Company Quick10K Filing
Quick10K
Mueller Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$33.59 58 $1,940
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-02-24 Annual: 2016-02-24
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-11-21 Officers
8-K 2018-11-09 Other Events, Exhibits
8-K 2018-10-23 Earnings, Exhibits
8-K 2018-08-06 Other Events, Exhibits
8-K 2018-08-02 Other Events, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-07-02 Enter Agreement, Other Events, Exhibits
8-K 2018-05-03 Shareholder Vote, Other Events, Exhibits
8-K 2018-04-24 Earnings, Exhibits
8-K 2018-03-29 Regulation FD, Exhibits
8-K 2018-03-15 Officers, Exhibits
8-K 2018-02-26 Other Events, Exhibits
8-K 2018-02-06 Earnings, Exhibits
RBC Regal Beloit
PRLB Proto Labs
NPO Enpro Industries
DRQ Dril-Quip
OIS Oil States International
BRSS Global Brass & Copper Holdings
CIR Circor
GSM Ferroglobe
GIFI Gulf Island Fabrication
HEBT Hebron Technology
MLI 2018-09-29
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Recent Accounting Standards
Note 2 - Earnings per Common Share
Note 3 - Acquisitions and Dispositions
Note 4 - Segment Information
Note 5 - Inventories
Note 6 - Financial Instruments
Note 7 - Investments in Unconsolidated Affiliates
Note 8 - Benefit Plans
Note 9 - Commitments and Contingencies
Note 10 - Income Taxes
Note 11 - Accumulated Other Comprehensive Income (Loss)
Note 12 - Noncontrolling Interests
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.2 q32018exhibit102.htm
EX-31.1 q32018exhibit311.htm
EX-31.2 q32018exhibit312.htm
EX-32.1 q32018exhibit321.htm
EX-32.2 q32018exhibit322.htm

Mueller Industries Earnings 2018-09-29

MLI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 mli-092918x10q.htm 10-Q Document


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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 29, 2018
Commission file number 1–6770
mlia26.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 every Interactive Data File required to be submitted 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 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,” “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 October 19, 2018 was 57,669,954.
 




MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended September 29, 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 Nine Months Ended
(In thousands, except per share data)
 
September 29, 2018
 
September 30, 2017 (1)
 
September 29, 2018
 
September 30, 2017 (1)
 
 
 
 
 
 
 
 
 
Net sales
 
$
645,958

 
$
550,363

 
$
1,948,791

 
$
1,742,549

 
 
 
 
 
 
 
 
 
Cost of goods sold
 
566,956

 
471,262

 
1,676,446

 
1,484,000

Depreciation and amortization
 
10,619

 
8,266

 
29,081

 
25,216

Selling, general, and administrative expense
 
38,889

 
33,214

 
112,077

 
104,676

Asset impairments
 

 

 

 
411

(Gain) loss on sale of assets
 
(2,691
)
 
140

 
(334
)
 
(1,491
)
Insurance recovery
 
(1,486
)
 

 
(1,486
)
 

 
 
 
 
 
 
 
 
 
Operating income
 
33,671

 
37,481

 
133,007

 
129,737

 
 
 
 
 
 
 
 
 
Interest expense
 
(6,746
)
 
(5,237
)
 
(18,728
)
 
(14,210
)
Other income (expense), net
 
411

 
(380
)
 
1,557

 
556

 
 
 
 
 
 
 
 
 
Income before income taxes
 
27,336

 
31,864

 
115,836

 
116,083

 
 
 
 
 
 
 
 
 
Income tax expense
 
(3,373
)
 
(8,716
)
 
(23,179
)
 
(33,295
)
Loss from unconsolidated affiliates, net of foreign tax
 
(3,100
)
 
(394
)
 
(13,568
)
 
(1,746
)
 
 
 
 
 
 
 
 
 
Consolidated net income
 
20,863

 
22,754

 
79,089

 
81,042

 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
(571
)
 
(496
)
 
(1,487
)
 
(1,164
)
 
 
 
 
 
 
 
 
 
Net income attributable to Mueller Industries, Inc.
 
$
20,292

 
$
22,258

 
$
77,602

 
$
79,878

 
 
 
 
 
 
 
 
 
Weighted average shares for basic earnings per share
 
56,877

 
56,987

 
56,858

 
56,891

Effect of dilutive stock-based awards
 
540

 
456

 
524

 
542

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

 
57,443

 
57,382

 
57,433

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.36

 
$
0.39

 
$
1.36

 
$
1.40

 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.35

 
$
0.39

 
$
1.35

 
$
1.39

 
 
 
 
 
 
 
 
 
Dividends per share
 
$
0.10

 
$
0.10

 
$
0.30

 
$
8.30


See accompanying notes to condensed consolidated financial statements.

(1) The Condensed Consolidated Statements of Income for the quarter and nine months ended September 30, 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 (expense), 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 Nine Months Ended
(In thousands)
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Consolidated net income
 
$
20,863

 
$
22,754

 
$
79,089

 
$
81,042

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 

 
 

 
 

 
 

Foreign currency translation
 
1,111

 
7,154

 
(5,534
)
 
15,270

Net change with respect to derivative instruments and hedging activities, net of tax of $(33), $23, $243, and $(162)
 
131

 
(132
)
 
(896
)
 
185

Net change in pension and postretirement obligation adjustments, net of tax of $(79), $102, $(221), and $285
 
270

 
(207
)
 
769

 
(572
)
Attributable to unconsolidated affiliates, net of tax of $2,005, $415, $2,086, and $614
 
(6,907
)
 
(735
)
 
(7,187
)
 
(1,086
)
Other, net
 

 

 

 
(380
)
 
 
 
 
 
 
 
 
 
Total other comprehensive (loss) income, net
 
(5,395
)
 
6,080

 
(12,848
)
 
13,417

 
 
 
 
 
 
 
 
 
Consolidated comprehensive income
 
15,468

 
28,834

 
66,241

 
94,459

Comprehensive income attributable to noncontrolling interests
 
(34
)
 
(499
)
 
(1,097
)
 
(2,002
)
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to Mueller Industries, Inc.
 
$
15,434

 
$
28,335

 
$
65,144

 
$
92,457


See accompanying notes to condensed consolidated financial statements.





4



MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
September 29,
2018
 
December 30,
2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
104,735

 
$
120,269

Accounts receivable, less allowance for doubtful accounts of $795 in 2018 and $980 in 2017
 
308,231

 
244,795

Inventories
 
313,396

 
327,901

Other current assets
 
34,842

 
46,150

 
 
 
 
 
Total current assets
 
761,204

 
739,115

 
 
 
 
 
Property, plant, and equipment, net
 
360,655

 
304,321

Goodwill, net
 
150,407

 
130,293

Intangible assets, net
 
64,786

 
42,008

Investments in unconsolidated affiliates
 
58,054

 
80,286

Other assets
 
26,637

 
24,150

 
 
 
 
 
Total assets
 
$
1,421,743

 
$
1,320,173

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities:
 
 

 
 

Current portion of debt
 
$
9,254

 
$
16,480

Accounts payable
 
121,412

 
102,503

Accrued wages and other employee costs
 
37,703

 
33,546

Other current liabilities
 
75,914

 
89,723

 
 
 
 
 
Total current liabilities
 
244,283

 
242,252

 
 
 
 
 
Long-term debt, less current portion
 
510,032

 
448,592

Pension liabilities
 
9,941

 
11,606

Postretirement benefits other than pensions
 
16,903

 
17,107

Environmental reserves
 
21,339

 
23,699

Deferred income taxes
 
17,299

 
19,403

Other noncurrent liabilities
 
18,538

 
21,486

 
 
 
 
 
Total liabilities
 
838,335

 
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 57,840,053 in 2018 and 57,809,509 in 2017
 
802

 
802

Additional paid-in capital
 
274,767

 
274,585

Retained earnings
 
803,627

 
743,503

Accumulated other comprehensive loss
 
(62,957
)
 
(51,056
)
Treasury common stock, at cost
 
(447,253
)
 
(445,723
)
 
 
 
 
 
Total Mueller Industries, Inc. stockholders' equity
 
568,986

 
522,111

Noncontrolling interests
 
14,422

 
13,917

 
 
 
 
 
Total equity
 
583,408

 
536,028

 
 
 
 
 
Commitments and contingencies
 

 

Total liabilities and equity
 
$
1,421,743

 
$
1,320,173

See accompanying notes to condensed consolidated financial statements.

5


MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
For the Nine Months Ended
(In thousands)
 
September 29, 2018
 
September 30, 2017 (1)
 
 
 
 
 
Cash flows from operating activities
 
 
 
 
Consolidated net income
 
$
79,089

 
$
81,042

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

 
 

Depreciation and amortization
 
29,320

 
25,439

Stock-based compensation expense
 
5,953

 
5,555

Loss from unconsolidated affiliates
 
13,568

 
1,746

Gain on sale of business
 

 
(1,491
)
Gain on disposals of properties
 
(247
)
 
(26
)
Gain on sales of securities
 

 
(611
)
Impairment charge
 

 
411

Insurance recovery
 
(1,486
)
 

Deferred income taxes
 
(1,502
)
 
624

Changes in assets and liabilities, net of effects of businesses acquired and sold:
 
 

 
 

Receivables
 
(42,201
)
 
(33,359
)
Inventories
 
48,716

 
(40,920
)
Other assets
 
11,250

 
(3,372
)
Current liabilities
 
(7,947
)
 
20,967

Other liabilities
 
(13,862
)
 
(1,498
)
Other, net
 
1,864

 
(965
)
 
 
 
 
 
Net cash provided by operating activities
 
122,515

 
53,542

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Capital expenditures
 
(16,685
)
 
(17,297
)
Acquisition of businesses, net of cash acquired
 
(167,677
)
 
(18,396
)
Proceeds from sale of business, net of cash sold
 

 
17,483

Investments in unconsolidated affiliates
 
(609
)
 
(3,317
)
Proceeds from sales of assets
 
18,693

 
11,732

Proceeds from sales of securities
 

 
1,787

 
 
 
 
 
Net cash used in investing activities
 
(166,278
)
 
(8,008
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Dividends paid to stockholders of Mueller Industries, Inc.
 
(17,051
)
 
(191,241
)
Dividends paid to noncontrolling interests
 
(592
)
 
(2,909
)
Repurchase of common stock
 
(6,575
)
 

Issuance of long-term debt
 
194,131

 

Repayments of long-term debt
 
(139,518
)
 
(100,917
)
Repayment of debt by consolidated joint ventures, net
 
(2,978
)
 
(3,451
)
Net cash used to settle stock-based awards
 
(726
)
 
(1,644
)
 
 
 
 
 
Net cash provided by (used in) financing activities
 
26,691

 
(300,162
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
(442
)
 
4,466

 
 
 
 
 
Decrease in cash, cash equivalents, and restricted cash
 
(17,514
)
 
(250,162
)
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
 
$
109,049

 
$
110,307

See accompanying notes to condensed consolidated financial statements.

(1) The Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 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 net 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 $78 thousand and $232 thousand of net periodic benefit income from operating income to other income (expense), net for the quarter and nine months ended September 30, 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 Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. 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 September 29, 2018.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires entities to report 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 nine months ended September 30, 2017 increased by $4.0 million. A reconciliation of cash, cash equivalents, and restricted cash as of September 29, 2018 and December 30, 2017 is as follows:

(In thousands)
 
September 29,
2018
 
December 30,
2017
 
 
 
 
 
Cash & cash equivalents
 
$
104,735

 
$
120,269

Restricted cash included within other current assets
 
4,206

 
6,189

Restricted cash included within other assets
 
108

 
105

 
 
 
 
 
Total cash, cash equivalents, and restricted cash
 
$
109,049

 
$
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 August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. For employers that sponsor defined benefit pension and/or other postretirement benefit plans, the ASU eliminates requirements for certain

8



disclosures that are no longer considered cost beneficial, requires new disclosures related to the weighted-average interest crediting rate for cash balance plans and explanations for significant gains and losses related to changes in benefit obligations, and clarifies the requirements for entities that provide aggregate disclosures for two or more plans. The ASU will be effective for the annual period beginning in 2020. The updated guidance requires retrospective adoption, and early adoption is permitted. The Company does not expect the adoption of the ASU to have a material impact on its Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU eliminates requirements to disclose the amount and reasons for transfers between level 1 and level 2 of the fair value hierarchy, but requires public companies to disclose changes in unrealized gains and losses for the period included in other comprehensive income (OCI) for recurring level 3 fair value measurements or instruments held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements. The ASU will be effective for interim and annual periods beginning in 2020. An entity is permitted to early adopt either the entire standard or only the provisions that eliminate or modify requirements, and can elect to early adopt in interim periods. The guidance on changes in unrealized gains and losses for the period included in OCI for recurring level 3 measurements, the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements, and the narrative description of measurement uncertainty is applied prospectively. All other amendments should be applied retrospectively. The Company does not expect the adoption of the ASU to have a material impact on its Condensed Consolidated Financial Statements.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements and ASU No. 2018-10, Codification Improvements to Topic 842, Leases. The ASUs provide entities with relief from the costs of implementation and clarify how to apply certain aspects of the new leasing standard, ASC 842.  ASC 842 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 guidance 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.  ASC 842 requires a modified retrospective adoption, but ASU 2018-11 amends ASC 842 so that entities may elect not to recast their comparative periods in transition and allows entities to change their date of initial application to the beginning of the period of adoption. The future minimum lease payments under noncancelable operating leases were approximately $40.5 million as of December 30, 2017. The Company is still evaluating the effects that the provisions of the ASUs and the ASC 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 79 thousand and 52 thousand stock-based awards were excluded from the computation of diluted earnings per share for the quarters ended September 29, 2018 and September 30, 2017, respectively, because they were antidilutive.

Note 3 – Acquisitions and Dispositions

Acquisitions

ATCO

On July 2, 2018, the Company entered into a stock purchase agreement pursuant to which the Company acquired all of the outstanding capital stock of ATCO Rubber Products, Inc. (ATCO) for approximately $156.7 million, net of working capital adjustments. The total purchase price consisted of $151.4 million in cash at closing and a contingent consideration arrangement which requires the Company to pay the former owner up to $12.0 million based on EBITDA growth of the acquired business. ATCO is an industry leader in the manufacturing and distribution of insulated HVAC flexible duct systems and will support the Company’s strategy to grow its Climate Products businesses to become a more valuable resource to its HVAC customers. The acquired business is reported in the Company’s Climate segment.

The fair value of the assets acquired totaled $139.2 million, consisting primarily of property, plant, and equipment of $83.2 million, inventories of $33.1 million, accounts receivable of $21.8 million, other current assets of $0.8 million, and other assets of $0.3 million. The fair value of the liabilities assumed totaled $19.8 million, consisting primarily of accounts payable of $8.1 million, other current liabilities of $9.6 million, and other liabilities of $2.1 million. Of the remaining purchase price, $15.9 million was allocated to tax-deductible goodwill and $21.4 million was allocated to intangible assets, including technology, customer relationships, trade names, and supply contracts. The purchase price allocation is provisional as of September 29, 2018 and subject

9



to change upon completion of the final valuation of the long-lived assets, working capital, and contingent consideration during the measurement period.

ATCO had revenues of approximately $166.0 million in its fiscal year ending December 31, 2017.

The following table presents condensed pro forma consolidated results of operations as if the ATCO acquisition has occurred at the beginning of the periods presented. The pro forma information does not purport to be indicative of the results that would have been obtained if the operations had actually been combined during the periods presented, and is not necessarily indicative of operating results to be expected in future periods. The most significant pro forma adjustments to the historical results of operations relate to the application of purchase accounting and financing structure.

 
 
For the Nine Months Ended
(In thousands, except per share data)
 
September 29, 2018
 
September 30, 2017
 
 
 
 
 
Net sales
 
$
2,036,367

 
$
1,868,677

Net income
 
84,823

 
82,523

 
 
 
 
 
Basic earnings per share
 
$
1.49

 
$
1.45

Diluted earnings per share
 
1.48

 
1.44


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 $13.6 million, net of working capital adjustments. The total purchase price consisted of $12.4 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 business. 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 $7.0 million, consisting primarily of property, plant, and equipment of $3.3 million, inventories of $1.8 million, and accounts receivable of $1.7 million. The fair value of the liabilities assumed totaled $0.9 million, consisting primarily of accounts payable of $0.7 million and other current liabilities of $0.2 million. Of the remaining purchase price, $7.5 million was allocated to non-deductible goodwill and intangible assets. The purchase price allocation is provisional as of September 29, 2018 and subject to change upon completion of the final valuation of the long-lived assets 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.


10



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 $1.5 million in the Condensed Consolidated Financial Statements for the nine months ended September 30, 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, Turbotec, and ATCO.  These domestic businesses manufacture and fabricate valves, assemblies, high pressure components, coaxial heat exchangers, and insulated HVAC flexible duct systems primarily for the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.


11



Summarized segment information is as follows:

 
 
For the Quarter Ended September 29, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
410,525

 
$
158,709

 
$
81,619

 
$
(4,895
)
 
$
645,958

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
363,174

 
141,435

 
66,832

 
(4,485
)
 
566,956

Depreciation and amortization
 
5,946

 
1,864

 
2,123

 
686

 
10,619

Selling, general, and administrative expense
 
17,387

 
3,086

 
6,890

 
11,526

 
38,889

(Gain) loss on sale of assets
 
(1,390
)
 
(1,301
)
 

 

 
(2,691
)
Insurance recovery
 

 
(1,486
)
 

 

 
(1,486
)
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
25,408

 
15,111

 
5,774

 
(12,622
)
 
33,671

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(6,746
)
Other income (expense), net
 
 

 
 

 
 

 
 

 
411

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
27,336


 
 
For the Quarter Ended September 30, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
384,078

 
$
147,578

 
$
32,488

 
$
(13,781
)
 
$
550,363

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
340,191

 
120,021

 
24,111

 
(13,061
)
 
471,262

Depreciation and amortization
 
5,290

 
1,845

 
636

 
495

 
8,266

Selling, general, and administrative expense
 
17,516

 
3,014

 
2,312

 
10,372

 
33,214

(Gain) loss on sale of assets
 
140

 

 

 

 
140

 
 
 
 
 
 
 
 
 
 
 
Operating income
 
20,941

 
22,698

 
5,429

 
(11,587
)
 
37,481

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(5,237
)
Other loss, net
 
 

 
 

 
 

 
 

 
(380
)
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
31,864



12



Segment information (continued):

 
 
For the Nine Months Ended September 29, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,294,672

 
$
511,932

 
$
156,854

 
$
(14,667
)
 
$
1,948,791

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
1,120,890

 
445,259

 
124,806

 
(14,509
)
 
1,676,446

Depreciation and amortization
 
17,568

 
5,715

 
3,371

 
2,427

 
29,081

Selling, general, and administrative expense
 
57,931

 
9,908

 
12,009

 
32,229

 
112,077

(Gain) loss on sale of assets
 
(2,093
)
 
(1,301
)
 

 
3,060

 
(334
)
Insurance recovery
 

 
(1,486
)
 

 

 
(1,486
)
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
100,376

 
53,837

 
16,668

 
(37,874
)
 
133,007

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(18,728
)
Other income, net
 
 

 
 

 
 

 
 

 
1,557

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
115,836


 
 
For the Nine Months Ended September 30, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Corporate and Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,205,697

 
$
451,919

 
$
103,403

 
$
(18,470
)
 
$
1,742,549

 
 
 
 
 
 
 
 
 
 
 
Cost of goods sold
 
1,049,098

 
377,036

 
77,124

 
(19,258
)
 
1,484,000

Depreciation and amortization
 
16,223

 
5,647

 
1,880

 
1,466

 
25,216

Selling, general, and administrative expense
 
55,133

 
9,802

 
7,244

 
32,497

 
104,676

Asset impairments
 
411

 

 

 

 
411

(Gain) loss on sale of assets
 
(1,491
)
 

 

 

 
(1,491
)
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
86,323

 
59,434

 
17,155

 
(33,175
)
 
129,737

 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 

 
 

 
 

 
 

 
(14,210
)
Other income, net
 
 

 
 

 
 

 
 

 
556

 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 

 
 

 
 

 
 

 
$
116,083



13



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

 
 
For the Quarter Ended September 29, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
340,269

 
$

 
$

 
$
340,269

Brass rod and forgings
 

 
122,411

 

 
122,411

OEM components, tube & assemblies
 
7,618

 
12,292

 
35,555

 
55,465

Valves and plumbing specialties
 
62,638

 

 

 
62,638

Other
 

 
24,006

 
46,064

 
70,070

 
 
 
 
 
 
 
 
 
 
 
410,525

 
158,709

 
81,619

 
650,853

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(4,895
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
645,958


 
 
For the Quarter Ended September 30, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
319,115

 
$

 
$

 
$
319,115

Brass rod and forgings
 

 
112,592

 

 
112,592

OEM components, tube & assemblies
 
6,962

 
13,051

 
32,488

 
52,501

Valves and plumbing specialties
 
58,001

 

 

 
58,001

Other
 

 
21,935

 

 
21,935

 
 
 
 
 
 
 
 
 
 
 
384,078

 
147,578

 
32,488

 
564,144

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(13,781
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
550,363


14



Disaggregation of revenue from contracts with customers (continued):

 
 
For the Nine Months Ended September 29, 2018
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
1,077,525

 
$

 
$

 
$
1,077,525

Brass rod and forgings
 

 
394,880

 

 
394,880

OEM components, tube & assemblies
 
22,128

 
41,956

 
110,790

 
174,874

Valves and plumbing specialties
 
195,019

 

 

 
195,019

Other
 

 
75,096

 
46,064

 
121,160

 
 
 
 
 
 
 
 
 
 
 
1,294,672

 
511,932

 
156,854

 
1,963,458

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(14,667
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
1,948,791


 
 
For the Nine Months Ended September 30, 2017
(In thousands)
 
Piping Systems
 
Industrial Metals
 
Climate
 
Total
 
 
 
 
 
 
 
 
 
Tube and fittings
 
$
945,914

 
$

 
$

 
$
945,914

Brass rod and forgings
 

 
346,555

 

 
346,555

OEM components, tube & assemblies
 
86,642

 
39,153

 
103,403

 
229,198

Valves and plumbing specialties
 
173,141

 

 

 
173,141

Other
 

 
66,211

 

 
66,211

 
 
 
 
 
 
 
 
 
 
 
1,205,697

 
451,919

 
103,403

 
1,761,019

 
 
 
 
 
 
 
 
 
Intersegment sales
 
 
 
 
 
 
 
(18,470
)
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
$
1,742,549


Note 5 – Inventories

(In thousands)
 
September 29,
2018
 
December 30,
2017
 
 
 
 
 
Raw materials and supplies
 
$
87,605

 
$
108,397

Work-in-process
 
61,138

 
46,158

Finished goods
 
171,725

 
180,143

Valuation reserves
 
(7,072
)
 
(6,797
)
 
 
 
 
 
Inventories
 
$
313,396

 
$
327,901



15



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 September 29, 2018, the Company held open futures contracts to purchase approximately $66.0 million of copper over the next 15 months related to fixed price sales orders.  The fair value of those futures contracts was an $839 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 September 29, 2018, this amount was approximately $90 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 September 29, 2018, the Company held open futures contracts to sell approximately $4.5 million of copper over the next three months related to copper inventory.  The fair value of those futures contracts was a $32 thousand net loss position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).


16



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
 
September 29,
2018
 
December 30,
2017
 
Balance Sheet Location
 
September 29,
2018
 
December 30,
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts - gains
 
Other current assets
 
$
207

 
$
1,014

 
Other current liabilities
 
$
880

 
$
55

Commodity contracts - losses
 
Other current assets
 
(127
)
 
(5
)
 
Other current liabilities
 
(1,831
)
 
(3,210
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives (1)
 
 
 
$
80

 
$
1,009

 
 
 
$
(951
)
 
$
(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 Nine Months Ended
(In thousands)
 
Location
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 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:
 
 
 
 
 
 
 
 
 
 
(Loss) gain on commodity contracts (nonqualifying)
 
Cost of goods sold
 
(2,848
)
 
(3,083
)
 
5,579

 
(3,506
)

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

 
 
For the Quarter Ended September 29, 2018
(In thousands)
 
Gain 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
 
$
305

 
Cost of goods sold
 
$
(180
)
Other
 
6

 
Other
 

 
 
 
 
 
 
 
Total
 
$
311

 
Total
 
$
(180
)

17



Changes recognized in and reclassified from AOCI (continued):

 
 
For the Quarter Ended September 30, 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
 
$
(541
)
 
Cost of goods sold
 
$
237

Interest rate swap
 

 
Interest expense
 
149

Other
 
23

 
Other
 

 
 
 
 
 
 
 
Total
 
$
(518
)
 
Total
 
$
386


 
 
For the Nine Months Ended September 29, 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
 
$
(438
)
 
Cost of goods sold
 
$
(455
)
Other
 
(3
)
 
Other
 

 
 
 
 
 
 
 
Total
 
$
(441
)
 
Total
 
$
(455
)

 
 
For the Nine Months Ended September 30, 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
 
$
(1,354
)
 
Cost of goods sold
 
$
913

Interest rate swap
 

 
Interest expense
 
447

Other
 
179

 
Other
 

 
 
 
 
 
 
 
Total
 
$
(1,175
)
 
Total
 
$
1,360


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 September 29, 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 September 29, 2018 and December 30, 2017, the Company had recorded restricted cash in other current assets of $3.4 million and $5.3 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.

18




Long-Term Debt

The fair value of long-term debt at September 29, 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 – Investments 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’ net accumulated losses. 

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)
 
September 29,
2018
 
December 30,
2017
 
 
 
 
 
Current assets
 
$
222,408

 
$
246,127

Noncurrent assets
 
112,547

 
139,200

Current liabilities
 
163,931

 
174,710

Noncurrent liabilities
 
60,112

 
58,334


 
 
For the Quarter Ended
 
For the Nine Months Ended
(In thousands)
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Net sales
 
$
131,827

 
$
148,400

 
$
382,132

 
$
407,300

Gross profit 
 
18,140

 
21,500

 
41,989

 
56,700

Net loss
 
(5,007
)
 
(788
)
 
(22,867
)
 
(3,492
)

The Company’s loss from unconsolidated affiliates, net of foreign tax, for the quarter ended September 29, 2018 included net losses of $2.5 million for Tecumseh.

The Company’s loss from unconsolidated affiliates, net of foreign tax, for the nine months ended September 29, 2018 included net losses of $15.4 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

19



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 nine months ended September 29, 2018 included net losses of $0.5 million and $2.1 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 Nine Months Ended
(In thousands) 
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
 
Pension benefits:
 
 
 
 
 
 
 
 
Service cost
 
$
22

 
$
35

 
$
66

 
$
106

Interest cost
 
1,478

 
1,659

 
4,436

 
4,977

Expected return on plan assets
 
(2,290
)
 
(2,184
)
 
(6,869
)
 
(6,552
)
Amortization of net loss
 
293

 
536

 
877

 
1,608

 
 
 
 
 
 
 
 
 
Net periodic benefit (income) cost
 
$
(497
)
 
$
46

 
$
(1,490
)
 
$
139

 
 
 
 
 
 
 
 
 
Other benefits: