Mueller Industries Inc: Form 10-Q for the period ended Mar 30, 2024

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 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 March 2024 seasonally adjusted annual rate of new housing starts was 1.32 million, compared to the March 2023 rate of 1.38 million. The average 30-year fixed mortgage rate was 6.75 percent for the first quarter of 2024 and 6.81 percent for the twelve months ended December 2023. 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 $716.0 billion in February 2024 compared to the February 2023 rate of $636.0 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 quarter of 2024 and 2023:

(In thousands)

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

The decrease in net sales during the first quarter of 2024 was primarily due to (i) lower unit sales volume of $39.8 million in our core product lines, primarily copper tube and line sets, (ii) a decrease in sales of $37.3 million in our non-core product lines, (iii) lower net selling prices of $36.7 million in our core product lines, and (iv) a decrease in sales of $7.7 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 quarter of 2024 and 2023:

(In thousands)

Cost of goods sold decreased in the first quarter of 2024 primarily due to the factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 28.4 percent compared with 30.1 percent in the prior year quarter. Depreciation and amortization decreased in the first quarter of 2024 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 first quarter of 2024 primarily as a result of (i) higher foreign currency transaction gains of $1.7 million, (ii) a gain on the sale of assets of $1.6 million recognized during the first quarter of 2024, (iii) lower employment costs, including incentive compensation and agent commissions, of $1.5 million, and (iv) the absence of expenses associated with Heatlink Group of $1.2 million. These decreases were partially offset by higher legal and professional fees of $1.7 million.

Interest expense was consistent with the first quarter of 2023. Interest income was higher during the first quarter of 2024 primarily as a result of (i) the purchase of short-term investments throughout 2023 and 2024 and (ii) higher rates on deposits. During the first quarters of 2024 and 2023, we recognized gains on the sale of short-term investments of $0.4 million and $1.9 million, respectively. Other expense, net, was consistent with the first quarter of 2023.

Our effective tax rate for the first quarter of 2024 was 26 percent compared with 26 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 $5.9 million, (ii) the effect of foreign tax rates higher than statutory tax rates and other foreign items of $1.5 million, and (iii) other items of $2.1 million.

For the first quarter of 2023, the difference between the effective tax rate and the amount computed using the U.S. federal statutory rate was primarily attributable to (i) increases related to the provision for state income taxes, net of the federal benefit, of $7.8 million, (ii) the effect of foreign tax rates higher than statutory tax rates and other foreign items of $2.1 million, and (iii) other items of $1.6 million.

During the first quarter of 2024 and 2023, we recognized net losses of $8.0 million and $1.0 million, respectively, on our investments in unconsolidated affiliates.

Piping Systems Segment

The following table compares summary operating results for the first quarter of 2024 and 2023 for the businesses comprising our Piping Systems segment:

(In thousands)

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

The decrease in net sales during the first quarter of 2024 was primarily attributable to (i) lower unit sales volume of $40.0 million in the segment’s core product lines, primarily copper tube and line sets, (ii) lower net selling prices in the segment’s core product lines of $30.5 million, and (iii) a decrease in sales of $7.7 million as a result of the disposition of Heatlink Group during the third quarter of 2023. These decreases were partially offset by an increase in sales of $1.7 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 quarter of 2024 and 2023:

(In thousands)

The decrease in cost of goods sold during the first quarter of 2024 was primarily due to the factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 28.7 percent compared with 29.4 percent in the prior year quarter. Depreciation and amortization decreased slightly in the first quarter of 2024 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 decreased for the first quarter of 2024 primarily as a result of (i) higher foreign currency transaction gains of $1.4 million, (ii) the absence of expenses associated with Heatlink Group of $1.2 million, and (iii) lower employment costs, including healthcare, of $0.9 million.

Industrial Metals Segment

The following table compares summary operating results for the first quarter of 2024 and 2023 for the businesses comprising our Industrial Metals segment:

(In thousands)

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

The decrease in net sales during the first quarter of 2024 was primarily due to (i) lower net selling prices of $6.3 million in the segment’s core product lines and (ii) lower sales of $2.8 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 quarter of 2024 and 2023:

(In thousands)

The decrease in cost of goods sold during the first quarter of 2024 was primarily due to the factors noted above regarding the change in net sales. Gross margin as a percentage of sales was 18.9 percent compared with 19.4 percent in the prior year quarter. Depreciation and amortization and selling, general, and administrative expense were consistent with the first quarter of 2023.

Climate Segment

The following table compares summary operating results for the first quarter of 2024 and 2023 for the businesses comprising our Climate segment:

(In thousands)

Sales for the first quarter of 2024 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 quarter of 2024 and 2023:

(In thousands)

Gross margin as a percentage of sales was 35.3 percent compared with 41.9 percent in the prior year quarter. Depreciation and amortization decreased for the first quarter of 2024 as a result of several long-lived assets becoming fully depreciated. Selling, general, and administrative expense decreased for the first quarter of 2024 primarily due to lower employment costs of $0.9 million.

Liquidity and Capital Resources

The following table presents selected financial information for the first quarter of 2024 and 2023:

(In thousands)

Cash Flows from Operating Activities

During the quarter ended March 30, 2024, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $141.7 million, (ii) an increase in current liabilities of $33.9 million, (iii) a decrease in inventories of $22.5 million, (iv) non-capital related insurance proceeds of $15.0 million for the March 2023 tornado in Covington, Tennessee, and (v) a decrease in other assets of $12.0 million. There were also increases due to non-cash adjustments primarily consisting of (i) depreciation and amortization of $9.3 million, (ii) losses from unconsolidated affiliates of $8.0 million, and (iii) stock-based compensation expense of $6.2 million. These increases were partially offset by an increase in accounts receivable of $75.2 million.

During the quarter ended April 1, 2023, net cash provided by operating activities was primarily attributable to (i) consolidated net income of $175.1 million, (ii) an increase in current liabilities of $50.8 million, (iii) depreciation and amortization of $10.7 million, and (iv) stock-based compensation expense of $5.6 million. These increases were largely offset by (i) an increase in accounts receivable of $111.5 million and (ii) an increase in other assets of $18.0 million.

Cash Flows from Investing Activities

The major components of net cash provided by investing activities during the quarter ended March 30, 2024 included (i) proceeds from the sale of securities of $96.5 million and (ii) proceeds from the sale of properties of $2.9 million. These sources were partially offset by (i) capital expenditures of $16.4 million and (ii) the issuance of notes receivable of $12.5 million.

The major components of net cash provided by investing activities during the quarter ended April 1, 2023 included (i) proceeds from the maturity of short-term investments of $50.0 million and (ii) insurance proceeds for property and equipment of $8.0 million. These sources were partially offset by capital expenditures of $7.6 million.

Cash Flows from Financing Activities

For the quarter ended March 30, 2024, net cash used in financing activities consisted primarily of (i) $27.9 million used to repurchase common stock, (ii) $22.3 million used for the payment of regular quarterly dividends to stockholders of the Company, and (iii) $2.5 million net cash used to settle stock-based awards.

For the quarter ended April 1, 2023, net cash used in financing activities consisted primarily of (i) $16.7 million used for the payment of regular quarterly dividends to stockholders of the Company and (ii) $2.6 million net cash used to settle stock-based awards.

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 March 30, 2024, we had $1.36 billion of cash on hand and $371.1 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 $0.2 million during the first quarter of 2024. 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 20.0 cents and 15.0 cents per common share during first quarters of 2024 and 2023, 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 March 30, 2024, the Company’s total debt was $0.8 million or less than one 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 March 30, 2024. The Credit Agreement backed approximately $28.9 million in letters of credit at the end of the first quarter of 2024.

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 March 30, 2024, 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 March 30, 2024, the Company has repurchased approximately 15.6 million shares under this authorization.

Contractual Cash Obligations

There have been no significant changes in our contractual cash obligations reported at December 30, 2023.

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 March 30, 2024, we held open futures contracts to purchase approximately $16.9 million of copper over the next 12 months related to fixed-price sales orders and to sell approximately $106.3 million of copper over the next six 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 March 30, 2024, we held no open futures contracts to purchase natural gas.

Interest Rates

At March 30, 2024, 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 March 30, 2024, we had open forward contracts with a financial institution to sell approximately 5.1 million euros, 28.1 million Swedish kronor, and 8.2 million Norwegian kroner through July 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 30, 2023, such factors include: (i) the current and projected future business environment, including interest rates capital and consumer spending; (ii) the domestic housing and commercial construction industry environment; (iii) availability and price fluctuations in commodities (including copper, natural gas, and other raw materials, including crude oil that indirectly affects plastic resins); (iv) competitive factors and competitor responses to the Company’s initiatives; (v) stability of government laws and regulations, including taxes; (vi) availability of financing; and (vii) continuation of the environment to make acquisitions, domestic and foreign, including regulatory requirements and market values of candidates.

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 March 30, 2024. 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 March 30, 2024 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 March 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 2023 Annual Report on Form 10-K. Except as set forth below, there have been no material changes in risk factors that were previously disclosed in our 2023 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.

Our pending acquisition of Nehring Electrical Works Company and certain of its affiliated companies involves a number of risks, the occurrence of which could adversely affect our business, financial condition, and operating results.

On April 19, 2024, we entered into an equity purchase agreement to acquire Nehring Electrical Works Company and certain of its affiliated companies (collectively, “Nehring”). The acquisition involves certain risks, the occurrence of which could adversely affect our business, financial condition, and operating results, including:

• delays in completing the acquisition within the expected time period and the risk that the acquisition may not be completed at all;
• diversion of management's attention to complete the acquisition and integrate Nehring’s operations thereafter;
• disruption to our existing operations and plans or inability to effectively manage our expanded operations after the closing of the acquisition;
• potential loss of key Nehring employees, suppliers or customers, or other adverse effects on existing business relationships with suppliers or customers; and
• our expanded operations may not achieve the growth prospects, synergies or other financial results that we have projected for the acquisition.

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