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
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| | |
For the quarterly period ended | September 30, 2017 | Commission file number 1–6770 |
MUELLER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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| |
Delaware | 25-0790410 |
(State or other jurisdiction | (I.R.S. Employer |
of incorporation or organization) | Identification No.) |
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8285 Tournament Drive, Suite 150 | |
Memphis, Tennessee | 38125 |
(Address of principal executive offices) | (Zip Code) |
(901) 753-3200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☒ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☐ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of the Registrant’s common stock outstanding as of October 20, 2017 was 57,805,254.
MUELLER INDUSTRIES, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2017
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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | For the Quarter Ended | | For the Nine Months Ended |
(In thousands, except per share data) | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
| | | | | | | | |
Net sales | | $ | 550,363 |
| | $ | 506,584 |
| | $ | 1,742,549 |
| | $ | 1,583,464 |
|
| | | | | | | | |
Cost of goods sold | | 471,262 |
| | 424,668 |
| | 1,484,000 |
| | 1,327,370 |
|
Depreciation and amortization | | 8,266 |
| | 9,016 |
| | 25,216 |
| | 26,997 |
|
Selling, general, and administrative expense | | 33,276 |
| | 32,413 |
| | 102,953 |
| | 102,707 |
|
Asset impairments | | — |
| | 3,000 |
| | 411 |
| | 3,000 |
|
| | | | | | | | |
Operating income | | 37,559 |
| | 37,487 |
| | 129,969 |
| | 123,390 |
|
| | | | | | | | |
Interest expense | | (5,237 | ) | | (1,830 | ) | | (14,210 | ) | | (5,370 | ) |
Other (expense) income, net | | (458 | ) | | 120 |
| | 324 |
| | 880 |
|
| | | | | | | | |
Income before income taxes | | 31,864 |
| | 35,777 |
| | 116,083 |
| | 118,900 |
|
| | | | | | | | |
Income tax expense | | (8,716 | ) | | (10,837 | ) | | (33,295 | ) | | (38,963 | ) |
(Loss) income from unconsolidated affiliates, net of tax | | (394 | ) | | 1,122 |
| | (1,746 | ) | | 3,049 |
|
| | | | | | | | |
Consolidated net income | | 22,754 |
| | 26,062 |
| | 81,042 |
| | 82,986 |
|
| | | | | | | | |
Net income attributable to noncontrolling interests | | (496 | ) | | (84 | ) | | (1,164 | ) | | (581 | ) |
| | | | | | | | |
Net income attributable to Mueller Industries, Inc. | | $ | 22,258 |
| | $ | 25,978 |
| | $ | 79,878 |
| | $ | 82,405 |
|
| | | | | | | | |
Weighted average shares for basic earnings per share | | 56,987 |
| | 56,631 |
| | 56,891 |
| | 56,536 |
|
Effect of dilutive stock-based awards | | 456 |
| | 586 |
| | 542 |
| | 589 |
|
| | | | | | | | |
Adjusted weighted average shares for diluted earnings per share | | 57,443 |
| | 57,217 |
| | 57,433 |
| | 57,125 |
|
| | | | | | | | |
Basic earnings per share | | $ | 0.39 |
| | $ | 0.46 |
| | $ | 1.40 |
| | $ | 1.46 |
|
| | | | | | | | |
Diluted earnings per share | | $ | 0.39 |
| | $ | 0.45 |
| | $ | 1.39 |
| | $ | 1.44 |
|
| | | | | | | | |
Dividends per share | | $ | 0.100 |
| | $ | 0.100 |
| | $ | 8.300 |
| | $ | 0.275 |
|
See accompanying notes to condensed consolidated financial statements.
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | For the Quarter Ended | | For the Nine Months Ended |
(In thousands) | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
| | | | | | | | |
Consolidated net income | | $ | 22,754 |
| | $ | 26,062 |
| | $ | 81,042 |
| | $ | 82,986 |
|
| | | | | | | | |
Other comprehensive income (loss), net of tax: | | |
| | |
| | |
| | |
|
Foreign currency translation | | 7,154 |
| | (4,304 | ) | | 15,270 |
| | (15,601 | ) |
Net change with respect to derivative instruments and hedging activities, net of tax of $23, $(119), $(162), $(606) | | (132 | ) | | (139 | ) | | 185 |
| | 1,155 |
|
Net change in pension and postretirement obligation adjustments, net of tax of $102, $(255), $285, $(1,175) | | (207 | ) | | 743 |
| | (572 | ) | | 3,445 |
|
Attributable to unconsolidated affiliates, net of tax of $415, $(2,888), $614, $(3,700) | | (735 | ) | | 5,112 |
| | (1,086 | ) | | 6,550 |
|
Other, net | | — |
| | 54 |
| | (380 | ) | | 77 |
|
| | | | | | | | |
Total other comprehensive income (loss), net | | 6,080 |
| | 1,466 |
| | 13,417 |
| | (4,374 | ) |
| | | | | | | | |
Consolidated comprehensive income | | 28,834 |
| | 27,528 |
| | 94,459 |
| | 78,612 |
|
Comprehensive (income) loss attributable to noncontrolling interests | | (499 | ) | | (480 | ) | | (2,002 | ) | | 382 |
|
| | | | | | | | |
Comprehensive income attributable to Mueller Industries, Inc. | | $ | 28,335 |
| | $ | 27,048 |
| | $ | 92,457 |
| | $ | 78,994 |
|
See accompanying notes to condensed consolidated financial statements.
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) |
| | | | | | | | |
(In thousands, except share data) | | September 30, 2017 | | December 31, 2016 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 106,344 |
| | $ | 351,317 |
|
Accounts receivable, less allowance for doubtful accounts of $854 in 2017 and $637 in 2016 | | 276,678 |
| | 256,291 |
|
Inventories | | 284,114 |
| | 242,013 |
|
Other current assets | | 25,692 |
| | 44,702 |
|
| | | | |
Total current assets | | 692,828 |
| | 894,323 |
|
| | | | |
Property, plant, and equipment, net | | 283,845 |
| | 295,231 |
|
Goodwill, net | | 139,445 |
| | 123,993 |
|
Intangible assets, net | | 36,943 |
| | 36,168 |
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Investment in unconsolidated affiliates | | 73,664 |
| | 77,110 |
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Other assets | | 22,499 |
| | 20,651 |
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| | | | |
Total assets | | $ | 1,249,224 |
| | $ | 1,447,476 |
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| | | | |
Liabilities | | |
| | |
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Current liabilities: | | |
| | |
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Current portion of debt | | $ | 14,450 |
| | $ | 13,655 |
|
Accounts payable | | 125,032 |
| | 103,175 |
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Accrued wages and other employee costs | | 34,096 |
| | 35,121 |
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Other current liabilities | | 71,581 |
| | 67,041 |
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| | | | |
Total current liabilities | | 245,159 |
| | 218,992 |
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| | | | |
Long-term debt, less current portion | | 388,818 |
| | 213,709 |
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Pension liabilities | | 14,947 |
| | 14,890 |
|
Postretirement benefits other than pensions | | 16,930 |
| | 16,383 |
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Environmental reserves | | 21,365 |
| | 21,208 |
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Deferred income taxes | | 19,963 |
| | 19,573 |
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Other noncurrent liabilities | | 12,005 |
| | 6,284 |
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| | | | |
Total liabilities | | 719,187 |
| | 511,039 |
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| | | | |
Equity | | |
| | |
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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 57,804,707 in 2017 and 57,395,209 in 2016 | | 802 |
| | 802 |
|
Additional paid-in capital | | 272,667 |
| | 273,345 |
|
Retained earnings | | 743,560 |
| | 1,141,831 |
|
Accumulated other comprehensive loss | | (54,377 | ) | | (66,956 | ) |
Treasury common stock, at cost | | (445,749 | ) | | (450,338 | ) |
| | | | |
Total Mueller Industries, Inc. stockholders' equity | | 516,903 |
| | 898,684 |
|
Noncontrolling interests | | 13,134 |
| | 37,753 |
|
| | | | |
Total equity | | 530,037 |
| | 936,437 |
|
| | | | |
Commitments and contingencies | | — |
| | — |
|
Total liabilities and equity | | $ | 1,249,224 |
| | $ | 1,447,476 |
|
See accompanying notes to condensed consolidated financial statements.
MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) |
| | | | | | | | |
| | For the Nine Months Ended |
(In thousands) | | September 30, 2017 | | October 1, 2016 |
| | | | |
Cash flows from operating activities | | | | |
Consolidated net income | | $ | 81,042 |
| | $ | 82,986 |
|
Reconciliation of consolidated net income to net cash provided by operating activities: | | |
| | |
|
Depreciation and amortization | | 25,439 |
| | 27,267 |
|
Stock-based compensation expense | | 5,555 |
| | 4,553 |
|
Loss (income) from unconsolidated affiliates | | 1,746 |
| | (3,049 | ) |
Gain on sale of business | | (1,491 | ) | | — |
|
Gain on disposals of properties | | (26 | ) | | (747 | ) |
Gain on sales of securities | | (611 | ) | | — |
|
Impairment charges | | 411 |
| | 3,000 |
|
Deferred income taxes | | 624 |
| | 6,491 |
|
Changes in assets and liabilities, net of businesses acquired and sold: | | |
| | |
|
Receivables | | (33,359 | ) | | (45,780 | ) |
Inventories | | (40,920 | ) | | (914 | ) |
Other assets | | (3,372 | ) | | 14,428 |
|
Current liabilities | | 20,967 |
| | (15,998 | ) |
Other liabilities | | (1,498 | ) | | (2,101 | ) |
Other, net | | (973 | ) | | 450 |
|
| | | | |
Net cash provided by operating activities | | 53,534 |
| | 70,586 |
|
| | | | |
Cash flows from investing activities | | |
| | |
|
Capital expenditures | | (17,297 | ) | | (15,632 | ) |
Acquisition of businesses, net of cash acquired | | (18,396 | ) | | (20,533 | ) |
Proceeds from sale of business, net of cash sold | | 17,483 |
| | — |
|
Net withdrawals from restricted cash balances | | 5,197 |
| | 1,177 |
|
Investment in unconsolidated affiliates | | (3,317 | ) | | — |
|
Proceeds from sales of assets | | 11,732 |
| | 5,301 |
|
Proceeds from sales of securities | | 1,787 |
| | — |
|
| | | | |
Net cash used in investing activities | | (2,811 | ) | | (29,687 | ) |
| | | | |
Cash flows from financing activities | | |
| | |
|
Dividends paid to stockholders of Mueller Industries, Inc. | | (191,241 | ) | | (15,555 | ) |
Dividends paid to noncontrolling interests | | (2,909 | ) | | (3,765 | ) |
Issuance of long-term debt | | — |
| | 2,000 |
|
(Repayment) issuance of debt by consolidated joint ventures, net | | (3,451 | ) | | 5,006 |
|
Net cash used to settle stock-based awards | | (1,644 | ) | | (1,356 | ) |
Repayments of long-term debt | | (100,917 | ) | | (769 | ) |
| | | | |
Net cash used in financing activities | | (300,162 | ) | | (14,439 | ) |
| | | | |
Effect of exchange rate changes on cash | | 4,466 |
| | (3,511 | ) |
| | | | |
(Decrease) increase in cash and cash equivalents | | (244,973 | ) | | 22,949 |
|
Cash and cash equivalents at the beginning of the period | | 351,317 |
| | 274,844 |
|
| | | | |
Cash and cash equivalents at the end of the period | | $ | 106,344 |
| | $ | 297,793 |
|
See accompanying notes to condensed consolidated financial statements. Refer to Note 2 for discussion of significant noncash financing activities.
MUELLER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
General
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K, including the annual financial statements incorporated therein.
The accompanying unaudited interim financial statements include all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented herein. The first nine months of 2017 contained 39 weeks, while the first nine months of 2016 contained 40 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 52 thousand and 218 thousand stock-based awards were excluded from the computation of diluted earnings per share for the quarters ended September 30, 2017 and October 1, 2016, respectively, because they were antidilutive.
Note 2 – Special Dividend
On March 9, 2017, the Company distributed a special dividend of $3.00 in cash and $5.00 in principal amount of the Company’s 6% Subordinated Debentures (Debentures) due March 1, 2027 for each share of common stock outstanding. Interest on the Debentures is payable semiannually on September 1 and March 1, commencing September 1, 2017. At issuance, the Debentures were recorded at their estimated fair value. The fair value of the Debentures was estimated based on quoted market prices for the same or similar issues, the current rates offered to the Company for debt of the same remaining maturities, or the use of market standard models. The carrying value of the Debentures approximates fair value at September 30, 2017.
The Debentures are subordinated to all other funded debt of the Company and are callable, in whole or in part, at any time at the option of the Company, subject to declining call premiums during the first five years. The Debentures also grant each holder the right to require the Company to repurchase such holder’s Debentures in the event of a change in control at declining repurchase premiums during the first five years. The Debentures may be redeemed, subject to the conditions set forth above, at the following redemption price (expressed as a percentage of principal amount) plus any accrued but unpaid interest to, but excluding, the redemption date:
If redeemed during the 12-month period beginning March 9:
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Year | | Redemption Price |
| | |
2017 | | 106% |
2018 | | 105 |
2019 | | 104 |
2020 | | 103 |
2021 | | 102 |
2022 and thereafter | | 100 |
The effect of the special dividend was a decrease in stockholders’ equity of approximately $458.7 million, an increase in long-term debt of approximately $284.5 million, and a decrease in cash of approximately $174.2 million.
Note 3 – Acquisitions and Dispositions
Acquisitions
On May 31, 2017, the Company entered into a share purchase agreement pursuant to which the Company acquired all of the outstanding shares of Pexcor Manufacturing Company Inc. (Pexcor) and Heatlink Group Inc. (Heatlink) for approximately $18.5 million, net of working capital adjustments. The total purchase price consisted of $16.3 million in cash at closing and a contingent consideration arrangement which requires the Company to pay the former owners up to $2.2 million based on EBITDA growth of the acquired companies. Pexcor and Heatlink, based out of Calgary, Canada, produce and sell a complete line of products for PEX plumbing and radiant systems. These businesses complement the Company’s existing businesses within the Piping Systems segment.
The fair value of the assets acquired totaled $10.4 million, consisting primarily of inventories of $4.5 million, accounts receivable of $2.8 million, property, plant, and equipment of $2.0 million, other current assets of $0.5 million, and other assets of $0.6 million. The fair value of the liabilities assumed totaled $4.3 million, consisting primarily of accounts payable of $3.6 million, other current liabilities of $0.4 million, and other liabilities of $0.3 million. Of the remaining purchase price, $12.4 million was allocated to non-deductible goodwill and intangible assets. The purchase price allocation is provisional as of September 30, 2017 and subject to change upon completion of the final valuation of the long-lived assets, working capital, and contingent consideration during the measurement period.
On April 26, 2016, the Company entered into an agreement pursuant to which the Company acquired a 60 percent equity interest in Jungwoo Metal Ind. Co., LTD (Jungwoo-Mueller) for approximately $20.5 million in cash. Jungwoo-Mueller, which manufactures copper-based pipe joining products, is headquartered in Seoul, South Korea and serves markets worldwide. This business complements the Company’s existing copper fittings business in the Piping Systems segment and is reported in the Company’s Condensed Consolidated Financial Statements one month in arrears.
The fair value of the assets acquired totaled $49.0 million, consisting primarily of property, plant, and equipment of $24.2 million, inventories of $17.6 million, accounts receivable of $5.6 million, other current assets of $1.4 million, and deferred tax assets of $0.2 million. The fair value of the liabilities assumed totaled $17.9 million, consisting primarily of long-term debt of $8.7 million, accounts payable of $7.3 million, pension liabilities of $0.8 million, other current liabilities of $0.5 million, and other liabilities of $0.6 million. Of the remaining purchase price, $1.0 million was allocated to non-deductible goodwill and intangible assets. The noncontrolling interest in Jungwoo-Mueller is $11.6 million. The valuation of the business has been finalized. Changes to the purchase price allocation from the amounts presented in the Company’s 2016 Annual Report on Form 10-K were immaterial.
Dispositions
On June 21, 2017, the Company entered into a definitive equity transfer agreement with Jiangsu Xingrong Hi-Tech Co. Ltd. and Jiangsu Baiyang Industries Co. Ltd. (Baiyang), together, the minority partners in Mueller-Xingrong (the Company’s Chinese joint venture), pursuant to which the Company sold its 50.5 percent equity interest in Mueller-Xingrong to Baiyang for approximately $18.3 million. Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications in China and was included in the Piping Systems segment. Mueller-Xingrong reported net sales of $67.3 million and net losses of $9 thousand in the first nine months of 2017 compared to net sales of $69.6 million and net income of $426 thousand in the first nine months of 2016. The carrying value of the assets disposed totaled $56.7 million, consisting primarily of accounts receivable, inventories, and long-lived assets. The carrying value of the liabilities disposed (consisting primarily of current debt and accounts payable), noncontrolling interest, and amounts recognized in accumulated other comprehensive income (AOCI) totaled $36.2 million. Since the disposal constituted a complete liquidation of the Company’s investment in a foreign entity, the Company removed from AOCI and recognized a cumulative translation gain of $3.8 million. As a result of the disposal, the Company recognized a net gain on the sale of this business of $1.5 million as a reduction of selling, general, and administrative expense in the Condensed Consolidated Financial Statements.
Note 4 –Segment Information
Each of the Company’s reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered as follows:
Piping Systems
Piping Systems is composed of the following operating segments: Domestic Piping Systems Group, Great Lakes Copper, Pexcor & Heatlink, European Operations, Trading Group, and Jungwoo-Mueller (the Company’s South Korean joint venture). The
Domestic Piping Systems Group manufactures copper tube and fittings, plastic fittings, and line sets. These products are manufactured in the U.S., sold in the U.S, and exported to markets worldwide. Outside the U.S., Great Lakes Copper manufactures copper tube and line sets and sells the products primarily in the U.S. and Canada, Pexcor & Heatlink produce a complete line of products for PEX plumbing and radiant systems in Canada, and the European Operations manufacture copper tube in the U.K. which is sold primarily in Europe. The Trading Group manufactures pipe nipples and imports and resells brass and plastic plumbing valves, malleable iron fittings, faucets, and plumbing specialty products in the U.S. and Mexico. Jungwoo-Mueller manufactures copper-based joining products that are sold worldwide. The Piping Systems segment’s products are sold primarily to plumbing, refrigeration, and air-conditioning wholesalers, hardware wholesalers and co-ops, building product retailers, and air-conditioning original equipment manufacturers (OEMs).
The Company disposed of Mueller-Xingrong (the Company’s Chinese joint venture) on June 21, 2017. This business manufactured engineered copper tube primarily for air-conditioning applications in China.
Industrial Metals
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, assemblies, high pressure components, and coaxial heat exchangers primarily for the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.
Summarized segment information is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended September 30, 2017 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Corporate and Eliminations | | Total |
| | | | | | | | | | |
Net sales | | $ | 384,078 |
| | $ | 147,578 |
| | $ | 32,488 |
| | $ | (13,781 | ) | | $ | 550,363 |
|
| | | | | | | | | | |
Cost of goods sold | | 340,191 |
| | 120,021 |
| | 24,111 |
| | (13,061 | ) | | 471,262 |
|
Depreciation and amortization | | 5,290 |
| | 1,845 |
| | 636 |
| | 495 |
| | 8,266 |
|
Selling, general, and administrative expense | | 17,873 |
| | 2,667 |
| | 2,312 |
| | 10,424 |
| | 33,276 |
|
| | | | | | | | | | |
Operating income | | 20,724 |
| | 23,045 |
| | 5,429 |
| | (11,639 | ) | | 37,559 |
|
| | | | | | | | | | |
Interest expense | | |
| | |
| | |
| | |
| | (5,237 | ) |
Other (expense) income, net | | |
| | |
| | |
| | |
| | (458 | ) |
| | | | | | | | | | |
Income before income taxes | | |
| | |
| | |
| | |
| | $ | 31,864 |
|
Segment Information (continued):
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended October 1, 2016 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Corporate and Eliminations | | Total |
| | | | | | | | | | |
Net sales | | $ | 351,557 |
| | $ | 131,350 |
| | $ | 30,003 |
| | $ | (6,326 | ) | | $ | 506,584 |
|
| | | | | | | | | | |
Cost of goods sold | | 301,867 |
| | 107,512 |
| | 22,210 |
| | (6,921 | ) | | 424,668 |
|
Depreciation and amortization | | 5,905 |
| | 1,964 |
| | 612 |
| | 535 |
| | 9,016 |
|
Selling, general, and administrative expense | | 16,647 |
| | 3,125 |
| | 2,357 |
| | 10,284 |
| | 32,413 |
|
Asset impairments | | 3,000 |
| | — |
| | — |
| | — |
| | 3,000 |
|
| | | | | | | | | | |
Operating income | | 24,138 |
| | 18,749 |
| | 4,824 |
| | (10,224 | ) | | 37,487 |
|
| | | | | | | | | | |
Interest expense | | |
| | |
| | |
| | |
| | (1,830 | ) |
Other income, net | | |
| | |
| | |
| | |
| | 120 |
|
| | | | | | | | | | |
Income before income taxes | | |
| | |
| | |
| | |
| | $ | 35,777 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2017 |
( In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Corporate and Eliminations | | Total |
| | | | | | | | | | |
Net sales | | $ | 1,205,697 |
| | $ | 451,919 |
| | $ | 103,403 |
| | $ | (18,470 | ) | | $ | 1,742,549 |
|
| | | | | | | | | | |
Cost of goods sold | | 1,049,098 |
| | 377,036 |
| | 77,124 |
| | (19,258 | ) | | 1,484,000 |
|
Depreciation and amortization | | 16,223 |
| | 5,647 |
| | 1,880 |
| | 1,466 |
| | 25,216 |
|
Selling, general, and administrative expense | | 54,293 |
| | 8,761 |
| | 7,244 |
| | 32,655 |
| | 102,953 |
|
Asset impairments | | 411 |
| | — |
| | — |
| | — |
| | 411 |
|
| | | | | | | | | | |
Operating income | | 85,672 |
| | 60,475 |
| | 17,155 |
| | (33,333 | ) | | 129,969 |
|
| | | | | | | | | | |
Interest expense | | |
| | |
| | |
| | |
| | (14,210 | ) |
Other income, net | | |
| | |
| | |
| | |
| | 324 |
|
| | | | | | | | | | |
Income before income taxes | | |
| | |
| | |
| | |
| | $ | 116,083 |
|
Segment Information (continued):
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended October 1, 2016 |
( In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Corporate and Eliminations | | Total |
| | | | | | | | | | |
Net sales | | $ | 1,109,109 |
| | $ | 393,608 |
| | $ | 92,068 |
| | $ | (11,321 | ) | | $ | 1,583,464 |
|
| | | | | | | | | | |
Cost of goods sold | | 949,015 |
| | 321,615 |
| | 68,363 |
| | (11,623 | ) | | 1,327,370 |
|
Depreciation and amortization | | 17,341 |
| | 6,219 |
| | 1,829 |
| | 1,608 |
| | 26,997 |
|
Selling, general, and administrative expense | | 51,497 |
| | 9,989 |
| | 7,336 |
| | 33,885 |
| | 102,707 |
|
Asset impairments | | 3,000 |
| | — |
| | — |
| | — |
| | 3,000 |
|
| | | | | | | | | | |
Operating income | | 88,256 |
| | 55,785 |
| | 14,540 |
| | (35,191 | ) | | 123,390 |
|
| | | | | | | | | | |
Interest expense | | |
| | |
| | |
| | |
| | (5,370 | ) |
Other income, net | | |
| | |
| | |
| | |
| | 880 |
|
| | | | | | | | | | |
Income before income taxes | | |
| | |
| | |
| | |
| | $ | 118,900 |
|
Note 5 – Inventories
|
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
| | | | |
Raw materials and supplies | | $ | 77,743 |
| | $ | 57,387 |
|
Work-in-process | | 47,651 |
| | 42,227 |
|
Finished goods | | 165,090 |
| | 149,288 |
|
Valuation reserves | | (6,370 | ) | | (6,889 | ) |
| | | | |
Inventories | | $ | 284,114 |
| | $ | 242,013 |
|
Note 6 – Derivative Instruments and Hedging Activities
The Company’s earnings and cash flows are subject to fluctuations due to changes in commodity prices, foreign currency exchange rates, and interest rates. The Company uses derivative instruments such as commodity futures contracts, foreign currency forward contracts, and interest rate swaps to manage these exposures.
All derivatives are recognized in the Condensed Consolidated Balance Sheets at their fair value. On the date the derivative contract is entered into, it is either a) designated as a hedge of (i) a forecasted transaction or the variability of cash flow to be paid (cash flow hedge) or (ii) the fair value of a recognized asset or liability (fair value hedge), or b) not designated in a hedge accounting relationship, even though the derivative contract was executed to mitigate an economic exposure (economic hedge), as the Company does not enter into derivative contracts for trading purposes. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in stockholders’ equity within AOCI, to the extent effective, until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged recognized asset or liability that is attributable to the hedged risk, are recorded in current earnings. Changes in the fair value of undesignated derivatives executed as economic hedges and the ineffective portion of designated derivatives are reported in current earnings.
The Company documents all relationships between derivative instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that
are designated as fair value hedges to specific assets and liabilities in the Condensed Consolidated Balance Sheets and linking cash flow hedges to specific forecasted transactions or variability of cash flow.
The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. When a derivative instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable of occurring, hedge accounting is discontinued prospectively in accordance with the derecognition criteria for hedge accounting.
Commodity Futures Contracts
Copper and brass represent the largest component of the Company’s variable costs of production. The cost of these materials is subject to global market fluctuations caused by factors beyond the Company’s control. The Company occasionally enters into forward fixed-price arrangements with certain customers; the risk of these arrangements is generally managed with commodity futures contracts. These futures contracts have been designated as cash flow hedges.
At September 30, 2017, the Company held open futures contracts to purchase approximately $11.8 million of copper over the next 15 months related to fixed price sales orders. The fair value of those futures contracts was a $165 thousand net loss position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy). In the next 12 months, the Company will reclassify into earnings realized gains or losses relating to cash flow hedges. At September 30, 2017, this amount was approximately $133 thousand of deferred net losses, net of tax.
The Company may also enter into futures contracts to protect the value of inventory against market fluctuations. At September 30, 2017, the Company held open futures contracts to sell approximately $57.7 million of copper over the next six months related to copper inventory. The fair value of those futures contracts was a $726 thousand net loss position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).
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 revolving credit facility, the all-in fixed rate is 2.98 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 Credit Agreement. The swap was designated and accounted for as a cash flow hedge at inception. During the fourth quarter of 2016, the Company discontinued hedge accounting prospectively.
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 within the fair value hierarchy). 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 $49 thousand loss position at September 30, 2017, and there was $107 thousand of deferred losses, net of tax, included in AOCI that are expected to be reclassified into interest expense over the remaining term of the interest rate swap.
The Company presents its derivative assets and liabilities in the Condensed Consolidated Balance Sheets on a net basis by counterparty. The following table summarizes the location and fair value of the derivative instruments and disaggregates the net derivative assets and liabilities into gross components on a contract-by-contract basis:
|
| | | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | | | Fair Value | | | | Fair Value |
(In thousands) | | Balance Sheet Location | | September 30, 2017 | | December 31, 2016 | | Balance Sheet Location | | September 30, 2017 | | December 31, 2016 |
| | | | | | | | | | | | |
Commodity contracts - gains | | Other current assets | | $ | 203 |
| | $ | 1,013 |
| | Other current liabilities | | $ | 796 |
| | $ | 564 |
|
Commodity contracts - losses | | Other current assets | | (120 | ) | | (148 | ) | | Other current liabilities | | (1,770 | ) | | (920 | ) |
Interest rate swap | | Other current assets | | — |
| | — |
| | Other current liabilities | | (49 | ) | | (787 | ) |
| | | | | | | | | | | | |
Total derivatives (1) | | | | $ | 83 |
| | $ | 865 |
| | | | $ | (1,023 | ) | | $ | (1,143 | ) |
(1) Does not include the impact of cash collateral provided to counterparties.
The following tables summarize the effects of derivative instruments on the Company’s Condensed Consolidated Statements of Income:
|
| | | | | | | | | | | | | | | | | | |
| | | | For the Quarter Ended | | For the Nine Months Ended |
(In thousands) | | Location | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Fair value hedges: | | | | | | | | | | |
Gain (loss) on commodity contracts (qualifying) | | Cost of goods sold | | $ | — |
| | $ | (37 | ) | | $ | — |
| | $ | (420 | ) |
Gain on hedged item - inventory | | Cost of goods sold | | — |
| | 32 |
| | — |
| | 382 |
|
| | | | | | | | | | |
Undesignated derivatives: | | | | | | | | | | |
(Loss) gain on commodity contracts (nonqualifying) | | Cost of goods sold | | (3,083 | ) | | 855 |
| | (3,506 | ) | | 2,676 |
|
The following tables summarize amounts recognized in and reclassified from AOCI during the period:
|
| | | | | | | | | | |
| | For the Quarter Ended September 30, 2017 |
(In thousands) | | (Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax | | Classification Gains (Losses) | | Loss Reclassified from AOCI (Effective Portion), Net of Tax |
Cash flow hedges: | | | | | | |
Commodity contracts | | $ | (541 | ) | | Cost of goods sold | | $ | 237 |
|
Interest rate swap | | — |
| | Interest expense | | 149 |
|
Other | | 23 |
| | Other | | — |
|
| | | | | | |
Total | | $ | (518 | ) | | Total | | $ | 386 |
|
Derivative Instruments and Hedging Activities (continued):
|
| | | | | | | | | | |
| | For the Quarter Ended October 1, 2016 |
(In thousands) | | (Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax | | Classification Gains (Losses) | | Loss Reclassified from AOCI (Effective Portion), Net of Tax |
Cash flow hedges: | | | | | | |
Commodity contracts | | $ | (1,434 | ) | | Cost of goods sold | | $ | 814 |
|
Interest rate swap | | 457 |
| | Interest expense | | 58 |
|
Other | | (32 | ) | | Other | | — |
|
| | | | | | |
Total | | $ | (1,009 | ) | | Total | | $ | 872 |
|
|
| | | | | | | | | | |
| | For the Nine Months Ended September 30, 2017 |
( In thousands) | | (Loss) Gain Recognized in AOCI (Effective Portion), Net of Tax | | Classification Gains (Losses) | | Loss Reclassified from AOCI (Effective Portion), Net of Tax |
Cash flow hedges: | | | | | | |
Commodity contracts | | $ | (1,354 | ) | | Cost of goods sold | | $ | 913 |
|
Interest rate swap | | — |
| | Interest expense | | 447 |
|
Other | | 179 |
| | Other | | — |
|
| | | | | | |
Total | | $ | (1,175 | ) | | Total | | $ | 1,360 |
|
|
| | | | | | | | | | |
| | For the Nine Months Ended October 1, 2016 |
( In thousands) | | Gain (Loss) Recognized in AOCI (Effective Portion), Net of Tax | | Classification Gains (Losses) | | (Gain) Loss Reclassified from AOCI (Effective Portion), Net of Tax |
Cash flow hedges: | | | | | | |
Commodity contracts | | $ | 1,903 |
| | Cost of goods sold | | $ | (477 | ) |
Interest rate swap | | (128 | ) | | Interest expense | | 186 |
|
Other | | (329 | ) | | Other | | — |
|
| | | | | | |
Total | | $ | 1,446 |
| | Total | | $ | (291 | ) |
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 September 30, 2017 was not material to the Condensed Consolidated Statements of Income.
The Company primarily enters into International Swaps and Derivatives Association master netting agreements with major financial institutions that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. The master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. The Company does not offset fair value amounts for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral. At September 30, 2017 and December 31, 2016, the Company had recorded restricted cash in other
current assets of $3.0 million and $1.4 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.
Note 7 – Investment in Unconsolidated Affiliates
The Company owns a 50 percent interest in Tecumseh Products Holdings LLC (Joint Venture), an unconsolidated affiliate that acquired Tecumseh Products Company (Tecumseh) during the third quarter of 2015. The Company also owns a 50 percent interest in a second unconsolidated affiliate that provided financing to Tecumseh in conjunction with the acquisition. These investments are recorded using the equity method of accounting, as the Company can exercise significant influence but does not own a majority equity interest or otherwise control the respective entities. Under the equity method of accounting, these investments are stated at initial cost and are adjusted for subsequent additional investments and the Company’s proportionate share of earnings or losses and distributions.
The Company records its proportionate share of the investees’ net income or loss one quarter in arrears as income (loss) from unconsolidated affiliates, net of tax, in the Condensed Consolidated Statements of Income and its proportionate share of the investees’ other comprehensive income (loss), net of income taxes, in the Condensed Consolidated Statements of Comprehensive Income. In general, the equity investment in unconsolidated affiliates is equal to the current equity investment plus the entities’ undistributed earnings.
The following tables present summarized financial information derived from the Company’s equity method investees’ combined consolidated financial statements, which are prepared in accordance with U.S. GAAP.
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | | | |
Current assets | | $ | 251,188 |
| | $ | 244,323 |
|
Noncurrent assets | | 132,000 |
| | 130,400 |
|
Current liabilities | | 177,110 |
| | 148,806 |
|
Noncurrent liabilities | | 59,334 |
| | 71,681 |
|
|
| | | | | | | | | | | | | | | | |
| | For the Quarter Ended | | For the Nine Months Ended |
(In thousands) | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
| | | | | | | | |
Net sales | | $ | 148,400 |
| | $ | 146,700 |
| | $ | 407,300 |
| | $ | 437,200 |
|
Gross profit | | 21,500 |
| | 22,200 |
| | 56,700 |
| | 59,700 |
|
Net (loss) income | | (788 | ) | | 2,244 |
| | (3,492 | ) | | 6,097 |
|
The Company’s income from unconsolidated affiliates, net of tax, for the nine months ended October 1, 2016 included a gain of $17.1 million that resulted from the allocation of the purchase price, which was partially offset by restructuring and impairment charges of $5.3 million and net losses of $5.7 million.
On December 30, 2015, the Company entered into a joint venture agreement with Cayan Ventures and Bahrain Mumtalakat Holding Company to build a copper tube mill in Bahrain. The business will operate and brand its products under the Mueller Industries family of brands. The Company has invested approximately $3.9 million of cash to date and will be the technical and marketing lead in return for 40 percent ownership in the joint venture.
Note 8 – Benefit Plans
The Company sponsors several qualified and nonqualified pension plans and other postretirement benefit plans for certain of its employees. The components of net periodic benefit cost (income) are as follows:
|
| | | | | | | | | | | | | | | | |
| | For the Quarter Ended | | For the Nine Months Ended |
(In thousands) | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
| | | | | | | | |
Pension benefits: | | | | | | | | |
Service cost | | $ | 35 |
| | $ | 180 |
| | $ | 106 |
| | $ | 540 |
|
Interest cost | | 1,659 |
| | 1,973 |
| | 4,977 |
| | 5,917 |
|
Expected return on plan assets | | (2,184 | ) | | (2,466 | ) | | (6,552 | ) | | (7,398 | ) |
Amortization of net loss | | 536 |
| | 760 |
| | 1,608 |
| | 2,280 |
|
| | | | | | | | |
Net periodic benefit cost | | $ | 46 |
| | $ | 447 |
| | $ | 139 |
| | $ | 1,339 |
|
| | | | | | | | |
Other benefits: | | |
| | |
| | |
| | |
|
Service cost | | $ | 54 |
| | $ | 61 |
| | $ | 163 |
| | $ | 183 |
|
Interest cost | | 147 |
| | 153 |
| | 442 |
| | 458 |
|
Amortization of prior service credit | | (225 | ) | | (224 | ) | | (676 | ) | | (672 | ) |
Amortization of net gain | | (10 | ) | | (9 | ) | | (30 | ) | | (27 | ) |
| | | | | | | | |
Net periodic benefit income | | $ | (34 | ) | | $ | (19 | ) | | $ | (101 | ) | | $ | (58 | ) |
Note 9 – Commitments and Contingencies
The Company is involved in certain litigation as a result of claims that arose in the ordinary course of business, which management believes will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company may also realize the benefit of certain legal claims and litigation in the future; these gain contingencies are not recognized in the Condensed Consolidated Financial Statements.
Lead Refinery Site
U.S.S. Lead Refinery, Inc. (Lead Refinery), a non-operating wholly owned subsidiary of MRRC, has conducted corrective action and interim remedial activities (collectively, Site Activities) at Lead Refinery’s East Chicago, Indiana site pursuant to the Resource Conservation and Recovery Act since December 1996. Although the Site Activities have been substantially concluded, Lead Refinery is required to perform monitoring and maintenance-related activities pursuant to a post-closure permit issued by the Indiana Department of Environmental Management effective as of March 2, 2013. Approximate costs to comply with the post-closure permit, including associated general and administrative costs, are estimated at between $2.1 million and $4.7 million over the next 20 years.
On April 9, 2009, pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the U.S. Environmental Protection Agency (EPA) added the Lead Refinery site and surrounding properties to the National Priorities List (NPL). On July 17, 2009, Lead Refinery received a written notice from the EPA indicating that it may be a PRP under CERCLA due to the release or threat of release of hazardous substances including lead into properties surrounding the Lead Refinery site. The EPA identified two other PRPs in connection with that matter. In November 2012, the EPA adopted a remedy for the surrounding properties and in September 2014, the EPA announced that it had entered into a settlement with the two other PRPs whereby they will pay approximately $26.0 million to fund the cleanup of approximately 300 properties surrounding the Lead Refinery site and perform certain remedial action tasks.
On November 8, 2016, the Company, its subsidiary Arava Natural Resources Company, Inc. (Arava), and Arava’s subsidiary MRRC each received general notice letters from the EPA asserting that they may be PRPs in connection with the Lead Refinery NPL site. The Company, Arava, and MRRC have denied liability for any remedial action and response costs associated with the Lead Refinery NPL site. In June 2017, the EPA requested that Lead Refinery conduct, and the Company fund, a remedial
investigation and feasibility study of the Lead Refinery NPL site pursuant to a proposed administrative settlement agreement and order on consent. The Company and Lead Refinery entered into that agreement in September 2017. The Company will make a capital contribution to Lead Refinery to conduct the remedial investigation and feasibility study and provide a financial guarantee in the amount of $1.0 million. The EPA has also informed the Company that the EPA’s position is that Mueller is a responsible party for the Lead Refinery NPL site, and accordingly is responsible for a share of remedial action and response costs at the site and in the adjacent residential area. At this juncture, the Company is unable to determine the likelihood of a material adverse outcome or the amount or range of a potential loss with respect to any remedial action related to the Lead Refinery NPL site.
Equal Employment Opportunity Commission Matter
On October 5, 2016, the Company received a demand letter from the Los Angeles District Office of the United States Equal Employment Opportunity Commission (EEOC). The EEOC alleges that between May 2011 and April 2015, various Company employees were terminated in violation of the Americans with Disabilities Act, and that certain of the Company’s employee leave and attendance policies were discriminatory in nature. On that basis, the EEOC’s letter includes a demand for monetary relief on behalf of an identified class of 20 individuals, and an unidentified class of 150 individuals, in addition to injunctive relief.
The Company believes the EEOC’s allegations are without merit. Notwithstanding the Company’s position, in consultation with its liability insurers, the Company entered into a conciliation process with the EEOC for purposes of resolving the claims. On April 12, 2017, the Company received a letter from the EEOC stating that the conciliation process had concluded without a resolution of the claims, and that the matter would be referred to its Legal Department for potential litigation. Due to the procedural stage of this matter, the Company is unable to determine the likelihood of a material adverse outcome in this matter, or the amount or range of a potential loss in excess of any available insurance coverage.
Guarantees
Guarantees, in the form of letters of credit, are issued by the Company generally to assure the payment of insurance deductibles and certain retiree health benefits. The terms of the guarantees are generally one year but are renewable annually as required. These letters are primarily backed by the Company’s revolving credit facility. The maximum payments that the Company could be required to make under its guarantees at September 30, 2017 were $8.4 million.
Note 10 – Income Taxes
The Company’s effective tax rate for the third quarter of 2017 was 27 percent compared with 30 percent for the same period last year. The items impacting the effective tax rate for the third quarter of 2017 were primarily attributable to reductions for the U.S. production activities deduction of $0.6 million, the effect of foreign tax rates lower than statutory tax rates of $1.6 million, and the tax benefit of equity compensation deductions of $0.5 million.
For the third quarter of 2016, the difference between the effective tax rate and the amount computed using the U.S. federal statutory rate was primarily attributable to reductions for the U.S. production activities deduction of $0.6 million, the effect of foreign tax rates lower than statutory rates of $1.0 million, and the tax benefit of equity compensation deductions of $0.8 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $0.6 million.
The Company’s effective tax rate for the first nine months of 2017 was 29 percent compared with 33 percent for the same period last year. The items impacting the effective tax rate for the first nine months of 2017 were primarily attributable to reductions for the U.S. production activities deduction of $2.4 million, the effect of foreign tax rates lower than statutory tax rates of $4.6 million, the tax benefit of equity compensation deductions of $2.2 million, and the impact of investments in unconsolidated affiliates of $0.9 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $1.7 million.
For the first nine months of 2016, the difference between the effective tax rate and the amount computed using the U.S. federal statutory tax rate was primarily attributable to reductions for the U.S. production activities deduction of $2.5 million, the effect of foreign tax rates lower than statutory rates of $3.5 million, and the tax benefit of equity compensation deductions of $0.8 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $2.3 million and the impact of investments in unconsolidated affiliates of $1.2 million.
The Company files a consolidated U.S. federal income tax return and numerous consolidated and separate-company income tax returns in many state, local, and foreign jurisdictions. The statute of limitations is open for the Company’s federal tax return and most state income tax returns for 2014 and all subsequent years and is open for certain state and foreign returns for earlier tax years due to ongoing audits and differing statute periods. While the Company believes that it is adequately reserved for possible
future audit adjustments, the final resolution of these examinations cannot be determined with certainty and could result in final settlements that differ from current estimates.
Note 11 – Accumulated Other Comprehensive Income
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 Nine Months Ended September 30, 2017 |
(In thousands) | | Cumulative Translation Adjustment | | Unrealized (Loss) Gain on Derivatives | | Pension/OPEB Liability Adjustment | | Unrealized Gain (Loss) on Equity Securities | | Attributable to Unconsol. Affiliates | | Total |
| | | | | | | | | | | | |
Balance as of December 31, 2016 | | $ | (49,965 | ) | | $ | (300 | ) | | $ | (23,046 | ) | | 380 |
| | $ | 5,975 |
| | $ | (66,956 | ) |
| | | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | | 18,209 |
| | (1,175 | ) | | (1,309 | ) | | (1 | ) | | (1,086 | ) | | 14,638 |
|
Amounts reclassified from AOCI | | (3,777 | ) | | 1,360 |
| | 737 |
| | (379 | ) | | — |
| | (2,059 | ) |
| | | | | | | | | | | | |
Net current-period other comprehensive income (loss) | | 14,432 |
| | 185 |
| | (572 | ) | | (380 | ) | | (1,086 | ) | | 12,579 |
|
| | | | | | | | | | | | |
Balance as of September 30, 2017 | | $ | (35,533 | ) | | $ | (115 | ) | | $ | (23,618 | ) | | — |
| | $ | 4,889 |
| | $ | (54,377 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended October 1, 2016 |
(In thousands) | | Cumulative Translation Adjustment | | Unrealized (Loss) Gain on Derivatives | | Pension/OPEB Liability Adjustment | | Unrealized Gain on Equity Securities | | Attributable to Unconsol. Affiliates | | Total |
| | | | | | | | | | | | |
Balance as of December 26, 2015 | | $ | (24,773 | ) | | $ | (2,009 | ) | | $ | (28,429 | ) | | 221 |
| | $ | — |
| | $ | (54,990 | ) |
| | | | | | | | | | | | |
Other comprehensive (loss) income before reclassifications | | (14,638 | ) | | 1,446 |
| | 2,258 |
| | 77 |
| | 6,550 |
| | (4,307 | ) |
Amounts reclassified from AOCI | | — |
| | (291 | ) | | 1,187 |
| | — |
| | — |
| | 896 |
|
| | | | | | | | | | | | |
Net current-period other comprehensive (loss) income | | (14,638 | ) | | 1,155 |
| | 3,445 |
| | 77 |
| | 6,550 |
| | (3,411 | ) |
| | | | | | | | | | | | |
Balance as of October 1, 2016 | | $ | (39,411 | ) | | $ | (854 | ) | | $ | (24,984 | ) | | 298 |
| | $ | 6,550 |
| | $ | (58,401 | ) |
Reclassification adjustments out of AOCI were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Amount reclassified from AOCI |
| | For the Quarter Ended | | For the Nine Months Ended | | |
( In thousands) | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | Affected line item |
| | | | | | | | | | |
Unrealized losses (gains) on derivatives: | | | | | | | | | | |
Commodity contracts | | $ | 223 |
| | $ | 848 |
| | $ | 1,247 |
| | $ | (1,023 | ) | | Cost of goods sold |
Interest rate swap | | 232 |
| | 91 |
| | 696 |
| | 291 |
| | Interest expense |
| | (69 | ) | | (67 | ) | | (583 | ) | | 441 |
| | Income tax (benefit) expense |
| | | | | | | | | | |
| | $ | 386 |
| | $ | 872 |
| | $ | 1,360 |
| | $ | (291 | ) | | Net of tax and noncontrolling interests |
| | | | | | | | | | |
Amortization of net loss and prior service cost on employee benefit plans | | $ | 301 |
| | $ | 527 |
| | $ | 902 |
| | $ | 1,581 |
| | Selling, general, and administrative expense |
| | (55 | ) | | (132 | ) | | (165 | ) | | (394 | ) | | Income tax benefit |
| | | | | | | | | | |
| | $ | 246 |
| | $ | 395 |
| | $ | 737 |
| | $ | 1,187 |
| | Net of tax and noncontrolling interests |
| | | | | | | | | | |
Sale of available-for-sale securities | | $ | — |
| | $ | — |
| | $ | (611 | ) | | $ | — |
| | Other income |
| | $ | — |
| | $ | — |
| | $ | 232 |
| | $ | — |
| | Income tax expense |
| | | | | | | | | | |
| | $ | — |
| | $ | — |
| | $ | (379 | ) | | $ | — |
| | Net of tax and noncontrolling interests |
| | | | | | | | | | |
Gain recognized upon sale of business | | $ | — |
| | $ | — |
| | $ | (3,777 | ) | | $ | — |
| | Selling, general, and administrative expense |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | Income tax expense |
| | | | | | | | | | |
| | $ | — |
| | $ | — |
| | $ | (3,777 | ) | | $ | — |
| | Net of tax and noncontrolling interests |
Note 12 – Noncontrolling Interests
|
| | | |
(In thousands) | Noncontrolling Interests |
| |
Balance as of December 31, 2016 | $ | 37,753 |
|
Sale of Mueller-Xingrong | (23,712 | ) |
Dividends paid to noncontrolling interests | (2,909 | ) |
Net income attributable to noncontrolling interests | 1,164 |
|
Other comprehensive income attributable to noncontrolling interests, net of tax: | |
Foreign currency translation | 838 |
|
| |
|
Balance as of September 30, 2017 | $ | 13,134 |
|
Note 13 – Recently Issued Accounting Standards
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires employers that sponsor defined benefit pension and/or other postretirement benefit plans to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period and other components of net periodic benefits cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income. The guidance is effective for the Company in interim and annual periods beginning in 2018. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance. The Company does not expect the adoption of the standard to have a material impact on its Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU eliminates step two from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The updated guidance requires a prospective adoption. Early adoption is permitted. The guidance is effective for the Company beginning in 2020. The Company is in the process of evaluating the effects of the provisions of the ASU on its Condensed Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU provides guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated guidance requires a prospective adoption. Early adoption is permitted. This update will be effective for the Company beginning in 2018. The Company does not expect the provisions of the ASU to have a material impact on its Condensed Consolidated Financial Statements.
In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The ASU provides correction or improvement to the guidance previously issued in ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under the ASU, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration that it expects to receive in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for the Company at the beginning of 2018. The standard permits the use of either the full retrospective or cumulative transition effect (modified retrospective) method. The Company currently expects to adopt the standard using the modified retrospective approach. The ASU requires revenue to be recognized over time (i.e., throughout the production process) rather than at a point in time (generally upon shipment to the customer) if performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. The Company is evaluating specific contract terms, primarily within the Industrial Metals and Climate segments, related to the production of customized products and payment rights to evaluate whether revenue from certain contracts will be recognized over time under the ASU. As part of the overall evaluation of the standard, the Company is assessing potential changes to its accounting policies, practices, and internal controls over financial reporting to support the standard.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires entities to show the changes in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance will be applied retrospectively and is effective for public business entities in interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of the standard to have a material impact on its Condensed Consolidated Financial Statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The ASU requires companies to account for the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. Companies will still be required to defer the income tax effects of intercompany inventory transactions in an exception to the income tax accounting guidance. The guidance is effective for public business entities in annual periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period. The Company is still evaluating the effects that the provisions of the ASU will have on its Condensed Consolidated Financial Statements.