Attached files

file filename
EX-32.2 - SECTION 906 CERTIFICATION OF THE CFO - MUELLER INDUSTRIES INCex322.htm
EX-32.1 - SECTION 906 CERTIFICATION OF THE CEO - MUELLER INDUSTRIES INCex321.htm
EX-31.2 - SECTION 302 CERTIFICATION OF THE CFO - MUELLER INDUSTRIES INCex312.htm
EX-31.1 - SECTION 302 CERTIFICATION OF THE CEO - MUELLER INDUSTRIES INCex311.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 June 27, 2015
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 No   o

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 No   o

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 July 20, 2015, was 56,986,702.


 
 

 
MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended June 27, 2015

__________________________

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
     
 
18
     
 
28
     
 
29
     
 
     
 
29
     
 
30
     
 
30
     
 
31
     
32


 
2

 

 
FINANCIAL INFORMATION
Financial Statements

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

   
For the Quarter Ended
   
For the Six Months Ended
   
(In thousands, except per share data)
 
June 27, 2015
   
June 28, 2014
   
June 27, 2015
   
June 28, 2014
   
                           
Net sales
 
$
555,593
   
$
649,691
   
$
1,092,835
   
$
1,224,065
   
                                   
Cost of goods sold
   
470,365
     
557,775
     
931,199
     
1,053,552
   
Depreciation and amortization
   
8,188
     
8,592
     
16,041
     
16,699
   
Selling, general, and administrative expense
   
33,420
     
33,367
     
66,251
     
66,508
   
Gain on sale of assets
   
(15,376
)
   
     
(15,376
)
   
(1,417
)
 
Severance
   
3,442
     
1,753
     
3,442
     
2,212
   
                                   
  Operating income
   
55,554
     
48,204
     
91,278
     
86,511
   
                                   
Interest expense
   
(2,219
)
   
(1,457
)
   
(4,295
)
   
(2,483
)
 
Other income, net
   
265
     
127
     
370
     
215
   
                                   
  Income before income taxes
   
53,600
     
46,874
     
87,353
     
84,243
   
                                   
Income tax expense
   
(19,738
)
   
(11,665
)
   
(31,151
)
   
(24,080
)
 
                                   
  Consolidated net income
   
33,862
     
35,209
     
56,202
     
60,163
   
                                   
Net income attributable to noncontrolling interest
   
(211
)
   
(164
)
   
(573
)
   
(412
)
 
                                   
  Net income attributable to Mueller Industries, Inc.
 
$
33,651
   
$
35,045
   
$
55,629
   
$
59,751
   
                                   
Weighted average shares for basic earnings per share
   
56,247
     
55,973
     
56,220
     
55,946
   
Effect of dilutive stock-based awards
   
743
     
747
     
737
     
800
   
                                   
Adjusted weighted average shares for diluted earnings per share
   
56,990
     
56,720
     
56,957
     
56,746
   
                                   
Basic earnings per share
 
$
0.60
   
$
0.63
   
$
0.99
   
$
1.07
   
                                   
Diluted earnings per share
 
$
0.59
   
$
0.62
   
$
0.98
   
$
1.05
   
                                   
Dividends per share
 
$
0.075
   
$
0.075
   
$
0.150
   
$
0.150
   
                                   
See accompanying notes to condensed consolidated financial statements.
 
 
 

 
3

 

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

   
For the Quarter Ended
   
For the Six Months Ended
   
(In thousands)
 
June 27, 2015
   
June 28, 2014
   
June 27, 2015
   
June 28, 2014
   
         
Consolidated net income
 
$
33,862
   
$
  35,209
   
$
56,202
   
$
60,163
   
                                   
Other comprehensive income (loss), net of tax:
                                 
  Foreign currency translation
   
7,056
     
1,795
     
(1,348
)
   
2,962
   
  Net change with respect to derivative instruments and hedging activities
   
(903
)
(1)
 
(360
)
(2)
 
(1,101
)
(3)
 
(1,476
)
(4)
  Net actuarial (gain) loss on pension and postretirement obligations
   
(647
)
(5)
 
(159
)
(6)
 
769
 
(7)
 
(156
)
(8)
  Other, net
   
34
     
24
     
7
     
9
   
                                   
Total other comprehensive income (loss)
   
5,540
     
1,300
     
(1,673
)
   
1,339
   
                                   
Consolidated comprehensive income
   
39,402
     
36,509
     
54,529
     
61,502
   
Comprehensive income attributable to noncontrolling interest
   
520
     
594
     
175
     
341
   
                                   
Comprehensive income attributable to Mueller Industries, Inc.
 
$
39,922
   
$
37,103
   
$
54,704
   
$
61,843
   
                                   
See accompanying notes to condensed consolidated financial statements.
 
 
 

 

 
_______________________________________ 
(1) Net of tax of $166
(2) Net of tax of $275
(3) Net of tax of $440
(4) Net of tax of $865
(5) Net of tax of $216
(6) Net of tax of $94
(7) Net of tax of $(286)
(8) Net of tax of $123

 
4

 
Index
 
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
June 27,
  2015
   
December 27,
 2014
 
             
Assets
           
Current assets:
           
  Cash and cash equivalents
 
$
299,147
   
$
352,134
 
  Accounts receivable, less allowance for doubtful accounts of $762 in 2015 and $666 in 2014
   
307,008
     
275,065
 
  Inventories
   
278,937
     
256,585
 
  Other current assets
   
45,680
     
57,429
 
                 
      Total current assets
   
930,772
     
941,213
 
                 
Property, plant, and equipment, net
   
261,149
     
245,910
 
Goodwill
   
101,453
     
102,909
 
Other assets
   
51,584
     
38,064
 
                 
      Total assets
 
$
1,344,958
   
$
1,328,096
 
                 
Liabilities
           
Current liabilities:
           
  Current portion of debt
 
$
18,014
   
$
36,194
 
  Accounts payable
   
89,715
     
100,735
 
  Accrued wages and other employee costs
   
34,654
     
41,595
 
  Other current liabilities
   
67,118
     
59,545
 
                 
      Total current liabilities
   
209,501
     
238,069
 
                 
Long-term debt, less current portion
   
204,750
     
205,250
 
Pension liabilities
   
18,728
     
20,070
 
Postretirement benefits other than pensions
   
21,331
     
21,486
 
Environmental reserves
   
21,657
     
21,842
 
Deferred income taxes
   
21,542
     
24,556
 
Other noncurrent liabilities
   
2,790
     
1,389
 
                 
      Total liabilities
   
500,299
     
532,662
 
                 
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 56,986,344 in 2015 and 56,901,445 in 2014
   
802
     
802
 
  Additional paid-in capital
   
270,784
     
268,575
 
  Retained earnings
   
1,039,882
     
992,798
 
  Accumulated other comprehensive loss
   
(44,195
)
   
(42,923
)
  Treasury common stock, at cost
   
(456,073
)
   
(457,102
)
                 
      Total Mueller Industries, Inc. stockholders’ equity
   
811,200
     
762,150
 
Noncontrolling interest
   
33,459
     
33,284
 
                 
      Total equity
   
844,659
     
795,434
 
                 
Commitments and contingencies
   
     
 
                 
      Total liabilities and equity
 
$
1,344,958
   
$
1,328,096
 
   
See accompanying notes to condensed consolidated financial statements.
 
 
 
5

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

   
For the Six Months Ended
 
 (In thousands)
 
June 27, 2015
   
June 28, 2014
 
         
Cash flows from operating activities
               
    Consolidated net income
 
$
56,202
   
$
60,163
 
    Reconciliation of consolidated net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
   
16,293
     
16,840
 
Stock-based compensation expense
   
2,966
     
3,526
 
Gain on disposal of assets
   
(15,392
)
   
(1,225
)
Impairment charges
   
570
     
 
Deferred income taxes
   
(1,445
)
   
(6,523
)
Income tax benefit from exercise of stock options
   
(146
)
   
(316
)
Changes in assets and liabilities, net of businesses acquired:
               
Receivables
   
(24,304
)
   
(100,413
)
Inventories
   
(5,252
)
   
(20,619
)
Other assets
   
6,963
     
(8,886
)
Current liabilities
   
(19,629
)
   
7,373
 
Other liabilities
   
(415
)
   
(893
)
Other, net
   
739
     
92
 
                 
Net cash provided by (used in) operating activities
   
17,150
     
(50,881
)
                 
Cash flows from investing activities
               
Capital expenditures
   
(15,969
)
   
(18,833
)
Acquisition of businesses, net of cash acquired
   
(35,978
)
   
(30,137
)
Net withdrawals from restricted cash balances
   
3,486
     
1,815
 
Proceeds from the sale of assets
   
5,518
     
4,874
 
                 
Net cash used in investing activities
   
(42,943
)
   
(42,281
)
                 
Cash flows from financing activities
               
Repayments of long-term debt
   
(500
)
   
(500
)
Dividends paid to stockholders of Mueller Industries, Inc.
   
(8,435
)
   
(8,394
)
(Repayment) issuance of debt by joint venture, net
   
(17,750
)
   
8,903
 
   Issuance of debt
   
     
22,635
 
   Net cash received to settle stock-based awards
   
125
     
296
 
   Repurchase of common stock
   
     
(58
)
   Income tax benefit from exercise of stock options
   
146
     
316
 
                 
Net cash (used in) provided by financing activities
   
(26,414
)
   
23,198
 
                 
Effect of exchange rate changes on cash
   
(780
)
   
363
 
                 
Decrease in cash and cash equivalents
   
(52,987
)
   
(69,601
)
Cash and cash equivalents at the beginning of the period
   
352,134
     
311,800
 
                 
Cash and cash equivalents at the end of the period
 
$
299,147
   
$
242,199
 
                 
See accompanying notes to condensed consolidated financial statements.


 
6

 

 
MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 for a fair presentation 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 24 thousand stock options were excluded from the computation of diluted earnings per share for the quarter ended June 27, 2015 because they were antidilutive.

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.

Guarantees

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 June 27, 2015 were $8.8 million.

Note 3 – Inventories

(In thousands)
 
June 27,
2015
   
December 27,
2014
 
               
Raw materials and supplies
 
$
70,487
   
$
53,586
 
Work-in-process
   
51,978
     
39,707
 
Finished goods
   
163,497
     
168,481
 
Valuation reserves
   
(7,025
)
   
(5,189
)
                 
Inventories
 
$
278,937
   
$
256,585
 
                 

Note 4 – 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.  

 
7

 
 
 
SPD manufactures copper tube and fittings, plastic fittings, and line sets.  These products are manufactured in the U.S.  SPD also imports and resells brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products.  Outside the U.S., the Company’s European Operations manufacture copper tube, which is sold primarily in Europe.  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’s products are sold primarily to plumbing, refrigeration, and air-conditioning wholesalers, hardware wholesalers and co-ops, and building product retailers.  For the six months ended June 28, 2014, cost of goods sold included a decrease in accruals related to import duties of $3.1 million.

IPD manufactures brass rod, impact extrusions, and forgings, as well as 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, gas appliance, and barbecue grill markets and specialty copper, copper-alloy, and aluminum tube.  Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications.  These products are sold primarily to OEM customers.

Summarized segment information is as follows:
 
   
For the Quarter Ended June 27, 2015
 
       
(In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
                         
                         
Net sales
 
$
327,336
   
$
230,380
   
$
(2,123
)
 
$
555,593
 
                                 
Cost of goods sold
   
278,237
     
194,207
     
(2,079
)
   
470,365
 
Depreciation and amortization
   
4,577
     
3,133
     
478
     
8,188
 
Selling, general, and administrative expense
   
20,473
     
6,239
     
6,708
     
33,420
 
Gain on sale of assets
   
(15,376
)
   
     
     
(15,376
)
Severance
   
3,442
     
     
     
3,442
 
                                 
Operating income
   
35,983
     
26,801
     
(7,230
)
   
55,554
 
                                 
Interest expense
                           
(2,219
)
Other income, net
                           
265
 
                                 
Income before income taxes
                         
$
53,600
 



 
8

 
 
 
Segment information (continued):

   
For the Quarter Ended June 28, 2014
 
       
(In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
                         
                         
Net sales
 
$
397,190
   
$
255,409
   
$
(2,908
)
 
$
649,691
 
                                 
Cost of goods sold
   
336,256
     
224,392
     
(2,873
)
   
557,775
 
Depreciation and amortization
   
5,096
     
2,892
     
604
     
8,592
 
Selling, general, and administrative expense
   
21,755
     
4,909
     
6,703
     
33,367
 
Severance
   
1,753
     
     
     
1,753
 
                                 
Operating income
   
  32,330
     
23,216
     
(7,342
)
   
48,204
 
                                 
Interest expense
                           
(1,457
)
Other income, net
                           
127
 
                                 
Income before income taxes
                         
$
46,874
 
 
 

 
   
For the Six Months Ended June 27, 2015
 
       
(In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
                         
                         
Net sales
 
$
632,353
   
$
465,697
   
$
(5,215
)
 
$
1,092,835
 
                                 
Cost of goods sold
   
538,700
     
397,640
     
(5,141
)
   
931,199
 
Depreciation and amortization
   
9,100
     
5,988
     
953
     
16,041
 
Selling, general, and administrative expense
   
41,013
     
12,720
     
12,518
     
66,251
 
Gain on sale of assets
   
(15,376
)
   
     
     
(15,376
)
Severance
   
3,442
     
     
     
3,442
 
                                 
Operating income
   
55,474
     
49,349
     
(13,545
)
   
91,278
 
                                 
Interest expense
                           
(4,295
)
Other income, net
                           
370
 
                                 
Income before income taxes
                         
$
87,353
 




 
9

 

 
 
Segment information (continued):

   
For the Six Months Ended June 28, 2014
 
(In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
                         
Net sales
 
$
735,217
   
$
495,439
   
$
(6,591
)
 
$
1,224,065
 
                                 
Cost of goods sold
   
625,281
     
434,795
     
(6,524
)
   
1,053,552
 
Depreciation and amortization
   
9,516
     
5,975
     
1,208
     
16,699
 
Selling, general, and administrative expense
   
43,410
     
10,167
     
12,931
     
66,508
 
Gain on sale of assets
   
(1,417
)
   
     
     
(1,417
)
Severance
   
2,212
     
     
     
2,212
 
                                 
Operating income
   
56,215
     
44,502
     
(14,206
)
   
86,511
 
                                 
Interest expense
                           
(2,483
)
Other income, net
                           
215
 
                                 
Income before income taxes
                         
$
84,243
 

Note 5 –Benefit Plans

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 Six Months Ended
 
(In thousands)
 
June 27, 2015
   
June 28, 2014
   
June 27, 2015
   
June 28, 2014
 
       
Pension benefits:
                       
    Service cost
 
$
228
   
$
175
   
$
500
   
$
397
 
    Interest cost
   
2,027
     
2,059
     
4,081
     
4,127
 
    Expected return on plan assets
   
(2,655
)
   
(3,201
)
   
(5,309
)
   
(6,402
)
    Amortization of net loss
   
656
     
189
     
1,370
     
377
 
                                 
Net periodic benefit cost (income)
 
$
256
   
$
(778
)
 
$
642
   
$
(1,501
)
                                 
Other benefits:
                               
    Service cost
 
$
84
   
$
87
   
$
180
   
$
176
 
    Interest cost
   
190
     
186
     
386
     
363
 
    Amortization of prior service cost (credit)
   
1
     
(1
)
   
3
     
(1
)
    Amortization of net gain
   
(16
)
   
(45
)
   
(13
)
   
(109
)
                                 
Net periodic benefit cost
 
$
259
   
$
227
   
$
556
   
$
429
 

Note 6 – Income Taxes

The Company’s effective tax rate for the second quarter of 2015 was 37 percent compared with 25 percent for the same period last year.  The difference between the effective tax rate and the amount computed using the U.S. federal statutory tax rate for the second quarter of 2015 was primarily attributable to state income taxes of $1.4 million and other miscellaneous items totaling $0.6 million, which were partially offset by the reduction for the U.S. production activities deduction of $1.2 million.

 
 
10

 
 
 
For the second quarter of 2014, the difference between the effective tax rate and the amount that would be computed using the U.S. federal statutory tax rate was attributable to reductions related to the U.S. production activities deduction of $1.4 million and decreases in valuation allowances of $4.8 million. These items were partially offset by the provision for state income taxes of $1.2 million.

The Company’s effective tax rate for the first half of 2015 was 36 percent compared with 29 percent for the same period last year.  The difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate was attributable to state income taxes of $2.2 million and miscellaneous other items totaling $1.0 million.  These items were partially offset by reductions for the U.S. production activities deduction of $2.2 million and the effect of foreign tax rates lower than statutory tax rates and other foreign adjustments of $0.4 million.

For the first half of 2014, the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate was attributable to reductions for: (i) the U.S. production activities deduction of $2.6 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 $0.3 million. These items were partially offset by the provision for state income taxes of $2.5 million.

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, and cash flows.  The Internal Revenue Service is currently auditing the 2013 federal tax return.  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 7 – Derivative Instruments and Hedging Activities

The Company’s 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 in 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 in 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 of occurring, hedge accounting is discontinued prospectively, in accordance with the derecognition criteria for hedge accounting.

 
11

 
 
 
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 June 27, 2015, the Company held open futures contracts to purchase approximately $26.8 million of copper over the next 13 months related to fixed price sales orders.  The fair value of those futures contracts was a $1.3 million net 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 relating to cash flow hedges. At June 27, 2015, this amount was approximately $919 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 June 27, 2015, the Company held open futures contracts to sell approximately $28.1 million of copper over the next six months related to copper inventory. The fair value of those futures contracts was a $1.3 million net gain position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820).  

Foreign Currency Forward Contracts

The Company has 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 June 27, 2015, the Company held open forward contracts to purchase approximately 3.4 million euros over the next five 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 $34 thousand net loss position. At June 27, 2015, there was $104 thousand of deferred net gains, net of tax, included in AOCI that are expected to be reclassified into depreciation expense over the useful life of the heavy machinery and equipment.

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 was 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 is accrued and recorded as an adjustment to interest expense.  The fair value of the interest rate swap was a $1.9 million net loss position at June 27, 2015, and there was $1.2 million of deferred net losses, net of tax, included in AOCI that are expected to be reclassified into interest expense over the term of the hedged item.

 
12

 
 
Derivative assets and liabilities are presented 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
 
June 27,
 2015
   
December 27,
 2014
 
Balance Sheet Location
 
June 27,
2015
   
December 27,
2014
 
Hedging instrument:
                           
  Commodity contracts - gains
Other current assets
 
$
1,361
   
$
99
 
Other current liabilities
 
$
40
   
$
15
 
  Commodity contracts - losses
Other current assets
   
     
(4
)
Other current liabilities
   
(1,319
)
   
(832
)
  Foreign currency contracts
Other current assets
   
     
 
Other current liabilities
   
(34
)
   
(81
)
  Interest rate swap
Other assets
   
     
 
Other liabilities
   
(1,921
)
   
(927
)
Total derivatives (1)
   
$
1,361
   
$
95
     
$
(3,234
)
 
$
(1,825
)
                                     
(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
   
Six Months Ended
 
(In thousands)
Location
 
June 27, 2015
   
June 28, 2014
   
June 27, 2015
   
June 28, 2014
 
Fair value hedges:
                         
  Gain (loss) on commodity contracts (qualifying)
Cost of goods sold
 
$
1,256
   
$
(20
)
 
$
1,468
   
$
6,271
 
  (Loss) gain on hedged item - Inventory
Cost of goods sold
   
(1,403
)
   
20
     
(1,650
)
   
(5,780
)
                                   
Undesignated derivatives:
                                 
  Gain (loss) on commodity contracts (nonqualifying)
Cost of goods sold
   
1,046
     
(72
)
   
1,279
     
1,466
 
 
 

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

   
        Three Months Ended June 27, 2015
(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
 
 $
(1,159
   
Cost of goods sold
 
 
$
 (81  )
Foreign currency contracts
   
3
     
Depreciation expense
 
 
     
Interest rate swap
   
267
     
Interest expense
 
 
    63  


 
13

 
 
   
        Three Months Ended June 28, 2014
 
(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
 
 $
578
     
Cost of goods sold
 
 
$
  168  
Foreign currency contracts
   
(25
)
   
Depreciation expense
   
 
  (63
)
Interest rate swap
   
(1,022
)
   
Interest expense
   
 
   
 
 
 
   
                Six Months Ended June 27, 2015
   
(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
 
$
(885
)    
Cost of goods sold
 
 
$
490  
Foreign currency contracts
   
(52
)
   
Depreciation expense
   
 
 
Interest rate swap
   
(765
)
   
Interest expense
   
 
131  
        Other     (19   )      Other       —   

 
   
           Six Months Ended June 28, 2014
 
(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
 
$
(432
)    
Cost of goods sold
 
 
$
459  
Foreign currency contracts
   
(3
)
   
Depreciation expense
   
 
(237
)
Interest rate swap
   
(1,267
)
   
Interest expense
   
 
 
 
 
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 June 27, 2015 was not material to the Condensed Consolidated Statements of Income.

The Company primarily enters into International Swaps and Derivatives Association 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 June 27, 2015 and December 27, 2014, the Company had recorded restricted cash in other current assets of $1.5 million and $0.5 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.


 
14

 

 
 
Note 8 – Accumulated Other Comprehensive Income

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 OPEB liabilities, and unrealized gains and losses on marketable securities classified as available-for-sale.

The following table provides changes in AOCI by component, net of taxes and noncontrolling interest (amounts in parentheses indicate debits to AOCI):

 
For the Six Months Ended June 27, 2015
 
(In thousands)
 
Cumulative Translation Adjustment
   
Unrealized (Losses)/Gains on Derivatives
   
Minimum Pension/OPEB Liability Adjustment
   
Unrealized Gains on Equity Investments
   
Total
 
                                 
Balance at December 27, 2014
 
 $
 (7,076
)
 
$
(953
)
 
$
(35,164
)
 
$
270
   
$
(42,923
)
                                         
Other comprehensive income (loss) before reclassifications
   
(947
)
   
(1,722
)
   
(229
)
   
7
     
(2,891
)
Amounts reclassified from AOCI
   
     
621
     
998
     
     
1,619
 
                                         
Net current-period other comprehensive income
   
(947
)
   
(1,101
)
   
769
     
7
     
(1,272
)
                                         
Balance at June 27, 2015
 
 $
(8,023
)
 
(2,054
)
 
(34,395
)
 
 $
277
   
 $
(44,195
)
 
 

 
 
For the Six Months Ended June 28, 2014
 
(In thousands)
 
Cumulative Translation Adjustment
   
Unrealized (Losses)/Gains on Derivatives
   
Minimum Pension/OPEB Liability Adjustment
   
Unrealized Gains on Equity Investments
   
Total
 
                                 
Balance at December 28, 2013
 
 $
 (462
)
 
$
1,546
   
$
(12,158
)
 
$
255
   
$
(10,819
)
                                         
Other comprehensive income (loss) before reclassifications
   
3,713
     
(1,698
)
   
(388
)
   
9
     
1,636
 
Amounts reclassified from AOCI
   
     
222
     
232
     
     
454
 
                                         
Net current-period other comprehensive income
   
3,713
     
(1,476
)
   
(156
)
   
9
     
2,090
 
                                         
Balance at June 28, 2014
 
 $
3,251
   
70
   
(12,314
)
 
 $
264
   
 $
(8,729
)


 
15

 
 
Reclassification adjustments out of AOCI were as follows:

   
Amount reclassified from AOCI
   
For the Three Months Ended
   
(In thousands)
 
June 27, 2015
   
June 28, 2014
 
Affected line item
           
Unrealized losses/(gains) on derivatives: 
             
  Commodity contracts
 
$
(111
 
$
208
 
Cost of goods sold
  Foreign currency contracts
   
     
(99
)
Depreciation expense
 Interest rate swap
   
98
     
 
Interest expense
     
(5
)
   
(4
)
Income tax expense
     
(18
   
105
 
Net of tax
     
     
 
Noncontrolling interest
                   
   
$
(18
 
$
105
 
Net of tax and noncontrolling
  interest
                   
  Amortization of net loss and prior service cost on employee benefit plans
 
$
641
   
$
143
 
Selling, general, and administrative
  expense
     
(164
)
   
(22
)
Income tax expense
     
477
     
121
 
Net of tax
     
     
 
Noncontrolling interest
                   
   
$
477
   
$
121
 
Net of tax and noncontrolling  interest
 
 

 
   
Amount reclassified from AOCI
   
For the Six Months Ended
   
(In thousands)
 
June 27, 2015
   
June 28, 2014
 
Affected line item
           
Unrealized losses/(gains) on derivatives: 
             
  Commodity contracts
 
$
651
   
$
565
 
Cost of goods sold
  Foreign currency contracts
   
     
(375
)
Depreciation expense
 Interest rate swap
   
204
     
 
Interest expense
     
(234
)
   
32
 
Income tax (expense) benefit
     
621
     
222
 
Net of tax
     
     
 
Noncontrolling interest
                   
   
$
621
   
$
222
 
Net of tax and noncontrolling  interest
                   
  Amortization of net loss and prior service cost on employee benefit plans
 
$
1,360
   
$
267
 
Selling, general, and administrative expense
     
(362
)
   
(35
)
Income tax expense
     
998
     
232
 
Net of tax
     
     
 
Noncontrolling interest
                   
   
$
998
   
$
232
 
Net of tax and noncontrolling  interest
 
 
16

 
 
Note 9 – Acquisitions and Dispositions

Acquisitions

On October 18, 2013, the Company entered into a definitive agreement with KME Yorkshire Limited to acquire certain assets and assume certain liabilities of its copper tube business.  Yorkshire Copper Tube (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 & 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.

The Company recognized approximately $3.4 million of severance costs related to the reorganization of Yorkshire during the second quarter 2015.

On March 30, 2015, the Company entered into a Stock Purchase Agreement with Turbotec Products, Inc. (Turbotec) providing for the purchase of all of the outstanding capital stock of Turbotec for approximately $14.2 million in cash, net of working capital adjustments. Turbotec manufactures coaxial heat exchangers and twisted tubes for the heating, ventilation, and air-conditioning (HVAC), geothermal, refrigeration, swimming pool heat pump, marine, ice machine, commercial boiler, and heat reclamation markets.  The acquisition of Turbotec complements the Company’s existing refrigeration business, a component of the OEM segment.  For the twelve months ended March 31, 2015, Turbotec’s net sales were approximately $21.8 million.  The fair value of the assets acquired totaled $14.4 million, consisting primarily of property, plant, and equipment of $9.1 million, inventories of $3.2 million, accounts receivable of $1.9 million, other current assets of $0.1 million, and other assets of $0.1 million.  The fair value of the liabilities assumed totaled $2.0 million, consisting primarily of accounts payable of $1.6 million and accrued expenses of $0.4 million.  Of the remaining purchase price, $0.9 million was allocated to nontax-deductible goodwill and $0.9 million was allocated to other intangible assets.  The allocation of the purchase price to long-lived assets is provisional as of June 27, 2015 and subject to change upon completion of the final valuation of the assets.  The results of operations for Turbotec have been included in the accompanying Condensed Consolidated Financial Statements from the acquisition date.

On June 18, 2015, the Company entered into a Membership Interest Purchase Agreement with Sherwood Valve Products, LLC (Sherwood) providing for the purchase of all of the outstanding equity interests of Sherwood for $21.8 million in cash, subject to working capital adjustments.  Sherwood manufactures valves and fluid control solutions for the HVAC, refrigeration, and compressed gas markets.  The acquisition of Sherwood complements the Company’s existing refrigeration business, a component of the OEM segment.  In 2014, Sherwood had net sales of approximately $49.1 million.  The fair value of the assets acquired totaled $28.7 million, consisting primarily of inventories of $14.8 million, property, plant, and equipment of $7.5 million, accounts receivable of $6.2 million, and other current assets of $0.2 million.  The fair value of the liabilities assumed totaled $6.9 million, consisting primarily of accounts payable of $6.5 million, accrued wages of $0.3 million, and other current liabilities of $0.1 million.  The allocation of the purchase price and review of working capital is provisional as of June 27, 2015 and subject to change upon completion of the final valuation of the assets.

Dispositions

On June 1, 2015, the Company sold certain assets.  Simultaneously, the Company entered into a lease agreement with the purchaser of the assets for their continued use for a period of approximately 22 months (Lease Period).

The total sales price was $20.2 million, of which $5.0 million was received on June 1, 2015; the Company will receive $5.0 million on December 30, 2016 and the remaining $10.2 million will be received at the end of the Lease Period.  This transaction resulted in a pre-tax gain of $15.4 million in the second quarter of 2015, or 17 cents per diluted share after tax.  This gain was recognized in the Plumbing & Refrigeration segment.

 
17

 
 
 
The net book value of the assets disposed was $2.3 million.  For goodwill testing purposes, these assets were part of the SPD reporting unit which is a component of the Company’s Plumbing & Refrigeration segment.  Because these assets met the definition of a business in accordance with ASC 805, Business Combinations, $2.4 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.

Note 10 – Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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.  The Company is in the process of evaluating the impact of ASU 2014-09 on its Consolidated Financial Statements.

In April 2015, the FASB issued ASU No. 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employers’ Defined Benefit Obligation and Plan Assets (ASU 2015-04).  The ASU allows employers with fiscal year-ends that do not coincide with a calendar month-end to make an accounting policy election to measure defined benefit plan assets and obligations as of the end of the month closest to their fiscal year-ends.  The new guidance is effective for public business entities in interim and fiscal periods beginning after December 15, 2015.  Prospective application is required, and early adoption is permitted.  The Company will continue to measure its defined benefit plan assets and obligation at fiscal year-end and will not elect to change the measurement date to a calendar month-end.

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


We are a leading manufacturer of plumbing, HVAC, refrigeration, and industrial 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 fittings and valves; refrigeration valves and fittings; fabricated tubular products; and steel nipples.  We also resell 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:

·
Plumbing & Refrigeration:  The Plumbing & Refrigeration segment is composed of SPD, European Operations, and Mexican Operations.  SPD manufactures and sells copper tube, copper and plastic fittings, line sets, and valves in North America and sources products for import distribution in North America.  European Operations manufacture copper tube in the United Kingdom, which is sold throughout Europe.  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 HVAC, plumbing, and refrigeration markets, to distributors to the manufactured housing and recreational vehicle industries, and to building material retailers.

·
OEM:  The OEM segment is composed of IPD, EPD, and Mueller-Xingrong, the Company’s Chinese joint venture.  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.

 
18

 
 
 
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 our products is in the construction of single and multi-family housing and commercial buildings.  Repairs and remodeling projects are also important drivers of underlying demand for these products.  

Residential construction activity has shown improvement in 2014 and into the first half of 2015, 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, higher interest rates, and tighter lending standards.  Per the U.S. Census Bureau, the June 2015 seasonally adjusted annual rate of new housing starts was 1.2 million compared with the June 2014 rate of 927 thousand.  While mortgage rates have risen in 2015 and 2014, they remain at historically low levels, as the average 30-year fixed mortgage rate was 3.77 percent for the first six months of 2015 and 4.17 percent for the twelve months ended December 2014. 

The private non-residential construction sector, which includes offices, industrial, health care and retail projects, began showing improvement in 2015 and 2014 from declines in previous years.   Per the U.S. Census Bureau, the actual (not seasonally adjusted) value of private nonresidential construction put in place was $347.7 billion in 2014 compared to $312.3 billion in 2013.  The seasonally adjusted annual value of private non-residential value of construction put in place was $392.8 billion in May 2015 compared to the December 2014 rate of $352.7 billion and the May 2014 rate of $348.5 billion.  The Company expects that most of these conditions will gradually improve.

Profitability of certain of the Company’s product lines depends upon the “spreads” between the cost of raw material 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 volumes that are 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 to offshore regions.

Results of Operations

Consolidated Results

The following table compares summary operating results for the second quarter of 2015 and 2014:

   
Three Months Ended
 
  Percent Change
     
Six Months Ended
 
   Percent Change
     
(In thousands)
 
June 27, 2015
   
June 28, 2014
 
  2015 vs. 2014
     
June 27, 2015
   
June 28, 2014
 
  2015 vs. 2014
     
                                       
Net sales
 
$
555,593
   
$
649,691
 
(14.5
)
%
 
$
1,092,835
   
$
1,224,065
 
(10.7
)
%
 
Operating income
   
55,554
     
48,204
 
15.2
       
91,278
     
86,511
 
5.5
     
Net income
   
33,651
     
35,045
 
(4.0
)
     
55,629
     
59,751
 
(6.9
)
   
                                               

 
19

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

     
 Quarter-to-Date
   
Year-to-Date 
   
     
 2015 vs. 2014
   
 2015 vs. 2014
   
Net selling price in core product lines
   
(5.6
)
%
 
(7.1
)
%
 
Unit sales volume in core product lines
   
(7.1
)
   
(1.3
)
   
Acquisitions & new products
   
1.2
     
0.8
     
Dispositions 
   
(2.5
)
   
(2.7
)
   
Other
   
(0.5
)
   
(0.4
)
   
                     
     
(14.5
)
%
 
(10.7
)
%
 
                     
 
The decrease in net sales during the second quarter of 2015 was primarily due to (i) lower unit sales volume of $44.1 million in our core product lines, primarily copper tube and brass rod, as well as our plastic drain, waste, and vent (DWV) fittings product line, (ii) lower net selling prices of $36.6 million in our core product lines, and (iii) the absence of sales of $15.0 million recorded by Primaflow, a business we sold during November 2014.  These decreases were offset by $5.7 million of sales recorded by Turbotec Products, Inc. (Turbotec), acquired in March 2015.

The decrease in net sales during the first half of 2015 was primarily due to (i) lower net selling prices of $87.5 million in our core product lines, primarily copper tube and brass rod, (ii) the absence of sales of $31.0 million recorded by Primaflow, and (iii) lower unit sales volume of $11.1 million in our core product lines as well as our plastic DWV fittings product line.  These decreases were offset by $5.7 million of sales recorded by Turbotec.

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

Average Copper Price Per Pound






 






 
20

 
 
 

The following tables compare operating expenses as dollar amounts and as a percent of net sales for the second quarter of 2015 and 2014:

   
Three Months Ended
   
Six Months Ended
 
(In thousands)
 
June 27, 2015
   
June 28, 2014
   
June 27, 2015