Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - MUELLER INDUSTRIES INCq22018exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - MUELLER INDUSTRIES INCq22018exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - MUELLER INDUSTRIES INCq22018exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - MUELLER INDUSTRIES INCq22018exhibit311.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2018
Commission file number 1–6770
mlia20.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 July 20, 2018 was 57,590,703.
 




MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 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
 
For the Six Months Ended
(In thousands, except per share data)
 
June 30, 2018
 
July 1, 2017 (1)
 
June 30, 2018
 
July 1, 2017 (1)
 
 
 
 
 
 
 
 
 
Net sales
 
$
662,773

 
$
614,266

 
$
1,302,833

 
$
1,192,186

 
 
 
 
 
 
 
 
 
Cost of goods sold
 
563,820

 
524,311

 
1,109,490

 
1,012,738

Depreciation and amortization
 
9,006

 
8,595

 
18,462

 
16,950

Selling, general, and administrative expense
 
38,428

 
36,299

 
72,485

 
71,873

(Gain) loss on sale of assets
 
(409
)
 
(1,631
)
 
3,060

 
(1,631
)
 
 
 
 
 
 
 
 
 
Operating income
 
51,928

 
46,692

 
99,336

 
92,256

 
 
 
 
 
 
 
 
 
Interest expense
 
(6,073
)
 
(6,442
)
 
(11,982
)
 
(8,973
)
Other income, net
 
586

 
342

 
1,146

 
936

 
 
 
 
 
 
 
 
 
Income before income taxes
 
46,441

 
40,592

 
88,500

 
84,219

 
 
 
 
 
 
 
 
 
Income tax expense
 
(12,411
)
 
(12,650
)
 
(19,806
)
 
(24,579
)
Loss from unconsolidated affiliates, net of foreign tax
 
(148
)
 
(109
)
 
(10,468
)
 
(1,352
)
 
 
 
 
 
 
 
 
 
Consolidated net income
 
33,882

 
27,833

 
58,226

 
58,288

 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
(700
)
 
(200
)
 
(916
)
 
(668
)
 
 
 
 
 
 
 
 
 
Net income attributable to Mueller Industries, Inc.
 
$
33,182

 
$
27,633

 
$
57,310

 
$
57,620

 
 
 
 
 
 
 
 
 
Weighted average shares for basic earnings per share
 
56,797

 
56,906

 
56,848

 
56,843

Effect of dilutive stock-based awards
 
514

 
511

 
516

 
585

 
 
 
 
 
 
 
 
 
Adjusted weighted average shares for diluted earnings per share
 
57,311

 
57,417

 
57,364

 
57,428

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.58

 
$
0.49

 
$
1.01

 
$
1.01

 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.58

 
$
0.48

 
$
1.00

 
$
1.00

 
 
 
 
 
 
 
 
 
Dividends per share
 
$
0.10

 
$
0.10

 
$
0.20

 
$
8.20


See accompanying notes to condensed consolidated financial statements.

(1) The Condensed Consolidated Statements of Income for the quarter and six months ended July 1, 2017 have 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
 
For the Six Months Ended
(In thousands)
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
 
 
 
 
 
 
 
 
 
Consolidated net income
 
$
33,882

 
$
27,833

 
$
58,226

 
$
58,288

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 

 
 

 
 

 
 

Foreign currency translation
 
(11,622
)
 
906

 
(6,645
)
 
8,116

Net change with respect to derivative instruments and hedging activities, net of tax of $(3), $(89), $276, and $(185)
 
35

 
261

 
(1,027
)
 
317

Net change in pension and postretirement obligation adjustments, net of tax of $(322), $172, $(142), and $183
 
950

 
(405
)
 
499

 
(365
)
Attributable to unconsolidated affiliates, net of tax of $(35), $(704), $81, and $199
 
121

 
1,247

 
(280
)
 
(351
)
Other, net
 

 
(236
)
 

 
(380
)
 
 
 
 
 
 
 
 
 
Total other comprehensive (loss) income, net
 
(10,516
)
 
1,773

 
(7,453
)
 
7,337

 
 
 
 
 
 
 
 
 
Consolidated comprehensive income
 
23,366

 
29,606

 
50,773

 
65,625

Comprehensive income attributable to noncontrolling interests
 
(670
)
 
(386
)
 
(1,063
)
 
(1,503
)
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to Mueller Industries, Inc.
 
$
22,696

 
$
29,220

 
$
49,710

 
$
64,122


See accompanying notes to condensed consolidated financial statements.





4



MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
June 30,
2018
 
December 30,
2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
281,445

 
$
120,269

Accounts receivable, less allowance for doubtful accounts of $760 in 2018 and $980 in 2017
 
333,903

 
244,795

Inventories
 
294,540

 
327,901

Other current assets
 
27,625

 
46,150

 
 
 
 
 
Total current assets
 
937,513

 
739,115

 
 
 
 
 
Property, plant, and equipment, net
 
284,836

 
304,321

Goodwill, net
 
139,012

 
130,293

Intangible assets, net
 
39,237

 
42,008

Investment in unconsolidated affiliates
 
70,065

 
76,434

Other assets
 
25,721

 
28,002

 
 
 
 
 
Total assets
 
$
1,496,384

 
$
1,320,173

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of debt
 
$
59,952

 
$
16,480

Accounts payable
 
112,090

 
102,503

Accrued wages and other employee costs
 
31,550

 
33,546

Other current liabilities
 
69,882

 
89,723

 
 
 
 
 
Total current liabilities
 
273,474

 
242,252

 
 
 
 
 
Long-term debt, less current portion
 
558,534

 
448,592

Pension liabilities
 
10,245

 
11,606

Postretirement benefits other than pensions
 
16,754

 
17,107

Environmental reserves
 
22,984

 
23,699

Deferred income taxes
 
19,650

 
19,403

Other noncurrent liabilities
 
22,654

 
21,486

 
 
 
 
 
Total liabilities
 
924,295

 
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 57,590,703 in 2018 and 57,809,509 in 2017
 
802

 
802

Additional paid-in capital
 
277,987

 
274,585

Retained earnings
 
788,753

 
743,503

Accumulated other comprehensive loss
 
(58,101
)
 
(51,056
)
Treasury common stock, at cost
 
(451,740
)
 
(445,723
)
 
 
 
 
 
Total Mueller Industries, Inc. stockholders' equity
 
557,701

 
522,111

Noncontrolling interests
 
14,388

 
13,917

 
 
 
 
 
Total equity
 
572,089

 
536,028

 
 
 
 
 
Commitments and contingencies
 

 

Total liabilities and equity
 
$
1,496,384

 
$
1,320,173

See accompanying notes to condensed consolidated financial statements.

5


MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
For the Six Months Ended
(In thousands)
 
June 30, 2018
 
July 1, 2017 (1)
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
Consolidated net income
 
$
58,226

 
$
58,288

Reconciliation of consolidated net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
18,622

 
17,093

Stock-based compensation expense
 
3,906

 
3,692

Loss from unconsolidated affiliates
 
10,468

 
1,352

Gain on sale of business
 

 
(1,631
)
Loss on disposals of properties
 
2,646

 
81

Gain on sales of securities
 

 
(611
)
Impairment charge
 

 
411

Deferred income taxes
 
(1,260
)
 
3

Changes in assets and liabilities:
 
 

 
 

Receivables
 
(90,345
)
 
(47,108
)
Inventories
 
33,357

 
(10,874
)
Other assets
 
12,405

 
(4,723
)
Current liabilities
 
(11,566
)
 
(1,262
)
Other liabilities
 
(1,361
)
 
(1,086
)
Other, net
 
1,121

 
(1,078
)
 
 
 
 
 
Net cash provided by operating activities
 
36,219

 
12,547

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(10,882
)
 
(11,908
)
Acquisition of businesses, net of cash acquired
 
(12,467
)
 
(18,419
)
Proceeds from sale of business, net of cash sold
 

 
17,483

Investment in unconsolidated affiliates
 
(609
)
 
(1,617
)
Proceeds from sales of assets
 
11,376

 
1,363

Proceeds from sales of securities
 

 
1,787

 
 
 
 
 
Net cash used in investing activities
 
(12,582
)
 
(11,311
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Dividends paid to stockholders of Mueller Industries, Inc.
 
(11,360
)
 
(185,539
)
Dividends paid to noncontrolling interests
 
(592
)
 
(2,909
)
Repurchase of common stock
 
(6,575
)
 

Issuance of long-term debt
 
193,247

 

Repayments of long-term debt
 
(37,107
)
 
(611
)
Repayment of debt by consolidated joint ventures, net
 
(3,100
)
 
(3,320
)
Net cash received (used) to settle stock-based awards
 
103

 
(785
)
 
 
 
 
 
Net cash provided by (used in) financing activities
 
134,616

 
(193,164
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
(368
)
 
3,516

 
 
 
 
 
Increase (decrease) in cash, cash equivalents, and restricted cash
 
157,885

 
(188,412
)
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
 
$
284,448

 
$
172,057

See accompanying notes to condensed consolidated financial statements.

(1) The Condensed Consolidated Statement of Cash Flows for the six months ended July 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 - Recent 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 $111 thousand and $154 thousand of net periodic benefit income from operating income to other income, net for the quarter and six months ended July 1, 2017, respectively.

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.  


7



The Company generates revenue through the manufacture and sale of copper tube and fittings; line sets; brass and copper alloy rod, bar, and shapes; aluminum impact extrusions; plastic fittings and valves; refrigeration valves and fittings; fabricated tubular products; and steel nipples. The Company also resells imported brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products.

Given the nature of the Company’s business and product offerings, sales transactions with customers are generally comprised of a single performance obligation that involves delivery of the products identified in the contracts with customers.  Performance obligations are generally satisfied at the point in time of shipment and payment is generally due within sixty days. Variable consideration is estimated for future rebates on certain product lines and product returns. The Company records variable consideration as an adjustment to the transaction price in the period it is incurred. Since variable consideration is settled within a short period of time, the time value of money is not significant.

The Company also evaluated specific contract terms, primarily within the Industrial Metals and Climate segments, related to the production of 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.

The Company adopted the ASU during the first quarter of 2018 using the modified retrospective method for all contracts with customers. The adoption did not result in a significant impact on opening retained earnings. Revenue for prior periods have not been adjusted and continue to be reported under Revenue Recognition (Topic 605). No significant judgments were made in the application of the guidance in ASC 606 and there were no material contract assets, contract liabilities, or deferred contract costs as of June 30, 2018.

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 six months ended July 1, 2017 increased by $4.5 million. A reconciliation of cash, cash equivalents, and restricted cash as of June 30, 2018 and December 30, 2017 is as follows:

(In thousands)
 
June 30,
2018
 
December 30,
2017
 
 
 
 
 
Cash & cash equivalents
 
$
281,445

 
$
120,269

Restricted cash included within other current assets
 
2,898

 
6,189

Restricted cash included within other assets
 
105

 
105

 
 
 
 
 
Total cash, cash equivalents, and restricted cash
 
$
284,448

 
$
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

8



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), Land Easement Practical Expedient for Transition to 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.  Approximately six thousand and four thousand stock-based awards were excluded from the computation of diluted earnings per share for the quarters ended June 30, 2018 and July 1, 2017, respectively, because they were antidilutive.

Note 3 – Acquisitions and Dispositions

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 $14.8 million, net of working capital adjustments. The total purchase price consisted of $12.5 million in cash at closing and a contingent consideration arrangement which requires the Company to pay the former owner up to $2.3 million based on EBITDA growth of the acquired company. 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 $5.6 million, consisting primarily of property, plant, and equipment of $2.1 million, inventories of $1.9 million, and accounts receivable of $1.6 million. The fair value of the liabilities assumed totaled $0.5 million, consisting primarily of accounts payable of $0.4 million and other current liabilities of $0.1 million. Of the remaining purchase price, $9.7 million was allocated to non-deductible goodwill and intangible assets. The purchase price allocation is provisional as of June 30, 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 $17.2 million, net of working capital adjustments. The total purchase price consisted of $16.3 million in cash at closing and a contingent consideration arrangement which requires the Company to pay the former owners up to $2.2 million based on the EBITDA growth of the acquired business. 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 $6.0 million, consisting primarily of accounts payable of $3.6 million, other current liabilities of $0.5 million, and deferred taxes of $1.9 million. Of the remaining purchase price, $13.3 million was allocated to non-deductible goodwill and intangible assets. The valuation of the business has been finalized. Changes to the purchase price allocation from the amounts presented in the Company’s 2017 Annual Report on Form 10-K included the valuation of the contingent consideration of $0.9 million and the recognition of a deferred tax liability of $1.9 million that resulted from a basis difference in the long-lived assets acquired. These changes resulted in an increase to goodwill.


9



Disposition

Mueller-Xingrong

On June 21, 2017, the Company entered into a definitive equity transfer agreement with Jiangsu Xingrong Hi-Tech Co. Ltd. and Jiangsu Baiyang Industries Co. Ltd. (Baiyang), together, the minority partners in Mueller-Xingrong (the Company’s Chinese joint venture), pursuant to which the Company sold its 50.5 percent equity interest in Mueller-Xingrong to Baiyang for approximately $18.3 million. Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications in China and was included in the Piping Systems segment. Mueller-Xingrong reported net sales of $67.3 million and net losses of $9 thousand in 2017. The carrying value of the assets disposed totaled $56.8 million, consisting primarily of accounts receivable, inventories, and long-lived assets. The carrying value of the liabilities disposed (consisting primarily of current debt and accounts payable), noncontrolling interest, and amounts recognized in accumulated other comprehensive income (AOCI) totaled $36.2 million. Since the disposal constituted a complete liquidation of the Company’s investment in a foreign entity, the Company removed from AOCI and recognized a cumulative translation gain of $3.8 million. As a result of the disposal, the Company recognized a net gain on the sale of this business of $1.6 million in the Condensed Consolidated Financial Statements for both the quarter and six months ended July 1, 2017.

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, 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 sells these products in Canada and the U.S., 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.

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.


10



Summarized segment information is as follows:

 
 
For the Quarter Ended June 30, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
453,183

 
$
175,891

 
$
39,172

 
$
(5,473
)
 
$
662,773

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
384,821

 
154,401

 
30,688

 
(6,090
)
 
563,820

Depreciation and amortization
 
5,744

 
1,948

 
627

 
687

 
9,006

Selling, general, and administrative expense
 
20,599

 
3,449

 
2,510

 
11,870

 
38,428

(Gain) loss on sale of assets
 

 

 

 
(409
)
 
(409
)
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
42,019

 
16,093

 
5,347

 
(11,531
)
 
51,928

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(6,073
)
Other income, net
 
 

 
 

 
 

 
 

 
586

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
46,441


 
 
For the Quarter Ended July 1, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
422,844

 
$
154,504

 
$
36,636

 
$
282

 
$
614,266

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
364,261

 
132,972

 
27,449

 
(371
)
 
524,311

Depreciation and amortization
 
5,591

 
1,904

 
615

 
485

 
8,595

Selling, general, and administrative expense
 
19,831

 
3,239

 
2,456

 
10,773

 
36,299

(Gain) loss on sale of assets
 
(1,631
)
 

 

 

 
(1,631
)
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
34,792

 
16,389

 
6,116

 
(10,605
)
 
46,692

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(6,442
)
Other income, net
 
 

 
 

 
 

 
 

 
342

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
40,592















11



Segment information (continued):

 
 
For the Six Months Ended June 30, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
884,147

 
$
353,223

 
$
75,235

 
$
(9,772
)
 
$
1,302,833

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
757,716

 
303,824

 
57,974

 
(10,024
)
 
1,109,490

Depreciation and amortization
 
11,622

 
3,851

 
1,248

 
1,741

 
18,462

Selling, general, and administrative expense
 
39,841

 
6,822

 
5,119

 
20,703

 
72,485

(Gain) loss on sale of assets
 

 

 

 
3,060

 
3,060

 
 
 
 
 
 
 
 
 
 
 
Operating income
 
74,968

 
38,726

 
10,894

 
(25,252
)
 
99,336

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(11,982
)
Other income, net
 
 

 
 

 
 

 
 

 
1,146

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
88,500


 
 
For the Six Months Ended July 1, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
821,619

 
$
304,341

 
$
70,915

 
$
(4,689
)
 
$
1,192,186

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
708,907

 
257,015

 
53,013

 
(6,197
)
 
1,012,738

Depreciation and amortization
 
10,933

 
3,802

 
1,244

 
971

 
16,950

Selling, general, and administrative expense
 
38,028

 
6,788

 
4,932

 
22,125

 
71,873

(Gain) loss on sale of assets
 
(1,631
)
 

 

 

 
(1,631
)
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
65,382

 
36,736

 
11,726

 
(21,588
)
 
92,256

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(8,973
)
Other income, net
 
 

 
 

 
 

 
 

 
936

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
84,219



12



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

 
 
For the Quarter Ended June 30, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
379,165

 
$

 
$

 
$
379,165

Brass rod and forgings
 

 
135,921

 

 
135,921

OEM components, tube & assemblies
 
7,448

 
14,597

 
39,172

 
61,217

Valves and plumbing specialties
 
66,570

 

 

 
66,570

Other
 

 
25,373

 

 
25,373

 
 
 
 
 
 
 
 
 
 
 
453,183

 
175,891

 
39,172

 
668,246

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(5,473
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
662,773


 
 
For the Quarter Ended July 1, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
318,433

 
$

 
$

 
$
318,433

Brass rod and forgings
 

 
119,783

 

 
119,783

OEM components, tube & assemblies
 
47,709

 
12,887

 
36,636

 
97,232

Valves and plumbing specialties
 
56,702

 

 

 
56,702

Other
 

 
21,834

 

 
21,834

 
 
 
 
 
 
 
 
 
 
 
422,844

 
154,504

 
36,636

 
613,984

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
282

 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
614,266



13



Disaggregation of revenue from contracts with customers (continued):

 
 
For the Six Months Ended June 30, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
737,256

 
$

 
$

 
$
737,256

Brass rod and forgings
 

 
272,469

 

 
272,469

OEM components, tube & assemblies
 
14,510

 
29,664

 
75,235

 
119,409

Valves and plumbing specialties
 
132,381

 

 

 
132,381

Other
 

 
51,090

 

 
51,090

 
 
 
 
 
 
 
 
 
 
 
884,147

 
353,223

 
75,235

 
1,312,605

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(9,772
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
1,302,833


 
 
For the Six Months Ended July 1, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
626,799

 
$

 
$

 
$
626,799

Brass rod and forgings
 

 
233,963

 

 
233,963

OEM components, tube & assemblies
 
79,680

 
26,102

 
70,915

 
176,697

Valves and plumbing specialties
 
115,140

 

 

 
115,140

Other
 

 
44,276

 

 
44,276

 
 
 
 
 
 
 
 
 
 
 
821,619

 
304,341

 
70,915

 
1,196,875

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(4,689
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
1,192,186


Note 5 – Inventories

(In thousands)
 
June 30,
2018
 
December 30,
2017
 
 
 
 
 
Raw materials and supplies
 
$
75,307

 
$
108,397

Work-in-process
 
57,472

 
46,158

Finished goods
 
169,047

 
180,143

Valuation reserves
 
(7,286
)
 
(6,797
)
 
 
 
 
 
Inventories
 
$
294,540

 
$
327,901


The decrease in inventories was primarily driven by the use of excess inventory built at the end of 2017 due to a casting outage in our brass rod mill that impaired our ability to melt scrap returns.  

14




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 June 30, 2018, the Company held open futures contracts to purchase approximately $48.2 million of copper over the next 15 months related to fixed price sales orders.  The fair value of those futures contracts was a $639 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 June 30, 2018, this amount was approximately $215 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 June 30, 2018, the Company held open futures contracts to sell approximately $0.2 million of copper over the next three months related to copper inventory.  The fair value of those futures contracts was an $8 thousand net gain position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).


15



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
 
June 30,
2018
 
December 30,
2017
 
Balance Sheet Location
 
June 30,
2018
 
December 30,
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts - gains
 
Other current assets
 
$
8

 
$
1,014

 
Other current liabilities
 
$
148

 
$
55

Commodity contracts - losses
 
Other current assets
 

 
(5
)
 
Other current liabilities
 
(787
)
 
(3,210
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives (1)
 
 
 
$
8

 
$
1,009

 
 
 
$
(639
)
 
$
(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
 
For the Six Months Ended
(In thousands)
 
Location
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
Gain on commodity contracts (qualifying)
 
Cost of goods sold
 
$

 
$

 
$
391

 
$

Loss on hedged item - inventory
 
Cost of goods sold
 

 

 
(385
)
 

 
 
 
 
 
 
 
 
 
 
 
Undesignated derivatives:
 
 
 
 
 
 
 
 
 
 
Gain (loss) on commodity contracts (nonqualifying)
 
Cost of goods sold
 
2,301

 
672

 
8,427

 
(423
)


16



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

 
 
For the Quarter Ended June 30, 2018
(In thousands)
 
Gain (Loss) 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
 
$
52

 
Cost of goods sold
 
$
17

Other
 
(34
)
 
Other
 

 
 
 
 
 
 
 
Total
 
$
18

 
Total
 
$
17


 
 
For the Quarter Ended July 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
 
$
(250
)
 
Cost of goods sold
 
$
324

Interest rate swap
 

 
Interest expense
 
149

Other
 
38

 
Other
 

 
 
 
 
 
 
 
Total
 
$
(212
)
 
Total
 
$
473


 
 
For the Six Months Ended June 30, 2018
(In thousands)
 
Loss Recognized in AOCI (Effective Portion), Net of Tax
 
Classification Gains (Losses)
 
Gain Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
 
 
 
 
 
 
Commodity contracts
 
$
(743
)
 
Cost of goods sold
 
$
(275
)
Other
 
(9
)
 
Other
 

 
 
 
 
 
 
 
Total
 
$
(752
)
 
Total
 
$
(275
)

 
 
For the Six Months Ended July 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
 
$
(813
)
 
Cost of goods sold
 
$
676

Interest rate swap
 

 
Interest expense
 
298

Other
 
156

 
Other
 

 
 
 
 
 
 
 
Total
 
$
(657
)
 
Total
 
$
974



17



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 June 30, 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 June 30, 2018 and December 30, 2017, the Company had recorded restricted cash in other current assets of $2.1 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 June 30, 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. 

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)
 
June 30,
2018
 
December 30,
2017
 
 
 
 
 
Current assets
 
$
236,856

 
$
246,127

Noncurrent assets
 
127,783

 
139,200

Current liabilities
 
172,658

 
174,710

Noncurrent liabilities
 
58,214

 
58,334



18



 
 
For the Quarter Ended
 
For the Six Months Ended
(In thousands)
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
 
 
 
 
 
 
 
 
 
Net sales
 
$
126,205

 
$
132,600

 
$
250,305

 
$
258,900

Gross profit 
 
11,749

 
19,600

 
23,849

 
35,200

Net income (loss)
 
471

 
(217
)
 
(17,860
)
 
(2,704
)

The Company’s loss from unconsolidated affiliates, net of foreign tax, for the quarter ended June 30, 2018 included net losses of $6.7 million, offset by a gain of $7.0 million related to a settlement with the Brazilian Federal Revenue Agency for Tecumseh.

The Company’s loss from unconsolidated affiliates, net of foreign tax, for the six months ended June 30, 2018 included net losses of $12.9 million and charges of $3.0 million related to certain labor claim contingencies, offset by a gain of $7.0 million related to a settlement with the Brazilian Federal Revenue Agency for Tecumseh.

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 and six months ended June 30, 2018 included net losses of $0.5 million and $1.6 million, respectively, for Bahrain.

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
 
For the Six Months Ended
(In thousands) 
 
June 30, 2018
 
July 1, 2017
 
June 30, 2018
 
July 1, 2017
 
 
 
 
 
 
 
 
 
Pension benefits:
 
 
 
 
 
 
 
 
Service cost
 
$
20

 
$
36

 
$
44

 
$
71

Interest cost
 
1,465

 
1,653

 
2,958

 
3,318

Expected return on plan assets
 
(2,290
)
 
(2,186
)
 
(4,579
)
 
(4,368
)
Amortization of net loss
 
235

 
516

 
584

 
1,072

 
 
 
 
 
 
 
 
 
Net periodic benefit (income) cost
 
$
(570
)
 
$
19

 
$
(993
)
 
$
93

 
 
 
 
 
 
 
 
 
Other benefits:
 
 

 
 

 
 

 
 

Service cost
 
$
56

 
$
53

 
$
116

 
$
109

Interest cost
 
146

 
146

 
294

 
295

Amortization of prior service credit
 
(225
)
 
(226
)
 
(451
)
 
(451
)
Amortization of net loss (gain)
 
11

 
(15
)
 
29

 
(20
)
 
 
 
 
 
 
 
 
 
Net periodic benefit income
 
$
(12
)
 
$
(42
)
 
$
(12
)
 
$
(67
)

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.


19



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.

Environmental

Non-operating Properties

Southeast Kansas Sites

The Kansas Department of Health and Environment (KDHE) has contacted the Company regarding environmental contamination at three former smelter sites in Kansas (Altoona, East La Harpe, and Lanyon).  The Company is not a successor to the companies that operated these smelter sites, but is exploring possible settlement with KDHE and other potentially responsible parties (PRP) in order to avoid litigation.  Another PRP conducted a site investigation of the Altoona site under a consent decree with KDHE and submitted a removal site evaluation report recommending a remedy.  The remedial design plan, which covers both on-site and certain off-site cleanup costs, was approved by the KDHE in 2016.  At the East La Harpe site, the Company and two other PRPs conducted a site study evaluation under KDHE supervision and prepared a site cleanup plan approved by KDHE.  In 2016, the corporate parent of a third party that the Company understands may owe indemnification obligations to one of the other PRPs in connection with the East La Harpe site filed for protection under Chapter 11 of the U.S. Bankruptcy Code.  KDHE has extended the deadline for the PRPs to develop a repository design plan to allow for wetlands permitting to take place.  With respect to the Lanyon Site, in 2016, the Company received a general notice letter from the United States Environmental Protection Agency (EPA) asserting that the Company is a PRP, which the Company has denied.  The Company’s reserve for its proportionate share of the remediation costs associated with the Southeast Kansas sites is $5.6 million.

Shasta Area Mine Sites

Mining Remedial Recovery Company (MRRC), a wholly owned subsidiary, owns certain inactive mines in Shasta County, California.  MRRC has continued a program, begun in the late 1980s, of implementing various remedial measures, including sealing mine portals with concrete plugs in portals that were discharging water.  The sealing program achieved significant reductions in the metal load in discharges from these adits; however, additional reductions are required pursuant to an order issued by the California Regional Water Quality Control Board (QCB).  In response to a 1996 QCB Order, MRRC completed a feasibility study in 1997 describing measures designed to mitigate the effects of acid rock drainage.  In December 1998, the QCB modified the 1996 order extending MRRC’s time to comply with water quality standards.  In September 2002, the QCB adopted a new order requiring MRRC to adopt Best Management Practices (BMP) to control discharges of acid mine drainage, and again extended the time to comply with water quality standards until September 2007.  During that time, implementation of BMP further reduced impacts of acid rock drainage; however, full compliance has not been achieved.  The QCB is presently renewing MRRC’s discharge permit and will concurrently issue a new order.  It is expected that the new 10-year permit will include an order requiring continued implementation of BMP through 2025 to address residual discharges of acid rock drainage.  The Company currently estimates that it will spend between approximately $12.8 million and $17.6 million for remediation at these sites over the next 30 years.

Lead Refinery Site

U.S.S. Lead Refinery, Inc. (Lead Refinery), a non-operating wholly owned subsidiary of MRRC, has conducted corrective action and interim remedial activities (collectively, Site Activities) at Lead Refinery’s East Chicago, Indiana site pursuant to the Resource Conservation and Recovery Act since December 1996.  Although the Site Activities have been substantially concluded, Lead Refinery is required to perform monitoring and maintenance-related activities pursuant to a post-closure permit issued by the Indiana Department of Environmental Management effective as of March 2, 2013.  Approximate costs to comply with the post-closure permit, including associated general and administrative costs, are estimated at between $1.8 million and $3.0 million over the next 19 years.
 
On April 9, 2009, pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the U.S. Environmental Protection Agency (EPA) added the Lead Refinery site and surrounding properties to the National Priorities List (NPL).  On July 17, 2009, Lead Refinery received a written notice from the EPA indicating that it may be a PRP under CERCLA due to the release or threat of release of hazardous substances including lead into properties surrounding the Lead Refinery NPL site.  The EPA identified two other PRPs in connection with that matter.  In November 2012, the EPA adopted a remedy for the surrounding properties and in September 2014, the EPA announced that it had entered into a settlement with the two other PRPs

20



whereby they will pay approximately $26.0 million to fund the cleanup of approximately 300 properties surrounding the Lead Refinery NPL site (zones 1 and 3 of operable unit 1) and perform certain remedial action tasks.

On November 8, 2016, the Company, its subsidiary Arava Natural Resources Company, Inc. (Arava), and Arava’s subsidiary MRRC each received general notice letters from the EPA asserting that they may be PRPs in connection with the Lead Refinery NPL site.  The Company, Arava, and MRRC have denied liability for any remedial action and response costs associated with the Lead Refinery NPL site.  In June 2017, the EPA requested that Lead Refinery conduct, and the Company fund, a remedial investigation and feasibility study of operable unit 2 of the Lead Refinery NPL site pursuant to a proposed administrative settlement agreement and order on consent. The Company and Lead Refinery entered into that agreement in September 2017. The Company has made a capital contribution to Lead Refinery to conduct the remedial investigation and feasibility study with respect to operable unit 2 and has provided financial assurance in the amount of $1.0 million. The EPA has also asserted its position that Mueller is a responsible party for the Lead Refinery NPL site, and accordingly is responsible for a share of remedial action and response costs at the site and in the adjacent residential area.

In January 2018, the EPA issued two unilateral administrative orders (UAOs) directing the Company, Lead Refinery, and four other PRPs to conduct soil and interior remediation of certain residences at the Lead Refinery NPL site (zones 2 and 3 of operable unit 1). The Company and Lead Refinery have reached agreement with the four other PRPs to implement these two UAOs, with the Company agreeing to pay, on an interim basis, (i) an estimated $4.5 million (subject to potential change through a future reallocation process) of the approximately $25.0 million the PRPs currently estimate it will cost to implement the UAOs, which estimate is subject to change, and (ii) $2.0 million relating to past costs incurred by other PRPs for work conducted at the site.  These amounts are included in the Company’s reserve for environmental liabilities as of December 30, 2017. The Company disputes that it was properly named in the UAOs, and has reserved its rights to petition the EPA for reimbursement of any costs incurred to comply with the UAOs upon the completion of the work required therein.  In October 2017, a group of private plaintiffs sued the Company, Arava, MRRC, and Lead Refinery, along with other defendants, in a private tort action relating to the site; the Company, Arava, and MRRC were voluntarily dismissed from that litigation without prejudice in March 2018.  At this juncture, the Company is unable to determine the likelihood of a material adverse outcome or the amount or range of a potential loss in excess of the current reserve with respect to any remedial action or litigation relating to the Lead Refinery NPL site, either at Lead Refinery’s former operating site (operable unit 2) or the adjacent residential area (operable unit 1).

Bonita Peak Mining District

Following an August 2015 spill from the Gold King Mine into the Animas River near Silverton, Colorado, the EPA listed the Bonita Peak Mining District on the NPL.  Said listing was finalized in September 2016.  The Bonita Peak Mining District encompasses 48 mining sites within the Animas River watershed, including the Sunnyside Mine, the American Tunnel, and the Sunbank Group.  On or about July 25, 2017, Washington Mining Company (Washington Mining) (a wholly-owned subsidiary of the Company’s wholly-owned subsidiary, Arava), received a general notice letter from the EPA stating that Washington Mining may be a PRP under CERCLA in connection with the Bonita Peak Mining District site and therefore responsible for the remediation of certain portions of the site, along with related costs incurred by the EPA.  Shortly thereafter, the Company received a substantively identical letter asserting that it may be a PRP at the Site and similarly responsible for the cleanup of certain portions of the site.  The general notice letters identify one other PRP at the site, and do not require specific action by Washington Mining or the Company at this time.  At this juncture, the Company is unable to determine the likelihood of a materially adverse outcome or the amount or range of a potential loss with respect to any remedial action related to the Bonita Peak Mining District NPL site.