The Company leases certain facilities, vehicles, and equipment which expire on various dates through 2033.2032. The following table includes supplemental information with regards to the Company’s operating leases:
Some of the Company’s leases include variable lease costs such as taxes, insurance, etc. These costs are immaterial for disclosure.
The following table presents certain information related to operating lease costs and cash paid during the period:
Note 10 – Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Total |
| | | | | | | | |
Goodwill | | $ | 166,428 |
| | $ | 8,854 |
| | $ | 4,416 |
| | $ | 179,698 |
|
Accumulated impairment charges | | (40,552 | ) | | (8,853 | ) | | — |
| | (49,405 | ) |
| | | | | | | | |
Balance at December 30, 2017: | | 125,876 |
| | 1 |
| | 4,416 |
| | 130,293 |
|
| | | | | | | | |
Additions (1) | | 5,049 |
| | — |
| | 17,770 |
| | 22,819 |
|
Currency translation | | (2,777 | ) | | — |
| | — |
| | (2,777 | ) |
| | | | | | | | |
Balance at December 29, 2018: | | 128,148 |
| | 1 |
| | 22,186 |
| | 150,335 |
|
| | | | | | | | |
Additions (2) | | 1,999 |
| | — |
| | — |
| | 1,999 |
|
Reductions (3) | | — |
| | — |
| | (534 | ) | | (534 | ) |
Currency translation | | 1,476 |
| | — |
| | — |
| | 1,476 |
|
| | | | | | | | |
Balance at December 28, 2019: | | |
| | |
| | |
| | |
|
Goodwill | | 172,175 |
| | 8,854 |
| | 21,652 |
| | 202,681 |
|
Accumulated impairment charges | | (40,552 | ) | | (8,853 | ) | | — |
| | (49,405 | ) |
| | | | | | | | |
Goodwill, net | | $ | 131,623 |
| | $ | 1 |
| | $ | 21,652 |
| | $ | 153,276 |
|
(1) Includes finalization of the purchase price allocation adjustment for Heatlink Group of $2.8 million. | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Total |
| | | | | | | | |
Goodwill | | $ | 168,700 | | | $ | 8,854 | | | $ | 22,186 | | | $ | 199,740 | |
Accumulated impairment charges | | (40,552) | | | (8,853) | | | 0 | | | (49,405) | |
| | | | | | | | |
Balance at December 29, 2018: | | 128,148 | | | 1 | | | 22,186 | | | 150,335 | |
| | | | | | | | |
Additions (1) | | 1,999 | | | 0 | | | 0 | | | 1,999 | |
Reductions (2) | | 0 | | | 0 | | | (534) | | | (534) | |
Currency translation | | 1,476 | | | 0 | | | 0 | | | 1,476 | |
| | | | | | | | |
Balance at December 28, 2019: | | 131,623 | | | 1 | | | 21,652 | | | 153,276 | |
| | | | | | | | |
Additions | | 11,710 | | | 0 | | | 1,964 | | | 13,674 | |
| | | | | | | | |
Currency translation | | 814 | | | 0 | | | 0 | | | 814 | |
| | | | | | | | |
Balance at December 26, 2020: | | | | | | | | |
Goodwill | | 184,699 | | | 8,854 | | | 23,616 | | | 217,169 | |
Accumulated impairment charges | | (40,552) | | | (8,853) | | | 0 | | | (49,405) | |
| | | | | | | | |
Goodwill, net | | $ | 144,147 | | | $ | 1 | | | $ | 23,616 | | | $ | 167,764 | |
(2)(1) Includes finalization of the purchase price allocation adjustment for Die-Mold of $2.0 million.
(3)(2) Includes finalization of the purchase price allocation adjustment for ATCO of $0.5 million.
Reporting units with recorded goodwill include Domestic Piping Systems Group, B&K LLC, Great Lakes, Heatlink Group, Die-Mold, European Operations, Jungwoo-Mueller, Westermeyer, Turbotec, ATCO, and ATCOShoals. Several factors give rise to goodwill in the Company’s acquisitions, such as the expected benefit from synergies of the combination and the existing workforce of the acquired businesses. There were 0 impairment charges resulting from the 2020, 2019, 2018, or 20172018 annual impairment tests as the estimated fair value of each of the reporting units exceeded its carrying value.
Other Intangible Assets
The carrying amount of intangible assets at December 26, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | |
Customer relationships | | $ | 61,068 | | | $ | (11,676) | | | $ | 49,392 | |
Non-compete agreements | | 2,689 | | | (2,527) | | | 162 | |
Patents and technology | | 22,585 | | | (5,672) | | | 16,913 | |
Trade names and licenses | | 14,631 | | | (4,476) | | | 10,155 | |
Other | | 1,676 | | | (1,091) | | | 585 | |
| | | | | | |
Other intangible assets | | $ | 102,649 | | | $ | (25,442) | | | $ | 77,207 | |
The carrying amount of intangible assets at December 28, 2019 was as follows:
|
| | | | | | | | | | | | |
(In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | |
Customer relationships | | $ | 44,832 |
| | $ | (8,773 | ) | | $ | 36,059 |
|
Non-compete agreements | | 2,499 |
| | (2,156 | ) | | 343 |
|
Patents and technology | | 19,804 |
| | (4,060 | ) | | 15,744 |
|
Trade names and licenses | | 10,155 |
| | (3,249 | ) | | 6,906 |
|
Other | | 1,676 |
| | (646 | ) | | 1,030 |
|
| | | | | | |
Other intangible assets | | $ | 78,966 |
| | $ | (18,884 | ) | | $ | 60,082 |
|
The carrying amount of intangible assets at December 29, 2018 was as follows:
|
| | | | | | | | | | | | |
(In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | |
Customer relationships | | $ | 43,104 |
| | $ | (6,309 | ) | | $ | 36,795 |
|
Non-compete agreements | | 2,400 |
| | (1,582 | ) | | 818 |
|
Patents and technology | | 17,879 |
| | (2,595 | ) | | 15,284 |
|
Trade names and licenses | | 9,173 |
| | (2,188 | ) | | 6,985 |
|
Other | | 2,526 |
| | (437 | ) | | 2,089 |
|
| | | | | | |
Other intangible assets | | $ | 75,082 |
| | $ | (13,111 | ) | | $ | 61,971 |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | | | | | |
Customer relationships | | $ | 44,832 | | | $ | (8,773) | | | $ | 36,059 | |
Non-compete agreements | | 2,499 | | | (2,156) | | | 343 | |
Patents and technology | | 19,804 | | | (4,060) | | | 15,744 | |
Trade names and licenses | | 10,155 | | | (3,249) | | | 6,906 | |
Other | | 1,676 | | | (646) | | | 1,030 | |
| | | | | | |
Other intangible assets | | $ | 78,966 | | | $ | (18,884) | | | $ | 60,082 | |
Amortization expense for intangible assets was $6.1 million in 2020, $5.4 million in 2019, and $4.4 million in 2018, and $3.1 million in 2017.2018. Future amortization expense is estimated as follows:
|
| | | | |
(In thousands) | | Amount |
| | |
2020 | | $ | 5,203 |
|
2021 | | 4,916 |
|
2022 | | 4,836 |
|
2023 | | 4,525 |
|
2024 | | 4,378 |
|
Thereafter | | 36,224 |
|
| | |
|
Expected amortization expense | | $ | 60,082 |
|
| | | | | | | | |
(In thousands) | | Amount |
| | |
2021 | | $ | 6,393 | |
2022 | | 6,311 | |
2023 | | 6,000 | |
2024 | | 5,769 | |
2025 | | 5,743 | |
Thereafter | | 46,991 | |
| | |
Expected amortization expense | | $ | 77,207 | |
Note 11 – Investments in Unconsolidated Affiliates
Tecumseh
The Company owns a 50 percent interest in an unconsolidated affiliate that acquired Tecumseh. The Company also owns a 50 percent interest in a second unconsolidated affiliate that provides financing to Tecumseh. Tecumseh is a global manufacturer of hermetically sealed compressors for residential and specialty air conditioning, household refrigerators and freezers, and commercial refrigeration applications, including air conditioning and refrigeration compressors, as well as condensing units, heat pumps, and complete refrigeration systems.
The following tables present summarized financial information derived from the Company’s equity method investees’ combined consolidated financial statements, which are prepared in accordance with U.S. GAAP.
|
| | | | | | | | |
(In thousands) | | 2019 | | 2018 |
| | | | |
Current assets | | $ | 198,559 |
| | $ | 228,214 |
|
Noncurrent assets | | 87,218 |
| | 114,257 |
|
Current liabilities | | 147,801 |
| | 175,371 |
|
Noncurrent liabilities | | 51,219 |
| | 57,216 |
|
| | | | |
Net sales | | $ | 488,270 |
| | $ | 509,517 |
|
Gross profit | | 58,494 |
| | 59,385 |
|
Net loss | | (44,053 | ) | | (20,049 | ) |
F-42
| | | | | | | | | | | | | | |
(In thousands) | | 2020 | | 2019 |
| | | | |
Current assets | | $ | 167,451 | | | $ | 198,559 | |
Noncurrent assets | | 78,241 | | | 87,218 | |
Current liabilities | | 120,202 | | | 147,801 | |
Noncurrent liabilities | | 50,020 | | | 51,219 | |
| | | | |
Net sales | | $ | 384,919 | | | $ | 488,270 | |
Gross profit | | 50,347 | | | 58,494 | |
Net loss | | (20,892) | | | (44,053) | |
The Company’s loss from unconsolidated affiliates, net of foreign tax, for 2020 and 2019 included net losses of $10.4 million and $22.0 million, respectively, for Tecumseh.
The Company’s loss from unconsolidated affiliates, net of foreign tax, for 2018 included net losses of $14.0 million and charges of $3.0 million related to certain labor claim contingencies, offset by a gain of $7.0 million related to a settlement with the Brazilian Federal Revenue Agency for Tecumseh.
Mueller Middle East
On December 30, 2015, the Company entered into a joint venture agreement with Cayan Ventures and Bahrain Mumtalakat Holding Company to build a copper tube mill in Bahrain. The business operates and brands its products under the Mueller Industries family of brands. The Company has invested approximately $5.0 million of cash to date and is the technical and marketing lead with a 40 percent ownership in the joint venture.
The Company’s loss from unconsolidated affiliates, net of foreign tax, for 2020 and 2019 included net gains of $0.2 million and 2018 included net losses of $2.6 million, respectively, for Mueller Middle East.
Mueller Middle East manufactures and sells copper coils to certain Mueller subsidiaries. For the year ended December 26, 2020, total sales to Mueller subsidiaries were approximately $37.4 million.
Note 12 – Debt
| | | | | | | | | | | | | | |
(In thousands) | | 2020 | | 2019 |
| | | | |
Subordinated Debentures with interest at 6.00%, due 2027 | | $ | 284,479 | | | $ | 284,479 | |
Revolving Credit Facility with interest at 1.52%, due 2021 | | 35,000 | | | 90,000 | |
Jungwoo-Mueller credit facility with interest at 1.90%, due 2021 | | 5,811 | | | 0 | |
Jungwoo-Mueller credit facility with interest at 2.55%, due 2020 | | 0 | | | 5,768 | |
2001 Series IRB's with interest at 1.14%, due 2021 | | 250 | | | 1,250 | |
Other | | 2,555 | | | 5,295 | |
| | 328,095 | | | 386,792 | |
| | | | |
Less debt issuance costs | | (219) | | | (538) | |
Less current portion of debt | | (41,283) | | | (7,530) | |
| | | | |
Long-term debt | | $ | 286,593 | | | $ | 378,724 | |
|
| | | | | | | | |
(In thousands) | | 2019 | | 2018 |
| | | | |
Subordinated Debentures with interest at 6.00%, due 2027 | | $ | 284,479 |
| | $ | 284,479 |
|
Revolving Credit Facility with interest at 3.20%, due 2021 | | 90,000 |
| | 195,000 |
|
Jungwoo-Mueller credit facility with interest at 2.86%, due 2019 | | — |
| | 5,264 |
|
Jungwoo-Mueller credit facility with interest at 2.55%, due 2020 | | 5,768 |
| | 5,104 |
|
2001 Series IRB's with interest at 3.03%, due 2021 | | 1,250 |
| | 2,250 |
|
Other | | 5,295 |
| | 5,458 |
|
| | 386,792 |
| | 497,555 |
|
| | | | |
Less debt issuance costs | | (538 | ) | | (857 | ) |
Less current portion of debt | | (7,530 | ) | | (7,101 | ) |
| | | | |
Long-term debt | | $ | 378,724 |
| | $ | 489,597 |
|
Subordinated Debentures
On March 9, 2017, the Company distributed a special dividend of $3.00 in cash and $5.00 in principal amount of the Company’s 6% Subordinated Debentures (Debentures) due March 1, 2027 for each share of common stock outstanding. Interest on the Debentures is payable semiannually on September 1 and March 1.
The Debentures are subordinated to all other funded debt of the Company and are callable, in whole or in part, at any time at the option of the Company, subject to declining call premiums during the first five years. The Debentures also grant each holder the right to require the Company to repurchase such holder’s Debentures in the event of a change in control at declining repurchase premiums during the first five years. The Debentures may be redeemed, subject to the conditions set forth above, at
the following redemption price (expressed as a percentage of principal amount) plus any accrued but unpaid interest to, but excluding, the redemption date:
If redeemed during the 12-month period beginning March 9:
|
| | |
Year | | Redemption Price |
| | |
2019 | | 104% |
2020 | | 103 |
2021 | | 102 |
2022 and thereafter | | 100 |
| | | | | | | | |
Year | | Redemption Price |
| | |
2020 | | 103% |
2021 | | 102 |
2022 and thereafter | | 100 |
Revolving Credit Facility
The Company’s Credit Agreement provides for an unsecured $350.0 million revolving credit facility (Revolving Credit Facility) that matures on December 6, 2021. Borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at LIBOR or Base Rate as defined by the Credit Agreement, plus a variable premium. LIBOR advances may be based upon the one, three, or six-month LIBOR. The variable premium is based upon the Company’s debt to total capitalization ratio, and can range from 112.5 to 162.5 basis points for LIBOR based loans and 12.5 to 62.5 basis points for Base Rate loans. At December 28, 2019,26, 2020, the premium was 150.0137.5 basis points for LIBOR loans and 50.037.5 basis points for Base Rate loans. Additionally, a commitment fee is payable quarterly on the total commitment less any outstanding loans or issued letters of credit, and varies from 15.0 to 30.0 basis points based upon the Company’s debt to total capitalization ratio. Availability of funds under the Revolving Credit Facility is reduced by the amount of certain outstanding letters of credit, which are used to secure the Company’s payment of insurance deductibles and certain retiree health benefits, totaling approximately $11.9$19.4 million at December 28, 2019.26, 2020. Terms of the letters of credit are generally renewable annually.
Jungwoo-Mueller
Jungwoo-Mueller has several secured revolving credit arrangements with a total borrowing capacity of KRW 25.8 billion (or approximately $21.9$23.5 million). Borrowings are secured by the real property and equipment of Jungwoo-Mueller.
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. At December 28, 2019,26, 2020, the Company was in compliance with all debt covenants.
Aggregate annual maturities of the Company’s debt are as follows:
|
| | | | |
(In thousands) | | Amount |
| | |
2020 | | $ | 7,530 |
|
2021 | | 90,502 |
|
2022 | | 525 |
|
2023 | | 804 |
|
2024 | | 540 |
|
Thereafter | | 286,891 |
|
| | |
|
Long-term debt | | $ | 386,792 |
|
| | | | | | | | |
(In thousands) | | Amount |
| | |
2021 | | $ | 41,283 | |
2022 | | 222 | |
2023 | | 222 | |
2024 | | 222 | |
2025 | | 167 | |
Thereafter | | 285,979 | |
| | |
Long-term debt | | $ | 328,095 | |
Net interest expense consisted of the following:
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Interest expense | | $ | 25,957 |
| | $ | 25,349 |
| | $ | 19,716 |
|
Capitalized interest | | (274 | ) | | (150 | ) | | (214 | ) |
| | | | | | |
| | $ | 25,683 |
| | $ | 25,199 |
| | $ | 19,502 |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2020 | | 2019 | | 2018 |
| | | | | | |
Interest expense | | $ | 19,510 | | | $ | 25,957 | | | $ | 25,349 | |
Capitalized interest | | (263) | | | (274) | | | (150) | |
| | | | | | |
| | $ | 19,247 | | | $ | 25,683 | | | $ | 25,199 | |
Interest paid in 2020, 2019, and 2018 and 2017 was $19.8 million, $25.4 million, $25.2 million, and $13.8$25.2 million, respectively.
Note 13 – Benefit Plans
Pension and Other Postretirement Plans
The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for certain employees. The following tables provide a reconciliation of the changes in the most significant plans’ benefit obligations and the fair value of the plans’ assets for 20192020 and 2018,2019, and a statement of the plans’ aggregate funded status:
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
Change in benefit obligation: | | | | | | | | |
Obligation at beginning of year | | $ | 166,739 |
| | $ | 186,766 |
| | $ | 14,382 |
| | $ | 16,407 |
|
Service cost | | — |
| | 88 |
| | 260 |
| | 235 |
|
Interest cost | | 5,972 |
| | 5,745 |
| | 609 |
| | 447 |
|
Actuarial loss (gain) | | 17,061 |
| | (10,637 | ) | | (1,860 | ) | | (1,185 | ) |
Benefit payments | | (9,883 | ) | | (10,368 | ) | | (832 | ) | | (892 | ) |
Settlement charge | | — |
| | — |
| | (198 | ) | | (171 | ) |
Foreign currency translation adjustment | | 2,275 |
| | (4,855 | ) | | 292 |
| | (459 | ) |
| | | | | | | | |
Obligation at end of year | | 182,164 |
| | 166,739 |
| | 12,653 |
| | 14,382 |
|
| | | | | | | | |
Change in fair value of plan assets: | | |
| | |
| | |
| | |
|
Fair value of plan assets at beginning of year | | 164,603 |
| | 186,336 |
| | — |
| | — |
|
Actual return on plan assets | | 26,734 |
| | (8,282 | ) | | — |
| | — |
|
Employer contributions | | — |
| | 999 |
| | 832 |
| | 892 |
|
Benefit payments | | (9,883 | ) | | (10,368 | ) | | (832 | ) | | (892 | ) |
Foreign currency translation adjustment | | 2,032 |
| | (4,082 | ) | | — |
| | — |
|
| | | | | | | | |
Fair value of plan assets at end of year | | 183,486 |
| | 164,603 |
| | — |
| | — |
|
| | | | | | | | |
Funded (underfunded) status at end of year | | $ | 1,322 |
| | $ | (2,136 | ) | | $ | (12,653 | ) | | $ | (14,382 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
Change in benefit obligation: | | | | | | | | |
Obligation at beginning of year | | $ | 182,164 | | | $ | 166,739 | | | $ | 12,653 | | | $ | 14,382 | |
Service cost | | 0 | | | 0 | | | 212 | | | 260 | |
Interest cost | | 3,260 | | | 5,972 | | | 430 | | | 609 | |
Actuarial loss (gain) | | 10,790 | | | 17,061 | | | 422 | | | (1,860) | |
Plan amendments | | 0 | | | 0 | | | (26) | | | 0 | |
| | | | | | | | |
Benefit payments | | (9,214) | | | (9,883) | | | (716) | | | (832) | |
Curtailment | | 0 | | | 0 | | | (183) | | | 0 | |
Settlement (1) | | (99,585) | | | 0 | | | 0 | | | (198) | |
Foreign currency translation adjustment | | 3,394 | | | 2,275 | | | (10) | | | 292 | |
| | | | | | | | |
Obligation at end of year | | 90,809 | | | 182,164 | | | 12,782 | | | 12,653 | |
| | | | | | | | |
Change in fair value of plan assets: | | | | | | | | |
Fair value of plan assets at beginning of year | | 183,486 | | | 164,603 | | | 0 | | | 0 | |
Actual return on plan assets | | 13,313 | | | 26,734 | | | 0 | | | 0 | |
Employer contributions | | 0 | | | 0 | | | 716 | | | 832 | |
Benefit payments | | (9,214) | | | (9,883) | | | (716) | | | (832) | |
Settlement (1) | | (99,585) | | | 0 | | | 0 | | | 0 | |
Surplus assets (1) | | (12,386) | | | 0 | | | 0 | | | 0 | |
Foreign currency translation adjustment | | 2,866 | | | 2,032 | | | 0 | | | 0 | |
| | | | | | | | |
Fair value of plan assets at end of year | | 78,480 | | | 183,486 | | | 0 | | | 0 | |
| | | | | | | | |
Funded (underfunded) status at end of year | | $ | (12,329) | | | $ | 1,322 | | | $ | (12,782) | | | $ | (12,653) | |
(1)In November 2019, the Company’s Board of Directors approved the termination of the U.S. defined benefit pension plan. There were no impacts to consolidated results for 2019. Settlement accounting criteria was met in Q4 2020, therefore, all resulting settlement charges occurred in 2020. The plan termination resulted in incremental benefit payments of approximately $100.0 million and termination costs of $17.8 million, which consisted of an $11.6 million non-cash
settlement charge and $6.2 million in federal excise tax on surplus assets returned to the Company of approximately $12.4 million, as of December 26, 2020.
The following represents amounts recognized in AOCI (before the effect of income taxes):
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
Unrecognized net actuarial loss | | $ | 36,195 |
| | $ | 39,101 |
| | $ | (1,609 | ) | | $ | 170 |
|
Unrecognized prior service credit | | — |
| | — |
| | (5,485 | ) | | (6,387 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
Unrecognized net actuarial loss (gain) | | $ | 26,476 | | | $ | 36,195 | | | $ | (1,187) | | | $ | (1,609) | |
Unrecognized prior service credit | | 0 | | | 0 | | | (2,401) | | | (5,485) | |
The Company sponsors one pension plan in the U.K. which comprised 43100 and 4543 percent of the above benefit obligation at December 26, 2020 and December 28, 2019, and December 29, 2018, respectively, and 39100 and 3739 percent of the above plan assets at December 26, 2020 and December 28, 2019, and December 29, 2018, respectively.
As of December 28, 2019, $1.626, 2020, $0.9 million of the actuarial net loss and $0.9 millionthe remainder of the prior service credit will, through amortization, be recognized as components of net periodic benefit cost in 2020.2021.
The aggregate status of all overfunded plans is recognized as an asset and the aggregate status of all underfunded plans is recognized as a liability in the Consolidated Balance Sheets. The amounts recognized as a liability are classified as current or long-term on a plan-by-plan basis. Liabilities are classified as current to the extent the actuarial present value of benefits payable within the next 12 months exceeds the fair value of plan assets, with all remaining amounts classified as long-term.
As of December 28, 201926, 2020 and December 29, 2018,28, 2019, the total funded status of the plans recognized in the Consolidated Balance Sheets was as follows:
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
Long-term asset | | $ | 8,592 |
| | $ | 10,580 |
| | $ | — |
| | $ | — |
|
Current liability | | — |
| | — |
| | (1,013 | ) | | (1,080 | ) |
Long-term liability | | (7,270 | ) | | (12,716 | ) | | (11,640 | ) | | (13,302 | ) |
| | | | | | | | |
Total funded (underfunded) status | | $ | 1,322 |
| | $ | (2,136 | ) | | $ | (12,653 | ) | | $ | (14,382 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
Long-term asset | | $ | 0 | | | $ | 8,592 | | | $ | 0 | | | $ | 0 | |
Current liability | | 0 | | | 0 | | | (948) | | | (1,013) | |
Long-term liability | | (12,329) | | | (7,270) | | | (11,834) | | | (11,640) | |
| | | | | | | | |
Total (underfunded) funded status | | $ | (12,329) | | | $ | 1,322 | | | $ | (12,782) | | | $ | (12,653) | |
The components of net periodic benefit cost (income) are as follows:
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
Pension benefits: | | | | | | |
Service cost | | $ | — |
| | $ | 88 |
| | $ | 128 |
|
Interest cost | | 5,972 |
| | 5,745 |
| | 6,344 |
|
Expected return on plan assets | | (8,103 | ) | | (9,522 | ) | | (9,374 | ) |
Amortization of net loss | | 1,950 |
| | 1,151 |
| | 2,206 |
|
| | | | | | |
Net periodic benefit income | | $ | (181 | ) | | $ | (2,538 | ) | | $ | (696 | ) |
| | | | | | |
Other benefits: | | |
| | |
| | |
|
Service cost | | $ | 260 |
| | $ | 235 |
| | $ | 235 |
|
Interest cost | | 609 |
| | 447 |
| | 599 |
|
Amortization of prior service credit | | (902 | ) | | (902 | ) | | (901 | ) |
Amortization of net (gain) loss | | (88 | ) | | 92 |
| | (42 | ) |
Settlement charge | | (2 | ) | | 38 |
| | 17 |
|
| | | | | | |
Net periodic benefit income | | $ | (123 | ) | | $ | (90 | ) | | $ | (92 | ) |
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2020 | | 2019 | | 2018 |
Pension benefits: | | | | | | |
Service cost | | $ | 0 | | | $ | 0 | | | $ | 88 | |
Interest cost | | 3,260 | | | 5,972 | | | 5,745 | |
Expected return on plan assets | | (5,704) | | | (8,103) | | | (9,522) | |
| | | | | | |
Amortization of net loss | | 2,305 | | | 1,950 | | | 1,151 | |
Settlement charge | | 11,642 | | | 0 | | | 0 | |
| | | | | | |
Net periodic benefit cost (income) | | $ | 11,503 | | | $ | (181) | | | $ | (2,538) | |
| | | | | | |
Other benefits: | | | | | | |
Service cost | | $ | 212 | | | $ | 260 | | | $ | 235 | |
Interest cost | | 430 | | | 609 | | | 447 | |
Amortization of prior service credit | | (519) | | | (902) | | | (902) | |
Amortization of net (gain) loss | | (193) | | | (88) | | | 92 | |
Curtailment gain | | (2,591) | | | 0 | | | 0 | |
Settlement charge | | 0 | | | (2) | | | 38 | |
| | | | | | |
Net periodic benefit income | | $ | (2,661) | | | $ | (123) | | | $ | (90) | |
During 2020, the Company recognized a curtailment gain of $2.6 million related to one of its postretirement benefit plans.
The components of net periodic benefit cost (income) other than the service cost component are included in other income, net in the Consolidated Statements of Income.
The weighted average assumptions used in the measurement of the Company’s benefit obligations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | | |
Discount rate | | 1.40 | % | | 1.93 | % | | 2.92 | % | | 3.70 | % |
Expected long-term return on plan assets | | 4.69 | % | | 3.84 | % | | N/A | | N/A |
Rate of compensation increases | | N/A | | N/A | | 5.00 | % | | 5.00 | % |
Rate of inflation | | 3.20 | % | | 3.20 | % | | N/A | | N/A |
|
| | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | |
Discount rate | | 1.93 | % | | 3.72 | % | | 3.70 | % | | 4.56 | % |
Expected long-term return on plan assets | | 3.84 | % | | 5.05 | % | | N/A |
| | N/A |
|
Rate of compensation increases | | N/A |
| | N/A |
| | 5.00 | % | | 5.00 | % |
Rate of inflation | | 3.20 | % | | 3.40 | % | | N/A |
| | N/A |
|
The weighted average assumptions used in the measurement of the Company’s net periodic benefit cost are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| | | | | | | | | | | | |
Discount rate | | 3.72 | % | | 3.22 | % | | 3.61 | % | | 4.56 | % | | 3.89 | % | | 4.21 | % |
Expected long-term return on plan assets | | 5.05 | % | | 5.27 | % | | 5.56 | % | | N/A |
| | N/A |
| | N/A |
|
Rate of compensation increases | | N/A |
| | N/A |
| | N/A |
| | 5.00 | % | | 5.00 | % | | 5.00 | % |
Rate of inflation | | 3.40 | % | | 3.30 | % | | 3.30 | % | | N/A |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | | | | |
Discount rate | | 1.93 | % | | 3.72 | % | | 3.22 | % | | 3.70 | % | | 4.56 | % | | 3.89 | % |
Expected long-term return on plan assets | | 3.84 | % | | 5.05 | % | | 5.27 | % | | N/A | | N/A | | N/A |
Rate of compensation increases | | N/A | | N/A | | N/A | | 5.00 | % | | 5.00 | % | | 5.00 | % |
Rate of inflation | | 3.20 | % | | 3.40 | % | | 3.30 | % | | N/A | | N/A | | N/A |
The Company’s Mexican postretirement plans use the rate of compensation increase in the benefit formulas. Past service in the U.K. pension plan will be adjusted for the effects of inflation. All other pension and postretirement plans use benefit formulas based on length of service.
The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is assumed to range from 4.04.3 to 7.08.7 percent for 2020,2021, gradually decrease to 4.1 percent through 2040, and remain at that level thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported.
Pension Assets
The weighted average asset allocation of the Company’s pension fund assets are as follows:
| | | | | | | | | | | | | | |
| | Pension Plan Assets |
Asset category | | 2020 | | 2019 |
| | | | |
Fixed income securities (includes fixed income mutual funds) | | 0 | % | | 55 | % |
Equity securities (includes equity mutual funds) | | 66 | | | 25 | |
Multi-asset securities | | 24 | | | 9 | |
Cash and equivalents (includes money market funds) | | 1 | | | 7 | |
Alternative investments | | 9 | | | 4 | |
| | | | |
Total | | 100 | % | | 100 | % |
|
| | | | | | |
| | Pension Plan Assets |
Asset category | | 2019 | | 2018 |
| | | | |
Fixed income securities (includes fixed income mutual funds) | | 55 | % | | 54 | % |
Equity securities (includes equity mutual funds) | | 25 |
| | 35 |
|
Multi-asset securities | | 9 |
| | — |
|
Cash and equivalents (includes money market funds) | | 7 |
| | 8 |
|
Alternative investments | | 4 |
| | 3 |
|
| | | | |
Total | | 100 | % | | 100 | % |
At December 28, 2019,26, 2020, the long-term target allocation, by asset category, of assets of the Company’s defined benefit pension plans was: (i) fixed incomeequity securities – at least 60 percent; (ii) equityand multi-asset securities, including equity index funds – not moreless than 3070 percent; and (iii)(ii) alternative investments – not more than 510 percent.
The pension plan obligations are long-term and, accordingly, the plan assets are invested for the long-term. Plan assets are monitored periodically. Based upon results, investment managers and/or asset classes are redeployed when considered necessary. None of the plans’ assets are expected to be returned to the Company during the next fiscal year. The assets of the plans do not include investments in securities issued by the Company.
The estimated rates of return on plan assets are the expected future long-term rates of earnings on plan assets and are forward-looking assumptions that materially affect pension cost. Establishing the expected future rates of return on pension assets is a judgmental matter. The Company reviews the expected long-term rates of return on an annual basis and revises as appropriate. The expected long-term rate of return on plan assets was 4.69 percent for 2020 and 3.84 percent for 2019 and 5.05 percent in 2018.2019.
The Company’s investments for its pension plans are reported at fair value. The following methods and assumptions were used to estimate the fair value of the Company’s plan asset investments:
Cash and money market funds – Valued at cost, which approximates fair value.
Mutual funds – Valued at the net asset value of shares held by the plans at December 28, 201926, 2020 and December 29, 2018,28, 2019, respectively, based upon quoted market prices.
Limited partnerships – Limited partnerships include investments in various Cayman Island multi-strategy hedge funds. The plans’ investments in limited partnerships are valued at the estimated fair value of the class shares owned by the plans based upon the equity in the estimated fair value of those shares. The estimated fair values of the limited partnerships are determined by the investment managers. In determining fair value, the investment managers of the limited partnerships utilize the estimated net asset valuations of the underlying investment entities. The underlying investment entities value securities and other financial instruments on a mark-to-market or estimated fair value basis. The estimated fair value is determined by the investment managers based upon, among other things, the type of investments, purchase price, marketability, current financial condition, operating results, and other information. The estimated fair values of substantially all of the investments of the underlying investment entities, which may include securities for which prices are not readily available, are determined by the investment managers or management of the respective underlying investment entities and may not reflect amounts that could be realized upon immediate sale. Accordingly, the estimated fair values may differ significantly from the values that would have been used had a ready market existed for these investments.
The following table sets forth by level, within the fair value hierarchy, the assets of the plans at fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 26, 2020 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Cash and money market funds | | $ | 492 | | | $ | 0 | | | $ | 0 | | | $ | 492 | |
| | | | | | | | |
Mutual funds (1) | | 0 | | | 71,084 | | | 0 | | | 71,084 | |
Limited partnerships | | 0 | | | 0 | | | 6,904 | | | 6,904 | |
| | | | | | | | |
Total | | $ | 492 | | | $ | 71,084 | | | $ | 6,904 | | | $ | 78,480 | |
| | | | Fair Value Measurements at December 28, 2019 | | | Fair Value Measurements at December 28, 2019 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | | | | | | | |
Cash and money market funds | | $ | 12,318 |
| | $ | — |
| | $ | — |
| | $ | 12,318 |
| Cash and money market funds | | $ | 12,318 | | | $ | 0 | | | $ | 0 | | | $ | 12,318 | |
| Mutual funds (1)(2) | | — |
| | 163,253 |
| | — |
| | 163,253 |
| | 0 | | | 163,253 | | | 0 | | | 163,253 | |
Limited partnerships | | — |
| | — |
| | 7,915 |
| | 7,915 |
| Limited partnerships | | 0 | | | 0 | | | 7,915 | | | 7,915 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 12,318 |
| | $ | 163,253 |
| | $ | 7,915 |
| | $ | 183,486 |
| Total | | $ | 12,318 | | | $ | 163,253 | | | $ | 7,915 | | | $ | 183,486 | |
(1)Approximately 76 percent of mutual funds are actively managed funds and approximately 24 percent of mutual funds are index funds. Additionally, 27 percent of the mutual funds’ assets are invested in non-U.S. multi-asset securities and 73 percent in non-U.S. equities. |
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 29, 2018 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
Cash and money market funds | | $ | 12,984 |
| | $ | — |
| | $ | — |
| | $ | 12,984 |
|
Mutual funds (2) | | — |
| | 146,591 |
| | — |
| | 146,591 |
|
Limited partnerships | | — |
| | — |
| | 5,028 |
| | 5,028 |
|
| | | | | | | | |
Total | | $ | 12,984 |
| | $ | 146,591 |
| | $ | 5,028 |
| | $ | 164,603 |
|
(2)Approximately 80 percent of mutual funds are actively managed funds and approximately 20 percent of mutual funds are index funds. Additionally, 10 percent of the mutual funds’ assets are invested in non-U.S. multi-asset securities, 28 percent in non-U.S. equities, 62 percent in U.S. fixed income securities.
| |
(1)
| Approximately 80 percent of mutual funds are actively managed funds and approximately 20 percent of mutual funds are index funds. Additionally, 10 percent of the mutual funds’ assets are invested in non-U.S. multi-asset securities, 28 percent in non-U.S. equities, and 62 percent in U.S. fixed income securities. |
| |
(2)
| Approximately 61 percent of mutual funds are actively managed funds and approximately 39 percent of mutual funds are index funds. Additionally, 5 percent of the mutual funds’ assets are invested in U.S. equities, 35 percent in non-U.S. equities, 59 percent in U.S. fixed income securities, and 1 percent in non-U.S. fixed income securities. |
The table below reflects the changes in the assets of the plan measured at fair value on a recurring basis using significant unobservable inputs (level 3 of fair value hierarchy) during the year ended December 28, 2019:26, 2020:
|
| | | | |
(In thousands) | | Limited Partnerships |
| | |
Balance, December 29, 2018 | | $ | 5,028 |
|
Redemptions | | (3,825 | ) |
Subscriptions | | 6,846 |
|
Net appreciation in fair value | | (134 | ) |
| | |
|
Balance, December 28, 2019 | | $ | 7,915 |
|
| | | | | | | | |
(In thousands) | | Limited Partnerships |
| | |
Balance, December 28, 2019 | | $ | 7,915 | |
| | |
| | |
Surplus assets | | (1,104) | |
Net appreciation in fair value | | 93 | |
| | |
Balance, December 26, 2020 | | $ | 6,904 | |
Contributions and Benefit Payments
The Company does not expect to contribute to itsthe U.K. pension plans,plan, other than to reimburse expenses, and expects to contribute $1.0 million to its other postretirement benefit plans in 2020. In November 2019, the Company’s Board of Directors approved the termination of the Mueller Pension Plan effective January 2020. The termination is expected to be complete by the end of 2020.2021. The Company expects future benefits to be paid from the plans as follows:
|
| | | | | | | | |
(In thousands) | | Pension Benefits | | Other Benefits |
| | | | |
2020 | | $ | 107,864 |
| | $ | 1,014 |
|
2021 | | 2,815 |
| | 959 |
|
2022 | | 2,905 |
| | 953 |
|
2023 | | 2,998 |
| | 1,053 |
|
2024 | | 3,094 |
| | 1,062 |
|
2025-2029 | | 17,020 |
| | 4,944 |
|
| | | | |
Total | | $ | 136,696 |
| | $ | 9,985 |
|
| | | | | | | | | | | | | | |
(In thousands) | | Pension Benefits | | Other Benefits |
| | | | |
2021 | | $ | 3,428 | | | $ | 947 | |
2022 | | 2,945 | | | 942 | |
2023 | | 3,050 | | | 1,016 | |
2024 | | 3,160 | | | 977 | |
2025 | | 3,273 | | | 974 | |
2026-2030 | | 18,210 | | | 4,700 | |
| | | | |
Total | | $ | 34,066 | | | $ | 9,556 | |
Multiemployer Plan
The Company contributes to the IAM National Pension Fund, National Pension Plan (IAM Plan), a multiemployer defined benefit plan. Participation in the IAM Plan was negotiated under the terms of 2 collective bargaining agreements in Port Huron, Michigan, the Local 218 IAM and Local 44 UAW that expire on May 7, 2023 and June 26, 2022, respectively. The Employer Identification Number for this plan is 51-6031295.
The risks of participating in multiemployer plans are different from single-employer plans in the following aspects: (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the underfunded obligations of the plan may be borne by the remaining participating employers; (iii) if the Company chooses to stop participating in the plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company makes contributions to the IAM Plan trusts that cover certain union employees; contributions by employees are not permitted. Contributions to the IAM Plan were approximately $1.2 million in 2020, $1.2 million in 2019, and $1.3 million in 2018, and $1.1 million in 2017.2018. The Company’s contributions are less than 5 percent of total employer contributions made to the IAM Plan indicated in the most recently filed Form 5500.
Under the Pension Protection Act of 2006, the IAM Plan’s actuary must certify the plan’s zone status annually. Plans in the red zone are generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded. If a plan is determined to be in endangered status, red zone or yellow zone, the plan’s trustees must develop a formal plan of corrective action, a Financial Improvement Plan and/or a Rehabilitation Plan. While theThe IAM Plan remains well-funded at over 80 percent, for 2020, and has been certified in the green zone. In 2019, although the IAM Plan was well-funded at 89 percent, for 2019, it has beenwas certified in the yellow zone due to a declining credit balance. However, as a result of a challenging investment environment and the decline of the IAM Plan’s credit balance, the IAM National Pension Plan Board of Trustees has voluntarily elected to place the IAM Plan in the red zone for 2019.zone. The action was taken to protect the IAM Plan’s participants’ core retirement benefits and strengthen the IAM Plan’s financial health over the long term. For 2018, the IAM Plan was determined to have green zone status.
401(k) Plans
The Company sponsors voluntary employee savings plans that qualify under Section 401(k) of the Internal Revenue Code of 1986. Compensation expense for the Company’s matching contribution to the 401(k) plans was $5.7 million in 2020, $5.4 million in 2019, $5.1 million in 2018, and $5.1 million in 2017.2018. The Company match is a cash contribution. Participants direct the investment of their account balances by allocating among a range of asset classes including mutual funds (equity, fixed income, and balanced funds) and money market funds. The plans do not allow direct investment in securities issued by the Company.
UMWA Benefit Plans
In October 1992, the Coal Industry Retiree Health Benefit Act of 1992 (1992 Act) was enacted. The 1992 Act mandates a method of providing for postretirement benefits to the United Mine Workers of America (UMWA) current and retired employees, including some retirees who were never employed by the Company. In October 1993, beneficiaries were assigned to the Company and the Company began its mandated contributions to the UMWA Combined Benefit Fund, a multiemployer trust. Beginning in 1994, the Company was required to make contributions for assigned beneficiaries under an additional multiemployer trust created by the 1992 Act, the UMWA 1992 Benefit Plan. The ultimate amount of the Company’s liability under the 1992 Act will vary due to factors which include, among other things, the validity, interpretation, and regulation of the 1992 Act, its joint and several obligation, the number of valid beneficiaries assigned, and the extent to which funding for this obligation will be satisfied by transfers of excess assets from the 1950 UMWA pension plan and transfers from the Abandoned Mine Reclamation Fund. Contributions to the plan were $57 thousand, $223 thousand, $153 thousand, and $182$153 thousand for the years ended 2020, 2019, 2018, and 2017,2018, respectively.
Note 14 – Commitments and Contingencies
Environmental
The Company is subject to federal, state, local, and foreign environmental laws and regulations. For all properties, the Company has provided and charged to expense $4.2 million in 2020, $1.7 million in 2019, and $2.0 million in 2018 and $7.5 million in 2017 for pending environmental matters. Environmental reserves totaled $24.0 million at December 26, 2020 and $20.9 million at December 28, 2019 and $23.6 million at December 29, 2018.2019. As of December 28, 2019,26, 2020, the Company expects to spend $0.8 million in 2020, $0.7$2.7 million in 2021, $0.6$0.8 million in 2022, $0.8 million in 2023, $0.7$0.9 million in 2024, $0.8 million in 2025, and $17.3$18.0 million thereafter for ongoing projects.
Non-operating Properties
Southeast Kansas Sites
The Kansas Department of Health and Environment (KDHE) has contacted the Company regarding environmental contamination at 3 former smelter sites in Kansas (Altoona, East La Harpe, and Lanyon). The Company is not a successor to the companies that operated these smelter sites, but is exploring possible settlement with KDHE and other potentially responsible parties (PRP) in order to avoid litigation.
Altoona. Another PRP conducted a site investigation of the Altoona site under a consent decree with KDHE and submitted a removal site evaluation report recommending a remedy. The remedial design plan, which covers both on-site and certain off-site cleanup costs, was approved by the KDHE in 2016. Construction of the remedy was completed in 2018.
East La Harpe. At the East La Harpe site, the Company and 2 other PRPs conducted a site study evaluation under KDHE supervision and prepared a site cleanup plan approved by KDHE. In 2016, the corporate parent (Peabody Energy) of a third party that the Company understands may owe indemnification obligations to one of the other PRPs (Blue Tee) in connection with the East La Harpe site filed for protection under Chapter 11 of the U.S. Bankruptcy Code. KDHE has extended the deadline for the PRPs to develop a repository design plan to allow for wetlands permitting to take place. In December 2018, KDHE provided a draft agreement which contemplates the use of funds KDHE obtained from two other parties (Peabody Energy and Blue Tee) to fund part of the remediation, and removes Blue Tee from the PRPs’ agreement with KDHE. The Company is currently negotiating the terms of the draft agreement.
Lanyon. With respect to the Lanyon Site, in 2016, the Company received a general notice letter from the United States Environmental Protection Agency (EPA) asserting that the Company is a PRP, which the Company has denied. EPA issued an interim record of decision in 2017 and has been remediating properties at the site.
The Company’s reserve for its proportionate share of the remediation costs associated with these 3 Southeast Kansas sites is $5.6 million. EPA issued an interim record of decision in 2017 and has been remediating properties at the site.
Shasta Area Mine Sites
Mining Remedial Recovery Company (MRRC), a wholly owned subsidiary, owns certain inactive mines in Shasta County, California. MRRC has continued a program, begun in the late 1980s, of implementing various remedial measures, including sealing mine portals with concrete plugs in portals that were discharging water. The sealing program achieved significant reductions in the metal load in discharges from these adits; however, additional reductions are required pursuant to an order
issued by the California Regional Water Quality Control Board (QCB). In response to a 1996 QCB Order, MRRC completed a feasibility study in 1997 describing measures designed to mitigate the effects of acid rock drainage. In December 1998, the QCB modified the 1996 order extending MRRC’s time to comply with water quality standards. In September 2002, the QCB adopted a new order requiring MRRC to adopt Best Management Practices (BMP) to control discharges of acid mine drainage, and again extended the time to comply with water quality standards until September 2007. During that time, implementation of BMP further reduced impacts of acid rock drainage; however, full compliance has not been achieved. The QCB is presently renewing MRRC’s discharge permit and will concurrently issue a new order. It is expected that the new 10-year permit will include an order requiring continued implementation of BMP through 2030 to address residual discharges of acid rock drainage. At this site, MRRC spent approximately $1.9$1.7 million from 20172018 through 20192020 for remediation, and currently estimates that it will spend between approximately $12.7$13.9 million and $17.7$18.0 million over the next 30 years.years and has accrued a reserve at the low end of this range.
Lead Refinery Site
U.S.S. Lead Refinery, Inc. (Lead Refinery), a non-operating wholly owned subsidiary of MRRC, has conducted corrective action and interim remedial activities (collectively, Site Activities) at Lead Refinery’s East Chicago, Indiana site pursuant to the Resource Conservation and Recovery Act since December 1996. Although the Site Activities have been substantially concluded, Lead Refinery is required to perform monitoring and maintenance-related activities pursuant to a post-closure permit issued by the Indiana Department of Environmental Management effective as of March 2, 2013. Lead Refinery spent approximately $0.7$0.6 million from 20172018 through 20192020 with respect to this site. Approximate costs to comply with the post-closure permit, including associated general and administrative costs, are estimated at between $1.8$1.7 million and $2.3$2.4 million over the next 1716 years. The Company has recorded a reserve at the low end of this range.
On April 9, 2009, pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the U.S. Environmental Protection Agency (EPA) added the Lead Refinery site and surrounding properties to the National Priorities List (NPL). On July 17, 2009, Lead Refinery received a written notice from the EPA indicating that it may be a PRP under CERCLA due to the release or threat of release of hazardous substances including lead into properties surrounding the Lead Refinery NPL site. The EPA identified two other PRPs in connection with that matter. In November 2012, the EPA adopted a remedy for the surrounding properties and in September 2014, the EPA announced that it had entered into a settlement with the two other PRPs whereby they will pay approximately $26.0 million to fund the cleanup of approximately 300 properties surrounding the Lead Refinery NPL site (zones 1 and 3 of operable unit 1) and perform certain remedial action tasks.
On November 8, 2016, the Company, its subsidiary Arava Natural Resources Company, Inc. (Arava), and Arava’s subsidiary MRRC each received general notice letters from the EPA asserting that they may be PRPs in connection with the Lead Refinery NPL site. The Company, Arava, and MRRC have denied liability for any remedial action and response costs associated with the Lead Refinery NPL site. In June 2017, the EPA requested that Lead Refinery conduct, and the Company fund, a remedial investigation and feasibility study of operable unit 2 of the Lead Refinery NPL site pursuant to a proposed administrative settlement agreement and order on consent. The Company and Lead Refinery entered into that agreement in September 2017. The Company
has made a capital contribution to Lead Refinery to conduct the remedial investigation and feasibility study with respect to operable unit 2 and has provided financial assurance in the amount of $1.0 million. The remedial investigation and feasibility study remain ongoing. The EPA has also asserted its position that Mueller is a responsible party for the Lead Refinery NPL site, and accordingly is responsible for a share of remedial action and response costs at the site and in the adjacent residential area.
In January 2018, the EPA issued 2 unilateral administrative orders (UAOs) directing the Company, Lead Refinery, and four other PRPs to conduct soil and interior remediation of certain residences at the Lead Refinery NPL site (zones 2 and 3 of operable unit 1). The Company and Lead Refinery have reached agreement with the four other PRPs to implement these two2 UAOs, with the Company agreeing to pay, on an interim basis, (i) an estimated $4.5 million (subject to potential change through a future reallocation process) of the approximately $25.0 million the PRPs currently estimateestimated it willwould cost to implement the UAOs, which estimate is subject to change, and (ii) $2.0 million relating to past costs incurred by other PRPs for work conducted at the site, as well as the possibility of up to $0.7 million in further payments for ongoing work by those PRPs, $0.4 million of which has been incurred by those PRPs and paid for by the Company to date.PRPs. As of year-end, the Company has made payments of approximately $7.0$7.2 million related to the aforementioned agreement with the other PRPs. The Company disputes that it was properly named in the UAOs, and has reserved its rights to petition the EPA for reimbursement of any costs incurred to comply with the UAOs upon the completion of the work required therein. In October 2017 a groupand March 2018, separate groups of private plaintiffs sued the Company, Arava, MRRC, and Lead Refinery, along with other defendants, in a privatetwo civil tort actionactions relating to the site; thesite. The Company, Arava, and MRRC werehave been voluntarily dismissed from that litigationboth litigations without prejudice, in March 2018. A second civil action asserting similar claims was filed against the Company, Arava, MRRC, andbut Lead Refinery in September 2018.remains a party to each. At this juncture, the Company is unable to determine the likelihood of a material adverse outcome or the amount or range of a potential loss in excess of the
current reserve with respect to any remedial action or litigation relating to the Lead Refinery NPL site, either at Lead Refinery’s former operating site (operable unit 2) or the adjacent residential area (operable unit 1), including, but not limited to, EPA oversight costs for which EPA may attempt to seek reimbursement from the Company, and past costs for which other PRPs may attempt to seek contribution from the Company.
Bonita Peak Mining District
Following an August 2015 spill from the Gold King Mine into the Animas River near Silverton, Colorado, the EPA listed the Bonita Peak Mining District on the NPL. Said listing was finalized in September 2016. The Bonita Peak Mining District encompasses 48 mining sites within the Animas River watershed, including the Sunnyside Mine, the American Tunnel, and the Sunbank Group. On or about July 25, 2017, Washington Mining Company (Washington Mining) (a wholly-owned subsidiary of the Company’s wholly-owned subsidiary, Arava), received a general notice letter from the EPA stating that Washington Mining may be a PRP under CERCLA in connection with the Bonita Peak Mining District site and therefore responsible for the remediation of certain portions of the site, along with related costs incurred by the EPA. Shortly thereafter, the Company received a substantively identical letter asserting that it may be a PRP at the site and similarly responsible for the cleanup of certain portions of the site. The general notice letters identify one other PRP at the site, and do not require specific action by Washington Mining or the Company at this time. At this juncture, the Company is unable to determine the likelihood of a materially adverse outcome or the amount or range of a potential loss with respect to any remedial action related to the Bonita Peak Mining District NPL site.
Operating Properties
Mueller Copper Tube Products, Inc.
In 1999, Mueller Copper Tube Products, Inc. (MCTP), a wholly owned subsidiary, commenced a cleanup and remediation of soil and groundwater at its Wynne, Arkansas plant to remove trichloroethylene, a cleaning solvent formerly used by MCTP. On August 30, 2000, MCTP received approval of its Final Comprehensive Investigation Report and Storm Water Drainage Investigation Report addressing the treatment of soils and groundwater from the Arkansas Department of Environmental Quality (ADEQ). The Company established a reserve for this project in connection with the acquisition of MCTP in 1998. Effective November 17, 2008, MCTP entered into a Settlement Agreement and Administrative Order by Consent to submit a Supplemental Investigation Work Plan (SIWP) and subsequent Final Remediation Work Plan (RWP) for the site. By letter dated January 20, 2010, ADEQ approved the SIWP as submitted, with changes acceptable to the Company. On December 16, 2011, MCTP entered into an amended Administrative Order by Consent to prepare and implement a revised RWP regarding final remediation for the Site. The remediation system was activated in February 2014. Costs to implement the work plans, including associated general and administrative costs, are estimated to approximate $0.6$0.9 million to $0.9$1.1 million over the next sixfive years. The Company has recorded a reserve at the low end of this range.
United States Department of Commerce Antidumping Review
On December 24, 2008, the Department of Commerce (DOC) initiated an antidumping administrative review of the antidumping duty order covering circular welded non-alloy steel pipe and tube from Mexico for the November 1, 2007 through October 31,
2008 period of review. The DOC selected Mueller Comercial as a respondent in the review. On April 19, 2010, the DOC published the final results of the review and assigned Mueller Comercial an antidumping duty rate of 48.33 percent. On May 25, 2010, the Company appealed the final results to the U.S. Court of International Trade (CIT). On December 16, 2011, the CIT issued a decision remanding the Department’s final results. While the matter was still pending, the Company and the United States reached an agreement to settle the appeal. Subject to the conditions of the agreement, the Company anticipated that certain of its subsidiaries would incur antidumping duties on subject imports made during the period of review and, as such, established a reserve for this matter. After the lapse of the statutory period of time during which U.S. Customs and Border Protection (CBP) was required, but failed, to liquidate the entries at the settled rate, the Company released the reserve. Between October 30, 2015 and November 27, 2015, CBP sent a series of invoices to Southland Pipe Nipples Co., Inc. (Southland), requesting payment of approximately $3.0 million in duties and interest in connection with 795 import entries made during the November 1, 2007 through October 31, 2008 period. On January 26, 2016 and January 27, 2016, Southland filed protests with CBP in connection with these invoices, noting that CBP’s asserted claims were not made in accordance with applicable law, including statutory provisions governing deemed liquidation. The Company believes in the merits of the legal objections raised in Southland’s protests, and CBP’s response to Southland’s protests is currently pending. Given the procedural posture and issues raised by this legal dispute, the Company cannot estimate the amount of potential duty liability, if any, that may result from CBP’s asserted claims.
Equal Employment Opportunity Commission Matter
On October 5, 2016,Deepwater Horizon Economic and Property Damage Claim
During 2020, Mueller Copper Tube Company, a wholly owned subsidiary of the Company, received a demand letter from the Los Angeles District Office of the United States Equal Employment Opportunity Commission (EEOC). The EEOC alleged that between May 2011 and April 2015, various Company employees were terminated in violation of the Americans with Disabilities Act (ADA), and that certain of the Company’s employee leave and attendance policies were discriminatory in nature. Thereafter, the Company, in consultation withcollected approximately $22.1 million related to its liability insurers, entered into conciliation and mediation efforts with the EEOC for purposes of resolving the claims. At the conclusion of those efforts, the Company and the EEOC reached agreement on a consensual resolution of the EEOC’s claims, which includes both monetary and equitable relief.
On June 28, 2018, the EEOC filed a complaint against the Company on behalf of a group of unidentified claimants in the United States District Court for the Central District of California alleging that the Company engaged in unlawful employment practices in violation of the ADA. On July 13, 2018, the District Court approved a Consent Decree between the Company and the EEOC to resolve the EEOC’s claims. The Consent Decree, which is currently set to expire in January 2021, provided that the Company pay up to $1.0 million in monetary relief to fund individual claims for discriminationclaim under the ADA as approved byDeepwater Horizon Economic and Property Damage Settlement Program. The collected amount represent settlement proceeds received after the EEOC. That amount was fully within the limitspayment of the Company’s applicable insurance coverage,fees and has been paid to claimants designated as eligible by the EEOC. The Consent Decree also required the Company to take a series of proactive measures to cultivate a work environment free from unlawful discrimination. Those measures have included, among others, assistance with the identification of potential claimants, employee, supervisory and managerial training regarding employee rights under the ADA, revised practices and procedures concerning reasonable workplace accommodations as required by the ADA, and related reporting and recordkeeping.expenses.
Guarantees
Guarantees, in the form of letters of credit, are issued by the Company generally to assure the payment of insurance deductibles, certain retiree health benefits, and debt at certain unconsolidated affiliates. The terms of the guarantees are generally one year but are renewable annually as required. These letters are primarily backed by the Company’s revolving credit facility. The maximum payments that the Company could be required to make under its guarantees at December 28, 201926, 2020 were $11.9$22.3 million.
Other
The Company is involved in certain litigation as a result of claims that arose in the ordinary course of business, which management believes will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. It may also realize the benefit of certain legal claims and litigation in the future; these gain contingencies are not recognized in the Consolidated Financial Statements.
Note 15 – Income Taxes
The components of income before income taxes were taxed under the following jurisdictions:
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Domestic | | $ | 112,812 |
| | $ | 105,455 |
| | $ | 76,876 |
|
Foreign | | 53,271 |
| | 44,962 |
| | 50,096 |
|
| | | | | | |
Income before income taxes | | $ | 166,083 |
| | $ | 150,417 |
| | $ | 126,972 |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2020 | | 2019 | | 2018 |
| | | | | | |
Domestic | | $ | 144,770 | | | $ | 112,812 | | | $ | 105,455 | |
Foreign | | 64,419 | | | 53,271 | | | 44,962 | |
| | | | | | |
Income before income taxes | | $ | 209,189 | | | $ | 166,083 | | | $ | 150,417 | |
Income tax expense consists of the following:
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Current tax expense: | | | | | | |
Federal | | $ | 19,066 |
| | $ | 17,974 |
| | $ | 28,584 |
|
Foreign | | 12,727 |
| | 9,650 |
| | 10,219 |
|
State and local | | 3,892 |
| | 3,158 |
| | 2,241 |
|
| | | | | | |
Current tax expense | | 35,685 |
| | 30,782 |
| | 41,044 |
|
| | | | | | |
Deferred tax (benefit) expense: | | |
| | |
| | |
|
Federal | | 1,725 |
| | (1,381 | ) | | (1,764 | ) |
Foreign | | (2,311 | ) | | 551 |
| | 1,118 |
|
State and local | | 158 |
| | 1,000 |
| | (2,514 | ) |
| | | | | | |
Deferred tax (benefit) expense | | (428 | ) | | 170 |
| | (3,160 | ) |
| | | | | | |
Income tax expense | | $ | 35,257 |
| | $ | 30,952 |
| | $ | 37,884 |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2020 | | 2019 | | 2018 |
| | | | | | |
Current tax expense: | | | | | | |
Federal | | $ | 37,964 | | | $ | 19,066 | | | $ | 17,974 | |
Foreign | | 16,221 | | | 12,727 | | | 9,650 | |
State and local | | 5,182 | | | 3,892 | | | 3,158 | |
| | | | | | |
Current tax expense | | 59,367 | | | 35,685 | | | 30,782 | |
| | | | | | |
Deferred tax (benefit) expense: | | | | | | |
Federal | | (5,991) | | | 1,725 | | | (1,381) | |
Foreign | | 90 | | | (2,311) | | | 551 | |
State and local | | 1,855 | | | 158 | | | 1,000 | |
| | | | | | |
Deferred tax (benefit) expense | | (4,046) | | | (428) | | | 170 | |
| | | | | | |
Income tax expense | | $ | 55,321 | | | $ | 35,257 | | | $ | 30,952 | |
The difference between the reported income tax expense and a tax determined by applying the applicable U.S. federal statutory income tax rate to income before income taxes is reconciled as follows:
|
| | | | | | | | | | | | |
(In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
Expected income tax expense | | $ | 34,892 |
| | $ | 31,588 |
| | $ | 44,440 |
|
State and local income tax, net of federal benefit | | 3,234 |
| | 3,495 |
| | 1,135 |
|
Effect of foreign statutory rates different from U.S. and other foreign adjustments | | (771 | ) | | 759 |
| | (6,026 | ) |
U.S. production activities deduction | | — |
| | — |
| | (1,575 | ) |
Investment in unconsolidated affiliates | | 538 |
| | (2,776 | ) | | 216 |
|
Benefit of stock-based compensation deductions | | (36 | ) | | (41 | ) | | (2,160 | ) |
Effect of tax on accumulated foreign earnings | | (111 | ) | | (4,415 | ) | | 12,893 |
|
Effect of tax rate change on net deferred tax liability balance | | — |
| | — |
| | (12,067 | ) |
Other, net | | (2,489 | ) | | 2,342 |
| | 1,028 |
|
| | | | | | |
Income tax expense | | $ | 35,257 |
| | $ | 30,952 |
| | $ | 37,884 |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2020 | | 2019 | | 2018 |
| | | | | | |
Expected income tax expense | | $ | 43,930 | | | $ | 34,892 | | | $ | 31,588 | |
State and local income tax, net of federal benefit | | 5,949 | | | 3,234 | | | 3,495 | |
Effect of foreign statutory rates different from U.S. and other foreign adjustments | | 2,783 | | | (771) | | | 759 | |
| | | | | | |
| | | | | | |
| | | | | | |
Investment in unconsolidated affiliates | | (387) | | | 538 | | | (2,776) | |
| | | | | | |
| | | | | | |
Effect of tax on accumulated foreign earnings | | 0 | | | (111) | | | (4,415) | |
| | | | | | |
Other, net | | 3,046 | | | (2,525) | | | 2,301 | |
| | | | | | |
Income tax expense | | $ | 55,321 | | | $ | 35,257 | | | $ | 30,952 | |
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax
rate from 35 percent to 21 percent, required companies to pay a one-time transition tax on the accumulated earnings of certain foreign subsidiaries, and created new taxes on certain foreign-sourced earnings.subsidiaries. The Company applied the guidance in Staff Accounting Bulletin No. 118 in accounting for the enactment date effects of the Act. At December 30, 2017, the Company made a reasonable estimate of the one-time transition tax on accumulated foreign earnings as well as the impact of the Act on its existing deferred tax balances. During the fourth quarter of 2018, the Company completed its accounting for all of the enactment-date income tax effects of the Act.
The one-time transition tax is based onAct, and following the Company’s total post-1986 earnings and profits (E&P) for whichcompletion of the accrualanalysis of U.S. income taxes had previously been deferred. The Company recorded a provisional amount for its one-time transition tax liability, resulting in an increase in income tax expense of $12.9 million, or 22 cents per diluted share, at December 30, 2017. During 2018, the Company continued to refine its calculation of the transition tax. Following the completion of this analysis,tax, the Company recorded a reduction to income tax expense of $4.4 million, or eight cents per diluted share, to reduce this liability. During 2019, the Treasury Department finalized regulationsregulation related to the calculation of the transition tax, the impact of which was immaterial to the financial statements.Company’s Consolidated Financial Statements. The Company continues to assert that the undistributed earnings of most of its foreign subsidiaries are permanently reinvested. No taxes have been accrued with respect to these undistributed earnings or any outside basis differences.
On December 30, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent, resulting in an income tax benefit of $12.1 million, or 21 cents per diluted share. The Company has concluded that no further adjustment is needed related to this remeasurement.
The global intangible low-taxed income (GILTI) provisions of the Act impose a tax on the GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to provide for the tax expense related to GILTIglobal intangible low-taxed income (GILTI) in the year the tax is incurred.
The Company includes interest and penalties related to income tax matters as a component of income tax expense. The income tax expense, related to penaltiesnone of which was material in 2020, 2019, and interest was immaterial in 2019, 2018, and 2017.2018.
The statute of limitations is open for the Company’s federal tax return for 2015 and for 2017 and all subsequent years. The statutes of limitations for most state returns are open for 20162017 and all subsequent years, and some state and foreign returns are also open for some earlier tax years due to differing statute periods. The Internal Revenue Service is currently auditing the Company’s 2015 and 2017 tax returns. While the Company believes that it is adequately reserved for possible audit adjustments, the final resolution of these examinations cannot be determined with certainty and could result in final settlements that differ from current estimates.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
|
| | | | | | | | |
(In thousands) | | 2019 | | 2018 |
| | | | |
Deferred tax assets: | | | | |
Inventories | | $ | 12,247 |
| | $ | 12,297 |
|
Other postretirement benefits and accrued items | | 9,271 |
| | 9,213 |
|
Other reserves | | 6,834 |
| | 7,847 |
|
Foreign tax attributes | | 5,909 |
| | 6,252 |
|
State tax attributes, net of federal benefit | | 22,395 |
| | 27,651 |
|
Stock-based compensation | | 3,378 |
| | 2,949 |
|
Right of Use Liability | | 5,965 |
| | — |
|
Basis difference in unconsolidated affiliates | | 6,547 |
| | 1,067 |
|
| | | | |
Total deferred tax assets | | 72,546 |
| | 67,276 |
|
Less valuation allowance | | (23,130 | ) | | (25,311 | ) |
| | | | |
Deferred tax assets, net of valuation allowance | | 49,416 |
| | 41,965 |
|
| | | | |
Deferred tax liabilities: | | |
| | |
|
Property, plant, and equipment | | 47,791 |
| | 44,910 |
|
Pension | | 949 |
| | 250 |
|
Right of Use Asset | | 5,967 |
| | — |
|
Other Liabilities | | 311 |
| | — |
|
| | | | |
Total deferred tax liabilities | | 55,018 |
| | 45,160 |
|
| | | | |
Net deferred tax liabilities | | $ | (5,602 | ) | | $ | (3,195 | ) |
| | | | | | | | | | | | | | |
(In thousands) | | 2020 | | 2019 |
| | | | |
Deferred tax assets: | | | | |
Inventories | | $ | 13,910 | | | $ | 12,247 | |
Other postretirement benefits and accrued items | | 11,477 | | | 9,271 | |
| | | | |
Other reserves | | 7,782 | | | 6,834 | |
Foreign tax attributes | | 6,250 | | | 5,909 | |
State tax attributes, net of federal benefit | | 21,178 | | | 22,395 | |
Stock-based compensation | | 3,751 | | | 3,378 | |
Right of Use Liability | | 6,034 | | | 5,965 | |
Basis difference in unconsolidated affiliates | | 8,478 | | | 6,547 | |
| | | | |
Total deferred tax assets | | 78,860 | | | 72,546 | |
Less valuation allowance | | (27,199) | | | (23,130) | |
| | | | |
Deferred tax assets, net of valuation allowance | | 51,661 | | | 49,416 | |
| | | | |
Deferred tax liabilities: | | | | |
Property, plant, and equipment | | 48,990 | | | 47,791 | |
Pension | | 0 | | | 949 | |
Right of Use Asset | | 6,157 | | | 5,967 | |
Other Liabilities | | 638 | | | 311 | |
| | | | |
| | | | |
Total deferred tax liabilities | | 55,785 | | | 55,018 | |
| | | | |
Net deferred tax liabilities | | $ | (4,124) | | | $ | (5,602) | |
As of December 28, 2019,26, 2020, after consideration of the federal impact, the Company had state income tax credit carryforwards of $2.3$2.6 million, all of which expire by 2022,2023, and other state income tax credit carryforwards of $11.7$9.0 million with unlimited lives. The Company had state net operating loss (NOL) carryforwards with potential tax benefits of $8.4$9.6 million, after consideration of the federal impact, expiring between 20202021 and 2034.2035. The state tax credit and NOL carryforwards are offset by valuation allowances totaling $10.7$12.0 million.
As of December 28, 2019,26, 2020, the Company had other foreign tax attributes with potential tax benefits of $5.0$4.6 million that have an unlimited life. These attributes were offset by a valuation allowance totaling $3.0$3.4 million. The Company also had other foreign tax attributes of $0.9$1.6 million, which have limited lives expiring between 20252034 and 2039.2040. The Company has also recorded a valuation allowance against deferred tax assets related to the book-tax differences in investments in unconsolidated affiliates.
Income taxes paid were approximately $49.3 million in 2020, $41.8 million in 2019, and $38.1 million in 2018, and $42.5 million in 2017.2018.
Note 16 – Equity
The Company’s Board of Directors has extended, until August 2020,July 2021, its authorization to repurchase up to 20 million shares of the Company’s common stock through open market transactions or through privately negotiated transactions. The Company has no obligation to purchase any shares and may cancel, suspend, or extend the time period for the purchase of shares at any time. Any purchases will be funded primarily through existing cash and cash from operations. The Company may hold any shares purchased in treasury or use a portion of the repurchased shares for its stock-based compensation plans, as well as for other corporate purposes. From its initial authorization in 1999 through December 28, 2019,26, 2020, the Company has repurchased approximately 6.26.4 million shares under this authorization.
Note 17 – Stock-Based Compensation
The Company has in effect stock incentive plans under which stock-based awards have been granted to certain employees and members of its Board of Directors. Under these existing plans, the Company may grant stock options, restricted stock awards, and performance stock awards. Approximately 1.6 million shares were available for future stock incentive awards at December 26, 2020.
During the years ended December 26, 2020, December 28, 2019, and December 29, 2018, the Company recognized stock-based compensation, as a component of selling, general, and administrative expense, in its Consolidated Statements of Income of $8.6 million, $8.7 million, and $8.0 million, respectively.
The total compensation expense not yet recognized related to stock incentive awards at December 26, 2020 was $20.8 million, with an average expense recognition period of 3.0 years.
The Company generally issues treasury shares when stock options are exercised, or when restricted stock awards or performance stock awards are granted. A summary of the activity and related information follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock Options | | Restricted Stock Awards | | Performance Stock Awards |
(Shares in thousands) | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | | | | | | | | | | | |
Beginning of period | | 939 | | | $ | 25.05 | | | 764 | | | $ | 31.44 | | | $ | 298 | | | $ | 31.08 | |
Granted | | 28 | | | 24.33 | | | 120 | | | 29.00 | | | 197 | | | 29.61 | |
Exercised/Released | | (158) | | | 15.55 | | | (176) | | | 31.93 | | | 0 | | | 0 | |
Forfeited | | (16) | | | 31.63 | | | (2) | | | 32.36 | | | 0 | | | 0 | |
| | | | | | | | | | | | |
End of period | | 793 | | | $ | 26.81 | | | 706 | | | $ | 30.89 | | | 495 | | | $ | 30.50 | |
Stock Options
Stock options are generally granted to purchase shares of common stock at prices not less thanan exercise price equal to the fairaverage of the high and low market valueprice of the Company’s stock on the grant date, as well as restricted stock awards.date. Generally, the awards vest within five years from the grant date. Any unexercised options expire after not more than ten years.
During the years ended December 28, 2019, December 29, 2018, and December 30, 2017, the Company recognized stock-based compensation, as a component of selling, general, and administrative expense, in its Consolidated Statements of Income of $8.7 million, $8.0 million, and $7.5 million, respectively.
Stock Options
The fair value of each option is estimated as a single award and amortized into compensation expense on a straight-line or accrual basis over its vesting period based on its vesting schedule. The weighted average grant-date fair value of options granted during 2019, 2018, and 2017 was $8.78, $9.64, and $9.38, respectively.
The Company estimates the fair value of all stock option awards as of the grant date by applying the Black-Scholes-Merton option pricing model. The use of this valuation model in the determination of compensation expense involves certain assumptions that are judgmental and/or highly sensitive including the expected life of the option, stock price volatility, risk-free interest rate, and dividend yield. Additionally, forfeitures are not estimated at the time of valuation; they are recognized as they occur. The weighted average of key assumptions used in determining the fair value of options granted and a discussion of the methodology used to develop each assumption are as follows:
|
| | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | | | | | |
Expected term | | 7.8 years |
| | 7.6 years |
| | 7.7 years |
|
Expected price volatility | | 28.6 | % | | 27.2 | % | | 28.9 | % |
Risk-free interest rate | | 2.4 | % | | 2.9 | % | | 2.1 | % |
Dividend yield | | 1.4 | % | | 1.3 | % | | 1.3 | % |
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | | | | | |
Fair value of stock options on grant date | | $ | 6.81 | | $ | 8.78 | | $ | 9.64 |
Expected term | | 7.9 years | | 7.8 years | | 7.6 years |
Expected price volatility | | 31.9 | % | | 28.6 | % | | 27.2 | % |
Risk-free interest rate | | 0.6 | % | | 2.4 | % | | 2.9 | % |
Dividend yield | | 1.7 | % | | 1.4 | % | | 1.3 | % |
Expected term – This is the period of time estimated based on historical experience over which the options granted are expected to remain outstanding. An increase in the expected term will increase compensation expense.
Expected price volatility – This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate the volatility assumption. Daily market value changes from the grant date over a past period representative of the expected term of the options are used. An increase in the expected price volatility rate will increase compensation expense.
Risk-free interest rate – This is the U.S. Treasury rate for the week of the grant, having a term representative of the expected term of the options. An increase in the risk-free rate will increase compensation expense.
Dividend yield – This rate is the annual dividends per share as a percentage of the Company’s stock price. An increase in the dividend yield will decrease compensation expense.
The total intrinsic value of options exercised was $2.4 million, $1.6 million, and $0.9 million in 2020, 2019, and $10.2 million in 2019, 2018, and 2017, respectively. The total fair value of options that vested was $0.7 million, $1.0 million, each yearand $1.0 million in 2020, 2019, 2018, and 2017.2018.
At December 28, 2019,26, 2020, the aggregate intrinsic value of all outstanding options was $6.3$6.4 million with a weighted average remaining contractual term of 5.55.3 years. Of the outstanding options, 613568 thousand are currently exercisable with an aggregate intrinsic value of $5.8$5.7 million, a weighted average exercise price of $22.34,$24.92, and a weighted average remaining contractual term of 4.54.6 years.
The total compensation expense not yet recognized related to unvested options at December 28, 2019 was $1.5 million, with an average expense recognition period of 3.0 years.
Restricted Stock Awards
The fair value of each restricted stock award equals the fair value of the Company’s stock on the grant date and is amortized into compensation expense on a straight-line or accrual basis over its vesting period based on its vesting schedule. The weighted average grant-date fair value of awards granted during 2020, 2019, and 2018 was $29.00, $28.64, and 2017 was $28.82, $32.04, and $30.97,$31.95, respectively.
The aggregate intrinsic value of outstanding and unvested awards was $33.7$24.7 million at December 28, 2019. Total compensation expense for restricted stock awards not yet recognized was $18.7 million with an average expense recognition period of 3.2 years.26, 2020. The total fair value of awards that vested was $5.6 million, $5.6 million, and $3.7 million in 2020, 2019, and $3.5 million in 2019, 2018, and 2017, respectively.
Performance Stock Awards
Performance stock awards require achievement of certain performance criteria which are predefined by the Compensation Committee of the Board of Directors at the time of grant.The Company generally issues treasury shares when options are exercised or restrictedfair value of each performance stock award equals the fair value of the Company’s stock on the grant date.Performance stock awards are granted. A summaryvested and released at the end of the activity and related information follows:performance period if the predefined performance criteria are achieved.
|
| | | | | | | | | | | | | | |
| | Stock Options | | Restricted Stock Awards |
(Shares in thousands) | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Grant Date Fair Value |
| | | | | | | | |
Outstanding at December 29, 2018 | | 1,014 |
| | $ | 23.90 |
| | 930 |
| | $ | 32.14 |
|
Granted | | 34 |
| | 28.82 |
| | 316 |
| | 28.82 |
|
Exercised/Released | | (94 | ) | | 13.37 |
| | (182 | ) | | 31.06 |
|
Forfeited | | (15 | ) | | 29.31 |
| | (2 | ) | | 34.12 |
|
| | | | | | | | |
Outstanding at December 28, 2019 | | 939 |
| | 25.05 |
| | 1,062 |
| | 31.34 |
|
For all performance stock awards, in the event the certified results equal the predefined performance criteria, the Company will grant the number of shares equal to the target award. In the event the certified results exceed the predefined performance criteria, additional shares up to the maximum award will be granted. In the event the certified results fall below the predefined performance criteria but above the minimum threshold, a reduced number of shares will be granted. If the certified results fall below the minimum threshold, no shares will be granted.
Approximately 1.9
In the period it becomes probable that the minimum threshold specified in the award will be achieved, the Company recognizes expense for the proportionate share of the total fair value of the performance stock awards related to the vesting period that has already lapsed for the shares expected to vest and be released. The remaining fair value of the shares expected to vest and be released is expensed on a straight-line basis over the balance of the vesting period. In the event the Company determines it is no longer probable that it will achieve the minimum threshold specified in the award, all of the previously recognized compensation expense is reversed in the period such a determination is made.
The weighted average grant-date fair value of awards granted during 2020, 2019, and 2018 was $29.61, $29.11, and $32.28, respectively.
The aggregate intrinsic value of outstanding and unvested awards was $17.2 million shares were available for future stock incentive awards at December 28, 2019.26, 2020.
Note 18 – Accumulated Other Comprehensive Income (Loss)
AOCI includes certain foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges, adjustments to pension and OPEBother post-employment benefit liabilities, unrealized gains and losses on marketable securities classified as available-for-sale, and other comprehensive income attributable to unconsolidated affiliates.
The following table provides changes in AOCI by component, net of taxes and noncontrolling interest (amounts in parentheses indicate debits to AOCI):
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Cumulative Translation Adjustment | | Unrealized Gain (Loss) on Derivatives | | Pension/ OPEB Liability Adjustment | | Attributable to Unconsol. Affiliates | | Total |
| | | | | | | | | | |
Balance at December 30, 2017 | | $ | (38,163 | ) | | $ | 847 |
| | $ | (20,610 | ) | | $ | 6,870 |
| | $ | (51,056 | ) |
| | | | | | | | | | |
Other comprehensive loss before reclassifications | | (16,094 | ) | | (802 | ) | | (3,642 | ) | | (8,686 | ) | | (29,224 | ) |
Amounts reclassified from AOCI | | — |
| | (371 | ) | | 303 |
| | — |
| | (68 | ) |
| | | | | | | | | | |
Net current-period other comprehensive loss | | (16,094 | ) | | (1,173 | ) | | (3,339 | ) | | (8,686 | ) | | (29,292 | ) |
Reclassification of stranded effects of the Act | | — |
| | 112 |
| | (1,018 | ) | | 1,462 |
| | 556 |
|
| | | | | | | | | | |
Balance at December 29, 2018 | | (54,257 | ) | | (214 | ) | | (24,967 | ) | | (354 | ) | | (79,792 | ) |
| | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | | 8,059 |
| | 1,176 |
| | 2,315 |
| | (839 | ) | | 10,711 |
|
Amounts reclassified from AOCI | | — |
| | (486 | ) | | 797 |
| | — |
| | 311 |
|
| | | | | | | | | | |
Balance at December 28, 2019 | | $ | (46,198 | ) | | $ | 476 |
| | $ | (21,855 | ) | | $ | (1,193 | ) | | $ | (68,770 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Cumulative Translation Adjustment | | Unrealized (Loss) Gain on Derivatives | | Pension/ OPEB Liability Adjustment | | | | Attributable to Unconsol. Affiliates | | Total |
| | | | | | | | | | | | |
Balance at December 29, 2018 | | $ | (54,257) | | | $ | (214) | | | $ | (24,967) | | | | | $ | (354) | | | $ | (79,792) | |
| | | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | | 8,059 | | | 1,176 | | | 2,315 | | | | | (839) | | | 10,711 | |
Amounts reclassified from AOCI | | 0 | | | (486) | | | 797 | | | | | 0 | | | 311 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance at December 28, 2019 | | (46,198) | | | 476 | | | (21,855) | | | | | (1,193) | | | (68,770) | |
| | | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | | 8,859 | | | (4,583) | | | (3,639) | | | | | (132) | | | 505 | |
Amounts reclassified from AOCI | | 0 | | | 5,091 | | | 8,291 | | | | | 0 | | | 13,382 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance at December 26, 2020 | | $ | (37,339) | | | $ | 984 | | | $ | (17,203) | | | | | $ | (1,325) | | | $ | (54,883) | |
Reclassification adjustments out of AOCI were as follows:
|
| | | | | | | | | | | | | | |
| | Amount reclassified from AOCI |
(In thousands) | | 2019 | | 2018 | | 2017 | | Affected Line Item |
| | | | | | | | |
Unrealized losses (gains) on derivatives: | | | | | | | | |
Commodity contracts | | $ | (587 | ) | | $ | (429 | ) | | $ | 1,309 |
| | Cost of goods sold |
Interest rate swap | | — |
| | — |
| | 851 |
| | Interest expense |
| | 101 |
| | 58 |
| | (624 | ) | | Income tax expense (benefit) |
| | | | | | | | |
| | $ | (486 | ) | | $ | (371 | ) | | $ | 1,536 |
| | Net of tax and noncontrolling interests |
| | | | | | | | |
Amortization of net loss and prior service cost on employee benefit plans | | $ | 960 |
| | $ | 341 |
| | $ | 1,263 |
| | Other income, net |
| | (163 | ) | | (38 | ) | | (221 | ) | | Income tax benefit |
| | | | | | | | |
| | $ | 797 |
| | $ | 303 |
| | $ | 1,042 |
| | Net of tax and noncontrolling interests |
| | | | | | | | |
Gain recognized upon sale of business | | $ | — |
| | $ | — |
| | $ | (3,777 | ) | | Gain on sale of assets, net |
| | — |
| | — |
| | — |
| | Income tax expense |
| | | | | | | | |
| | $ | — |
| | $ | — |
| | $ | (3,777 | ) | | Net of tax and noncontrolling interests |
| | | | | | | | |
Sale of available-for-sale securities | | $ | — |
| | $ | — |
| | $ | (611 | ) | | Other income, net |
| | — |
| | — |
| | 232 |
| | Income tax expense |
| | | | | | | | |
| | $ | — |
| | $ | — |
| | $ | (379 | ) | | Net of tax and noncontrolling interests |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount reclassified from AOCI |
(In thousands) | | 2020 | | 2019 | | 2018 | | Affected Line Item |
| | | | | | | | |
Unrealized losses (gains) on derivatives: | | | | | | | | |
Commodity contracts | | $ | 6,337 | | | $ | (587) | | | $ | (429) | | | Cost of goods sold |
| | | | | | | | |
| | (1,246) | | | 101 | | | 58 | | | Income tax (benefit) expense |
| | | | | | | | |
| | $ | 5,091 | | | $ | (486) | | | $ | (371) | | | Net of tax and noncontrolling interests |
| | | | | | | | |
Amortization of net loss (gain) and prior service cost on employee benefit plans | | $ | 11,642 | | | $ | 0 | | | $ | 0 | | | Pension plan termination expense |
| | (998) | | | 960 | | | 341 | | | Other income, net |
| | (2,353) | | | (163) | | | (38) | | | Income tax benefit |
| | | | | | | | |
| | $ | 8,291 | | | $ | 797 | | | $ | 303 | | | Net of tax and noncontrolling interests |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Note 19 – Quarterly Financial Information (Unaudited) (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| | | | | | | | | |
2020 | | | | | | | | | |
Net sales | | $ | 602,919 | | | $ | 500,168 | | | $ | 619,105 | | | $ | 675,851 | | |
Gross profit (2) | | 94,204 | | | 97,009 | | | 118,325 | | | 122,344 | | |
Consolidated net income (3) | | 33,951 | | | 28,487 | | | 43,957 | | | 37,254 | | |
Net income attributable to Mueller Industries, Inc. | | 32,415 | | | 27,956 | | | 42,702 | | | 36,420 | | |
Basic earnings per share | | 0.58 | | | 0.50 | | | 0.77 | | | 0.65 | | |
Diluted earnings per share | | 0.57 | | | 0.50 | | | 0.76 | | | 0.64 | | |
Dividends per share | | 0.10 | | | 0.10 | | | 0.10 | | | 0.10 | | |
| | | | | | | | | |
2019 | | | | | | | | | |
Net sales | | $ | 611,781 | | | $ | 666,394 | | | $ | 608,602 | | | $ | 543,839 | | |
Gross profit (2) | | 100,388 | | | 102,446 | | | 97,814 | | | 94,358 | | |
Consolidated net income | | 17,139 | | | 28,676 | | | 30,444 | | | 29,973 | | |
Net income attributable to Mueller Industries, Inc. | | 15,723 | | | 27,986 | | | 29,093 | | | 28,170 | | |
Basic earnings per share | | 0.28 | | | 0.50 | | | 0.52 | | | 0.50 | | |
Diluted earnings per share | | 0.28 | | | 0.50 | | | 0.52 | | | 0.50 | | |
Dividends per share | | 0.10 | | | 0.10 | | | 0.10 | | | 0.10 | | |
(1)The sum of quarterly amounts may not equal the annual amounts reported due to rounding. In addition, the earnings per share amounts are computed independently for each quarter, while the full year is based on the weighted average shares outstanding.
(2)Gross profit is net sales less cost of goods sold, which excludes depreciation and amortization.
(3)Includes income earned by Shoals Tubular, Inc., acquired during Q1 2020, and Kessler Sales and Distribution, acquired during Q3 2020.
|
| | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| | | | | | | | | |
2019 | | | | | | | | | |
Net sales | | $ | 611,781 |
| | $ | 666,394 |
| | $ | 608,602 |
| | $ | 543,839 |
| |
Gross profit (2) | | 100,388 |
| | 102,446 |
| | 97,814 |
| | 94,358 |
| |
Consolidated net income | | 17,139 |
| | 28,676 |
| | 30,444 |
| | 29,973 |
| |
Net income attributable to Mueller Industries, Inc. | | 15,723 |
| | 27,986 |
| | 29,093 |
| | 28,170 |
| |
Basic earnings per share | | 0.28 |
| | 0.50 |
| | 0.52 |
| | 0.50 |
| |
Diluted earnings per share | | 0.28 |
| | 0.50 |
| | 0.52 |
| | 0.50 |
| |
Dividends per share | | 0.10 |
| | 0.10 |
| | 0.10 |
| | 0.10 |
| |
| | | | | | | | | |
2018 | | |
| | |
| | |
| | |
| |
Net sales | | $ | 640,060 |
| | $ | 662,773 |
| | $ | 645,958 |
| | $ | 559,087 |
| |
Gross profit (2) | | 94,390 |
| | 98,953 |
| | 79,002 |
| | 85,133 |
| |
Consolidated net income (3) | | 24,344 |
| | 33,882 |
| | 20,863 |
| | 27,731 |
| |
Net income attributable to Mueller Industries, Inc. | | 24,128 |
| | 33,182 |
| | 20,292 |
| | 26,857 |
| |
Basic earnings per share | | 0.42 |
| | 0.58 |
| | 0.36 |
| | 0.47 |
| |
Diluted earnings per share | | 0.42 |
| | 0.58 |
| | 0.35 |
| | 0.47 |
| |
Dividends per share | | 0.10 |
| | 0.10 |
| | 0.10 |
| | 0.10 |
| |
| |
(1)
| The sum of quarterly amounts may not equal the annual amounts reported due to rounding. In addition, the earnings per share amounts are computed independently for each quarter, while the full year is based on the weighted average shares outstanding. |
| |
(2)
| Gross profit is net sales less cost of goods sold, which excludes depreciation and amortization. |
| |
(3)
| Includes income earned by ATCO, acquired during Q3 2018, and Die-Mold, acquired during Q1 2018. |
Note 20 – Subsequent Events
On February 12, 2020, Mueller Copper Tube Company, a wholly owned subsidiary of22, 2021, the Company collected approximately $21.9 million relatedannounced that intends to issue on or about February 25, 2021 a notice of full redemption to the holders of its claim under the Deepwater Horizon Economic and Property Damage Settlement Program, which as previously reported by the Company, was originally approved in November 2018, subject to appeal. The collected amount represents settlement proceeds received after the payment of fees and expenses.6% Subordinated Debentures due 2027.
On January 17, 2020,29, 2021, the Company entered into a stockan asset purchase agreement pursuant to whichwith Hart & Cooley LLC, whereby the Company acquired all ofpurchased the outstanding stock of Shoals Tubular, Inc. (STI) for approximately $15.4Hart & Cooley flexible duct business. The total purchase price was $14.0 million net of working capital adjustments. STI is a manufacturer of brazed manifolds, headers, and distributor assemblies used primarily by manufactures of residential heating and air conditioning units. STIin cash paid at closing. The acquisition will be reported with and complementsexpand the Company’s footprint in the air quality and climate control systems market and complement the existing flexible duct business in itswithin the Climate segment.
In January 2020, the Company completed the purchase of its corporate headquarters located in Collierville, TN for $10.6 million. In 2019, the building was leased and was included in the operating lease right-of-use assets line item in the Consolidated Balance Sheet. In 2020, it will be included in property, plant, and equipment, net. The corporate headquarters lease represents $9.3 million and $9.5 million of the total operating lease right-of-use-assets and related lease liabilities at year-end. Remaining lease payments under the previous agreement were $14.5 million at the end of 2019 and are included in the operating lease maturities table in “Note 8 – Leases.”
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Mueller Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mueller Industries, Inc. (the Company) as of December 28, 201926, 2020 and December 29, 2018,28, 2019, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 28, 2019,26, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 28, 201926, 2020 and December 29, 2018,28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2019,26, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 28, 2019,26, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 26, 202024, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accountsaccount or disclosures to which they relate.it relates.
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| | |
| | Defined Benefit Pension Obligation |
Description of the Matter | | At December 28, 2019,26, 2020 the aggregate defined benefit pension obligation was $182.2$90.8 million and exceeded the fair value of pension plan assets was $183.5of $78.5 million, resulting in an overfundedunderfunded defined benefit pension obligation of $1.3$12.3 million. As disclosed in Notes 1 and 13 to the consolidated financial statements, the Company recognizes the overfunded or underfunded status of the plans as an asset or liability in the consolidated balance sheets with changes in the funded status recorded through comprehensive income in the year in which those changes occur. The obligations for these plans are actuarially determined and affected by assumptions, including discount rates, expected long-term return on plan assets, and certain employee-related factors such as mortality.
Auditing the defined benefit pension obligation is complex and required the involvement of our actuarial specialists due to the highly judgmental nature of actuarial assumptions (e.g., discount rate, mortality rate, and expected return on plan assets, and mortality rate)assets) used in the measurement process and the geographical differences of the plans, which require different considerations for the relevant assumptions based on the respective economic and demographic environments.process. These assumptions have a significant effect on the projected benefit obligation. |
| | |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the measurement and valuation of the defined benefit pension obligation. For example, we tested controls over management’s review of the defined benefit pension obligation, including the significant actuarial assumptions used by management and the related data inputs.
To test the defined benefit pension obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above and testing the completeness and accuracy of the underlying data, including the participant data used by management.
We involved our actuarial specialist to assist with our procedures. For example, we compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension obligation from prior year due to the change in service cost, interest cost, actuarial gains and losses, benefit payments, contributions and other activities.activities, including settlements. In addition, we evaluated management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments that is used to measure the defined benefit pension obligation. As part of this assessment, we compared management’s selected discount rate to an independently developed range of reasonable discount rates. To evaluate the mortality rate assumption, we assessed whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific factors were applied. Lastly, to evaluate the expected return on plan assets, we assessed whether management’s assumption was consistent with a range of returns for a portfolio of comparative investments. |
| | |
| | Valuation of Goodwill - Heatlink Group Reporting Unit |
Description of the Matter | | At December 28, 2019, the Company’s goodwill was $153.3 million, of which $131.6 million related to the Piping Systems segment which includes the Heatlink Group reporting unit. As disclosed in Notes 1 and 10 to the consolidated financial statements, goodwill is evaluated annually for possible impairment as of the first day of the fourth quarter unless circumstances indicate the need to accelerate the timing of the evaluation.
Auditing management’s annual goodwill impairment test for the Heatlink Group reporting unit was complex and highly judgmental due to the significant estimates required to determine the fair value of the reporting unit. Fair value for the Heatlink Group reporting unit is determined using the income approach, incorporating market participant considerations and management’s assumptions on revenue growth rates, operating margins, discount rates and a terminal value, among other factors. Fair value estimates of reporting units with fair values that do not significantly exceed their carrying values are sensitive to these assumptions and are directly impacted by the condition of the markets in which the reporting unit operates.
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How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the goodwill impairment process. For example, we tested controls over management’s review of the significant assumptions used in the reporting unit valuations as well as management’s review around the reasonableness of the data used in these valuations.
To test the estimated fair value of the Heatlink Group reporting unit, we performed audit procedures that included, among others, evaluating methodologies used, involving our valuation specialists in testing the significant assumptions and valuation methodology described above and testing the underlying data used by the Company in its analysis for completeness and accuracy. We compared the significant assumptions used by management to current industry and economic trends, historical results and other guideline companies within the same industry, as well as other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the reporting unit resulting from changes in the inputs and assumptions. We evaluated the incorporation of the applicable assumptions into the model and tested the model’s computational accuracy.
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We have served as the Company’s auditor since 1991. | |
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Memphis, Tennessee | |
February 26, 202024, 2021 | |
MUELLER INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 26, 2020, December 28, 2019, and December 29, 2018 and December 30, 2017
| | | | | | Additions | | | | | | | | | Additions | | | | |
(In thousands) | | Balance at beginning of year | | Charged to costs and expenses | | Other additions | | Deductions | | Balance at end of year | (In thousands) | | Balance at beginning of year | | Charged to costs and expenses | | Other additions | | Deductions | | Balance at end of year |
| | | | | | | | | | | | | | | | | | | | |
2019 | | | | | | | | | | | |
2020 | | 2020 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 836 |
| | $ | (81 | ) | | $ | 263 |
| | $ | 248 |
| | $ | 770 |
| Allowance for doubtful accounts | | $ | 770 | | | $ | 1,208 | | | $ | 0 | | | $ | 440 | | | $ | 1,538 | |
| | | | | | | | | | | |
Environmental reserves | | $ | 23,619 |
| | $ | 1,659 |
| | $ | — |
| | $ | 4,412 |
| | $ | 20,866 |
| Environmental reserves | | $ | 20,866 | | | $ | 4,242 | | | $ | 0 | | | $ | 1,107 | | | $ | 24,001 | |
| | | | | | | | | | | |
Valuation allowance for deferred tax assets | | $ | 25,311 |
| | $ | 2,919 |
| | $ | 290 |
| | $ | 5,390 |
| | $ | 23,130 |
| Valuation allowance for deferred tax assets | | $ | 23,130 | | | $ | 2,317 | | | $ | 1,898 | | | $ | 146 | | | $ | 27,199 | |
| | 2018 | | | | | | | | | | | |
2019 | | 2019 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 980 |
| | $ | (286 | ) | | $ | 220 |
| | $ | 78 |
| | $ | 836 |
| Allowance for doubtful accounts | | $ | 836 | | | $ | (81) | | | $ | 263 | | | $ | 248 | | | $ | 770 | |
| | | | | | | | | | | |
Environmental reserves | | $ | 28,004 |
| | $ | 1,981 |
| | $ | — |
| | $ | 6,366 |
| | $ | 23,619 |
| Environmental reserves | | $ | 23,619 | | | $ | 1,659 | | | $ | 0 | | | $ | 4,412 | | | $ | 20,866 | |
| | | | | | | | | | | |
Valuation allowance for deferred tax assets | | $ | 30,316 |
| | $ | 1,209 |
| | $ | 150 |
| | $ | 6,364 |
| | $ | 25,311 |
| Valuation allowance for deferred tax assets | | $ | 25,311 | | | $ | 2,919 | | | $ | 290 | | | $ | 5,390 | | | $ | 23,130 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2018 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 980 | | | $ | (286) | | | $ | 220 | | | $ | 78 | | | $ | 836 | |
| | | | | | | | | | |
Environmental reserves | | $ | 28,004 | | | $ | 1,981 | | | $ | 0 | | | $ | 6,366 | | | $ | 23,619 | |
| | | | | | | | | | |
Valuation allowance for deferred tax assets | | $ | 30,316 | | | $ | 1,209 | | | $ | 150 | | | $ | 6,364 | | | $ | 25,311 | |
|
| | | | | | | | | | | | | | | | | | | | |
2017 | | |
| | |
| | |
| | |
| | |
|
Allowance for doubtful accounts | | $ | 637 |
| | $ | 422 |
| | $ | (61 | ) | | $ | 18 |
| | $ | 980 |
|
| | | | | | | | | | |
Environmental reserves | | $ | 21,864 |
| | $ | 7,491 |
| | $ | — |
| | $ | 1,351 |
| | $ | 28,004 |
|
| | | | | | | | | | |
Valuation allowance for deferred tax assets | | $ | 18,681 |
| | $ | 7 |
| | $ | 11,628 |
| (1) | $ | — |
| | $ | 30,316 |
|
| |
(1)
| The valuation allowance increased by $11.6 million during 2017 to a balance of $30.3 million as of December 30, 2017. The change to the valuation allowance was attributable to the recording of valuation allowances against tax attributes generated in 2017 primarily resulting from the Act and increased interest expense in state tax jurisdictions where the Company has no tax liability.
|