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EX-32.2 - SECTION 906 CERTIFICATION OF THE CFO - MUELLER INDUSTRIES INCex32_2.htm
EX-32.1 - SECTION 906 CERTIFICATION OF THE CEO - MUELLER INDUSTRIES INCex32_1.htm
EX-31.2 - SECTION 302 CERTIFICATION OF THE CFO - MUELLER INDUSTRIES INCex31_2.htm
EX-10.1 - EXHIBIT 10.1 SHARE PURCHASE AGREEMENT AMONG GREAT LAKES COPPER INC. AND MUELLER COPPER TUBE PRODUCTS, INC. - MUELLER INDUSTRIES INCsharepurchaseagreement-glc.htm
EX-31.1 - SECTION 302 CERTIFICATION OF THE CEO - MUELLER INDUSTRIES INCex31_1.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 26, 2015
Commission file number 1–6770


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       

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     No

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   
Accelerated filer   
Non-accelerated filer   
Smaller reporting company   

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

The number of shares of the Registrant's common stock outstanding as of October 19, 2015, was 57,158,180.

MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended September 26, 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.

__________________________

INDEX


 
 
Page Number
Part I.  Financial Information
 
 
 
 
 
Item 1.   – Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II.  Other Information
 
 
 
 
 
 
 
 
 
     
 
     
 
 
 
 



2

 
PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements

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 26, 2015
   
September 27, 2014
   
September 26, 2015
   
September 27, 2014
 
 
 
   
   
   
 
Net sales
 
$
535,184
   
$
602,820
   
$
1,628,019
   
$
1,826,885
 
 
                               
Cost of goods sold
   
467,167
     
521,278
     
1,398,366
     
1,574,830
 
Depreciation and amortization
   
8,749
     
8,952
     
24,790
     
25,651
 
Selling, general, and administrative expense
   
32,241
     
34,004
     
98,492
     
100,512
 
Gain on sale of assets
   
     
     
(15,376
)
   
(1,417
)
Severance
   
     
860
     
3,442
     
3,072
 
 
                               
Operating income
   
27,027
     
37,726
     
118,305
     
124,237
 
 
                               
Interest expense
   
(1,682
)
   
(1,430
)
   
(5,977
)
   
(3,913
)
Other income, net
   
164
     
225
     
534
     
440
 
 
                               
Income before income taxes
   
25,509
     
36,521
     
112,862
     
120,764
 
 
                               
Income tax expense
   
(5,223
)
   
(12,199
)
   
(36,374
)
   
(36,279
)
Loss from unconsolidated subsidiary, net of tax
   
(2,191
)
   
     
(2,191
)
   
 
 
                               
Consolidated net income
   
18,095
     
24,322
     
74,297
     
84,485
 
 
                               
Net income attributable to noncontrolling interest
   
(295
)
   
(499
)
   
(868
)
   
(911
)
 
                               
Net income attributable to Mueller Industries, Inc.
 
$
17,800
   
$
23,823
   
$
73,429
   
$
83,574
 
 
                               
Weighted average shares for basic earnings per share
   
56,375
     
56,107
     
56,272
     
55,999
 
Effect of dilutive stock-based awards
   
598
     
637
     
690
     
746
 
 
                               
Adjusted weighted average shares for diluted earnings per share
   
56,973
     
56,744
     
56,962
     
56,745
 
 
                               
Basic earnings per share
 
$
0.32
   
$
0.42
   
$
1.30
   
$
1.49
 
 
                               
Diluted earnings per share
 
$
0.31
   
$
0.42
   
$
1.29
   
$
1.47
 
 
                               
Dividends per share
 
$
0.075
   
$
0.075
   
$
0.225
   
$
0.225
 
 
                               
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 Nine Months Ended
 
(In thousands)
 
September 26, 2015
 
 
September 27, 2014
 
 
September 26, 2015
 
 
September 27, 2014
 
 
 
 
Consolidated net income
 
$
18,095
 
 
$
24,322
 
 
$
74,297
 
 
$
84,485
 
 
       
       
       
       
Other comprehensive (loss) income, net of tax:
       
       
       
       
Foreign currency translation
   
(12,153
)
   
(6,661
)
   
(13,501
)
   
(3,698
)
Net change with respect to derivative instruments and hedging activities
   
(915
)
(1
)
 
(174
)
(2
)
 
(2,016
)
(3
)
 
(1,650
)
(4)
Net actuarial loss on pension and postretirement obligations
   
1,231
 
(5
)
 
646
 
(6
)
 
2,000
 
(7
)
 
490
 
(8)
Other, net
   
(53
)
     
(1
)
     
(46
)
     
7
   
 
                                       
Total other comprehensive loss
   
(11,890
)
     
(6,190
)
     
(13,563
)
     
(4,851
)
 
 
                                       
Consolidated comprehensive income
   
6,205
       
18,132
       
60,734
       
79,634
   
Comprehensive loss (income) attributable to noncontrolling interest
   
709
       
(889
)
     
534
       
(548
)
 
 
                                       
Comprehensive income attributable to Mueller Industries, Inc.
 
$
6,914
     
$
17,243
     
$
61,268
     
$
79,086
   
 
                                       
See accompanying notes to condensed consolidated financial statements.
 
                                       
 
                                       

_______________________________________ 
 
(1) Net of tax of $575
(2) Net of tax of $42
(3) Net of tax of $1,014
(4) Net of tax of $907
(5) Net of tax of $(429)
(6) Net of tax of $(232)
(7) Net of tax of $(715)
(8) Net of tax of $(109)
4

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

(In thousands, except share data)
September 26, 2015
 
December 27, 2014
 
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
 
 
$
220,745
 
 
 
$
352,134
 
Accounts receivable, less allowance for doubtful accounts of $623 in 2015 and $666 in 2014
 
   
299,417
 
 
   
275,065
 
Inventories
 
   
250,799
 
 
   
256,585
 
Other current assets
 
   
54,538
 
 
   
57,429
 
 
 
       
 
       
Total current assets
 
   
825,499
 
 
   
941,213
 
 
 
       
 
       
Property, plant, and equipment, net
 
   
270,655
 
 
   
245,910
 
Goodwill
 
   
163,063
 
 
   
102,909
 
Investment in unconsolidated subsidiary
     
63,709
       
 
Other assets
 
   
50,600
 
 
   
38,064
 
 
 
       
 
       
Total assets
 
 
$
1,373,526
 
 
 
$
1,328,096
 
 
 
       
 
       
Liabilities
               
Current liabilities:
               
Current portion of debt
 
 
$
13,756
 
 
 
$
36,194
 
Accounts payable
 
   
113,597
 
 
   
100,735
 
Accrued wages and other employee costs
 
   
34,042
 
 
   
41,595
 
Other current liabilities
 
   
68,146
 
 
   
59,545
 
 
 
       
 
       
Total current liabilities
 
   
229,541
 
 
   
238,069
 
 
 
       
 
       
Long-term debt, less current portion
 
   
204,500
 
 
   
205,250
 
Pension liabilities
 
   
17,323
 
 
   
20,070
 
Postretirement benefits other than pensions
 
   
26,701
 
 
   
21,486
 
Environmental reserves
 
   
21,566
 
 
   
21,842
 
Deferred income taxes
 
   
22,142
 
 
   
24,556
 
Other noncurrent liabilities
 
   
3,570
 
 
   
1,389
 
 
 
       
 
       
Total liabilities
 
   
525,343
 
 
   
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 57,158,013 in 2015 and 56,901,445 in 2014
 
   
802
 
 
   
802
 
Additional paid-in capital
 
   
269,529
 
 
   
268,575
 
Retained earnings
 
   
1,053,395
 
 
   
992,798
 
Accumulated other comprehensive loss
 
   
(55,084
)
 
   
(42,923
)
Treasury common stock, at cost
 
   
(453,209
)
 
   
(457,102
)
 
 
       
 
       
Total Mueller Industries, Inc. stockholders' equity
 
   
815,433
 
 
   
762,150
 
Noncontrolling interest
 
   
32,750
 
 
   
33,284
 
 
 
       
 
       
Total equity
 
   
848,183
 
 
   
795,434
 
 
 
       
 
       
Commitments and contingencies
 
   
 
 
   
 
 
 
       
 
       
Total liabilities and equity
 
 
$
1,373,526
 
 
 
$
1,328,096
 
 
 
       
 
       
See accompanying notes to condensed consolidated financial statements.
 

5

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

 
 
For the Nine Months Ended
 
(In thousands)
 
September 26, 2015
   
September 27, 2014
 
 
 
 
Cash flows from operating activities
 
   
 
Consolidated net income
 
$
74,297
   
$
84,485
 
Reconciliation of consolidated net income to net cash provided by operating activities:
               
Depreciation and amortization
   
25,132
     
25,888
 
Stock-based compensation expense
   
4,611
     
4,957
 
Equity in losses of unconsolidated subsidiary
   
2,191
     
 
Gain on disposal of assets
   
(14,875
)
   
(1,146
)
Impairment charges
   
570
     
 
Deferred income taxes
   
(8,262
)
   
(6,908
)
Income tax benefit from exercise of stock options
   
(953
)
   
(829
)
Changes in assets and liabilities, net of businesses acquired:
               
Receivables
   
5,249
     
(62,854
)
Inventories
   
29,901
     
(14,868
)
Other assets
   
4,302
     
(15,272
)
Current liabilities
   
(27,580
)
   
(8,675
)
Other liabilities
   
740
     
(797
)
Other, net
   
145
     
223
 
 
               
Net cash provided by operating activities
   
95,468
     
4,204
 
 
               
Cash flows from investing activities
               
Capital expenditures
   
(22,502
)
   
(28,406
)
Acquisition of businesses, net of cash acquired
   
(107,405
)
   
(30,137
)
Net withdrawals from restricted cash balances
   
1,822
     
2,507
 
Investment in unconsolidated subsidiary
   
(65,900
)
   
 
Proceeds from sales of assets
   
5,521
     
4,920
 
 
               
Net cash used in investing activities
   
(188,464
)
   
(51,116
)
 
               
Cash flows from financing activities
               
Dividends paid to stockholders of Mueller Industries, Inc.
   
(12,669
)
   
(12,606
)
Issuance of long-term debt
   
     
12,008
 
Repayment of debt by joint venture, net
   
(21,597
)
   
(3,170
)
Net cash used to settle stock-based awards
   
(718
)
   
(887
)
Repurchase of common stock
   
     
(58
)
Repayments of long-term debt
   
(750
)
   
(800
)
Income tax benefit from exercise of stock options
   
953
     
829
 
 
               
Net cash used in financing activities
   
(34,781
)
   
(4,684
)
 
               
Effect of exchange rate changes on cash
   
(3,612
)
   
(346
)
 
               
Decrease in cash and cash equivalents
   
(131,389
)
   
(51,942
)
Cash and cash equivalents at the beginning of the period
   
352,134
     
311,800
 
 
               
Cash and cash equivalents at the end of the period
 
$
220,745
   
$
259,858
 
 
               
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 383 thousand stock based awards were excluded from the computation of diluted earnings per share for the quarter ended September 26, 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 September 26, 2015, were $8.8 million.

Note 3 – Inventories

(In thousands)
 
September 26, 2015
   
December 27, 2014
 
     
         
Raw materials and supplies
 
$
55,522
   
$
53,586
 
Work-in-process
   
38,689
     
39,707
 
Finished goods
   
162,780
     
168,481
 
Valuation reserves
   
(6,192
)
   
(5,189
)
                 
Inventories
 
$
250,799
   
$
256,585
 
                 


7


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. 

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 nine months ended September 27, 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 September 26, 2015
 
 (In thousands)
 
Plumbing & Refrigeration Segment
   
OEM
Segment
   
Corporate and Eliminations
   
Total
 
 
 
   
   
   
 
                 
Net sales
 
$
325,022
   
$
212,596
   
$
(2,434
)
 
$
535,184
 
                                 
Cost of goods sold
   
280,891
     
188,665
     
(2,389
)
   
467,167
 
Depreciation and amortization
   
4,468
     
3,839
     
442
     
8,749
 
Selling, general, and administrative expense
   
20,104
     
6,814
     
5,323
     
32,241
 
                                 
Operating income
 
$
19,559
   
$
13,278
   
$
(5,810
)
   
27,027
 
                                 
Interest expense
                           
(1,682
)
Other income, net
                           
164
 
 
                               
Income before income taxes
                         
$
25,509
 
 
                               



8


 
Segment information (continued):

 
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
     
22,613
     
5,533
     
5,858
     
34,004
 
Severance
     
860
     
     
     
860
 
 
 
                               
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 Nine Months Ended September 26, 2015
 
(In thousands) 
Plumbing & Refrigeration Segment
 
OEM
Segment
 
Corporate and Eliminations
 
Total
 
                           
 
                         
Net sales
 
 
$
957,375
   
$
678,293
   
$
(7,649
)
 
$
1,628,019
 
                                   
Cost of goods sold
     
819,591
     
586,305
     
(7,530
)
   
1,398,366
 
Depreciation and amortization
 
   
13,568
     
9,827
     
1,395
     
24,790
 
Selling, general, and administrative expense
     
61,117
     
19,534
     
17,841
     
98,492
 
Gain on sale of assets
     
(15,376
)
   
     
     
(15,376
)
Severance
 
   
3,442
     
     
     
3,442
 
 
 
                               
Operating income
 
 
$
75,033
   
$
62,627
   
$
(19,355
)
   
118,305
 
                                   
Interest expense
 
                           
(5,977
)
Other income, net
                             
534
 
 
 
                               
Income before income taxes
                         
 
$
112,862
 
 
 
                               




9

 
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
   
66,023
     
15,700
     
18,789
     
100,512
 
Gain on sale of assets
   
(1,417
)
   
     
     
(1,417
)
Severance
   
3,072
     
     
     
3,072
 
                                 
Operating income
 
$
76,371
   
$
68,479
   
$
(20,613
)
   
124,237
 
                                 
Interest expense
                           
(3,913
)
Other income, net
                           
440
 
 
                               
Income before income taxes
                         
$
120,764
 
 
                               

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 Nine Months Ended
 
(In thousands) 
 
September 26, 2015
   
September 27, 2014
   
September 26, 2015
   
September 27, 2014
 
     
Pension benefits:
 
   
   
   
 
Service cost
 
$
250
   
$
199
   
$
750
   
$
596
 
Interest cost
   
2,041
     
2,064
     
6,122
     
6,191
 
Expected return on plan assets
   
(2,654
)
   
(3,202
)
   
(7,963
)
   
(9,604
)
Amortization of prior service cost
   
     
1
     
     
1
 
Amortization of net loss
   
685
     
188
     
2,055
     
565
 
                                 
Net periodic benefit (income) cost
 
$
322
   
$
(750
)
 
$
964
   
$
(2,251
)
                                 
Other benefits:
                               
Service cost
 
$
90
   
$
88
   
$
270
   
$
264
 
Interest cost
   
193
     
181
     
579
     
544
 
Amortization of prior service cost (credit)
   
2
     
     
5
     
(1
)
Amortization of net gain
   
(7
)
   
(55
)
   
(20
)
   
(164
)
                                 
Net periodic benefit cost
 
$
278
   
$
214
   
$
834
   
$
643
 
                                 

Note 6 – Income Taxes

The Company's effective tax rate for the third quarter of 2015 was 20 percent compared with 33 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 third quarter of 2015 was primarily attributable to reductions to the Company's deferred tax liabilities of $4.2 million resulting from the acquisition of a foreign subsidiary and the U.S. production activities deduction of $0.8 million.

10

 
The Company's effective tax rate for the first nine months of 2015 was 32 percent compared with 30 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 for the first nine months of 2015 was primarily attributable to a reduction to the Company's deferred tax liabilities of $4.2 million resulting from the acquisition of a foreign subsidiary and the U.S. production activities deduction of $3.0 million.  These items were partially offset by state income taxes of $2.1 million.

For the third quarter of 2014, the difference between the effective tax rate and the amount computed using the U.S. federal statutory tax rate 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.

For the first nine months of 2014, the difference between the effective tax rate and the amount computed using the U.S. federal statutory tax rate was attributable to reductions for the U.S. production activities deduction of $3.5 million, decreases in valuation allowances of $5.7 million and 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.

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 2012 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 September 26, 2015, the Company held open futures contracts to purchase approximately $22.7 million of copper over the next 12 months related to fixed price sales orders.  The fair value of those futures contracts was a $1.8 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 September 26, 2015, this amount was approximately $1.3 million of deferred net losses, net of tax.

The Company may also enter into futures contracts to protect the value of inventory against market fluctuations.  At September 26, 2015, the Company held open futures contracts to sell approximately $9.8 million of copper over the next six months related to copper inventory. The fair value of those futures contracts was a $508 thousand net gain position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820).  

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.   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.  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 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 $2.8 million net loss position at September 26, 2015, and there was $1.8 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.

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 the net derivative assets and liabilities into gross components on a contract-by-contract basis:



12

 
 
Asset Derivatives
 
Liability Derivatives
 
 
  
 
Fair Value
 
 
 
Fair Value
 
(In thousands)
Balance Sheet Location
 
Sept. 26, 2015
   
Dec. 27, 2014
 
Balance Sheet Location
 
Sept. 26, 2015
   
Dec. 27, 2014
 
Hedging instrument:
 
 
   
 
 
 
   
 
  Commodity contracts - gains
Other current assets
 
$
511
   
$
99
 
Other current liabilities
 
$
61
   
$
15
 
  Commodity contracts - losses
Other current assets
   
     
(4
)
Other current liabilities
   
(1,912
)
   
(832
)
  Foreign currency contracts
Other current assets
   
     
 
Other current liabilities
   
(23
)
   
(81
)
  Interest rate swap
Other assets
   
     
 
Other liabilities
   
(2,817
)
   
(927
)
 
Total derivatives (1)
 
 
$
511
   
$
95
 
 
 
$
(4,691
)
 
$
(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
 
Nine Months Ended
 
(In thousands)
Location
Sept. 26, 2015
 
Sept. 27, 2014
 
Sept. 26, 2015
 
Sept. 27, 2014
 
Fair value hedges:
 
 
 
 
 
  Gain on commodity contracts (qualifying)
Cost of goods sold
 
$
1,831
   
$
1,100
   
$
3,300
   
$
7,371
 
  Loss on hedged item - Inventory
Cost of goods sold
   
(1,943
)
   
(922
)
   
(3,593
)
   
(6,702
)

 
  
Three Months Ended
 
Nine Months Ended
 
(In thousands)
Location
Sept. 26, 2015
 
Sept. 27, 2014
 
Sept. 26, 2015
 
Sept. 27, 2014
 
Undesignated derivatives:
 
 
   
   
   
 
  Gain on commodity contracts (nonqualifying)
Cost of goods sold
 
$
1,143
   
$
   
$
2,422
   
$
1,466
 

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

 
Three Months Ended September 26, 2015 
 
(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
 
$
(2,046
)
Cost of goods sold
 
$
1,708
 
Foreign currency contracts
   
(7
)
Depreciation expense
   
 
Interest rate swap
   
(632
)
Interest expense
   
58
 

13


 
Derivative information (continued):

 
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
)
Depreciation expense
   
(46
)
Interest rate swap
   
430
 
Interest expense
   
 

 
 
 
 
 
 
Nine Months Ended September 26, 2015 
 
(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
$
(2,931
)
Cost of goods sold
 
$
2,198
 
Foreign currency contracts
 
(59
)
Depreciation expense
   
 
Interest rate swap
 
(1,397
)
Interest expense
   
189
 
Other
 
(16
)
Other
       

   
 
 
 
 
 
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
)
Depreciation expense
   
(283
 )
Interest rate swap
   
(837
)
Interest expense
   
 
Other
   
3
 
Other
       

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 26, 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 September 26, 2015 and December 27, 2014, the Company had recorded restricted cash in other current assets of $1.7 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 Nine Months Ended September 26, 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 (loss) income before reclassifications
   
(12,099
)
   
(4,403
)
   
510
     
(46
)
   
(16,038
)
Amounts reclassified from AOCI
   
     
2,387
     
1,490
     
     
3,877
 
 
                                       
Net current-period other comprehensive income
   
(12,099
)
   
(2,016
)
   
2,000
     
(46
)
   
(12,161
)
 
                                       
Balance at September 26, 2015
 
$
(19,175
)
 
$
(2,969
)
 
$
(33,164
)
 
$
224
   
$
(55,084
)






15

 
AOCI information (continued):

 
 
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
 
 
 
   
   
   
   
 
Balance at December 28, 2013
 
$
(462
)
 
$
1,546
   
$
(12,158
)
 
$
255
   
$
(10,819
)
 
                                       
Other comprehensive (loss) income 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
)
 
                                       
Balance at September 27, 2014
 
$
(3,799
)
 
$
(104
)
 
$
(11,668
)
 
$
262
   
$
(15,309
)

Reclassification adjustments out of AOCI were as follows:

 
 
Amount reclassified from AOCI
   
For the Three Months Ended
   
(In thousands)
 
Sept. 26, 2015
   
Sept. 27, 2014
 
Affected line item
 
 
   
Unrealized losses/(gains) on derivatives: 
 
   
 
   
  Commodity contracts
 
$
2,339
   
$
(214
)
Cost of goods sold
  Foreign currency contracts
   
     
(71
)
Depreciation expense
  Interest rate swap
   
91
     
 
Interest expense
 
   
(664
)
   
65
 
Income tax (expense) benefit
 
   
1,766
     
(220
)
Net of tax
 
   
     
 
Noncontrolling interest
 
               
      
 
 
$
1,766
   
$
(220
)
Net of tax and noncontrolling
  interest
 
               
      
Amortization of net loss and prior service cost on employee benefit plans
 
$
680
   
$
134
 
Selling, general, and administrative
  expense
 
   
(188
)
   
(19
)
Income tax expense
 
   
492
     
115
 
Net of tax
 
   
     
 
Noncontrolling interest
 
               
      
 
 
$
492
   
$
115
 
Net of tax and noncontrolling
  interest


16


 
AOCI information (continued):

 
 
Amount reclassified from AOCI
   
For the Nine Months Ended
   
(In thousands)
 
Sept. 26, 2015
   
Sept. 27, 2014
 
Affected line item
 
 
   
Unrealized losses/(gains) on derivatives: 
 
   
 
   
  Commodity contracts
 
$
2,990
   
$
351
 
Cost of goods sold
  Foreign currency contracts
   
     
(446
)
Depreciation expense
  Interest rate swap
   
295
     
 
Interest expense
 
   
(898
)
   
97
 
Income tax (expense) benefit
 
   
2,387
     
2
 
Net of tax
 
   
     
 
Noncontrolling interest
 
               
      
 
 
$
2,387
   
$
2
 
Net of tax and noncontrolling
  interest
 
               
      
Amortization of net loss and prior service cost on employee benefit plans
 
$
2,040
   
$
401
 
Selling, general, and administrative
   expense
 
   
(550
)
   
(54
)
Income tax expense
 
   
1,490
     
347
 
Net of tax
 
   
     
 
Noncontrolling interest
 
               
      
 
 
$
1,490
   
$
347
 
Net of tax and noncontrolling
  interest

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 first nine months of 2015, compared to $3.1 million in the first nine months of 2014.  The Company does not expect to incur further severance costs for the rationalization of the business.

17

 
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, $2.1 million was allocated to non-tax-deductible goodwill, $0.9 million was allocated to other intangible assets, and $1.2 million was allocated to deferred tax liabilities.  The allocation of the purchase price to long-lived assets is provisional as of September 26, 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, net of 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 $28.9 million, consisting primarily of inventories of $11.9 million, property, plant, and equipment of $10.3 million, accounts receivable of $6.5 million, and other current assets of $0.2 million.  The fair value of the liabilities assumed totaled $7.1 million, consisting primarily of accounts payable of $6.0 million, accrued wages of $0.5 million, other current liabilities of $0.5 million, and other noncurrent liabilities of $0.1 million.  The allocation of the purchase price to long-lived assets is provisional as of September 26, 2015 and subject to change upon completion of the final valuation of the assets.  The results of operations for Sherwood have been included in the accompanying Condensed Consolidated Financial Statements from the acquisition date.

On July 31, 2015, the Company entered into a Share Purchase Agreement with Great Lakes Copper, Inc. providing for the purchase of all of the outstanding shares of Great Lakes Copper Ltd. (Great Lakes) for $71.5 million in cash, subject to post-closing working capital adjustments.  The acquisition of Great Lakes complements the Company's existing copper tube businesses in the Plumbing & Refrigeration segment.  For the twelve months ended June 30, 2015, Great Lakes' net sales were approximately $260.5 million.  The fair value of the assets acquired totaled $49.9 million, consisting primarily of accounts receivable of $26.0 million, inventories of $14.3 million, property, plant, and equipment of $9.5 million, and other current assets of $0.1 million.  The fair value of the liabilities assumed totaled $40.3 million, consisting primarily of accounts payable of $34.4 million, other postretirement benefits of $5.7 million, and other current liabilities of $0.2 million.  Of the remaining purchase price, $61.9 million was allocated to tax-deductible and non-tax-deductible goodwill.  The allocation of the purchase price to long-lived assets and review of working capital is provisional as of September 26, 2015 and subject to change upon completion of the final valuation of the assets.  The results of operations for Great Lakes have been included in the accompanying Condensed Consolidated Financial Statements from the acquisition date.

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.

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.


18

 
Note 10 – Equity Method Investment

During the third quarter of 2015, the Company entered into a joint venture agreement with affiliates of Atlas Holdings LLC to form MA Industrial JV LLC (Joint Venture), which simultaneously entered into a definitive merger agreement with MA Industrial Sub, Inc. and Tecumseh Products Company (Tecumseh) to commence a cash tender offer to acquire all of the outstanding shares of Tecumseh.  On September 21, 2015, the tender offer and back-end merger was completed and Mueller contributed $65.9 million for a 50 percent ownership interest in the Joint Venture.  Tecumseh is a global manufacturer of compressors and related products.  The Company accounts for this investment using the equity method of accounting.

Note 11 – 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, 2017.  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. 2015-03, Interest – Imputation of Interest (Topic 835-30) (ASU 2015-03).  The ASU simplifies the presentation of debt issuance costs by requiring debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability rather than as a separate asset.  In circumstances in which there is not an associated debt liability amount recorded in the financial statements when the debt issuance costs are incurred, they will be reported on the balance sheet as an asset until the debt liability is recorded.  The guidance is effective for public business entities in interim and fiscal periods beginning after December 15, 2015.  Retrospective application is required, and early adoption is permitted.  The Company is in the process of evaluating the impact of ASU 2015-11 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.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory (ASU 2015-11).  The ASU simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value.  It does not impact existing impairment models to inventories that are accounted for using LIFO.  The guidance is effective for public business entities in interim and fiscal periods beginning after December 15, 2016.  Early adoption is permitted.  The Company is in the process of evaluating the impact of ASU 2015-11 on its Consolidated Financial Statements.

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

General Overview

We are a leading manufacturer of copper, brass, aluminum, and plastic 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.  Our operations are located throughout the United States and in Canada, Mexico, Great Britain, and China.

19

 
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, refrigeration, and industrial 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 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 recent years, but remains at levels below long-term 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 September 2015 seasonally adjusted annual rate of new housing starts was 1.2 million compared with the September 2014 rate of 1.0 million.  While mortgage rates have risen in 2015 and 2014, they remain at historically low levels, as the average 30-year fixed mortgage rate was 3.83 percent for the first nine 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 nonresidential value of construction put in place was $404.7 billion in August 2015 compared to the December 2014 rate of $352.7 billion and the August 2014 rate of $346.3 billion.  We expect that most of these conditions will continue to improve.

Profitability of certain of our product lines depends upon the "spreads" between the costs of raw materials and the selling prices of our 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.  We attempt to minimize the effects on profitability from fluctuations in material costs by passing through these costs to our customers.  Our earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions.

Earnings and profitability are also impacted by unit volumes that are subject to market trends, such as substitute products, imports, technologies, and market share.  In core product lines, we intensively manage our 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.  We 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.


20

 
Results of Operations

Consolidated Results

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

 
Three Months Ended
   
Percent Change
 
 
Nine Months Ended
   
Percent Change
 
(In thousands)
Sept. 26, 2015
 
Sept. 27, 2014
   
2015 vs. 2014
 
 
Sept. 26, 2015
 
Sept. 27, 2014
   
2015 vs. 2014
 
 
 
   
 
 
 
   
 
Net sales
 
$
535,184
   
$
602,820
     
(11.2
)
 
%
 
$
1,628,019
   
$
1,826,885
     
(10.9
)%
Operating income
   
27,027
     
37,726
     
(28.4
)
     
118,305
     
124,237
     
(4.8
)
Net income
   
17,800
     
23,823
     
(25.3
)
     
73,429
     
83,574
     
(12.1
)
 
                       
 
                       
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
 
(10.5
)
%
 
(8.3
)
%
 
Unit sales volume in core product lines
 
(7.0
)
 
 
(3.2
)
 
 
Acquisitions & new products
 
9.9
     
3.8
     
Dispositions 
 
(2.9
)
 
 
(2.8
)
 
 
Other
 
(0.7
)
 
 
(0.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(11.2
)
%
 
(10.9
)
%
 
 
 
 
 
 
 
 
 
 
 
The decrease in net sales during the third quarter of 2015 was primarily due to (i) lower net selling prices of $63.3 million in our core product lines, primarily copper tube and brass rod, (ii) lower unit sales volume of $42.2 million, primarily  in our OEM segment, and (iii) the absence of sales of $15.7 million recorded by Primaflow, a business we sold during November 2014.  These decreases were offset by $40.4 million of sales recorded by Great Lakes Copper, Ltd. (Great Lakes), acquired in July 2015, $11.2 million of sales recorded by Sherwood Valve Products, LLC (Sherwood), acquired in June 2015, and $5.6 million of sales recorded by Turbotec Products, Inc. (Turbotec), acquired in March 2015.

The decrease in net sales during the first nine months of 2015 was primarily due to (i) lower net selling prices of $150.9 million in our core product lines, primarily copper tube and brass rod, (ii) lower unit sales volume of $57.8 million in our core product lines, and (iii) the absence of sales of $46.7 million recorded by Primaflow, a business we sold during November 2014.  These decreases were offset by $40.4 million of sales recorded by Great Lakes, $11.2 million of sales recorded by Sherwood, and $11.3 million of sales recorded by Turbotec.

21

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

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

 
 
Three Months Ended
   
Nine Months Ended
 
(In thousands)
 
Sept. 26, 2015
   
Sept. 27, 2014
   
Sept. 26, 2015
   
Sept. 27, 2014
 
 
 
   
   
   
 
Cost of goods sold
 
$
467,167
   
$
521,278
   
$
1,398,366
   
$
1,574,830
 
Depreciation and
  amortization
   
8,749
     
8,952
     
24,790
     
25,651
 
Selling, general and administrative expense
   
32,241
     
34,004
     
98,492
     
100,512
 
Gain on sale of assets
   
     
     
(15,376
)
   
(1,417
)
Severance
   
     
860
     
3,442
     
3,072
 
 
                               
   
$
508,157
   
$
565,094
   
$
1,509,714
   
$
1,702,648
 

 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
 
Sept. 26, 2015
 
 
Sept. 27, 2014
 
 
Sept. 26, 2015
 
 
Sept. 27, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
 
87.3
%
 
 
86.5
%
 
 
85.9
%