial condition, cash flows, capital requirements, earnings, and other factors.

#### Long-Term Debt

As of September 30, 2023, the Company’s total debt was $1.9 million or 0.1 percent of its total capitalization.

The Company’s Credit Agreement provides for an unsecured $400.0 million revolving credit facility, which matures March 31, 2026. There were no borrowings outstanding under the Credit Agreement as of September 30, 2023. The Credit Agreement backed approximately $28.7 million in letters of credit at the end of the third quarter of 2023.

Covenants contained in the Company’s financing obligations require, among other things, the maintenance of minimum levels of tangible net worth and the satisfaction of certain minimum financial ratios. As of September 30, 2023, the Company was in compliance with all of its debt covenants.

#### Share Repurchase Program

The Board of Directors has extended, until July 2024, the authorization to repurchase up to 40 million shares of the Company’s common stock through open market transactions or through privately negotiated transactions. We may cancel, suspend, or extend the time period for the repurchase of shares at any time. Any repurchases will be funded primarily through existing cash and cash from operations. We may hold any shares repurchased in treasury or use a portion of the repurchased shares for our stock-based compensation plans, as well as for other corporate purposes. From its initial authorization in 1999 through September 30, 2023, the Company has repurchased approximately 15.0 million shares under this authorization.

#### Contractual Cash Obligations

There have been no significant changes in our contractual cash obligations reported at December 31, 2022.

## Market risk

As filed, 6,303 characters.

The Company is exposed to market risk from changes in raw material and energy costs, interest rates, and foreign currency exchange rates. To reduce such risks, we may periodically use financial instruments. Hedging transactions are authorized and executed pursuant to policies and procedures. Further, we do not buy or sell financial instruments for trading purposes.

### Cost and Availability of Raw Materials and Energy

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

The Company occasionally enters into future fixed-price arrangements with certain customers. We may utilize futures contracts to hedge risks associated with these forward fixed-price arrangements. We may also utilize futures contracts to manage price risk associated with inventory. Depending on the nature of the hedge, changes in the fair value of the futures contracts will either be offset against the change in fair value of the inventory through earnings or recognized as a component of accumulated other comprehensive income (AOCI) in equity and reflected in earnings upon the sale of inventory. Periodic value fluctuations of the contracts generally offset the value fluctuations of the underlying fixed-price transactions or inventory. At September 30, 2023, we held open futures contracts to purchase approximately $18.2 million of copper over the next ten months related to fixed-price sales orders and to sell approximately $6.8 million of copper over the next eight months related to copper inventory.

We may enter into futures contracts or forward fixed-price arrangements with certain vendors to manage price risk associated with natural gas purchases. The effective portion of gains and losses with respect to these positions are deferred in equity as a component of AOCI and reflected in earnings upon consumption of natural gas. Periodic value fluctuations of the futures contracts generally offset the value fluctuations of the underlying natural gas prices. As of September 30, 2023, we held no open futures contracts to purchase natural gas.

### Interest Rates

At September 30, 2023, we had no variable-rate debt outstanding. At this borrowing level, a hypothetical 10 percent increase in interest rates would have had an insignificant unfavorable impact on our pretax earnings and cash flows. The primary interest rate exposure on variable-rate debt is based on the Secured Overnight Financing Rate (SOFR).

### Foreign Currency Exchange Rates

Foreign currency exposures arising from transactions include firm commitments and anticipated transactions denominated in a currency other than an entity’s functional currency. The Company and its subsidiaries generally enter into transactions denominated in their respective functional currencies. We may utilize certain futures or forward contracts with financial institutions to hedge foreign currency transactional exposures. Gains and losses with respect to these positions are deferred in equity as a component of AOCI and reflected in earnings upon collection of receivables or payment of commitments. At September 30, 2023, we had open forward contracts with a financial institution to sell approximately 4.7 million euros, 25.2 million Swedish kronor, and 8.0 million Norwegian kroner through January 2024.

The Company’s primary foreign currency exposure arises from foreign-denominated revenues and profits and their translation into U.S. dollars. The primary currencies to which we are exposed include the Canadian dollar, the British pound sterling, the Mexican peso, the South Korean won, and the Bahraini dinar. The Company generally views its investments in foreign subsidiaries with a functional currency other than the U.S. dollar as long-term. As a result, we generally do not hedge these net investments.

### Cautionary Statement Regarding Forward Looking Information

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

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statement identifying important economic, political, and technological factors, among others, which could cause actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. In addition to those factors discussed under “Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2022, such factors include: (i) the current and projected future business environment, including interest rates capital and consumer spending, and the impact of the COVID-19 pandemic; (ii) the domestic housing and commercial construction industry environment; (iii) availability and price fluctuations in commodities (including copper, natural gas, and other raw materials, including crude oil that indirectly affects plastic resins); (iv) competitive factors and competitor responses to the Company’s initiatives; (v) stability of government laws and regulations, including taxes; (vi) availability of financing; and (vii) continuation of the environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates.

## Controls and procedures

As filed, 1,979 characters.

### Evaluation of Disclosure Controls and Procedures

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

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act as of September 30, 2023. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2023 to ensure that information required to be disclosed in Company reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ending September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 553 characters.

The Company is exposed to risk as it operates its businesses. To provide a framework to understand the operating environment of the Company, we have provided a brief explanation of the more significant risks associated with our businesses in our 2022 Annual Report on Form 10-K. There have been no material changes in risk factors that were previously disclosed in our 2022 Annual Report on Form 10-K. Additionally, the operating results of the Company’s unconsolidated affiliates may be adversely affected by unfavorable economic and market conditions.

Filed Oct 25, 2023.
Source: SEC EDGAR, the filing index for accession 0000089439-23-000070. Last ingested by Listed: Nov 2, 2026, 12:26 ET. No prices; not investment advice.