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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2015
Commission file number 1–6770

Mueller Industries, Inc. Logo
MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
25-0790410
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)

8285 Tournament Drive, Suite 150
  
Memphis, Tennessee
38125
(Address of principal executive offices)
(Zip Code)

(901) 753-3200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   x No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   x No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   x
Accelerated filer   o
Non-accelerated filer   o
Smaller reporting company   o

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

The number of shares of the Registrant’s common stock outstanding as of July 20, 2015, was 56,986,702.


 
 
 
Index
MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended June 27, 2015

__________________________

As used in this report, the terms “Company,” “Mueller,” and “Registrant” mean Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole, unless the context indicates otherwise.

__________________________
 
INDEX


   
Page Number
Part I.  Financial Information
  
     
   
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
18
     
 
28
     
 
29
     
 
     
 
29
     
 
30
     
 
30
     
 
31
     
32


 
2
 

Index

 
FINANCIAL INFORMATION
Financial Statements

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

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

 
3
 
Index

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

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

 

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

 
4
 
Index
 
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
  
June 27,
  2015
    
December 27,
 2014
  
             
Assets
            
Current assets:
            
  Cash and cash equivalents
  
$
299,147
    
$
352,134
  
  Accounts receivable, less allowance for doubtful accounts of $762 in 2015 and $666 in 2014
    
307,008
      
275,065
  
  Inventories
    
278,937
      
256,585
  
  Other current assets
    
45,680
      
57,429
  
                 
      Total current assets
    
930,772
      
941,213
  
                 
Property, plant, and equipment, net
    
261,149
      
245,910
  
Goodwill
    
101,453
      
102,909
  
Other assets
    
51,584
      
38,064
  
                 
      Total assets
  
$
1,344,958
    
$
1,328,096
  
                 
Liabilities
            
Current liabilities:
            
  Current portion of debt
  
$
18,014
    
$
36,194
  
  Accounts payable
    
89,715
      
100,735
  
  Accrued wages and other employee costs
    
34,654
      
41,595
  
  Other current liabilities
    
67,118
      
59,545
  
                 
      Total current liabilities
    
209,501
      
238,069
  
                 
Long-term debt, less current portion
    
204,750
      
205,250
  
Pension liabilities
    
18,728
      
20,070
  
Postretirement benefits other than pensions
    
21,331
      
21,486
  
Environmental reserves
    
21,657
      
21,842
  
Deferred income taxes
    
21,542
      
24,556
  
Other noncurrent liabilities
    
2,790
      
1,389
  
                 
      Total liabilities
    
500,299
      
532,662
  
                 
Equity
                
Mueller Industries, Inc. stockholders’ equity:
                
  Preferred stock - $1.00 par value; shares authorized 5,000,000; none outstanding
    
—
      
—
  
  Common stock - $.01 par value; shares authorized 100,000,000; issued 80,183,004; outstanding 56,986,344 in 2015 and 56,901,445 in 2014
    
802
      
802
  
  Additional paid-in capital
    
270,784
      
268,575
  
  Retained earnings
    
1,039,882
      
992,798
  
  Accumulated other comprehensive loss
    
(44,195
)
    
(42,923
)
  Treasury common stock, at cost
    
(456,073
)
    
(457,102
)
                 
      Total Mueller Industries, Inc. stockholders’ equity
    
811,200
      
762,150
  
Noncontrolling interest
    
33,459
      
33,284
  
                 
      Total equity
    
844,659
      
795,434
  
                 
Commitments and contingencies
    
—
      
—
  
                 
      Total liabilities and equity
  
$
1,344,958
    
$
1,328,096
  
   
See accompanying notes to condensed consolidated financial statements.
  
 
 
5
 
Index

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

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


 
6
 

Index

 
MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

General

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.  Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole.  This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K, including the annual financial statements incorporated therein.

The accompanying unaudited interim financial statements include all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.  

Note 1 – Earnings per Common Share

Basic per share amounts have been computed based on the average number of common shares outstanding.  Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options and vesting of restricted stock awards, computed using the treasury stock method.  Approximately 24 thousand stock options were excluded from the computation of diluted earnings per share for the quarter ended June 27, 2015 because they were antidilutive.

Note 2 – Commitments and Contingencies

The Company is involved in certain litigation as a result of claims that arose in the ordinary course of business, which management believes will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.  The Company may also realize the benefit of certain legal claims and litigation in the future; these gain contingencies are not recognized in the Condensed Consolidated Financial Statements.

Guarantees

Guarantees, in the form of letters of credit, are issued by the Company generally to assure the payment of insurance deductibles and certain retiree health benefits.  The terms of the Company’s guarantees are generally one year but are renewable annually as required.  These letters are primarily backed by the Company’s revolving credit facility.  The maximum payments that the Company could be required to make under its guarantees at June 27, 2015 were $8.8 million.

Note 3 – Inventories

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

Note 4 – Industry Segments

The Company’s reportable segments are Plumbing & Refrigeration and Original Equipment Manufacturers (OEM).  For disclosure purposes, as permitted under Accounting Standards Codification (ASC) 280, Segment Reporting, certain operating segments are aggregated into reportable segments.  The Plumbing & Refrigeration segment is composed of Standard Products (SPD), European Operations, and Mexican Operations.  The OEM segment is composed of Industrial Products (IPD), Engineered Products (EPD), and Jiangsu Mueller–Xingrong Copper Industries Limited (Mueller-Xingrong).  These segments are classified primarily by the markets for their products.  Performance of segments is generally evaluated by their operating income.  

 
7
 
 
Index
 
SPD manufactures copper tube and fittings, plastic fittings, and line sets.  These products are manufactured in the U.S.  SPD also imports and resells brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products.  Outside the U.S., the Company’s European Operations manufacture copper tube, which is sold primarily in Europe.  Mexican Operations consist of pipe nipple manufacturing and import distribution businesses including product lines of malleable iron fittings and other plumbing specialties.  The Plumbing & Refrigeration segment’s products are sold primarily to plumbing, refrigeration, and air-conditioning wholesalers, hardware wholesalers and co-ops, and building product retailers.  For the six months ended June 28, 2014, cost of goods sold included a decrease in accruals related to import duties of $3.1 million.

IPD manufactures brass rod, impact extrusions, and forgings, as well as a wide variety of end products including plumbing brass, automotive components, valves, and fittings.  EPD manufactures and fabricates valves and assemblies primarily for the refrigeration, air-conditioning, gas appliance, and barbecue grill markets and specialty copper, copper-alloy, and aluminum tube.  Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications.  These products are sold primarily to OEM customers.

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



 
8
 
 
Index

 
Segment information (continued):

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

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




 
9
 

Index
 
 
Segment information (continued):

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

Note 5 –Benefit Plans

The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for certain of its employees.  The components of net periodic benefit cost are as follows:

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

Note 6 – Income Taxes

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

 
 
10
 
 
Index
 
For the second quarter of 2014, the difference between the effective tax rate and the amount that would be computed using the U.S. federal statutory tax rate was attributable to reductions related to the U.S. production activities deduction of $1.4 million and decreases in valuation allowances of $4.8 million. These items were partially offset by the provision for state income taxes of $1.2 million.

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

For the first half of 2014, the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate was attributable to reductions for: (i) the U.S. production activities deduction of $2.6 million; (ii) decreases in valuation allowances of $5.7 million; and (iii) the effect of foreign tax rates lower than statutory tax rates and other foreign adjustments of $0.3 million. These items were partially offset by the provision for state income taxes of $2.5 million.

The Company files a consolidated U.S. federal income tax return and numerous consolidated and separate-company income tax returns in many state, local, and foreign jurisdictions.  The statute of limitations is open for the Company’s federal tax return and most state income tax returns for 2011 and all subsequent years and is open for certain state and foreign returns for earlier tax years due to ongoing audits and differing statute periods.  The Internal Revenue Service has audited the 2012 federal income tax return, the results of which were immaterial to the Company’s financial position, results of operations, and cash flows.  The Internal Revenue Service is currently auditing the 2013 federal tax return.  While the Company believes that it is adequately reserved for possible future audit adjustments, the final resolution of these examinations cannot be determined with certainty and could result in final settlements that differ from current estimates.

Note 7 – Derivative Instruments and Hedging Activities

The Company’s earnings and cash flows are subject to fluctuations due to changes in commodity prices, foreign currency exchange rates, and interest rates. The Company uses derivative instruments such as commodity futures contracts, foreign currency forward contracts, and interest rate swaps to manage these exposures.

All derivatives are recognized in the Condensed Consolidated Balance Sheets at their fair value. On the date the derivative contract is entered into, it is designated as (i) a hedge of a forecasted transaction or the variability of cash flow to be paid (cash flow hedge), or (ii) a hedge of the fair value of a recognized asset or liability (fair value hedge). Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in accumulated other comprehensive income (AOCI), to the extent effective, until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings.  Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.

The Company documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities in the Condensed Consolidated Balance Sheets and linking cash flow hedges to specific forecasted transactions or variability of cash flow.

The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flow or fair values of hedged items.  When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable of occurring, hedge accounting is discontinued prospectively, in accordance with the derecognition criteria for hedge accounting.

 
11
 
Index
 
 
Commodity Futures Contracts

Copper and brass represent the largest component of the Company’s variable costs of production.  The cost of these materials is subject to global market fluctuations caused by factors beyond the Company’s control.  The Company occasionally enters into forward fixed-price arrangements with certain customers; the risk of these arrangements is generally managed with commodity futures contracts.   These futures contracts have been designated as cash flow hedges.  

At June 27, 2015, the Company held open futures contracts to purchase approximately $26.8 million of copper over the next 13 months related to fixed price sales orders.  The fair value of those futures contracts was a $1.3 million net loss position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820, Fair Value Measurements and Disclosures (ASC 820)). In the next twelve months, the Company will reclassify into earnings realized gains or losses relating to cash flow hedges. At June 27, 2015, this amount was approximately $919 thousand of deferred net losses, net of tax.

The Company may also enter into futures contracts to protect the value of inventory against market fluctuations.   These futures contracts have been designated as fair value hedges.  

At June 27, 2015, the Company held open futures contracts to sell approximately $28.1 million of copper over the next six months related to copper inventory. The fair value of those futures contracts was a $1.3 million net gain position, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820).  

Foreign Currency Forward Contracts

The Company has entered into certain contracts to purchase heavy machinery and equipment denominated in euros. In anticipation of entering into these contracts, the Company entered into forward contracts to purchase euros to protect itself against adverse foreign exchange rate fluctuations.  

At June 27, 2015, the Company held open forward contracts to purchase approximately 3.4 million euros over the next five months.  The fair value of these contracts, which was determined by obtaining quoted market prices (Level 1 hierarchy as defined by ASC 820), was a $34 thousand net loss position. At June 27, 2015, there was $104 thousand of deferred net gains, net of tax, included in AOCI that are expected to be reclassified into depreciation expense over the useful life of the heavy machinery and equipment.

Interest Rate Swap

On February 20, 2013, the Company entered into a two-year forward-starting interest rate swap agreement with an effective date of January 12, 2015, and an underlying notional amount of $200.0 million, pursuant to which the Company receives variable interest payments based on one-month LIBOR and pays fixed interest at a rate of 1.4 percent.  Based on the Company’s current variable premium pricing on its Term Loan Facility, the all-in fixed rate on the effective date was 2.7 percent.  The interest rate swap will mature on December 11, 2017, and is structured to offset the interest rate risk associated with the Company’s floating-rate, LIBOR-based Term Loan Facility Agreement.  The swap was designated and accounted for as a cash flow hedge from inception.

The fair value of the interest rate swap is estimated based on the present value of the difference between expected cash flows calculated at the contracted interest rate and the expected cash flows at the current market interest rate using observable benchmarks for LIBOR forward rates at the end of the period (Level 2 hierarchy as defined by ASC 820).  Interest payable and receivable under the swap agreement is accrued and recorded as an adjustment to interest expense.  The fair value of the interest rate swap was a $1.9 million net loss position at June 27, 2015, and there was $1.2 million of deferred net losses, net of tax, included in AOCI that are expected to be reclassified into interest expense over the term of the hedged item.

 
12
 
Index
 
Derivative assets and liabilities are presented in our Condensed Consolidated Balance Sheets on a net basis by counterparty. The following table summarizes the location and fair value of the derivative instruments and disaggregates our net derivative assets and liabilities into gross components on a contract-by-contract basis:

 
Asset Derivatives
  
Liability Derivatives
  
     
Fair Value
      
Fair Value
  
(In thousands)
Balance Sheet Location
  
June 27,
 2015
    
December 27,
 2014
  
Balance Sheet Location
  
June 27,
2015
    
December 27,
2014
  
Hedging instrument:
                            
  Commodity contracts - gains
Other current assets
  
$
1,361
    
$
99
  
Other current liabilities
  
$
40
    
$
15
  
  Commodity contracts - losses
Other current assets
    
—
      
(4
)
Other current liabilities
    
(1,319
)
    
(832
)
  Foreign currency contracts
Other current assets
    
—
      
—
  
Other current liabilities
    
(34
)
    
(81
)
  Interest rate swap
Other assets
    
—
      
—
  
Other liabilities
    
(1,921
)
    
(927
)
Total derivatives (1)
    
$
1,361
    
$
95
      
$
(3,234
)
  
$
(1,825
)
                                     
(1) Does not include the impact of cash collateral received from or provided to counterparties.
  
                                     
 
 
The following tables summarize the effects of derivative instruments on our Condensed Consolidated Statements of Income:

     
Three Months Ended
    
Six Months Ended
  
(In thousands)
Location
  
June 27, 2015
    
June 28, 2014
    
June 27, 2015
    
June 28, 2014
  
Fair value hedges:
                          
  Gain (loss) on commodity contracts (qualifying)
Cost of goods sold
  
$
1,256
    
$
(20
)
  
$
1,468
    
$
6,271
  
  (Loss) gain on hedged item - Inventory
Cost of goods sold
    
(1,403
)
    
20
      
(1,650
)
    
(5,780
)
                                   
Undesignated derivatives:
                                  
  Gain (loss) on commodity contracts (nonqualifying)
Cost of goods sold
    
1,046
      
(72
)
    
1,279
      
1,466
  
 
 

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

   
        Three Months Ended June 27, 2015
(In thousands)
  
Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax
      
Classification Gains (Losses)
  
Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:
                      
Commodity contracts
  
 $
(1,159
) 
    
Cost of goods sold
  
 
$
  (81  )
Foreign currency contracts
    
3
      
Depreciation expense
  
 
     —  
Interest rate swap
    
267
      
Interest expense
  
 
     63  


 
13
 
 
Index

   
        Three Months Ended June 28, 2014
  
(In thousands)
  
Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax
      
Classification Gains (Losses)
  
Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
  
Cash flow hedges:
                    
Commodity contracts
  
 $
578
      
Cost of goods sold
  
 
$
   168  
Foreign currency contracts
    
(25
)
    
Depreciation expense
    
 
   (63
)
Interest rate swap
    
(1,022
)
    
Interest expense
    
 
   —  
 
 
 
   
                Six Months Ended June 27, 2015
    
(In thousands)
  
Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax
      
Classification Gains (Losses)
  
Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
  
Cash flow hedges:
                    
Commodity contracts
  
$
(885
 )    
Cost of goods sold
  
 
$
 490  
Foreign currency contracts
    
(52
)
    
Depreciation expense
    
 
—
 
Interest rate swap
    
(765
)
    
Interest expense
    
 
131  
        Other     (19   )      Other       —   

 
   
           Six Months Ended June 28, 2014
  
(In thousands)
  
Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax
      
Classification Gains (Losses)
  
Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax
  
Cash flow hedges:
                    
Commodity contracts
  
$
(432
 )    
Cost of goods sold
  
 
$
 459  
Foreign currency contracts
    
(3
)
    
Depreciation expense
    
 
(237
)
Interest rate swap
    
(1,267
)
    
Interest expense
    
 
—  
 
 
The Company enters into futures and forward contracts that closely match the terms of the underlying transactions.  As a result, the ineffective portion of the open hedge contracts through June 27, 2015 was not material to the Condensed Consolidated Statements of Income.

The Company primarily enters into International Swaps and Derivatives Association master netting agreements with major financial institutions that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.  The Company does not offset fair value amounts for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral.  At June 27, 2015 and December 27, 2014, the Company had recorded restricted cash in other current assets of $1.5 million and $0.5 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.


 
14
 

Index
 
 
Note 8 – Accumulated Other Comprehensive Income

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

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

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

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


 
15
 
 
Index

Reclassification adjustments out of AOCI were as follows:

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

 
   
Amount reclassified from AOCI
   
For the Six Months Ended
    
(In thousands)
  
June 27, 2015
    
June 28, 2014
  
Affected line item
           
Unrealized losses/(gains) on derivatives: 
              
  Commodity contracts
  
$
651
    
$
565
  
Cost of goods sold
  Foreign currency contracts
    
—
      
(375
)
Depreciation expense
 Interest rate swap
    
204
      
—
  
Interest expense
     
(234
)
    
32
  
Income tax (expense) benefit
     
621
      
222
  
Net of tax
     
—
      
—
  
Noncontrolling interest
                   
   
$
621
    
$
222
  
Net of tax and noncontrolling  interest
                   
  Amortization of net loss and prior service cost on employee benefit plans
  
$
1,360
    
$
267
  
Selling, general, and administrative expense
     
(362
)
    
(35
)
Income tax expense
     
998
      
232
  
Net of tax
     
—
      
—
  
Noncontrolling interest
                   
   
$
998
    
$
232
  
Net of tax and noncontrolling  interest
 
 
16
 
Index
 
Note 9 – Acquisitions and Dispositions

Acquisitions

On October 18, 2013, the Company entered into a definitive agreement with KME Yorkshire Limited to acquire certain assets and assume certain liabilities of its copper tube business.  Yorkshire Copper Tube (Yorkshire) produces European standard copper distribution tubes.  This transaction received regulatory approval in the United Kingdom on February 11, 2014 and closed on February 28, 2014.  The purchase price was approximately $30.1 million, paid in cash.  The acquisition of Yorkshire complements the Company’s existing copper tube businesses in the Plumbing & Refrigeration segment.  In 2012, Yorkshire had annual revenue of approximately $196.1 million.  During the third quarter of 2014, the purchase price allocation, including all fair value measurements, was finalized.  The fair value of the assets acquired totaled $20.7 million, consisting primarily of inventories of $17.6 million, property, plant, and equipment of $2.1 million, and other current assets of $1.0 million.  The fair value of the liabilities assumed totaled $15.6 million, consisting primarily of accounts payable and accrued expenses of $15.2 million and other current liabilities of $0.4 million.  Of the remaining purchase price, $8.1 million was allocated to tax-deductible goodwill and $16.9 million was allocated to other intangible assets.

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

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

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

Dispositions

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

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

 
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The net book value of the assets disposed was $2.3 million.  For goodwill testing purposes, these assets were part of the SPD reporting unit which is a component of the Company’s Plumbing & Refrigeration segment.  Because these assets met the definition of a business in accordance with ASC 805, Business Combinations, $2.4 million of the SPD reporting unit’s goodwill balance was allocated to the disposal group.  The amount of goodwill allocated was based on the relative fair values of the asset group which was disposed and the portion of the SPD reporting unit which was retained.

Note 10 – Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09).  The ASU will supersede virtually all existing revenue recognition guidance under U.S. GAAP and will be effective for annual reporting periods beginning after December 15, 2016.  The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided.  The new guidance establishes a five-step approach for the recognition of revenue.  The Company is in the process of evaluating the impact of ASU 2014-09 on its Consolidated Financial Statements.

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

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

General Overview

We are a leading manufacturer of plumbing, HVAC, refrigeration, and industrial products.  The range of these products is broad:  copper tube and fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; fabricated tubular products; and steel nipples.  We also resell imported brass and plastic plumbing valves, malleable iron fittings, faucets and plumbing specialty products.  Mueller’s operations are located throughout the United States and in Canada, Mexico, Great Britain, and China.

The Company’s businesses are aggregated into two reportable segments:

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

·
OEM:  The OEM segment is composed of IPD, EPD, and Mueller-Xingrong, the Company’s Chinese joint venture.  The OEM segment manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies.  Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications; these products are sold primarily to OEMs located in China.  The OEM segment sells its products primarily to original equipment manufacturers, many of which are in the HVAC, plumbing, and refrigeration markets.

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

Residential construction activity has shown improvement in 2014 and into the first half of 2015, but remains at levels below historical averages.  Continued improvement is expected, but may be tempered by continuing low labor participation rates, the pace of household formations, higher interest rates, and tighter lending standards.  Per the U.S. Census Bureau, the June 2015 seasonally adjusted annual rate of new housing starts was 1.2 million compared with the June 2014 rate of 927 thousand.  While mortgage rates have risen in 2015 and 2014, they remain at historically low levels, as the average 30-year fixed mortgage rate was 3.77 percent for the first six months of 2015 and 4.17 percent for the twelve months ended December 2014. 

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

Profitability of certain of the Company’s product lines depends upon the “spreads” between the cost of raw material and the selling prices of its products.  The open market prices for copper cathode and scrap, for example, influence the selling price of copper tube, a principal product manufactured by the Company.  The Company attempts to minimize the effects on profitability from fluctuations in material costs by passing through these costs to its customers.  The Company’s earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions.

Earnings and profitability are also impacted by unit volumes that are subject to market trends, such as substitute products, imports, technologies, and market share.  In core product lines, the Company intensively manages its pricing structure while attempting to maximize its profitability.  From time-to-time, this practice results in lost sales opportunities and lower volume.  For plumbing systems, plastics are the primary substitute product; these products represent an increasing share of consumption.  U.S. consumption of copper tube is still predominantly supplied by U.S. manufacturers.  For certain air-conditioning and refrigeration applications, aluminum based systems are the primary substitution threat.  The Company cannot predict the acceptance or the rate of switching that may occur.  In recent years, brass rod consumption in the U.S. has declined due to the outsourcing of many manufactured products to offshore regions.

Results of Operations

Consolidated Results

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

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

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

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

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

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

Average Copper Price Per Pound






 






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

   
Three Months Ended
    
Six Months Ended
  
(In thousands)
  
June 27, 2015
    
June 28, 2014
    
June 27, 2015
    
June 28, 2014
  
                         
Cost of goods sold
  
$
470,365
    
$
557,775
    
$
931,199
    
$
1,053,552
  
Depreciation and
  amortization
    
8,188
      
8,592
      
16,041
      
16,699
  
Selling, general and administrative expense
    
33,420
      
33,367
      
66,251
      
66,508
  
Gain on sale of assets
    
(15,376
)
    
—
      
(15,376
)
    
(1,417
)
Severance
    
3,442
      
1,753
      
3,442
      
2,212
  
                                 
Operating expenses
  
$
500,039
    
$
601,487
    
$
1,001,557
    
$
1,137,554
  
 

 
   
Three Months Ended
    
Six Months Ended
  
   
June 27, 2015
    
June 28, 2014
    
June 27, 2015
    
June 28, 2014
  
                         
Cost of goods sold
    
84.7
%
    
85.9
%
    
85.2
%
    
86.0
%
Depreciation and
  amortization
    
1.5
      
1.3
      
1.5
      
1.4
  
Selling, general and administrative expense
    
6.0
      
5.1
      
6.0
      
5.4
  
Gain on sale of assets
    
(2.8