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EXCEL - IDEA: XBRL DOCUMENT - MUELLER INDUSTRIES INCFinancial_Report.xls
EX-31.1 - SECTION 302 CERTIFICATION OF THE CEO - MUELLER INDUSTRIES INCex311.htm
EX-31.2 - SECTION 302 CERTIFICATION OF THE CFO - MUELLER INDUSTRIES INCex312.htm
EX-32.1 - SECTION 906 CERTIFICATION OF THE CEO - MUELLER INDUSTRIES INCex321.htm
EX-32.2 - SECTION 906 CERTIFICATION OF THE CFO - MUELLER INDUSTRIES INCex322.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2014
Commission file number 1–6770
 
 
Mueller Industries, Inc. Logo
 

MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
25-0790410
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)

8285 Tournament Drive, Suite 150
 
Memphis, Tennessee
38125
(Address of principal executive offices)
(Zip Code)

(901) 753-3200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 Yes x Noo
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x Noo
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   x
Accelerated filer   o
Non-accelerated filer   o
Smaller reporting company   o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   o     No   x

The number of shares of the Registrant’s common stock outstanding as of October 22, 2014, was 56,890,102.
 
 
 
 
 

 


MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended September 27, 2014

__________________________

As used in this report, the terms “Company,” “Mueller,” and “Registrant” mean Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole, unless the context indicates otherwise.

__________________________



   
Page Number
Part I.  Financial Information
 
     
   
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
21
     
 
26
     
 
28
     
Part II.  Other Information
 
     
 
28
     
 
30
     
 
30
     
 
31
     
32



 
2

 
 

PART I. FINANCIAL INFORMATION

MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
For the Quarter Ended
   
For the Nine Months Ended
 
(In thousands, except per share data)
 
September 27, 2014
   
September 28, 2013
   
September 27, 2014
   
September 28, 2013
 
                         
Net sales
 
$
602,820
   
$
528,854
   
$
1,826,885
   
$
1,670,826
 
                                 
Cost of goods sold
   
521,278
     
456,302
     
1,574,830
     
1,440,277
 
Depreciation and amortization
   
8,952
     
7,882
     
25,651
     
24,364
 
Selling, general, and administrative expense
   
34,864
     
32,921
     
102,167
     
99,078
 
Gain on sale of plastic fittings manufacturing assets
   
     
(39,765
)
   
     
(39,765
)
Impairment charges
   
     
4,304
     
     
4,304
 
Insurance settlements
   
     
     
     
(106,332
)
                                 
Operating income
   
37,726
     
67,210
     
124,237
     
248,900
 
                                 
Interest expense
   
(1,430
)
   
(1,243
)
   
(3,913
)
   
(2,940
)
Other income, net
   
225
     
842
     
440
     
4,324
 
                                 
Income before income taxes
   
36,521
     
66,809
     
120,764
     
250,284
 
                                 
Income tax expense
   
(12,199
)
   
(26,816
)
   
(36,279
)
   
(92,015
)
                                 
Consolidated net income
   
24,322
     
39,993
     
84,485
     
158,269
 
                                 
Net income attributable to noncontrolling interest
   
(499
)
   
(129
)
   
(911
)
   
(1,053
)
                                 
Net income attributable to Mueller Industries, Inc.
 
$
23,823
   
$
39,864
   
$
83,574
   
$
157,216
 
                                 
Weighted average shares for basic earnings per share(1)
   
56,107
     
55,787
     
55,999
     
55,704
 
Effect of dilutive stock-based awards(1)
   
637
     
723
     
746
     
737
 
                                 
Adjusted weighted average shares for diluted earnings per share(1)
   
56,744
     
56,510
     
56,745
     
56,441
 
                                 
Basic earnings per share(1)
 
$
0.42
   
$
0.71
   
$
1.49
   
$
2.82
 
                                 
Diluted earnings per share(1)
 
$
0.42
   
$
0.71
   
$
1.47
   
$
2.79
 
                                 
Dividends per share(1)
 
$
0.075
   
$
0.0625
   
$
0.225
   
$
0.1875
 
                                 
See accompanying notes to condensed consolidated financial statements.
_______________________________________ 

1 Adjusted retroactively to reflect the two-for-one stock split that occurred on March 14, 2014.

 
 
 
3

 
 

 
MUELLER INDUSTRIES, INC.
(Unaudited)

   
For the Quarter Ended
   
For the Nine Months Ended
   
(In thousands)
 
September 27, 2014
   
September 28, 2013
   
September 27, 2014
   
September 28, 2013
   
         
Consolidated net income
 
$
24,322
   
$
39,993
   
$
84,485
   
$
158,269
   
                                   
Other comprehensive (loss) income, net of tax:
                                 
Foreign currency translation
   
(6,661
)
   
6,738
     
(3,698
)
   
770
   
Net change with respect to derivative instruments and hedging activities
   
(174
)
(2)
 
531
 
(3)
 
(1,650
)
(4)
 
1,005
 
(5)
Net actuarial loss on pension and postretirement obligations
   
646
 
(6)
 
(186
)
(7)
 
490
 
(8)
 
1,975
 
(9)
Other, net
   
(1
)
   
22
     
7
     
105
   
                                   
Total other comprehensive (loss) income
   
(6,190
)
   
7,105
     
(4,851
)
   
3,855
   
                                   
Consolidated comprehensive income
   
18,132
     
47,098
     
79,634
     
162,124
   
Comprehensive income attributable to noncontrolling interest
   
(889
)
   
(186
)
   
(548
)
   
(1,613
)
 
                                   
Comprehensive income attributable to Mueller Industries, Inc.
 
$
17,243
   
$
46,912
   
$
79,086
   
$
160,511
   
                                   
See accompanying notes to condensed consolidated financial statements.
                                   
                                   

_______________________________________ 
 
2 Net of tax of $42
 
3 Net of tax of $(280)
 
4 Net of tax of $907
 
5 Net of tax of $(607)
 
6 Net of tax of $(232)
 
7 Net of tax of $(3)
 
8 Net of tax of $(109)
 
9 Net of tax of $(963)

 
 
 
 
 
4

 
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except share data)
 
September 27, 2014
   
December 28, 2013
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
259,858
   
$
311,800
 
Accounts receivable, less allowance for doubtful accounts of $981 in 2014 and $2,391 in 2013
   
332,508
     
271,847
 
Inventories
   
282,493
     
251,716
 
Current deferred income taxes
   
8,963
     
8,106
 
Other current assets
   
40,356
     
31,248
 
                 
Total current assets
   
924,178
     
874,717
 
                 
Property, plant, and equipment, net
   
246,169
     
244,457
 
Goodwill
   
103,242
     
94,357
 
Other assets
   
54,147
     
34,236
 
                 
Total assets
 
$
1,327,736
   
$
1,247,767
 
                 
Liabilities
           
Current liabilities:
           
Current portion of debt
 
$
37,207
   
$
29,083
 
Accounts payable
   
92,342
     
80,897
 
Accrued wages and other employee costs
   
34,577
     
37,109
 
Other current liabilities
   
69,197
     
72,167
 
                 
Total current liabilities
   
233,323
     
219,256
 
                 
Long-term debt, less current portion
   
205,500
     
206,250
 
Pension liabilities
   
9,299
     
10,645
 
Postretirement benefits other than pensions
   
16,561
     
16,781
 
Environmental reserves
   
21,557
     
22,144
 
Deferred income taxes
   
33,342
     
35,975
 
Other noncurrent liabilities
   
581
     
849
 
                 
Total liabilities
   
520,163
     
511,900
 
                 
Equity
               
Mueller Industries, Inc. stockholders’ equity:
               
Preferred stock - $1.00 par value; shares authorized 5,000,000; none outstanding
   
     
 
Common stock - $.01 par value; shares authorized 100,000,000; issued 80,183,004; outstanding 56,885,661 in 2014 and 56,604,674(10) in 2013
   
802
     
401
 
Additional paid-in capital
   
267,361
     
267,142
 
Retained earnings
   
979,079
     
908,274
 
Accumulated other comprehensive loss
   
(15,309
)
   
(10,819
)
Treasury common stock, at cost
   
(457,371
)
   
(461,593
)
                 
Total Mueller Industries, Inc. stockholders’ equity
   
774,562
     
703,405
 
Noncontrolling interest
   
33,011
     
32,462
 
                 
Total equity
   
807,573
     
735,867
 
                 
Commitments and contingencies
   
     
 
                 
Total liabilities and equity
 
$
1,327,736
   
$
1,247,767
 
                 
See accompanying notes to condensed consolidated financial statements.
 
_______________________________________ 
 
10 Adjusted retroactively to reflect the two-for-one stock split that occurred on March 14, 2014.
 
 
5

 
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the Nine Months Ended
 
(In thousands)
 
September 27, 2014
 
September 28, 2013
 
         
Cash flows from operating activities
               
Consolidated net income
 
$
84,485
   
$
158,269
 
Reconciliation of consolidated net income to net cash provided by operating activities:
               
Depreciation and amortization
   
25,888
     
24,583
 
Stock-based compensation expense
   
4,957
     
4,560
 
Insurance settlements
   
     
(106,332
)
Insurance proceeds – noncapital related
   
     
32,395
 
Gain on sale of plastic fittings manufacturing assets
   
     
(39,765
)
Gain on disposal of properties
   
(1,146
)
   
(3,316
)
Impairment charges
   
     
4,304
 
Deferred income taxes
   
(6,908
)
   
14,152
 
Income tax benefit from exercise of stock options
   
(829
)
   
(670
)
Changes in assets and liabilities, net of business acquired:
               
Receivables
   
(62,854
)
   
(38,370
)
Inventories
   
(14,868
)
   
(4,566
)
Other assets
   
(15,272
)
   
4,886
 
Current liabilities
   
(8,675
)
   
19,649
 
Other liabilities
   
(797
)
   
(297
)
Other, net
   
223
     
508
 
                 
Net cash provided by operating activities
   
4,204
     
69,990
 
                 
Cash flows from investing activities
               
Capital expenditures
   
(28,406
)
   
(33,402
)
Acquisition of business
   
(30,137
)
   
 
Insurance proceeds for property and equipment
   
     
29,910
 
Net withdrawals from (deposits into) restricted cash balances
   
2,507
     
(2,473
)
Proceeds from sales of assets
   
4,920
     
64,966
 
                 
Net cash (used in) provided by investing activities
   
(51,116
)
   
59,001
 
                 
Cash flows from financing activities
               
Dividends paid to stockholders of Mueller Industries, Inc.
   
(12,606
)
   
(10,449
)
Debt issuance cost
   
     
(50
)
Issuance of long-term debt, net
   
12,008
     
 
(Repayment) issuance of debt by joint venture, net
   
(3,170
)
   
4,940
 
Net cash used to settle stock-based awards
   
(887
)
   
(337
)
Repurchase of common stock
   
(58
)
   
 
Repayments of long-term debt
   
(800
)
   
(750
)
Income tax benefit from exercise of stock options
   
829
     
670
 
                 
Net cash used in financing activities
   
(4,684
)
   
(5,976
)
                 
Effect of exchange rate changes on cash
   
(346
)
   
228
 
                 
(Decrease) increase in cash and cash equivalents
   
(51,942
)
   
123,243
 
Cash and cash equivalents at the beginning of the period
   
311,800
     
198,934
 
                 
Cash and cash equivalents at the end of the period
 
$
259,858
   
$
322,177
 
                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
6

 
 
 
MUELLER INDUSTRIES, INC.
(Unaudited)

General

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.  Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole.  This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K, including the annual financial statements incorporated therein.

The accompanying unaudited interim financial statements include all normal recurring adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.


Note 1 – Earnings per Common Share

Basic per share amounts have been computed based on the average number of common shares outstanding.  Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options and vesting of restricted stock awards, computed using the treasury stock method.  Approximately 180 thousand stock based awards were excluded from the computation of diluted earnings per share for the quarter ended September 27, 2014 because they were antidilutive.

On February 21, 2014, the Company’s Board of Directors announced a two-for-one stock split of its common stock effected in the form of a stock dividend of one share for each outstanding share.  The record date for the stock split was March 14, 2014, and the additional shares were distributed on March 28, 2014.  Accordingly, all references to share and per share amounts presented in the Condensed Consolidated Financial Statements and this Quarterly Report on Form 10-Q have been adjusted retroactively to reflect the stock split.


Note 2 – Commitments and Contingencies

The Company is involved in certain litigation as a result of claims that arose in the ordinary course of business, which management believes will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.  The Company may also realize the benefit of certain legal claims and litigation in the future; these gain contingencies are not recognized in the Condensed Consolidated Financial Statements.

U.K. Actions Relating to the European Commission’s 2004 Copper Tube Decision and 2006 Copper Fittings Decision
 
In the Competition Appeal Tribunal (the CAT) in the United Kingdom, IMI plc and IMI Kynoch Limited (IMI) and Boliden AB (Boliden) were served with claims by 21 claimants, all companies within the Travis Perkins Group (TP and the TP Claimants) regarding copper tube. The TP Claimants sought follow-on damages arising out of conduct described in the European Commission’s September 3, 2004, decision regarding copper tube.  The claims purported to arise from the findings of the European Commission as set forth in that decision (Copper Tube Decision).  IMI and Boliden commenced legal proceedings against Mueller Industries, Inc., WTC Holding Company, Inc., DENO Holding Company, Inc., Mueller Europe, Limited, and DENO Acquisition EURL (the five Mueller entities), and in those proceedings claimed  a contribution for any follow-on damages.

In the High Court in the United Kingdom, IMI was also served with claims by 21 TP Claimants regarding copper fittings.  The TP Claimants are seeking follow-on damages arising out of conduct described in the European Commission’s September 20, 2006, decision regarding copper fittings.  The claims similarly purport to arise from the findings of the European Commission as set forth in that decision.  IMI commenced legal proceedings against Mueller Industries, Inc., Mueller Europe Limited, and WTC Holding Company, Inc. (the three Mueller entities), and in those proceedings claimed a contribution for any follow-on damages.
 
 
7

 
 
 
 As to the claims arising from the Copper Tube Decision brought in the CAT, following the CAT’s grant of approval, the case was transferred to the High Court. Mueller’s defense in response to the contribution claims brought by IMI and Boliden was served on March 15, 2013.  During the second quarter of 2014, a settlement was reached in respect of the claims against Mueller and the High Court has dismissed the claims against Mueller. The total payment made by Mueller pursuant to the settlement did not have a material impact on the Company’s financial position, results of operations, or cash flows.

As to the claims arising from the Copper Fittings Decision, Mueller's defense in response to the contribution claims brought by IMI was served on May 30, 2014.  During the third quarter of 2014, a settlement was reached in respect of the claims against Mueller and the High Court has dismissed the claims against Mueller.  The total payment made by Mueller pursuant to the settlement did not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
 
Environmental

Lead Refinery Site

U.S.S. Lead Refinery, Inc. (Lead Refinery), a non-operating wholly owned subsidiary of Mining Remedial Recovery Company, has conducted corrective action and interim remedial activities and studies (collectively, Site Activities) at Lead Refinery’s East Chicago, Indiana site pursuant to the Resource Conservation and Recovery Act.  Site Activities, which began in December 1996, have been substantially concluded.  Lead Refinery is required to perform monitoring and maintenance activities with respect to Site 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 $0.1 million annually in 2013, 2012 and 2011 with respect to this site.  Approximate costs to comply with the post-closure permit, including associated general and administrative costs, are between $2.1 million and $3.9 million over the next 20 years.
 
On April 9, 2009, pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the Environmental Protection Agency (EPA) added the Lead Refinery site, and properties surrounding the Lead Refinery site, to the National Priorities List (NPL).  The NPL is a list of priority sites where the EPA has determined that there has been a release or threatened release of hazardous substances that warrant investigation and, if appropriate, remedial action.  The NPL does not assign liability to any party including the owner or operator of a property placed on the NPL.  The placement of a site on the NPL does not necessarily mean that remedial action must be taken.  On July 17, 2009, Lead Refinery received a written notice from the EPA that the agency is of the view that Lead Refinery may be a potentially responsible party (PRP) under CERCLA in connection with the release or threat of release of hazardous substances including lead into properties surrounding the Lead Refinery site.  The EPA has identified two other PRPs in connection with the release or threat of release of hazardous substances into properties surrounding the Lead Refinery site. PRPs under CERCLA include current and former owners and operators of a site, persons who arranged for disposal or treatment of hazardous substances at a site, or persons who accepted hazardous substances for transport to a site.  In November 2012, the EPA adopted a remedy in connection with properties surrounding the Lead Refinery site.  The EPA has estimated that the cost to implement the November 2012 remedy will be $30.0 million.  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 site.
 
The Company monitors EPA press releases and periodically communicates with the EPA to inquire of the status of the investigation and cleanup of the Lead Refinery site.  As of September 27, 2014, the EPA has not conducted an investigation of the Lead Refinery site pursuant to CERCLA, proposed remedies for the Lead Refinery site, or informed Lead Refinery that it is a PRP at the Lead Refinery site.  Until the extent of any remedial action is determined for the Lead Refinery site, the Company is unable to determine the likelihood of a material adverse outcome or the amount or range of a potential loss with respect to placement of the Lead Refinery site and adjacent properties on the NPL.  Lead Refinery lacks the financial resources needed to undertake any investigations or remedial action that may be required by the EPA pursuant to CERCLA.


 
8

 
 
 
Other

Guarantees, in the form of letters of credit, are issued by the Company generally to assure the payment of insurance deductibles and certain retiree health benefits.  The terms of the Company’s 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 September 27, 2014, were $10.6 million.


Note 3 – Insurance Claims

In September 2011, a portion of the Company’s Wynne, Arkansas manufacturing operation was damaged by fire.  Certain inventories, production equipment, and building structures were extensively damaged.  During the second quarter of 2013, the Company settled the claim with its insurer for total proceeds of $127.3 million, net of the deductible of $0.5 million.  As a result of the settlement with its insurer, all proceeds received and all costs previously deferred (which were recorded as other current liabilities in prior periods) were recognized, resulting in a pre-tax gain of $106.3 million in the second quarter of 2013, or $1.17 per diluted share after tax.


Note 4 – Inventories

(In thousands)
 
September 27, 2014
   
December 28, 2013
 
       
Raw materials and supplies
 
$
63,438
   
$
54,613
 
Work-in-process
   
44,232
     
43,796
 
Finished goods
   
180,377
     
159,422
 
Valuation reserves
   
(5,554
)
   
(6,115
)
                 
Inventories
 
$
282,493
   
$
251,716
 
                 
 
 
 
Note 5 – Industry Segments

The Company’s reportable segments are Plumbing & Refrigeration and Original Equipment Manufacturers (OEM).  For disclosure purposes, as permitted under Accounting Standards Codification (ASC) 280, Segment Reporting, certain operating segments are aggregated into reportable segments.  The Plumbing & Refrigeration segment is composed of Standard Products (SPD), European Operations, and Mexican Operations.  The OEM segment is composed of Industrial Products (IPD), Engineered Products (EPD), and Jiangsu Mueller–Xingrong Copper Industries Limited (Mueller-Xingrong).  These segments are classified primarily by the markets for their products.  Performance of segments is generally evaluated by their operating income.  Intersegment transactions are generally conducted on an arms-length basis.

SPD manufactures copper tube and fittings, plastic fittings, plastic pipe, and line sets.  These products are manufactured in the U.S.  Outside the U.S., the Company’s European Operations manufacture copper tube, which is sold primarily in Europe.  SPD also imports and resells brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products.  Mexican Operations consist of pipe nipple manufacturing and import distribution businesses including product lines of malleable iron fittings and other plumbing specialties.  The European Operations also includes the import distribution of fittings, valves, and plumbing specialties primarily in the U.K. and Ireland.  The Plumbing & Refrigeration segment’s products are sold primarily to plumbing, refrigeration, and air-conditioning wholesalers, hardware wholesalers and co-ops, and building product retailers.  For the nine months ended September 27, 2014, cost of goods sold included a decrease in accruals related to import duties of $3.1 million.

 
9

 
 
 
IPD manufactures brass rod, impact extrusions, and forgings which are used in a wide variety of end products including plumbing brass, automotive components, valves, and fittings.  EPD manufactures and fabricates valves and assemblies primarily for the refrigeration, air-conditioning, and gas appliance markets and specialty copper, copper-alloy, and aluminum tubing.  Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications.  These products are sold primarily to original equipment manufacturers.

Summarized segment information is as follows:
   
For the Quarter Ended September 27, 2014
 
 (In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
                         
                                 
Net sales
 
$
357,843
   
$
247,883
   
$
(2,906
)
 
$
602,820
 
                                 
Cost of goods sold
   
308,927
     
215,225
     
(2,874
)
   
521,278
 
Depreciation and amortization
   
5,287
     
3,148
     
517
     
8,952
 
Selling, general, and administrative expense
   
23,473
     
5,533
     
5,858
     
34,864
 
                                 
   Operating income
 
$
20,156
   
$
23,977
   
$
(6,407
)
   
37,726
 
                                 
Interest expense
                           
(1,430
)
Other income, net
                           
225
 
                                 
Income before income taxes
                         
$
36,521
 
                                 
 
   
For the Quarter Ended September 28, 2013
 
 (In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
                         
                                 
Net sales
 
$
301,622
   
$
230,396
   
$
(3,164
)
 
$
528,854
 
                                 
Cost of goods sold
   
258,035
     
201,399
     
(3,132
)
   
456,302
 
Depreciation and amortization
   
4,172
     
3,150
     
560
     
7,882
 
Selling, general, and administrative expense
   
20,736
     
5,779
     
6,406
     
32,921
 
Gain on sale of plastic fittings manufacturing assets
   
(39,765
)
   
     
     
(39,765
)
Impairment charges
   
4,173
     
131
     
     
4,304
 
                                 
  Operating income
 
$
54,271
   
$
19,937
   
$
(6,998
)
   
67,210
 
                                 
Interest expense
                           
(1,243
)
Other income, net
                           
842
 
                                 
Income before income taxes
                         
$
66,809
 
                                 
 
 
10

 


Segment information (continued):

   
For the Nine Months Ended September 27, 2014
 
(In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
                         
                         
Net sales
 
$
1,093,060
   
$
743,322
   
$
(9,497
)
 
$
1,826,885
 
                                 
Cost of goods sold
   
934,208
     
650,020
     
(9,398
)
   
1,574,830
 
Depreciation and amortization
   
14,803
     
9,123
     
1,725
     
25,651
 
Selling, general, and administrative expense
   
67,678
     
15,700
     
18,789
     
102,167
 
                                 
  Operating income
 
$
76,371
   
$
68,479
   
$
(20,613
)
   
124,237
 
                                 
Interest expense
                           
(3,913
)
Other income, net
                           
440
 
                                 
Income before income taxes
                         
$
120,764
 
                                 

   
For the Nine Months Ended September 28, 2013
 
(In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
                         
                         
Net sales
 
$
942,109
   
$
741,227
   
$
(12,510
)
 
$
1,670,826
 
                                 
Cost of goods sold
   
800,782
     
651,875
     
(12,380
)
   
1,440,277
 
Depreciation and amortization
   
12,861
     
9,854
     
1,649
     
24,364
 
Selling, general, and administrative expense
   
61,245
     
18,168
     
19,665
     
99,078
 
Gain on sale of plastic fittings manufacturing assets
   
(39,765
)
   
     
     
(39,765
)
Impairment charges
   
4,173
     
131
     
     
4,304
 
Insurance settlement
   
(103,895
)
   
     
(2,437
)
   
(106,332
)
                                 
  Operating income
 
$
206,708
   
$
61,199
   
$
(19,007
)
   
248,900
 
                                 
Interest expense
                           
(2,940
)
Other income, net
                           
4,324
 
                                 
Income before income taxes
                         
$
250,284
 
                                 


Note 6 – Debt

Effective May 29, 2014, the Company amended its credit agreement (the Credit Agreement) entered into on March 7, 2011 to reduce the unsecured $350.0 million revolving credit facility to $200.0 million.  The Credit Agreement also provides for a $200.0 million Term Loan Facility, which, together with the Revolving Loan Facility, mature on December 11, 2017.  
 
On March 21, 2014, Mueller Europe, Limited (MEL) entered into a credit agreement (the Invoice Facility) establishing a total borrowing capacity of £40.0 million, or approximately $65.9 million.  The Invoice Facility has an initial term of two years.  Borrowings outstanding under the Invoice Facility are secured by MEL’s trade account receivables denominated in British pounds.  Borrowings were approximately $11.7 million at September 27, 2014, and bear interest at the latest base-lending rate published by HSBC plus 155 basis points, which was approximately 2.05 percent at the end of the third quarter of 2014.

 
11

 
 
 
On September 23, 2013, Mueller-Xingrong entered into a credit agreement with a syndicate of four banks established a secured revolving credit facility (the JV Credit Agreement), which matured on September 24, 2014.  At the maturity date, individual draws on the JV Credit Agreement had maturity dates ranging up to nine months.  Mueller-Xingrong is in process of negotiating a new credit agreement.  Management believes that cash generated by Mueller-Xingrong’s operations and cash currently on hand will be sufficient to fund its operations in the near term.  Borrowings under the JV Credit Agreement were approximately $24.5 million and bear an interst rate at the latest base-lending rate published by the People’s Bank of China, which was 5.6 percent at September 27, 2014.
 
 
Note 7 – Employee Benefits

The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for certain of its employees.  The components of net periodic benefit cost are as follows:

   
For the Quarter Ended
   
For the Nine Months Ended
 
(In thousands)
 
September 27, 2014
   
September 28, 2013
   
September 27, 2014
   
September 28, 2013
 
       
Pension benefits:
                       
Service cost
 
$
199
   
$
350
   
$
596
   
$
1,051
 
Interest cost
   
2,064
     
2,023
     
6,191
     
6,070
 
Expected return on plan assets
   
(3,202
)
   
(2,845
)
   
(9,604
)
   
(8,535
)
Amortization of prior service cost
   
1
     
1
     
1
     
1
 
Amortization of net loss
   
188
     
984
     
565
     
2,954
 
                                 
Net periodic benefit (income) cost
 
$
(750
)
 
$
513
   
$
(2,251
)
 
$
1,541
 
                                 
Other benefits:
                               
Service cost
 
$
88
   
$
69
   
$
264
   
$
207
 
Interest cost
   
181
     
155
     
544
     
467
 
Amortization of prior service cost (credit)
   
     
2
     
(1
)
   
5
 
Amortization of net gain
   
(55
)
   
(41
)
   
(164
)
   
(125
)
                                 
Net periodic benefit cost
 
$
214
   
$
185
   
$
643
   
$
554
 
                                 


Note 8 – Income Taxes

The Company’s effective tax rate for the third quarter of 2014 was 33 percent.  The difference between the effective tax rate and the amount computed using the U.S. federal statutory tax rate for the third quarter of 2014 was primarily related to the reduction for the U.S. production activities deduction of $1.0 million, which was partially offset by the provision for state income taxes, net of the federal benefit, of $0.3 million.

The Company’s effective tax rate for the third quarter of 2013 was 40 percent.  Factors that explain the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate for the third quarter of 2013 were increases related to: (i) the impairment of goodwill of $1.8 million; (ii) increases in the valuation allowance of $1.0 million; (iii) the provision for state income taxes, net of federal benefit of $1.2 million; and (iv) the effect of foreign adjustments of $0.4 million.  These items were partially offset by the U.S. production activities deduction of $1.0 million.
 
The Company’s effective tax rate for the first nine months of 2014 was 30 percent.  The difference between the effective tax rate and the amount computed using the U.S. federal statutory tax rate was attributable to reductions for: (i) the U.S. production activities deduction of $3.5 million; (ii) decreases in valuation allowances of $5.7 million; and (iii) the effect of foreign tax rates lower than statutory tax rates and other foreign adjustments of $0.5 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $2.8 million.

 
12

 
 
 
The Company’s effective tax rate for the first nine months of 2013 was 37 percent.  Factors that explain the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate for the first nine months were increases related to: (i) goodwill impairment of $1.8 million and (ii) the provision for state income taxes, net of the federal benefit, of $7.4 million.  These items were partially offset by reductions related to: (i) the effect of foreign tax rates lower than statutory tax rates and other foreign items of $1.1 million; (ii) decreases in valuation allowances of $0.4 million; and (iii) the U.S. production activities deduction of $3.9 million.

The Company released a valuation allowance of $4.8 million, or eight cents per diluted share, in the second quarter of 2014 related to certain state income tax credits.  As a result of legislative changes enacted in the second quarter, the Company now expects to be able to use such credits within the foreseeable future.

Total unrecognized tax benefits, including derecognized deferred tax assets, as of September 27, 2014 were $2.8 million.  It is reasonably possible that this amount may decrease by the full amount over the next twelve months, none of which will impact the effective tax rate.

The Company files a consolidated U.S. federal income tax return and numerous consolidated and separate-company income tax returns in many state, local, and foreign jurisdictions.  The statute of limitations is open for the Company’s federal tax return and most state income tax returns for 2011 and all subsequent years and is open for certain state and foreign returns for earlier tax years due to ongoing audits and differing statute periods.  The Internal Revenue Service has audited the 2012 federal income tax return, the results of which were immaterial to the Company’s financial position, results of operations, or cash flows.  While the Company believes that it is adequately reserved for possible future audit adjustments, the final resolution of these examinations cannot be determined with certainty and could result in final settlements that differ from current estimates.


 
Note 9 – Derivative Instruments and Hedging Activities

Earnings and cash flows are subject to fluctuations due to changes in commodity prices, foreign currency exchange rates, and interest rates. The Company uses derivative instruments such as commodity futures contracts, foreign currency forward contracts, and interest rate swaps to manage these exposures.

All derivatives are recognized on the Condensed Consolidated Balance Sheets at their fair value. On the date the derivative contract is entered into, it is designated as (i) a hedge of a forecasted transaction or the variability of cash flow to be paid (cash flow hedge), or (ii) a hedge of the fair value of a recognized asset or liability (fair value hedge). Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in accumulated other comprehensive income (AOCI), to the extent effective, until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings.  Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.

The Company documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Condensed Consolidated Balance Sheets and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flow or fair values of hedged items.  When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively, in accordance with the derecognition criteria for hedge accounting.

 
13

 
 
 
Commodity Futures Contracts

Copper and brass represent the largest component of the Company’s variable costs of production.  The cost of these materials is subject to global market fluctuations caused by factors beyond the Company’s control.  The Company occasionally enters into forward fixed-price arrangements with certain customers; the risk of these arrangements is generally managed with commodity futures contracts.   These futures contracts have been designated as cash flow hedges.  

At September 27, 2014, the Company held open futures contracts to purchase approximately $18.0 million of copper over the next 15 months related to fixed price sales orders.  The fair value of those futures contracts was a $99 thousand loss position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820, Fair Value Measurements and Disclosures (ASC 820)). In the next twelve months, the Company will reclassify into earnings realized gains or losses of cash flow hedges. At September 27, 2014, this amount was approximately $55 thousand of deferred net losses, net of tax.

The Company may also enter into futures contracts to protect the value of inventory against market fluctuations.   These futures contracts have been designated as fair value hedges.  

At September 27, 2014, the Company held open futures contracts to sell approximately $11.4 million of copper over the next six months related to copper inventory. The fair value of those futures contracts was a $445 thousand gain position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820).  During the fourth quarter of 2013, the Company dedesignated previous hedges on its inventory because the hedging relationship was no longer deemed to be highly effective.  These contracts no longer qualified as hedging instruments as of December 28, 2013.

Foreign Currency Forward Contracts

During 2012 and 2013, the Company entered into certain contracts to purchase heavy machinery and equipment denominated in euros. In anticipation of entering into these contracts, the Company entered into forward contracts to purchase euros to protect itself against adverse foreign exchange rate fluctuations.  

At September 27, 2014, the Company held open forward contracts to purchase approximately 3.0 million euros over the next six months.  The fair value of these contracts, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820), was a $68 thousand loss position recorded in other current liabilities at September 27, 2014, and an $836 thousand gain position recorded in other current assets at December 28, 2013. At September 27, 2014, there was $15 thousand of deferred losses, net of tax, included in AOCI that is expected to be reclassified into property, plant, and equipment, net, when the hedged transactions occur.

 
 
Interest Rate Swap

On February 20, 2013, the Company entered into a two-year forward-starting interest rate swap agreement with an effective date of January 12, 2015, and an underlying notional amount of $200.0 million, pursuant to which the Company receives variable interest payments based on one-month LIBOR and pays fixed interest at a rate of 1.4 percent.  Based on the Company’s current variable premium pricing on its Term Loan Facility, the all-in fixed rate on the effective date is 2.7 percent.  The interest rate swap will mature on December 11, 2017, and is structured to offset the interest rate risk associated with the Company’s floating-rate, LIBOR-based Term Loan Facility Agreement.  The swap was designated and accounted for as a cash flow hedge from inception.
 
The fair value of the interest rate swap is estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rate and the expected cash flows at the current market interest rate using observable benchmarks for LIBOR forward rates at the end of the period (Level 2 hierarchy as defined by ASC 820).  Interest payable and receivable under the swap agreement will be accrued and recorded as an adjustment to interest expense.  The fair value of the interest rate swap was an $8 thousand gain position and was recorded in other assets at September 27, 2014.  At September 27, 2014, there was $5 thousand of deferred net gains, net of tax, included in AOCI that is expected to be reclassified into interest expense over the term of the hedged item.

 
14

 
 
 
We present our derivative assets and liabilities in our Condensed Consolidated Balance Sheets on a net basis by counterparty. The following table summarizes the location and fair value of the derivative instruments and disaggregates our net derivative assets and liabilities into gross components on a contract-by-contract basis:

 
Asset Derivatives
 
Liability Derivatives
 
     
Fair Value
     
Fair Value
 
(In thousands)
Balance Sheet Location
 
Sept. 27, 2014
   
Dec. 28, 2013
 
Balance Sheet Location
 
Sept. 27, 2014
   
Dec. 28, 2013
 
Hedging instrument:
                           
  Commodity contracts - gains
Other current assets
 
$
526
   
$
448
 
Other current liabilities
 
$
10
   
$
340
 
  Commodity contracts - losses
Other current assets
   
(76
)
   
(10
)
Other current liabilities
   
(115
)
   
(2,107
)
  Foreign currency contracts
Other current assets
   
     
836
 
Other current liabilities
   
(68
)
   
 
  Interest rate swap
Other assets
   
8
     
1,324
 
Other liabilities
   
     
 
Total derivatives (1)
   
$
458
   
$
2,598
     
$
(173
)
 
$
(1,767
)
                                     
(1) Does not include the impact of cash collateral received from or provided to counterparties.
 
                                     
 
 
 
The following tables summarize the effects of derivative instruments on our Condensed Consolidated Statements of Income:

     
Three Months Ended
   
Nine Months Ended
 
(In thousands)
Location
 
Sept. 27, 2014
   
Sept. 28, 2013
   
Sept. 27, 2014
   
Sept. 28, 2013
 
Fair value hedges:
                         
  Gain (loss) on commodity contracts (qualifying)
Cost of goods sold
 
$
1,100
   
$
(846
)
 
$
7,371
   
$
4,344
 
  (Loss) gain on hedged item - Inventory
Cost of goods sold
   
(922
)
   
1,042
     
(6,702
)
   
(3,770
)

     
Three Months Ended
   
Nine Months Ended
 
(In thousands)
Location
 
Sept. 27, 2014
   
Sept. 28, 2013
   
Sept. 27, 2014
   
Sept. 28, 2013
 
Undesignated derivatives:
                                 
  Gain on commodity contracts (nonqualifying)
Cost of goods sold
 
$
   
$
   
$
1,466
   
$
 

 
 
15

 
 
 
The following tables summarize amounts recognized in and reclassified from AOCI during the period:

   
Three Months Ended September 27, 2014
(In thousands)
 
(Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax
 
Classification Gains (Losses)
(Gain) Loss Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
           
Commodity contracts
 
 $
(202
Cost of goods sold
 $
(174
)
Foreign currency contracts
   
(181
)
Property, plant, and   equipment, net
 
(46
)
Interest rate swap
   
430
 
Interest expense
 
 

                 
   
Three Months Ended September 28, 2013
(In thousands)
 
Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax
 
Classification Gains (Losses)
  Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
               
Commodity contracts
 
 $
474
 
Cost of goods sold
 $
 788
 
Foreign currency contracts
   
372
 
Property, plant, and  equipment, net
 
 
Interest rate swap
   
(747
)
Interest expense
 
 

                 
   
Nine Months Ended September 27, 2014
(In thousands)
 
(Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax
 
Classification Gains (Losses)
Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
               
Commodity contracts
 
 $
(634
)
Cost of goods sold
 $
285
 
Foreign currency contracts
   
(184
)
Property, plant, and  equipment, net
 
(283
)
Interest rate swap
   
(837
)
Interest expense
 
 

               
   
Nine Months Ended September 28, 2013
 
(In thousands)
 
(Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax
 
Classification Gains (Losses)
Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
               
Commodity contracts
 
 $
(3,056
)
Cost of goods sold
 $
3,309
 
Foreign currency contracts
   
352
 
Property, plant, and  equipment, net
 
 
Interest rate swap
   
649
 
Interest expense
 
 
                 
 
 
16

 
 
 
The Company enters into futures and forward contracts that closely match the terms of the underlying transactions.  As a result, the ineffective portion of the open hedge contracts through September 27, 2014 was not material to the Condensed Consolidated Statements of Income.

The Company primarily enters into International Swaps and Derivatives Association (ISDA) master netting agreements with major financial institutions that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.  The Company does not offset fair value amounts for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral.  At September 27, 2014 and December 28, 2013, the Company had recorded restricted cash in other current assets of $0.5 million and $2.1 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.


Note 10 – Accumulated Other Comprehensive Income

Changes in AOCI by component, net of taxes and noncontrolling interest, were as follows:

 
For the Nine Months Ended September 27, 2014
 
(In thousands)
 
Cumulative Translation Adjustment
   
Unrealized (Losses)/Gains on Derivatives
   
Minimum Pension/OPEB Liability Adjustment
   
Unrealized Gains on Equity Investments
   
Total
 
                                 
Beginning balance
 
 $
 (462
)
 
$
1,546
   
$
(12,158
)
 
$
255
   
$
(10,819
)
                                         
Other comprehensive income (loss) before reclassifications
   
(3,337
)
   
(1,652
)
   
143
     
7
     
(4,839
)
Amounts reclassified from AOCI
   
     
2
     
347
     
     
349
 
                                         
Net current-period other comprehensive income
   
(3,337
)
   
(1,650
)
   
490
     
7
     
(4,490
)
                                         
Ending balance
 
 $
(3,799
)
 
(104
)
 
(11,668
)
 
 $
262
   
 $
(15,309
)

 
 
17

 
 
 
For the Nine Months Ended September 28, 2013
 
(In thousands)
 
Cumulative Translation Adjustment
   
Unrealized (Losses)/Gains on Derivatives
   
Minimum Pension/OPEB Liability Adjustment
   
Unrealized Gains on Equity Investments
   
Total
 
                                 
Beginning balance
 
 $
 (3,033
)
 
$
(166
)
 
$
(39,527
)
 
$
103
   
$
(42,623
)
                                         
Other comprehensive income (loss) before reclassifications
   
211
     
4,314
     
79
     
105
     
4,709
 
Amounts reclassified from AOCI
   
     
  (3,309
)
   
1,896
     
     
(1,413
)
                                         
Net current-period other comprehensive income
   
211
     
1,005
     
1,975
     
105
     
3,296
 
                                         
Ending balance
 
 $
  (2,822
)
 
  839
   
(37,552
)
 
 $
208
   
 $
(39,327
)

Reclassification adjustments out of AOCI were as follows:

   
Amount reclassified from AOCI
   
For the Quarter Ended
   
(In thousands)
 
Sept. 27, 2014
   
Sept. 28, 2013
 
Affected line item
           
Unrealized losses/(gains) on derivatives: 
             
  Commodity contracts
 
$
(214
 
$
1,046
 
Cost of goods sold
  Foreign currency contracts
   
(71
   
 
Property, plant, and equipment, net
     
65
     
(258
)
Income tax benefit (expense)
     
(220
   
788
 
Net of tax
     
     
 
Noncontrolling interest
                   
   
$
(220
 
$
788
 
Net of tax and noncontrolling  interest
                   
Amortization of employee benefit items:
                 
  Amortization of net loss and prior service cost
 
$
134
   
$
946
 
Selling, general, and administrative  expense
     
(19
)
   
(318
)
Income tax expense
     
115
     
628
 
Net of tax
     
     
 
Noncontrolling interest
                   
   
$
115
   
$
628
 
Net of tax and noncontrolling  interest


 
18

 
 
   
Amount reclassified from AOCI
   
For the Nine Months Ended
   
(In thousands)
 
Sept. 27, 2014
   
Sept. 28, 2013
 
Affected line item
           
Unrealized losses/(gains) on derivatives: 
             
  Commodity contracts
 
$
351
   
$
4,922
 
Cost of goods sold
  Foreign currency contracts
   
(446
)
   
 
Property, plant, and equipment, net
     
97
     
(1,613
)
Income tax benefit (expense)
     
2
     
3,309
 
Net of tax
     
     
 
Noncontrolling interest
                   
   
$
2
   
$
3,309
 
Net of tax and noncontrolling  interest
                   
Amortization of employee benefit items:
                 
  Amortization of net loss and prior service cost
 
$
401
   
$
2,835
 
Selling, general, and administrative expense
     
(54
)
   
(939
)
Income tax expense
     
347
     
1,896
 
Net of tax
     
     
 
Noncontrolling interest
                   
   
$
347
   
$
1,896
 
Net of tax and noncontrolling interest


Note 11 – Acquisitions and Dispositions

On October 18, 2013, the Company entered into a definitive agreement with KME Yorkshire Limited (Yorkshire) to acquire certain assets and assume certain liabilities of Yorkshire for purposes of acquiring its copper tube business.  Yorkshire produces European standard copper distribution tubes.  This transaction received regulatory approval in the United Kingdom on February 11, 2014 and closed on February 28, 2014.  The purchase price was approximately $30.1 million, paid in cash.  The acquisition of Yorkshire complements the Company’s existing copper tube businesses in the Plumbing and Refrigeration segment.  In 2012, Yorkshire had annual revenue of approximately $196.1 million.  During the third quarter of 2014, the purchase price allocation, including all fair value measurements, was finalized.  The fair value of the assets acquired totaled $20.7 million, consisting primarily of inventories of $17.6 million, property, plant, and equipment of $2.1 million, and other current assets of $1.0 million.  The fair value of the liabilities assumed totaled $15.6 million, consisting primarily of accounts payable and accrued expenses of $15.2 million and other current liabilities of $0.4 million.  Of the remaining purchase price, $8.1 million was allocated to tax-deductible goodwill and $16.9 million was allocated to other intangible assets such as customer lists of $11.3 million that will be amortized over approximately 19 years, non-compete agreements of $4.5 million that will be amortized over approximately three years, and trade names and licenses of $1.1 million that will be amortized over approximately ten years.  The results of operations for Yorkshire have been included in the accompanying Condensed Consolidated Financial Statements from the acquisition date.

On October 17, 2013, the Company entered into a Stock Purchase Agreement with Commercial Metals Company and Howell Metal Company (Howell) providing for the purchase of all of the outstanding capital stock of Howell for approximately $55.3 million in cash, net of working capital adjustments.  Howell manufactures copper tube and line sets for U.S. distribution.  The acquisition of Howell complements the Company’s copper tube and line sets businesses, both components of the Plumbing and Refrigeration segment.   For the twelve months ended August 31, 2013, Howell’s net sales for copper tube and line sets totaled $156.3 million.  During the first quarter of 2014, the purchase price allocation, including all fair value measurements, was finalized.  The fair value of the assets acquired totaled $63.0 million, consisting primarily of receivables of $14.6 million, inventories of $27.6 million, property, plant, and equipment of $20.3 million, and other current assets of $0.5 million.  The fair value of the liabilities assumed totaled $11.4 million, consisting primarily of accounts payable and accrued expenses of $9.9 million and other current liabilities of $1.5 million.  Of the remaining purchase price, $2.3 million was allocated to other intangible assets and $1.4 million to tax-deductible goodwill.  The results of operations for Howell have been included in the accompanying Condensed Consolidated Financial Statements from the acquisition date of October 17, 2013.

 
19

 
 
 
On August 9, 2013, the Company sold certain of its plastic fittings manufacturing assets located in Portage, Michigan and Ft. Pierce, Florida.  Simultaneously, the Company entered into a lease agreement with the purchaser of the assets to continue to manufacture and distribute Schedule 40 plastic fittings utilizing the Ft. Pierce assets for a period of approximately eight to 14 months (Transition Period).  The total sales price was $66.2 million, of which $61.2 million was received on August 9, 2013; the remaining $5.0 million was received during the second quarter of 2014.  This transaction resulted in a pre-tax gain of $39.8 million in the third quarter of 2013, or 81 cents per diluted share after tax.

The net book value of assets disposed in the aforementioned plastic sale transaction was $15.9 million.  For goodwill testing purposes, these assets were part of the SPD reporting unit which is a component of the Company’s Plumbing & Refrigeration operating segment.  Because these assets met the definition of a business in accordance with ASC 805 Business Combinations, $10.5 million of the SPD reporting unit’s goodwill balance was allocated to the disposal group.  The amount of goodwill allocated was based on the relative fair values of the asset group which was disposed and the portion of the SPD reporting unit which was retained.
 
 
The Company will continue to manufacture and supply plastic drain, waste, and vent (DWV) fittings.  The Company extended its third party supply agreement to complement its product offering with purchased products the Company does not competitively manufacture with its remaining assets.  This supply agreement was originally entered into after the majority of the Company’s plastic manufacturing assets were destroyed in the 2011 fire at its Wynne, Arkansas facility.  The extended supply agreement has an initial five-year term.

With the decision to cease the Company’s manufacturing operations in Portage, there was an evaluation of the remaining long-lived assets for impairment, and it was determined that the carrying value of the land and building were no longer recoverable.  An impairment charge of $3.2 million was recognized during the third quarter of 2013 to adjust the carrying value of the land and building to their estimated fair value.  The fair value estimate was determined by obtaining and evaluating recent sales data for similar assets (Level 2 hierarchy as defined by ASC 820).


Note 12 – Recently Issued Accounting Standards

In December 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-11, Balance Sheet (Topic 210) (ASU 2011-11). The amendments in this ASU require improved disclosure information about financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement.  Subsequently in January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01), which clarifies the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. These ASUs should be applied retrospectively for all comparative periods presented for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The requirements of these ASUs were adopted during the first quarter of 2014 and did not have a significant impact on our disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09).  The ASU will supersede virtually all existing revenue recognition guidance under U.S. GAAP and will be effective for annual reporting periods beginning after December 15, 2016.  The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided.  The new guidance establishes a five-step approach for the recognition of revenue.  Based on our preliminary assessment, we do not anticipate that the new guidance will fundamentally change our revenue recognition policies, practices, or systems.
 
 
 
 
 
20

 


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Overview

The Company is a leading manufacturer of copper, brass, plastic, and aluminum products.  The range of these products is broad:  copper tube and fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic pipe, fittings and valves; refrigeration valves and fittings; fabricated tubular products; and steel nipples.  The Company also resells imported brass and plastic plumbing valves, malleable iron fittings, faucets and plumbing specialty products.  Mueller’s operations are located throughout the United States and in Canada, Mexico, Great Britain, and China.

The Company’s businesses are aggregated into two reportable segments: the Plumbing & Refrigeration segment and the Original Equipment Manufacturers (OEM) segment.  For disclosure purposes, as permitted under Accounting Standards Codification (ASC) 280, Segment Reporting, certain operating segments are aggregated into reportable segments.  The Plumbing & Refrigeration segment is composed of Standard Products (SPD), European Operations, and Mexican Operations.  The OEM segment is composed of Industrial Products (IPD), Engineered Products (EPD), and Mueller-Xingrong.  Certain administrative expenses and expenses related primarily to retiree benefits at inactive operations are combined into the Corporate and Eliminations classification.  These reportable segments are described in more detail below.

SPD manufactures and sells copper tube, copper and plastic fittings, line sets, plastic pipe, and valves in North America and sources certain products for distribution in North America.  European Operations manufacture copper tube in Europe, which is sold throughout Europe; activities also include import distribution in the U.K. and Ireland.  Mexican Operations consist of pipe nipple manufacturing and import distribution businesses including product lines of malleable iron fittings and other plumbing specialties.  The Plumbing & Refrigeration segment sells products to wholesalers in the heating, ventilation, and air-conditioning (HVAC), plumbing, and refrigeration markets, to distributors to the manufactured housing and recreational vehicle industries, and to building material retailers.

The OEM segment manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies.  Mueller–Xingrong manufactures engineered copper tube primarily for air-conditioning applications; these products are sold primarily to OEMs located in China.  The OEM segment sells its products primarily to original equipment manufacturers, many of which are in the HVAC, plumbing, and refrigeration markets.

New housing starts and commercial construction are important determinants of the Company’s sales to the HVAC, refrigeration, and plumbing markets because the principal end use of a significant portion of the Company’s products is in the construction of single and multi-family housing and commercial buildings.  Repairs and remodeling projects are also important drivers of underlying demand for these products.

The majority of the Company’s manufacturing facilities operated at below capacity during 2013 and the first nine months of 2014 due to reduced demand for the Company’s products arising from the general economic conditions in the U.S. and foreign markets that the Company serves.  These conditions have significantly affected the demand for virtually all of the Company’s core products in recent years.

Residential construction activity in 2013 and into the first nine months of 2014 has shown improvement, but remains at levels below historical averages. Continued improvement is expected, but may be tempered by continuing low labor participation rates, the pace of household formations, and tighter lending standards.  Per the U.S. Census Bureau, the September 2014 seasonally adjusted annual rate of new housing starts was 1.0 million compared with the September 2013 rate of 0.9 million.  While mortgage rates have risen in 2013 and 2014, they remain at historically low levels, as the average 30-year fixed mortgage rate was 4.24 percent for the first nine months of 2014 and 3.98 percent for the twelve months ended December 2013. 
 
 
The private non-residential construction sector, which includes offices, industrial, health care, and retail projects, began showing modest improvement in 2012 and 2013 from declines in previous years.  According to the U.S. Census Bureau, the actual (not seasonally adjusted) value of private nonresidential construction put in place was $301.4 billion in 2012 compared to $304.9 billion in 2013.  The seasonally adjusted annual value of private non-residential value of construction put in place was $333.3 billion in August 2014 compared to the August 2013 rate of $305.2 billion and the December 2013 rate of $331.4 billion.  The Company expects that most of these conditions will gradually improve, but at an irregular pace.

 
21

 
 
 
Profitability of certain of the Company’s product lines depends upon the “spreads” between the costs of raw materials and the selling prices of its products.  The open market prices for copper cathode and scrap, for example, influence the selling price of copper tube, a principal product manufactured by the Company.  The Company attempts to minimize the effects on profitability from fluctuations in material costs by passing through these costs to its customers.  The Company’s earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions.
 
Earnings and profitability are also impacted by unit volume that is subject to market trends, such as substitute products, imports, technologies, and market share.  In core product lines, the Company intensively manages its pricing structure while attempting to maximize its profitability.  From time-to-time, this practice results in lost sales opportunities and lower volume.  For plumbing systems, plastics are the primary substitute product; these products represent an increasing share of consumption.  U.S. consumption of copper tube is still predominantly supplied by U.S. manufacturers.  For certain air-conditioning and refrigeration applications, aluminum based systems are the primary substitution threat.  The Company cannot predict the acceptance or the rate of switching that may occur.  In recent years, brass rod consumption in the U.S. has declined due to the outsourcing of many manufactured products from offshore regions.

Results of Operations

Third Quarter 2014 compared with Third Quarter 2013

During the third quarter of 2014, the Company’s net sales were $602.8 million, which compares with net sales of $528.9 million over the same period of 2013.   The $73.9 million increase was primarily attributable to higher unit sales volume in the Company’s core product lines of $70.4 million, of which approximately $64.5 million was attributable to sales recorded by Howell Metal Company (Howell), acquired in October 2013, and Yorkshire Copper Tube (Yorkshire), acquired in February 2014.  

Cost of goods sold was $521.3 million in the third quarter of 2014 compared with $456.3 million in the same period of 2013.  Consistent with the factors noted above regarding net sales, the year-over-year increase was due primarily to increased sales volume.