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EX-32.2 - EXHIBIT 32.2 - MUELLER INDUSTRIES INCq12018exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - MUELLER INDUSTRIES INCq12018exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - MUELLER INDUSTRIES INCq12018exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - MUELLER INDUSTRIES INCq12018exhibit311.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
March 31, 2018
Commission file number 1–6770
mlia15.jpg
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   ☒    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, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    ☒
Accelerated filer    ☐
Non-accelerated filer    ☐
Smaller reporting company    ☐
 
Emerging growth company    ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 April 20, 2018 was 57,564,680.
 




MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2018

 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements

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

 
 
For the Quarter Ended
(In thousands, except per share data)
 
March 31, 2018
 
April 1, 2017 (1)

 
 
 
 
 
Net sales
 
$
640,060

 
$
577,920

 
 
 
 
 
Cost of goods sold
 
545,670

 
488,427

Depreciation and amortization
 
9,456

 
8,355

Selling, general, and administrative expense
 
34,057

 
35,574

Asset impairment
 
3,469

 

 
 
 
 
 
Operating income
 
47,408

 
45,564

 
 
 
 
 
Interest expense
 
(5,909
)
 
(2,531
)
Other income, net
 
560

 
594

 
 
 
 
 
Income before income taxes
 
42,059

 
43,627

 
 
 
 
 
Income tax expense
 
(7,395
)
 
(11,929
)
Loss from unconsolidated affiliates, net of foreign tax
 
(10,320
)
 
(1,243
)
 
 
 
 
 
Consolidated net income
 
24,344

 
30,455

 
 
 
 
 
Net income attributable to noncontrolling interests
 
(216
)
 
(468
)
 
 
 
 
 
Net income attributable to Mueller Industries, Inc.
 
$
24,128

 
$
29,987

 
 
 
 
 
Weighted average shares for basic earnings per share
 
56,900

 
56,780

Effect of dilutive stock-based awards
 
517

 
658

 
 
 
 
 
Adjusted weighted average shares for diluted earnings per share
 
57,417

 
57,438

 
 
 
 
 
Basic earnings per share
 
$
0.42

 
$
0.53

 
 
 
 
 
Diluted earnings per share
 
$
0.42

 
$
0.52

 
 
 
 
 
Dividends per share
 
$
0.100

 
$
8.100


See accompanying notes to condensed consolidated financial statements.

(1) The Condensed Consolidated Statement of Income for the quarter ended April 1, 2017 has been adjusted to reflect the adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The components of net periodic benefit cost (income) other than the service cost component are included in other income, net in the Condensed Consolidated Statements of Income. Refer to Note 1 for further discussion.


3



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

 
 
For the Quarter Ended
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Consolidated net income
 
$
24,344

 
$
30,455

 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 

 
 

Foreign currency translation
 
4,977

 
7,210

Net change with respect to derivative instruments and hedging activities, net of tax of $279 and $(96)
 
(1,062
)
 
56

Net change in pension and postretirement obligation adjustments, net of tax of $180 and $11
 
(451
)
 
40

Attributable to unconsolidated affiliates, net of tax of $116 and $903
 
(401
)
 
(1,598
)
Other, net
 

 
(144
)
 
 
 
 
 
Total other comprehensive income, net
 
3,063

 
5,564

 
 
 
 
 
Consolidated comprehensive income
 
27,407

 
36,019

Comprehensive income attributable to noncontrolling interests
 
(393
)
 
(1,117
)
 
 
 
 
 
Comprehensive income attributable to Mueller Industries, Inc.
 
$
27,014

 
$
34,902


See accompanying notes to condensed consolidated financial statements.





4



MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
March 31,
2018
 
December 30, 2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
91,573

 
$
120,269

Accounts receivable, less allowance for doubtful accounts of $783 in 2018 and $980 in 2017
 
321,756

 
244,795

Inventories
 
329,231

 
327,901

Other current assets
 
20,267

 
46,150

 
 
 
 
 
Total current assets
 
762,827

 
739,115

 
 
 
 
 
Property, plant, and equipment, net
 
300,074

 
304,321

Goodwill, net
 
137,048

 
130,293

Intangible assets, net
 
40,735

 
42,008

Investment in unconsolidated affiliates
 
70,056

 
76,434

Other assets
 
26,104

 
28,002

 
 
 
 
 
Total assets
 
$
1,336,844

 
$
1,320,173

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of debt
 
$
9,087

 
$
16,480

Accounts payable
 
115,425

 
102,503

Accrued wages and other employee costs
 
27,107

 
33,546

Other current liabilities
 
61,705

 
89,723

 
 
 
 
 
Total current liabilities
 
213,324

 
242,252

 
 
 
 
 
Long-term debt, less current portion
 
478,778

 
448,592

Pension liabilities
 
11,098

 
11,606

Postretirement benefits other than pensions
 
17,051

 
17,107

Environmental reserves
 
23,091

 
23,699

Deferred income taxes
 
18,807

 
19,403

Other noncurrent liabilities
 
21,630

 
21,486

 
 
 
 
 
Total liabilities
 
783,779

 
784,145

 
 
 
 
 
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 57,564,594 in 2018 and 57,809,509 in 2017
 
802

 
802

Additional paid-in capital
 
276,429

 
274,585

Retained earnings
 
761,319

 
743,503

Accumulated other comprehensive loss
 
(47,614
)
 
(51,056
)
Treasury common stock, at cost
 
(452,181
)
 
(445,723
)
 
 
 
 
 
Total Mueller Industries, Inc. stockholders' equity
 
538,755

 
522,111

Noncontrolling interests
 
14,310

 
13,917

 
 
 
 
 
Total equity
 
553,065

 
536,028

 
 
 
 
 
Commitments and contingencies
 

 

Total liabilities and equity
 
$
1,336,844

 
$
1,320,173

See accompanying notes to condensed consolidated financial statements.

5



MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
For the Quarter Ended
(In thousands)
 
March 31, 2018
 
April 1, 2017 (1)

 
 
 
 
 
Cash flows from operating activities
 
 
 
 
Consolidated net income
 
$
24,344

 
$
30,455

Reconciliation of consolidated net income to net cash used in operating activities:
 
 

 
 

Depreciation and amortization
 
9,536

 
8,419

Stock-based compensation expense
 
1,912

 
1,736

Loss from unconsolidated affiliates
 
10,320

 
1,243

Gain on disposals of properties
 
(676
)
 
(16
)
Gain on sales of securities
 

 
(254
)
Impairment charge
 
3,469

 

Deferred income taxes
 
(940
)
 
(80
)
Changes in assets and liabilities:
 
 

 
 

Receivables
 
(72,843
)
 
(53,756
)
Inventories
 
3,504

 
(6,991
)
Other assets
 
20,967

 
1,205

Current liabilities
 
(23,898
)
 
8,215

Other liabilities
 
(1,845
)
 
(668
)
Other, net
 
(365
)
 
(930
)
 
 
 
 
 
Net cash used in operating activities
 
(26,515
)
 
(11,422
)
 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(5,517
)
 
(7,345
)
Acquisition of businesses, net of cash acquired
 
(12,466
)
 

Investment in unconsolidated affiliates
 
(609
)
 

Proceeds from sales of assets
 
708

 
192

Proceeds from sales of securities
 

 
1,444

 
 
 
 
 
Net cash used in investing activities
 
(17,884
)
 
(5,709
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Dividends paid to stockholders of Mueller Industries, Inc.
 
(5,679
)
 
(179,848
)
Repurchase of common stock
 
(6,575
)
 

Issuance of long-term debt
 
41,754

 

Repayments of long-term debt
 
(15,903
)
 
(306
)
Repayment of debt by consolidated joint ventures, net
 
(3,342
)
 
(7,367
)
Net cash received (used) to settle stock-based awards
 
50

 
(870
)
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
 
10,305

 
(188,391
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
1,289

 
2,499

 
 
 
 
 
Decrease in cash, cash equivalents, and restricted cash
 
(32,805
)
 
(203,023
)
Cash, cash equivalents, and restricted cash at the beginning of the period
 
126,563

 
360,469

 
 
 
 
 
Cash, cash equivalents, and restricted cash at the end of the period
 
$
93,758

 
$
157,446

See accompanying notes to condensed consolidated financial statements.

(1) The Condensed Consolidated Statement of Cash Flows for the quarter ended April 1, 2017 has been adjusted to reflect the adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The Condensed Consolidated Statements of Cash Flows reflects the changes during the periods in the total of cash, cash equivalents, and restricted cash. Therefore, restricted cash activity is included with cash when reconciling the beginning-of-period and end-of-period total amounts shown. Refer to Note 1 for further discussion.


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 (U.S. GAAP) 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 herein. 

Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications primarily relate to the adoptions of Accounting Standards Update (ASU) 2017-07 and 2016-18 as further described in “Note 1 - Recently Issued Accounting Standards.”

Note 1 – Recent Accounting Standards

Adopted

In February 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI). The ASU permits entities to reclassify tax effects stranded in AOCI as a result of tax reform to retained earnings. The guidance is effective for the Company in interim and annual periods beginning in 2019. Early adoption is permitted and can be applied retrospectively or in the period of adoption. The Company early adopted the ASU during the first quarter of 2018, which resulted in a reclassification of $556 thousand from AOCI to retained earnings during the quarter.

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires employers that sponsor defined benefit pension and/or other postretirement benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period and other components of net periodic benefits cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. The Company adopted the ASU during the first quarter of 2018 using a retrospective approach for each period presented, and elected to use the practical expedient that allows the Company to use the amounts previously presented in its Benefit Plans disclosure as the estimation basis for applying the retrospective presentation requirements. Prior to the adoption of the ASU, net periodic benefit cost (income) was reported within selling, general, and administrative expense in the Condensed Consolidated Statements of Income. The prior periods have been revised to conform to the current period presentation, resulting in the reclassification of $43 thousand of net periodic benefit income from operating income to other income, net for the quarter ended April 1, 2017.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated guidance requires prospective adoption. Early adoption is permitted. The Company early adopted the ASU during the first quarter of 2018 and the adoption had no impact on its Condensed Consolidated Financial Statements.

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The ASU provides correction or improvement to the guidance previously issued in ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under the ASU, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration that it expects to receive in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU requires revenue to be recognized over time (i.e., throughout the production process) rather than at a point in time (generally upon shipment to the customer) if performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.  The Company adopted the ASU during the first quarter of 2018. The Company has evaluated specific contract terms, primarily within the Industrial Metals and Climate segments, related to the production of

7



customized products and payment rights and determined that there are no significant changes to the timing or nature of revenue recognition under the ASU. As part of the overall evaluation of the standard, the Company has assessed and implemented necessary changes to its accounting policies, practices, and internal controls over financial reporting to support the standard.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The Company adopted the ASU during the first quarter of 2018 using a retrospective approach for each period presented. Prior to the adoption of the ASU, the Company presented the change in restricted cash balances separately as a cash flow from investing activity. Upon adoption, the Company included restricted cash in each of the balances of the cash, cash equivalents, and restricted cash at the beginning and end of periods in the Condensed Consolidated Statements of Cash Flows. The prior period has been revised to conform to the current period presentation, and as a result, net cash flows for the quarter ended April 1, 2017 increased by $10.6 million. A reconciliation of cash, cash equivalents, and restricted cash as of March 31, 2018 and December 30, 2017 is as follows:

(In thousands)
 
March 31,
2018
 
December 30, 2017
 
 
 
 
 
Cash & cash equivalents
 
$
91,573

 
$
120,269

Restricted cash included within other current assets
 
2,080

 
6,189

Restricted cash included within other assets
 
105

 
105

 
 
 
 
 
Total cash, cash equivalents, and restricted cash
 
$
93,758

 
$
126,563


Amounts included in restricted cash relate to required deposits in brokerage accounts that facilitate the Company’s hedging activities as well as imprest funds for the Company’s self-insured workers’ compensation program.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The ASU requires companies to account for the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. Companies will still be required to defer the income tax effects of intercompany inventory transactions in an exception to the income tax accounting guidance. The Company adopted the ASU during the first quarter of 2018 and the adoption had no impact on its Condensed Consolidated Financial Statements.

Issued

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  The ASU requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months.  Recognition, measurement and presentation of expenses will depend on classification as a financing or operating lease.  The amendments also require certain quantitative and qualitative disclosures about leasing arrangements.  The ASU will be effective for interim and annual periods beginning in 2019.  Early adoption is permitted.  Currently the guidance requires a modified retrospective adoption, but in January 2018 the FASB proposed ASU No. 2018-01, Leases (Topic 842), which if approved will allow entities to elect a simplified transition approach whereby they would apply the provisions of the new guidance at the effective date without adjusting the comparative periods presented. The Company is still evaluating the effects that the provisions of the ASU will have on its Condensed Consolidated Financial Statements.

Note 2 – 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.  There were no awards excluded from the computation of diluted earnings per share for the quarter ended March 31, 2018, and approximately 579 thousand stock-based awards excluded from the computation of diluted earnings per share for the quarter ended April 1, 2017 because they were antidilutive.


8



Note 3 – Acquisitions

Die-Mold

On March 31, 2018, the Company entered into a share purchase agreement pursuant to which the Company acquired all of the outstanding shares of Die-Mold Tool Limited (Die-Mold) for approximately $12.5 million in cash, net of working capital adjustments. Die-Mold, based out of Ontario, Canada, is a manufacturer of plastic PEX and other plumbing-related fittings and an integrated designer and manufacturer of plastic injection tooling. The business complements the Company’s existing businesses within the Piping Systems segment.

The fair value of the assets acquired totaled $6.0 million, consisting primarily of property, plant, and equipment of $2.1 million, inventories of $2.0 million, and accounts receivable of $1.9 million. The fair value of the liabilities assumed totaled $0.7 million, consisting primarily of accounts payable of $0.6 million and other current liabilities of $0.1 million. Of the remaining purchase price, $7.2 million was allocated to non-deductible goodwill and intangible assets. The purchase price allocation is provisional as of March 31, 2018 and subject to change upon completion of the final valuation of the long-lived assets, working capital, and contingent consideration during the measurement period.

Heatlink Group

On May 31, 2017, the Company entered into a share purchase agreement pursuant to which the Company acquired all of the outstanding shares of Pexcor Manufacturing Company Inc. and Heatlink Group Inc. (collectively, Heatlink Group) for approximately $16.3 million in cash, net of working capital adjustments. Heatlink Group, based out of Calgary, Alberta, Canada, produces and sells a complete line of products for PEX plumbing and radiant systems. The business complements the Company’s existing businesses within the Piping Systems segment.

The fair value of the assets acquired totaled $9.9 million, consisting primarily of inventories of $4.6 million, accounts receivable of $2.8 million, property, plant, and equipment of $2.0 million, and other current assets of $0.5 million. The fair value of the liabilities assumed totaled $4.1 million, consisting primarily of accounts payable of $3.6 million, and other current liabilities of $0.5 million. Of the remaining purchase price, $10.5 million was allocated to non-deductible goodwill and intangible assets. The purchase price allocation is provisional as of March 31, 2018 and subject to change upon completion of the final valuation of the long-lived assets, working capital, and contingent consideration during the measurement period.

Note 4 – Segment Information

Each of the Company’s reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered as follows:

Piping Systems

Piping Systems is composed of the following operating segments: Domestic Piping Systems Group, Great Lakes Copper, Heatlink Group, Die-Mold, European Operations, Trading Group, and Jungwoo-Mueller (the Company’s South Korean joint venture).  The Domestic Piping Systems Group manufactures copper tube and fittings, plastic fittings, and line sets.  These products are manufactured in the U.S., sold in the U.S, and exported to markets worldwide.   Outside the U.S., Great Lakes Copper manufactures copper tube and line sets in Canada and sells the products primarily in the U.S. and Canada, Heatlink Group produces a complete line of products for PEX plumbing and radiant systems in Canada and sells these products in Canada and the U.S., Die-Mold manufactures PEX and other plumbing-related fittings and plastic injection tooling in Canada, and the European Operations manufacture copper tube in the U.K. which is sold primarily in Europe.  The Trading Group manufactures pipe nipples and imports and resells brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products in the U.S. and Mexico.  Jungwoo-Mueller manufactures copper-based joining products that are sold worldwide.  The Piping Systems segment’s products are sold primarily to plumbing, refrigeration, and air-conditioning wholesalers, hardware wholesalers and co-ops, building product retailers, and air-conditioning original equipment manufacturers (OEMs).

Industrial Metals

Industrial Metals is composed of the following operating segments: Brass Rod & Copper Bar Products, Impacts & Micro Gauge, and Brass Value-Added Products.  These businesses manufacture brass rod, impact extrusions, and forgings, as well as a wide variety of end products including plumbing brass, automotive components, valves, fittings, and gas assemblies.  These products are manufactured in the U.S. and sold primarily to OEMs in the U.S., many of which are in the industrial, transportation, construction, heating, ventilation, and air-conditioning, plumbing, refrigeration, and energy markets.

9




Climate

Climate is composed of the following operating segments: Refrigeration Products, Fabricated Tube Products, Westermeyer, and Turbotec.  These domestic businesses manufacture and fabricate valves, assemblies, high pressure components, and coaxial heat exchangers primarily for the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.

Summarized segment information is as follows:

 
 
For the Quarter Ended March 31, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
430,964

 
$
177,332

 
$
36,063

 
$
(4,299
)
 
$
640,060

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
372,895

 
149,423

 
27,286

 
(3,934
)
 
545,670

Depreciation and amortization
 
5,878

 
1,903

 
621

 
1,054

 
9,456

Selling, general, and administrative expense
 
19,242

 
3,373

 
2,609

 
8,833

 
34,057

Asset impairment
 

 

 

 
3,469

 
3,469

 
 
 
 
 
 
 
 
 
 
 
Operating income
 
32,949

 
22,633

 
5,547

 
(13,721
)
 
47,408

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(5,909
)
Other income, net
 
 

 
 

 
 

 
 

 
560

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
42,059

 
 
 
For the Quarter Ended April 1, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
398,775

 
$
149,837

 
$
34,279

 
$
(4,971
)
 
$
577,920

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
344,646

 
124,043

 
25,564

 
(5,826
)
 
488,427

Depreciation and amortization
 
5,342

 
1,898

 
629

 
486

 
8,355

Selling, general, and administrative expense
 
18,197

 
3,549

 
2,476

 
11,352

 
35,574

 
 
 
 
 
 
 
 
 
 
 
Operating income
 
30,590

 
20,347

 
5,610

 
(10,983
)
 
45,564

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(2,531
)
Other income, net
 
 

 
 

 
 

 
 

 
594

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
43,627



10



The following tables represent a disaggregation of revenue from contracts with customers, along with the reportable segment for each category:

 
 
For the Quarter Ended March 31, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
358,091

 
$

 
$

 
$
358,091

Brass rod and forgings
 

 
136,548

 

 
136,548

OEM components, tube & assemblies
 
7,062

 
15,067

 
36,063

 
58,192

Valves and plumbing specialties
 
65,811

 

 

 
65,811

Other
 

 
25,717

 

 
25,717

 
 
 
 
 
 
 
 
 
 
 
430,964

 
177,332

 
36,063

 
644,359

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(4,299
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
640,060


 
 
For the Quarter Ended April 1, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
308,366

 
$

 
$

 
$
308,366

Brass rod and forgings
 

 
114,180

 

 
114,180

OEM components, tube & assemblies
 
31,971

 
13,215

 
34,279

 
79,465

Valves and plumbing specialties
 
58,438

 

 

 
58,438

Other
 

 
22,442

 

 
22,442

 
 
 
 
 
 
 
 
 
 
 
398,775

 
149,837

 
34,279

 
582,891

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(4,971
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
577,920


Note 5 – Inventories

(In thousands)
 
March 31,
2018
 
December 30, 2017
 
 
 
 
 
Raw materials and supplies
 
$
94,633

 
$
108,397

Work-in-process
 
63,254

 
46,158

Finished goods
 
178,115

 
180,143

Valuation reserves
 
(6,771
)
 
(6,797
)
 
 
 
 
 
Inventories
 
$
329,231

 
$
327,901

 

11



Note 6 – Financial Instruments

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 either a) designated as a hedge of (i) a forecasted transaction or the variability of cash flow to be paid (cash flow hedge) or (ii) the fair value of a recognized asset or liability (fair value hedge), or b) not designated in a hedge accounting relationship, even though the derivative contract was executed to mitigate an economic exposure (economic hedge), as the Company does not enter into derivative contracts for trading purposes.  Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in stockholders’ equity within 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 derivatives executed as economic hedges and the ineffective portion of designated derivatives are reported in current earnings.

The Company documents all relationships between derivative instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions.  This process includes linking all derivative instruments 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 derivative instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items.  When a derivative instrument 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.

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 March 31, 2018, the Company held open futures contracts to purchase approximately $47.8 million of copper over the next 12 months related to fixed price sales orders.  The fair value of those futures contracts was a $117 thousand net loss position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).  In the next 12 months, the Company will reclassify into earnings realized gains or losses relating to cash flow hedges.  At March 31, 2018, this amount was approximately $287 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.  At March 31, 2018, the Company held open futures contracts to sell approximately $1.7 million of copper over the next four months related to copper inventory.  The fair value of those futures contracts was a $56 thousand net gain position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).


12



The Company presents its derivative assets and liabilities in the 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:

 
 
Asset Derivatives
 
Liability Derivatives
 
 
  
 
Fair Value
 
 
 
Fair Value
(In thousands)
 
Balance Sheet Location
 
March 31, 2018
 
December 30, 2017
 
Balance Sheet Location
 
March 31, 2018
 
December 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts - gains
 
Other current assets
 
$
319

 
$
1,014

 
Other current liabilities
 
$
75

 
$
55

Commodity contracts - losses
 
Other current assets
 
(15
)
 
(5
)
 
Other current liabilities
 
(440
)
 
(3,210
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives (1)
 
 
 
$
304

 
$
1,009

 
 
 
$
(365
)
 
$
(3,155
)
(1) Does not include the impact of cash collateral provided to counterparties.
The following tables summarize the effects of derivative instruments on the Company’s Condensed Consolidated Statements of Income:
 
 
  
 
For the Quarter Ended
(In thousands)
 
Location
 
March 31, 2018
 
April 1,
2017
Fair value hedges:
 
 
 
 
 
 
Gain on commodity contracts (qualifying)
 
Cost of goods sold
 
$
391

 
$

(Loss) gain on hedged item - inventory
 
Cost of goods sold
 
(385
)
 

 
 
 
 
 
 
 
Undesignated derivatives:
 
 
 
 
 
 
Gain (loss) on commodity contracts (nonqualifying)
 
Cost of goods sold
 
6,126

 
(1,095
)

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

 
 
For the Quarter Ended March 31, 2018
(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
 
$
(795
)
 
Cost of goods sold
 
$
(292
)
Other
 
25

 
Other
 

 
 
 
 
 
 
 
Total
 
$
(770
)
 
Total
 
$
(292
)


13



Derivative instruments and hedging activities (continued):

 
 
For the Quarter Ended April 1, 2017
(In thousands)
 
(Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax
 
Classification Gains (Losses)
 
Loss Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
 
 
 
 
 
 
Commodity contracts
 
$
(563
)
 
Cost of goods sold
 
$
352

Interest rate swap
 

 
Interest expense
 
149

Other
 
118

 
Other
 

 
 
 
 
 
 
 
Total
 
$
(445
)
 
Total
 
$
501


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 qualifying open hedge contracts through March 31, 2018 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 March 31, 2018 and December 30, 2017, the Company had recorded restricted cash in other current assets of $1.3 million and $5.3 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.

Long-Term Debt

The fair value of long-term debt at March 31, 2018 approximates the carrying value on that date.  The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities.  The fair value of long-term debt is classified as level 2 within the fair value hierarchy.  This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.  

Note 7 – Investment in Unconsolidated Affiliates

Tecumseh

The Company owns a 50 percent interest in an unconsolidated affiliate that acquired Tecumseh Products Company LLC (Tecumseh).  The Company also owns a 50 percent interest in a second unconsolidated affiliate that provides financing to Tecumseh.  These investments are recorded using the equity method of accounting, as the Company can exercise significant influence but does not own a majority equity interest or otherwise control the respective entities.  Under the equity method of accounting, these investments are stated at initial cost and are adjusted for subsequent additional investments and the Company’s proportionate share of earnings or losses and distributions.

The Company records its proportionate share of the investees’ income or loss, net of foreign taxes, one quarter in arrears as income (loss) from unconsolidated affiliates, net of foreign tax, in the Condensed Consolidated Statements of Income and its proportionate share of the investees’ other comprehensive income (loss), net of income taxes, in the Condensed Consolidated Statements of Comprehensive Income. The U.S. tax effect of the Company’s proportionate share of Tecumseh’s income or loss is recorded in income tax expense in the Condensed Consolidated Statements of Income. In general, the equity investment in unconsolidated affiliates is equal to the current equity investment plus the investees’ undistributed earnings. 


14



The following tables present summarized financial information derived from the Company’s equity method investees’ combined consolidated financial statements, which are prepared in accordance with U.S. GAAP.

(In thousands)
 
March 31,
2018
 
December 30, 2017
 
 
 
 
 
Current assets
 
$
230,289

 
$
246,127

Noncurrent assets
 
128,200

 
139,200

Current liabilities
 
164,309

 
174,710

Noncurrent liabilities
 
61,183

 
58,334


 
 
For the Quarter Ended
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Net sales
 
$
124,100

 
$
126,300

Gross profit 
 
12,100

 
15,600

Net loss
 
(18,331
)
 
(2,487
)

The Company’s loss from unconsolidated affiliates, net of foreign tax, for the quarter ended March 31, 2018 included net losses of $6.2 million and charges of $3.0 million related to certain labor claim contingencies for Tecumseh.

Bahrain

On December 30, 2015, the Company entered into a joint venture agreement with Cayan Ventures and Bahrain Mumtalakat Holding Company to build a copper tube mill in Bahrain. The business will operate and brand its products under the Mueller Industries family of brands. The Company has invested approximately $4.5 million of cash to date and will be the technical and marketing lead in return for 40 percent ownership in the joint venture.

The Company’s loss from unconsolidated affiliates, net of foreign tax, for the quarter ended March 31, 2018 included net losses of $1.1 million for Bahrain.


15



Note 8 – 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 (income) are as follows:

 
 
For the Quarter Ended
(In thousands) 
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Pension benefits:
 
 
 
 
Service cost
 
$
24

 
$
35

Interest cost
 
1,493

 
1,665

Expected return on plan assets
 
(2,289
)
 
(2,182
)
Amortization of net loss
 
349

 
556

 
 
 
 
 
Net periodic benefit (income) cost
 
$
(423
)
 
$
74

 
 
 
 
 
Other benefits:
 
 

 
 

Service cost
 
$
60

 
$
56

Interest cost
 
148

 
149

Amortization of prior service credit
 
(226
)
 
(225
)
Amortization of net loss (gain)
 
18

 
(5
)
 
 
 
 
 
Net periodic benefit income
 
$

 
$
(25
)

The components of net periodic benefit cost (income) other than the service cost component are included in other income, net in the Condensed Consolidated Statements of Income.

Note 9 – 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 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 March 31, 2018 were $8.0 million.

Note 10 – Income Taxes

The Company’s effective tax rate for the first quarter of 2018 was 18 percent compared with 27 percent for the same period last year.  The difference between the Company’s effective tax rate and the current U.S. statutory rate of 21 percent is primarily related to tax benefits from losses on investments in unconsolidated affiliates of $3.9 million, which was partially offset by increases related to the provision for state income taxes, net of the federal benefit, of $1.2 million, and other items of $1.2 million. The Company is forecasting an annual effective tax rate between 21 percent and 23 percent.

The Company records the U.S. tax effects of its investment in Tecumseh, an unconsolidated affiliate, in income tax expense in the Condensed Consolidated Statements of Income.

The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on the accumulated earnings of certain

16



foreign subsidiaries, and creates new taxes on certain foreign-sourced earnings. The Company is applying the guidance in SAB 118 in accounting for the enactment date effects of the Act. At December 30, 2017, the Company made a reasonable estimate of the one-time transition tax on accumulated foreign earnings as well as the impact of the Act on its existing deferred tax balances. As discussed below, the Company has not completed its accounting for the tax effects of the Act as of March 31, 2018.

The one-time transition tax is based on the Company’s total post-1986 earnings and profits (E&P) for which the accrual of U.S. income taxes had previously been deferred. The Company recorded a provisional amount for its one-time transition tax liability of $12.9 million at December 30, 2017, and has not adjusted this amount as of March 31, 2018. The Company has not yet completed its calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the transition tax is impacted in part by the amount of those earnings held in cash and other specified assets. Accordingly, the Company’s estimate of the one-time transition tax may change when it finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets.

At December 30, 2017, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. A provisional tax benefit of $12.1 million was recorded, and no adjustment was recorded to this estimate in the current quarter. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these balances.

The global intangible low-taxed income (GILTI) provisions of the Act impose a tax on the GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of these provisions and has not yet determined the new accounting policy. No estimate was recorded for GILTI as of December 30, 2017. At March 31, 2018, because the Company is still assessing the GILTI provisions and future income subject to the GILTI provisions, it has included an estimate of the tax on GILTI related to current-year operations in the forecasted effective tax rate and has not provided additional GILTI on deferred items.

The Company’s effective tax rate for the first quarter of 2017 was 27 percent. The difference between the Company’s effective tax rate and the 2017 U.S. statutory rate of 35 percent was primarily attributable to reductions for the U.S. production activities deduction of $0.9 million, the effect of foreign tax rates lower than statutory rates of $1.4 million, the tax benefit of equity compensation deductions of $1.7 million, and the impact of tax benefits from losses on investments in unconsolidated affiliates of $0.8 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $0.9 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 2014 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. 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 11 – Accumulated Other Comprehensive Income (Loss)

AOCI includes certain foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges, adjustments to pension and OPEB liabilities, unrealized gains and losses on marketable securities classified as available-for-sale, and other comprehensive income attributable to unconsolidated affiliates.


17



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

 
 
For the Quarter Ended March 31, 2018
(In thousands)
 
Cumulative Translation Adjustment
 
Unrealized Gain (Loss) on Derivatives
 
Pension/OPEB Liability Adjustment
 
Unrealized Gain on Equity Securities
 
Attributable to Unconsol. Affiliates
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 30, 2017
 
$
(38,163
)
 
$
847

 
$
(20,610
)
 

 
$
6,870

 
$
(51,056
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
4,800

 
(770
)
 
(570
)
 

 
(401
)
 
3,059

Amounts reclassified from AOCI
 

 
(292
)
 
119

 

 

 
(173
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net current-period other comprehensive income (loss)
 
4,800

 
(1,062
)
 
(451
)
 

 
(401
)
 
2,886

Reclassification of stranded effects of the Act
 

 
112

 
(1,018
)
 

 
1,462

 
556

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of March 31, 2018
 
$
(33,363
)
 
$
(103
)
 
$
(22,079
)
 

 
$
7,931

 
$
(47,614
)

 
 
For the Quarter Ended April 1, 2017
(In thousands)
 
Cumulative Translation Adjustment
 
Unrealized (Loss) Gain on Derivatives
 
Pension/OPEB Liability Adjustment
 
Unrealized Gain (Loss) on Equity Securities
 
Attributable to Unconsol. Affiliates
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
$
(49,965
)
 
$
(300
)
 
$
(23,046
)
 
380

 
$
5,975

 
$
(66,956
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
6,561

 
(445
)
 
(222
)
 
16

 
(1,598
)
 
4,312

Amounts reclassified from AOCI
 

 
501

 
262

 
(160
)
 

 
603

 
 
 
 
 
 
 
 
 
 
 
 
 
Net current-period other comprehensive income (loss)
 
6,561

 
56

 
40

 
(144
)
 
(1,598
)
 
4,915

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of April 1, 2017
 
$
(43,404
)
 
$
(244
)
 
$
(23,006
)
 
236

 
$
4,377

 
$
(62,041
)


18



Reclassification adjustments out of AOCI were as follows:

 
Amount reclassified from AOCI
 
 
For the Quarter Ended
 
 
(In thousands)
 
March 31, 2018
 
April 1, 2017
 
Affected line item
 
 
 
 
 
 
 
Unrealized losses (gains) on derivatives: 
 
 
 
 
 
   
Commodity contracts
 
$
(365
)
 
$
422

 
Cost of goods sold
Interest rate swap
 

 
232

 
Interest expense
 
 
73

 
(153
)
 
Income tax expense (benefit)
 
 
 
 
 
 
 
 
 
$
(292
)
 
$
501

 
Net of tax and noncontrolling interests
 
 
 
 
 
 
 
Amortization of net loss and prior service cost on employee benefit plans
 
$
141

 
$
326

 
Other income, net
 
 
(22
)
 
(64
)
 
Income tax benefit
 
 
 
 
 
 
 
 
 
$
119

 
$
262

 
Net of tax and noncontrolling interests
 
 
 
 
 
 
 
Sale of available-for-sale securities
 
$

 
$
(254
)
 
Other income, net
 
 
$

 
$
94

 
Income tax expense
 
 
 
 
 
 
 
 
 
$

 
$
(160
)
 
Net of tax and noncontrolling interests
 
 
 
 
 
 
 

Note 12 – Noncontrolling Interests

(In thousands)
Noncontrolling Interests
 
 
Balance as of December 30, 2017
$
13,917

Net income attributable to noncontrolling interests
216

Other comprehensive income attributable to noncontrolling interests, net of tax:
 
Foreign currency translation
177

 
 

Balance as of March 31, 2018
$
14,310


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; line sets; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum impact extrusions; PEX plastic tube, refrigeration valves and fittings; fabricated tubular products; and steel nipples.  We also resell brass and plastic plumbing valves, plastic fittings, malleable iron fittings, faucets, and plumbing specialty products.  Mueller’s operations are located throughout the United States and in Canada, Mexico, Great Britain, South Korea, and China.


19



Each of our reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered as follows:

Piping Systems:  The Piping Systems segment is composed of Domestic Piping Systems Group, Great Lakes Copper, Heatlink Group, Die-Mold, European Operations, Trading Group, and Jungwoo-Mueller (our South Korean joint venture).  The Domestic Piping Systems Group manufactures copper tube and fittings, plastic fittings, and line sets.  These products are manufactured in the U.S., sold in the U.S., and exported to markets worldwide. Great Lakes Copper manufactures copper tube and line sets in Canada and sells the products primarily in the U.S. and Canada.  Heatlink Group manufactures a complete line of products for PEX plumbing and radiant systems in Canada and sells these products in Canada and the U.S. Die-Mold manufactures PEX and other plumbing-related fittings and plastic injection tooling in Canada. European Operations manufacture copper tube in the United Kingdom, which is sold throughout Europe.  The Trading Group manufactures pipe nipples and sources products for import distribution in North America.  Jungwoo-Mueller manufactures copper-based joining products that are sold worldwide.  The Piping Systems segment sells products to wholesalers in the plumbing and refrigeration markets, distributors to the manufactured housing and recreational vehicle industries, building material retailers, and air-conditioning original equipment manufacturers (OEMs).

The Company disposed of Mueller-Xingrong (the Company’s Chinese joint venture) on June 21, 2017. This business manufactured engineered copper tube primarily for air-conditioning applications in China.

Industrial Metals:  The Industrial Metals segment is composed of Brass Rod & Copper Bar Products, Impacts & Micro Gauge, and Brass Value-Added Products.  The segment manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum impact extrusions; and gas valves and assemblies.   The segment manufactures and sells its products primarily to domestic OEMs in the industrial, transportation, construction, heating, ventilation, and air-conditioning, plumbing, refrigeration, and energy markets.

Climate: The Climate segment is composed of Refrigeration Products, Fabricated Tube Products, Westermeyer, and Turbotec.  The segment manufactures and sells refrigeration valves and fittings, fabricated tubular products, high pressure components, and coaxial heat exchangers.  The segment sells its products primarily to the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.

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

Residential construction activity has shown improvement in recent years, but remains at levels below long-term historical averages.  Per the U.S. Census Bureau, the March 2018 seasonally adjusted annual rate of new housing starts was 1.3 million, compared to the March 2017 rate of 1.2 million.  Mortgage rates remain at historically low levels, as the average 30-year fixed mortgage rate was 4.27 percent for the first quarter of 2018 and 3.99 percent for the twelve months ended December 2017.  The private non-residential construction sector, which includes offices, industrial, health care, and retail projects, has shown improvement in recent years.  Per the U.S. Census Bureau, the seasonally adjusted annual value of private nonresidential construction put in place was $448.6 billion in February 2018 compared to the February 2017 rate of $443.6 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 copper and brass scrap, for example, influence the selling price of copper tube and brass rod, two principal products manufactured by the Company.  We attempt to minimize the effects on profitability from fluctuations in material costs by passing through these costs to our customers.  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 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 first quarter of 2018 and 2017:

 
 
Quarter Ended
 
Percent Change
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
2018 vs. 2017
 
 
 
 
 
 
 
Net sales
 
$
640,060

 
$
577,920

 
10.8
 %
Operating income
 
47,408

 
45,564

 
4.0

Net income
 
24,128

 
29,987

 
(19.5
)
 
 The following are components of changes in net sales compared to the prior year:

 
 
2018 vs. 2017
Net selling price in core product lines
 
10.5
 %
Unit sales volume in core product lines
 
1.9

Acquisitions
 
0.9

Dispositions
 
(4.5
)
Other
 
2.0

 
 
 
 
 
10.8
 %

The increase in net sales during the first quarter of 2018 was primarily due to (i) higher net selling prices of $60.9 million in our core product lines, (ii) higher unit sales volume of $21.4 million in our domestic core product lines, and (iii) $5.4 million of sales recorded by Heatlink Group, acquired in May 2017. These increases were offset by (i) lower unit sales volume of $10.4 million in our non-domestic core product lines and (ii) the absence of sales of $26.0 million recorded by Mueller-Xingrong, a business we sold during June 2017.

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:

chart-39e53b2fc39859c9bcfa02.jpg

21




The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for the first quarter of 2018 and 2017:

 
 
For the Quarter Ended
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Cost of goods sold
 
$
545,670

 
$
488,427

Depreciation and amortization
 
9,456

 
8,355

Selling, general and administrative expense
 
34,057

 
35,574

Asset impairment
 
3,469

 

 
 
 
 
 
Operating expenses
 
$
592,652

 
$
532,356


 
 
For the Quarter Ended
 
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Cost of goods sold
 
85.3
%
 
84.5
%
Depreciation and amortization
 
1.5

 
1.4

Selling, general and administrative expense
 
5.3

 
6.2

Asset impairment
 
0.5

 

 
 
 
 
 
Operating expenses
 
92.6
%
 
92.1
%

The increase in cost of goods sold was primarily due to the increase in the average cost of copper and the increase in sales volume in our core product lines, partially offset by the decrease in sales volume resulting from the sale of Mueller-Xingrong.  Depreciation and amortization increased in the first quarter of 2018 as a result of several new long-lived assets being placed into service, offset by the impact of the sale of long-lived assets at Mueller-Xingrong. Selling, general, and administrative expense decreased for the first quarter of 2018 primarily as a result of (i) fees of $1.4 million received for services provided under certain equipment transfer and licensing agreements, (ii) net gains on the sale of long-lived assets of $0.7 million, (iii) a decrease in bad debt expense of $0.5 million, and (iv) the absence of expenses associated with Mueller-Xingrong of $0.3 million. This was partially offset by incremental expenses associated with Heatlink Group of $1.4 million. In addition, we recognized a fixed asset impairment charge of $3.5 million for a corporate aircraft that was taken out of service and classified as held-for-sale during first quarter of 2018.

Interest expense increased in the first quarter of 2018 primarily as a result of interest associated with our 6% Subordinated Debentures that were issued during the first quarter as part of our special dividend.  Other income, net, for the first quarter of 2018 was consistent with the first quarter of 2017.

Our effective tax rate for the first quarter of 2018 was 18 percent compared with 27 percent for the same period last year.  The items impacting the effective tax rate for the first quarter of 2018 were primarily attributable to the reduction for the impact of tax benefits from losses on investments in unconsolidated affiliates of $3.9 million, which was partially offset by increases related to the provision for state income taxes, net of the federal benefit, of $1.2 million, and other items of $1.2 million.

For the first quarter of 2017, the difference between the effective tax rate and the amount computed using the U.S. federal statutory rate was primarily attributable to reductions for the U.S. production activities deduction of $0.9 million, the effect of foreign tax rates lower than statutory rates of $1.4 million, the tax benefit of equity compensation deductions of $1.7 million, and the impact of tax benefits from losses on investments in unconsolidated affiliates of $0.8 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $0.9 million.

During the first quarter of 2018, we recognized losses of $10.3 million on our investment in unconsolidated affiliates. During the first quarter of 2017, we recognized $1.2 million of losses on these investments. 


22



Piping Systems Segment

The following table compares summary operating results for the first quarter of 2018 and 2017 for the businesses comprising our Piping Systems segment:

 
 
For the Quarter Ended
 
Percent Change
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
2018 vs. 2017
 
 
 
 
 
 
 
Net sales
 
$
430,964

 
$
398,775

 
8.1
%
Operating income
 
32,949

 
30,590

 
7.7

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

 
 
2018 vs. 2017
Net selling price in core product lines
 
10.4
 %
Unit sales volume in core product lines
 
1.3

Acquisitions
 
1.4

Dispositions
 
(6.6
)
Other
 
1.6

 
 
 
 
 
8.1
 %

Net sales during the first quarter of 2018 increased primarily as a result of (i) higher net selling prices in the segment’s core product lines of $41.4 million, (ii) an increase in net sales of $8.5 million in the segment’s non-core product lines, (iii) $5.4 million of sales recorded by Heatlink Group, and (iv) higher unit sales volume of $15.6 million in the segment’s domestic core product lines.  These increases were offset by (i) lower unit sales volume of $10.4 million in the segment’s non-domestic core product lines and (ii) the absence of sales of $26.0 million recorded by Mueller-Xingrong.

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales the first quarter of 2018 and 2017:

 
 
For the Quarter Ended
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Cost of goods sold
 
$
372,895

 
$
344,646

Depreciation and amortization
 
5,878

 
5,342

Selling, general and administrative expense
 
19,242

 
18,197

 
 
 
 
 
Operating expenses
 
$
398,015

 
$
368,185

 
 
 
For the Quarter Ended
 
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Cost of goods sold
 
86.5
%
 
86.4
%
Depreciation and amortization
 
1.4

 
1.3

Selling, general and administrative expense
 
4.5

 
4.6

 
 
 
 
 
Operating expenses
 
92.4
%
 
92.3
%

23




The increase in cost of goods sold during the first quarter of 2018 was primarily due to the increase in the average cost of copper and the increase in sales volume, partially offset by the decrease in sales volume resulting from the sale of Mueller-Xingrong.  Depreciation and amortization increased slightly, as a result of several new long-lived assets being placed into service, offset by the impact of the sale of long-lived assets at Mueller-Xingrong. Selling, general, and administrative expenses increased for the first quarter of 2018, primarily due to (i) incremental expenses associated with Heatlink Group of $1.4 million and (ii) an increase in legal and professional fees of $0.6 million.  This was partially offset by (i) net gains on the sale of long-lived assets of $0.7 million and (ii) the absence of expenses associated with Mueller-Xingrong of $0.3 million.

Industrial Metals Segment

The following table compares summary operating results for the first quarter of 2018 and 2017 for the businesses comprising our Industrial Metals segment:

 
 
For the Quarter Ended
 
Percent Change
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
2018 vs. 2017
 
 
 
 
 
 
 
Net sales
 
$
177,332

 
$
149,837

 
18.3
%
Operating income
 
22,633

 
20,347

 
11.2

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

 
 
2018 vs. 2017
Net selling price in core product lines
 
13.3
%
Unit sales volume in core product lines
 
3.9

Other
 
1.1

 
 
 
 
 
18.3
%

The increase in net sales during the first quarter of 2018 was primarily due to (i) higher net selling prices of $19.6 million and (ii) higher unit sales volume of $5.8 million in the segment’s core product lines. 

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for the first quarter of 2018 and 2017:

 
 
For the Quarter Ended
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Cost of goods sold
 
$
149,423

 
$
124,043

Depreciation and amortization
 
1,903

 
1,898

Selling, general and administrative expense
 
3,373

 
3,549

 
 
 
 
 
Operating expenses
 
$
154,699

 
$
129,490



24



 
 
For the Quarter Ended
 
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Cost of goods sold
 
84.3
%
 
82.8
%
Depreciation and amortization
 
1.1

 
1.3

Selling, general and administrative expense
 
1.8

 
2.3

 
 
 
 
 
Operating expenses
 
87.2
%
 
86.4
%

The increase in cost of goods sold during the first quarter of 2018 was primarily due to the increase in the average cost of copper and the increase in sales volume in the segment’s core product lines.  Depreciation and amortization for the first quarter of 2018 was consistent with the first quarter of 2017. Selling, general, and administrative expenses decreased slightly as a result of a decrease in employee compensation expenses, including incentive compensation, of $0.3 million.

Climate Segment

The following table compares summary operating results for the first quarter of 2018 and 2017 for the businesses comprising our Climate segment:

 
 
For the Quarter Ended
 
Percent Change
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
2018 vs. 2017
 
 
 
 
 
 
 
Net sales
 
$
36,063

 
$
34,279

 
5.2
 %
Operating income
 
5,547

 
5,610

 
(1.1
)

Sales for the first quarter of 2018 increased primarily as a result of an increase in volume and product mix. 

The following tables compare cost of goods sold and operating expenses as dollar amounts and as a percent of net sales for the first quarter of 2018 and 2017:

 
 
For the Quarter Ended
(In thousands)
 
March 31, 2018
 
April 1,
2017
 
 
 
 
 
Cost of goods sold
 
$
27,286

 
$
25,564

Depreciation and amortization
 
621

 
629

Selling, general and administrative expense
 
2,609

 
2,476

 
 
 
 
 
Operating expenses
 
$
30,516

 
$
28,669