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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 July 2, 2016

Commission file number 1–6770

MUELLER INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

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

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

(901) 753-3200

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x No   ☐

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

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

Large accelerated filer   ☒	Accelerated filer   ☐
Non-accelerated filer   ☐	Smaller reporting company   ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ☐                      No   ☒

The number of shares of the Registrant's common stock outstanding as of July 25, 2016, was 57,172,780.

MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended July 2, 2016

__________________________

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

__________________________

 

INDEX

 

		Page Number
Part I.  Financial Information
	Item 1.  – Financial Statements (Unaudited)
	a.)  Condensed Consolidated Statements of Income	3
	b.)  Condensed Consolidated Statements of Comprehensive Income	4
	c.)  Condensed Consolidated Balance Sheets	5
	d.)  Condensed Consolidated Statements of Cash Flows	6
	e.)  Notes to Condensed Consolidated Financial Statements	7
	Item 2.  – Management's Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.  – Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.  – Controls and Procedures	32
Part II.  Other Information
	Item 1.  – Legal Proceedings	33
	Item 1A. – Risk Factors	33
	Item 2.  – Unregistered Sales of Equity Securities and Use of Proceeds	33
	Item 5. – Other Information	34
	Item 6.  – Exhibits	35
Signatures		36

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

MUELLER INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

		For the Quarter Ended								For the Six Months Ended
(In thousands, except per share data)		July 2, 2016				June 27, 2015				July 2, 2016				June 27, 2015
Net sales		$	544,071			$	555,593			$	1,076,880			$	1,092,835
Cost of goods sold			456,060				470,365				902,702				931,199
Depreciation and amortization			9,061				8,188				17,981				16,041
Selling, general, and administrative expense			34,514				33,420				70,294				66,251
Gain on sale of assets			—				(15,376	)			—				(15,376	)
Severance			—				3,442				—				3,442
Operating income			44,436				55,554				85,903				91,278
Interest expense			(1,692	)			(2,219	)			(3,540	)			(4,295	)
Other income, net			515				265				760				370
Income before income taxes			43,259				53,600				83,123				87,353
Income tax expense			(14,005	)			(19,738	)			(28,126	)			(31,151	)
(Loss) income from unconsolidated affiliates, net of tax			(995	)			—				1,927				—
Consolidated net income			28,259				33,862				56,924				56,202
Net income attributable to noncontrolling interests			(462	)			(211	)			(497	)			(573	)
Net income attributable to Mueller Industries, Inc.		$	27,797			$	33,651			$	56,427			$	55,629
Weighted average shares for basic earnings per share			56,511				56,247				56,489				56,220
Effect of dilutive stock-based awards			418				743				456				737
Adjusted weighted average shares for diluted earnings per share			56,929				56,990				56,945				56,957
Basic earnings per share		$	0.49			$	0.60			$	1.00			$	0.99
Diluted earnings per share		$	0.49			$	0.59			$	0.99			$	0.98
Dividends per share		$	0.100			$	0.075			$	0.175			$	0.150
See accompanying notes to condensed consolidated financial statements.

 

MUELLER INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

		For the Quarter Ended								For the Six Months Ended
(In thousands)		July 2, 2016				June 27, 2015				July 2, 2016				June 27, 2015
Consolidated net income		$	28,259			$	33,862			$	56,924			$	56,202
Other comprehensive income (loss), net of tax:
Foreign currency translation			(10,186	)			7,056				(11,297	)			(1,348	)
Net change with respect to derivative instruments and hedging activities			700		(1)		(903	)	(2)		1,294		(3)		(1,101	)	(4)
Net actuarial (gain) loss on pension and postretirement obligations			1,530		(5)		(647	)	(6)		2,702		(7)		769		(8)
Attributable to unconsolidated affiliates			1,438		(9)		—				1,438		(9)		—
Other, net			9				34				23				7
Total other comprehensive (loss) income			(6,509	)			5,540				(5,840	)			(1,673	)
Consolidated comprehensive income			21,750				39,402				51,084				54,529
Comprehensive loss attributable to noncontrolling interests			123				520				862				175
Comprehensive income attributable to Mueller Industries, Inc.		$	21,873			$	39,922			$	51,946			$	54,704
See accompanying notes to condensed consolidated financial statements.

 

 

 

_______________________________________ 

(1) Net of tax of $(266)

(2) Net of tax of $166

(3) Net of tax of $(487)

(4) Net of tax of $440

(5) Net of tax of $(522)

(6) Net of tax of $216

(7) Net of tax of $(920)

(8) Net of tax of $(286)

(9) Net of tax of $(812)

INDEX

MUELLER INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)		July 2,   2016				December 26,  2015
Assets
Current assets:
Cash and cash equivalents		$	283,161			$	274,844
Accounts receivable, less allowance for doubtful accounts of $565 in 2016 and $623 in 2015			305,332				251,571
Inventories			249,954				239,378
Other current assets			27,276				34,608
Total current assets			865,723				800,401
Property, plant, and equipment, net			297,939				280,224
Goodwill, net			128,339				120,252
Intangible assets, net			39,050				40,636
Investment in unconsolidated affiliates			70,077				65,900
Other assets			19,347				31,388
Total assets		$	1,420,475			$	1,338,801
Liabilities
Current liabilities:
Current portion of debt		$	16,226			$	11,760
Accounts payable			105,138				88,051
Accrued wages and other employee costs			31,199				35,636
Other current liabilities			65,387				73,982
Total current liabilities			217,950				209,429
Long-term debt, less current portion			213,646				204,250
Pension liabilities			15,435				17,449
Postretirement benefits other than pensions			17,268				17,427
Environmental reserves			20,830				20,943
Deferred income taxes			13,644				7,161
Other noncurrent liabilities			2,930				2,440
Total liabilities			501,703				479,099
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 57,167,406 in 2016 and 57,158,608 in 2015			802				802
Additional paid-in capital			274,928				271,158
Retained earnings			1,110,010				1,063,543
Accumulated other comprehensive loss			(59,472	)			(54,990	)
Treasury common stock, at cost			(453,613	)			(453,228	)
Total Mueller Industries, Inc. stockholders' equity			872,655				827,285
Noncontrolling interests			46,117				32,417
Total equity			918,772				859,702
Commitments and contingencies			—				—
Total liabilities and equity		$	1,420,475			$	1,338,801
See accompanying notes to condensed consolidated financial statements.

 

 

 

 

MUELLER INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		For the Six Months Ended
(In thousands)		July 2, 2016				June 27, 2015
Cash flows from operating activities
Consolidated net income		$	56,924			$	56,202
Reconciliation of consolidated net income to net cash provided by operating activities:
Depreciation and amortization			18,162				16,293
Stock-based compensation expense			2,874				2,966
Equity in earnings of unconsolidated affiliates			(1,927	)			—
Gain on disposal of assets			(555	)			(15,392	)
Impairment charges			—				570
Deferred income taxes			3,548				(1,445	)
Income tax benefit from exercise of stock options			(186	)			(146	)
Changes in assets and liabilities, net of businesses acquired:
Receivables			(52,334	)			(24,304	)
Inventories			1,176				(5,252	)
Other assets			17,009				6,963
Current liabilities			(1,314	)			(19,629	)
Other liabilities			(1,440	)			(415	)
Other, net			(72	)			739
Net cash provided by operating activities			41,865				17,150
Cash flows from investing activities
Capital expenditures			(10,248	)			(15,969	)
Acquisition of businesses, net of cash acquired			(20,533	)			(35,978	)
Net withdrawals from restricted cash balances			1,508				3,486
Proceeds from the sale of assets			1,482				5,518
Net cash used in investing activities			(27,791	)			(42,943	)
Cash flows from financing activities
Repayments of long-term debt			(500	)			(500	)
Dividends paid to stockholders of Mueller Industries, Inc.			(9,887	)			(8,435	)
Issuance (repayment) of debt by joint ventures, net			4,426				(17,750	)
Issuance of debt			2,000				—
Net cash received to settle stock-based awards			326				125
Income tax benefit from exercise of stock options			186				146
Net cash used in financing activities			(3,449	)			(26,414	)
Effect of exchange rate changes on cash			(2,308	)			(780	)
Increase (decrease) in cash and cash equivalents			8,317				(52,987	)
Cash and cash equivalents at the beginning of the period			274,844				352,134
Cash and cash equivalents at the end of the period		$	283,161			$	299,147
See accompanying notes to condensed consolidated financial statements.

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 herein.  The fiscal six months ended July 2, 2016 contained 27 weeks, while the fiscal six months ended June 27, 2015 contained 26 weeks.

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 418 thousand and 24 thousand stock options were excluded from the computation of diluted earnings per share for the quarters ended July 2, 2016 and June 27, 2015, respectively, because they were antidilutive.

Note 2 – Acquisitions and Dispositions

 

Acquisitions

On April 26, 2016, the Company entered into an agreement providing for the purchase of a 60.0 percent equity interest in Jungwoo Metal Ind. Co., LTD (Jungwoo-Mueller) for approximately $21.8 million in cash.  Jungwoo-Mueller manufactures copper-based pipe joining products and is headquartered in Seoul, South Korea and serves markets worldwide.  It complements the Company's existing copper fittings businesses in the Piping Systems segment and is reported in the Company's Condensed Consolidated Financial Statements one month in arrears.

This acquisition was accounted for using the acquisition method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on respective fair values.

The fair value of the assets acquired totaled $50.1 million, consisting primarily of property, plant, and equipment of $25.9 million, inventories of $15.8 million, accounts receivable of $5.6 million, other current assets of $1.5 million and cash of $1.3 million.  The fair value of the liabilities assumed totaled $17.3 million, consisting primarily of long-term debt of $8.7 million, accounts payable of $7.3 million, pension liabilities of $0.8 million, and other current liabilities of $0.5 million. Of the remaining purchase price, $3.6 million was allocated to non-deductible goodwill.  The noncontrolling interest in Jungwoo-Mueller is $14.6 million.  The purchase price allocation is provisional as of July 2, 2016 and subject to change upon completion of the final valuation of the long-lived assets and noncontrolling interest during the measurement period.

 

During the second quarter of 2015, the Company recognized approximately $3.4 million of severance costs related to the reorganization of Yorkshire Copper Tube, acquired in 2014.

 

The valuations of businesses acquired during 2015 have been finalized.  During the second quarter of 2016, a deferred tax liability of $4.1 million was recorded that resulted from a basis difference in the long-lived assets acquired from Great Lakes Copper Ltd.  This resulted in an increase in goodwill. There were no changes to the purchase price allocations for Turbotec Products, Inc. or Sherwood Valve LLC from the amounts presented in the Company's 2015 Annual Report on Form 10-K.

 

 

Piping Systems

Piping Systems is composed of the following operating segments: Domestic Piping Systems Group, Canadian Operations, European Operations, Trading Group, Mueller-Xingrong (the Company's Chinese joint venture), and Jungwoo-Mueller (the Company's South Korean joint venture).  The Domestic Piping Systems Group manufactures copper tube and fittings, plastic fittings, and line sets.  These products are manufactured in the U.S.   Outside the U.S., the Canadian Operations manufacture copper tube and line sets and sell the products primarily in the U.S. and Canada, and the European Operations manufacture copper tube, 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.  Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications in China.  Jungwoo-Mueller manufactures copper-based joining products that are sold worldwide.  The Piping System 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, construction, heating, ventilation, and air-conditioning, plumbing, and refrigeration markets.

Climate

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

 

 

 

 

 

 

 

 

 

		For the Quarter Ended June 27, 2015
(In thousands)		Piping Systems				Industrial Metals				Climate				Corporate and Eliminations				Total
Net sales		$	379,750			$	145,228			$	31,498			$	(883	)		$	555,593
Cost of goods sold			326,338				120,808				24,134				(915	)			470,365
Depreciation and amortization			5,335				1,643				614				596				8,188
Selling, general, and administrative expense			16,776				2,302				2,500				11,842				33,420
Gain on sale of assets			(15,376	)			—				—				—				(15,376	)
Severance			3,442				—				—				—				3,442
Operating income			43,235				20,475				4,250				(12,406	)			55,554
Interest expense																			(2,219	)
Other income, net																			265
Income before taxes																		$	53,600

 

 

Segment information (continued):

 

		For the Six Months Ended June 27, 2015
(In thousands)		Piping Systems				Industrial Metals				Climate				Corporate and Eliminations				Total
Net sales		$	741,232			$	296,264			$	57,309			$	(1,970	)		$	1,092,835
Cost of goods sold			639,028				248,532				45,401				(1,762	)			931,199
Depreciation and amortization			10,522				3,298				1,039				1,182				16,041
Selling, general, and administrative expense			34,122				5,000				4,354				22,775				66,251
Gain on sale of assets			(15,376	)			—				—				—				(15,376	)
Severance			3,442				—				—				—				3,442
Operating income			69,494				39,434				6,515				(24,165	)			91,278
Interest expense																			(4,295	)
Other income, net																			370
Income before taxes																		$	87,353

 

 

 

 

(In thousands)		July 2, 2016				December 26, 2015
Segment assets:
Piping Systems		$	863,138			$	811,343
Industrial Metals			160,655				153,102
Climate			66,383				61,672
General Corporate			330,299				312,684
		$	1,420,475			$	1,338,801

 

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 (i) a hedge of a forecasted transaction or the variability of cash flow to be paid or received  (cash flow hedge), or (ii) a hedge of 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, as the Company does not enter into derivative contracts for trading purposes (economic hedge).  Changes in the fair value of a derivative instrument 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 instrument 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.

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 July 2, 2016, the Company held open futures contracts to purchase approximately $22.3 million of copper over the next 18 months related to fixed price sales orders.  The fair value of those futures contracts was a $1.7 million net gain 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 July 2, 2016, this amount was approximately $979 thousand of deferred net gains, net of tax.

 

INDEX

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 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		July 2,  2016				December 26, 2015				Balance Sheet Location		July 2,  2016				December 26, 2015
Hedging instrument:
Commodity contracts - gains	Other current assets			$	1,761			$	60		Other current liabilities			$	24			$	238
Commodity contracts - losses	Other current assets				(85	)			—		Other current liabilities				(522	)			(1,864	)
Interest rate swap	Other assets				—				—		Other liabilities				(2,407	)			(1,692	)
Total derivatives (1)				$	1,676			$	60					$	(2,905	)		$	(3,318	)
(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		July 2, 2016				June 27, 2015				July 2, 2016				June 27, 2015
Fair value hedges:
(Loss) gain on commodity contracts (qualifying)	Cost of goods sold			$	(332	)		$	1,256			$	(383	)		$	1,468
Gain (loss) on hedged item - Inventory	Cost of goods sold				288				(1,403	)			350				(1,650	)
Undesignated derivatives:
Gain on commodity contracts (nonqualifying)	Cost of goods sold				1,326				1,046				1,820				1,279

 

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

	Three Months Ended July 2, 2016
(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		$	2,464		Cost of goods sold			$	(1,359	)
Interest rate swap			(115	)	Interest expense				59
Other			(349	)	Other				—
Total		$	2,000		Total			$	(1,300	)

 

 

 

 

 

	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	)
Interest rate swap			267		Interest expense				63
Other			7						—
Total		$	(885	)				$	(18	)

 

 

 

 

	Six Months Ended July 2, 2016
(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		$	3,337		Cost of goods sold			$	(1,291	)
Interest rate swap			(585	)	Interest expense				128
Other			(295	)	Other				—
Total		$	2,457					$	(1,163	)

INDEX

 

Derivative instrument information (continued):

	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
Interest rate swap			(765	)	Interest expense			131
Other			(72	)	Other			—
Total		$	(1,722	)			$	621

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 July 2, 2016 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 July 2, 2016 and December 26, 2015, the Company had recorded restricted cash in other current assets of $1.0 million and $2.6 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.

Note 6 – Investment in Unconsolidated Affiliates

The Company records its proportionate share of the investees' net income or loss one quarter in arrears as income (loss) from unconsolidated affiliates, net of tax,  in the Condensed Consolidated Statements of Income.   

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

(In thousands)		March 31,  2016				September 30, 2015
Current assets		$	248,511			$	251,389
Noncurrent assets			119,900				112,156
Current liabilities			158,000				178,784
Noncurrent liabilities			70,237				63,643

 

 

 

INDEX

 

Note 7 –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)		July 2, 2016				June 27,  2015				July 2, 2016				June 27,  2015
Pension benefits:
Service cost		$	165			$	228			$	360			$	500
Interest cost			1,969				2,027				3,944				4,081
Expected return on plan assets			(2,466	)			(2,655	)			(4,932	)			(5,309	)
Amortization of net loss			746				656				1,520				1,370
Net periodic benefit cost		$	414			$	256			$	892			$	642
Other benefits:
Service cost		$	60			$	84			$	122			$	180
Interest cost			149				190				305				386
Amortization of prior service (credit) cost			(224	)			1				(448	)			3
Amortization of net gain			(20	)			(16	)			(18	)			(13	)
Net periodic benefit (income) cost		$	(35	)		$	259			$	(39	)		$	556

Note 8 – 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.  It 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 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 July 2, 2016 were $7.0 million.

INDEX

Note 9 – Income Taxes

The Company's effective tax rate for the second quarter of 2016 was 32 percent compared with 37 percent for the same period last year.  The items impacting the effective tax rate for the second quarter of 2016 were primarily attributable to reductions for the U.S. production activities deduction of $1.0 million, and the effect of foreign tax rates lower than statutory tax rates of $1.4 million.  These items were partially offset by the provision for state income taxes, net of the federal benefit, of $0.8 million and miscellaneous items totaling $0.5 million.

For the second quarter of 2015, the difference between the effective tax rate and the amount computed using the U.S. federal statutory tax rate was primarily attributable to increases for state income taxes, net of the federal benefit, of $1.4 million and miscellaneous items totaling $0.6 million.  These items were partially offset by reductions for the U.S. production activities deduction of $1.2 million.

The Company's effective tax rate for the first half of 2016 was 34 percent compared with 36 percent for the same period last year.  The items impacting the effective tax rate for the first half of 2016 were primarily attributable to reductions for the U.S. production activities deduction of $1.9 million and the effect of foreign tax rates lower than statutory tax rates of $2.5 million.  These items were partially offset by the provision for state income taxes, net of the federal benefit, of $1.7 million,  and miscellaneous items totaling $1.7 million.

For the first half of 2015, the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate was attributable to increases for state income taxes, net of the federal benefit, 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 income taxes lower than statutory tax rates and other foreign adjustments of $0.4 million.

The Company files a consolidated U.S. federal income tax return and numerous consolidated and separate-company income tax returns in many state, local, and foreign jurisdictions.  The statute of limitations is open for the Company's federal tax return and most state income tax returns for 2012 and all subsequent years and is open for certain state and foreign returns for earlier tax years due to ongoing audits and differing statute periods.  The Internal Revenue Service is currently auditing the Company's 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 10 – 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, unrealized gains and losses on marketable securities classified as available-for-sale, and other comprehensive income attributable to unconsolidated affiliates.

 

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

		For the Six Months Ended July 2, 2016
(In thousands)		Cumulative Translation Adjustment				Unrealized (Losses)/Gains on Derivatives				Minimum Pension/OPEB Liability Adjustment				Other				Total
Balance at December 26, 2015		$	(24,773	)		$	(2,009	)		$	(28,429	)		$	221			$	(54,990	)
Other comprehensive income (loss) before reclassifications			(9,939	)			2,457				1,910				1,461				(4,111	)
Amounts reclassified from AOCI			—				(1,163	)			792				—				(371	)
Net current-period other comprehensive income			(9,939	)			1,294				2,702				1,461				(4,482	)
Balance at July 2, 2016		$	(34,712	)		$	(715	)		$	(25,727	)		$	1,682			$	(59,472	)

 

 

 

 

 

		For the Six Months Ended June 27, 2015
(In thousands)		Cumulative Translation Adjustment				Unrealized (Losses)/Gains on Derivatives				Minimum Pension/OPEB Liability Adjustment				Other				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	)

 

Reclassification adjustments out of AOCI were as follows:

		Amount reclassified from AOCI
		For the Three Months Ended
(In thousands)		July 2, 2016				June 27, 2015			Affected line item
Unrealized losses/(gains) on derivatives:
Commodity contracts		$	(2,108	)		$	(111	)	Cost of goods sold
Interest rate swap			92				98		Interest expense
			716				(5	)	Income tax expense
			(1,300	)			(18	)	Net of tax
			—				—		Noncontrolling interests
		$	(1,300	)		$	(18	)	Net of tax and noncontrolling   interests
Amortization of net loss and prior service cost on employee benefit plans		$	502			$	641		Selling, general, and administrative   expense
			(122	)			(164	)	Income tax expense
			380				477		Net of tax
			—				—		Noncontrolling interests
		$	380			$	477		Net of tax and noncontrolling   interests

 

 

 

 

		Amount reclassified from AOCI
		For the Six Months Ended
(In thousands)		July 2, 2016				June 27, 2015			Affected line item
Unrealized losses/(gains) on derivatives:
Commodity contracts		$	(1,871	)		$	651		Cost of goods sold
Interest rate swap			200				204		Interest expense
			508				(234	)	Income tax expense
			(1,163	)			621		Net of tax
			—				—		Noncontrolling interests
		$	(1,163	)		$	621		Net of tax and noncontrolling   interests
Amortization of net loss and prior service cost on employee benefit plans		$	1,054			$	1,360		Selling, general, and administrative    expense
			(262	)			(362	)	Income tax expense
			792				998		Net of tax
			—				—		Noncontrolling interests
		$	792			$	998		Net of tax and noncontrolling   interests

 

Note 11 – Noncontrolling Interests

(In thousands)		Noncontrolling Interests
Balance at December 26, 2015		$	32,417
Purchase of Jungwoo-Mueller			14,562
Net income attributable to noncontrolling interests			497
Other comprehensive loss attributable to noncontrolling interests, net of tax:
Foreign currency translation			(1,359	)
Balance at July 2, 2016		$	46,117

Note 12 – Recently Issued Accounting Standards

In March 2016, the Financial Accounting Standards Board (FASB) issued ASU (Accounting Standards Update) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting (ASU 2016-09).  The ASU requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled.  It will also allow a company to make a policy election to account for forfeitures as they occur.  The guidance is effective for public business entities in interim and fiscal periods beginning after December 15, 2016.  Early adoption is permitted, but all of the guidance must be adopted in the same period.  The Company is in the process of evaluating the impact of ASU 2016-09 on its Condensed Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02).  ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months.  Recognition, measurement and presentation of expenses will depend on classification as a financing or operating lease.  The amendments also require certain quantitative and qualitative disclosures about leasing arrangements.  The ASU will be effective for interim and fiscal periods beginning after December 15, 2018.  Early adoption is permitted.  The updated guidance requires a modified retrospective adoption.  The Company is still evaluating the effects that the provision of ASU 2016-02 will have on its Condensed Consolidated Financial Statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issue Costs (ASU 2015-03).  The ASU simplifies the presentation of debt issuance costs by requiring debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability rather than as a separate asset.  In circumstances in which there is not an associated debt liability amount recorded in the financial statements when the debt issuance costs are incurred, they will be reported on the balance sheet as an asset until the debt liability is recorded.  The guidance is effective for public business entities in interim and fiscal periods beginning after December 15, 2015.  Retrospective application is required.  The Company adopted ASU 2015-03 effective December 27, 2015.  The adoption of the ASU did not have a material impact on the Company's Condensed Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09).  The ASU will supersede virtually all existing revenue recognition guidance under U.S. GAAP and will be effective for annual reporting periods beginning after December 15, 2017.  The fundamental principles of the new guidance are that companies should recognize revenue in a manner that reflects the timing of the transfer of services to customers and the amount of revenue recognized reflects the consideration that a company expects to receive for the goods and services provided.  The new guidance establishes a five-step approach for the recognition of revenue.  The Company is in the process of evaluating the impact of ASU 2014-09 on its Condensed Consolidated Financial Statements.