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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 report ended July 1, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-6770
mlilogocoppera04.jpg
MUELLER INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware25-0790410
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
150 Schilling BoulevardSuite 100 
ColliervilleTennessee38017
(Address of principal executive offices)(Zip Code)
(901) 753-3200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of exchange on which registered
Common StockMLINYSE
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  
Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes      No  

The number of shares of the Registrant’s common stock outstanding as of July 21, 2023 was 56,778,790.



MUELLER INDUSTRIES, INC.

FORM 10-Q

For the Quarterly Period Ended July 1, 2023
As used in this report, the terms “Company,” “Mueller,” and “Registrant” mean Mueller Industries, Inc. and its consolidated subsidiaries taken as a whole, unless the context indicates otherwise.

INDEX
  Page Number
 
   
  
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
   
2


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

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

For the Quarter EndedFor the Six Months Ended
(In thousands, except per share data)July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Net sales$896,984 $1,150,042 $1,868,176 $2,160,044 
Cost of goods sold639,272 820,914 1,318,070 1,565,425 
Depreciation and amortization10,416 11,302 21,073 22,143 
Selling, general, and administrative expense56,062 48,956 108,693 96,412 
Gain on sale of assets   (5,507)
Gain on insurance settlement(19,466) (19,466) 
Operating income210,700 268,870 439,806 481,571 
Interest expense(135)(147)(278)(305)
Interest income7,732 103 13,967 263 
Unrealized gain on short-term investments20,820  20,820  
Other income, net1,841 2,100 4,077 2,720 
Income before income taxes240,958 270,926 478,392 484,249 
Income tax expense(62,122)(68,290)(123,479)(122,489)
Income (loss) from unconsolidated affiliates, net of foreign tax715 4,888 (269)5,012 
Consolidated net income179,551 207,524 354,644 366,772 
Net income attributable to noncontrolling interests(1,840)(972)(3,694)(1,904)
Net income attributable to Mueller Industries, Inc.$177,711 $206,552 $350,950 $364,868 
Weighted average shares for basic earnings per share55,660 55,787 55,677 55,943 
Effect of dilutive stock-based awards1,340 741 1,023 776 
Adjusted weighted average shares for diluted earnings per share
57,000 56,528 56,700 56,719 
Basic earnings per share$3.19 $3.70 $6.30 $6.52 
Diluted earnings per share$3.12 $3.65 $6.19 $6.43 
Dividends per share$0.30 $0.25 $0.60 $0.50 

See accompanying notes to condensed consolidated financial statements.

3


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

 For the Quarter EndedFor the Six Months Ended
(In thousands)July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Consolidated net income$179,551 $207,524 $354,644 $366,772 
Other comprehensive income (loss), net of tax:    
Foreign currency translation7,725 (17,120)17,976 (15,907)
Net change with respect to derivative instruments and hedging activities, net of tax of $775, $3,450, $503, and $2,846
(2,679)(11,886)(1,725)(9,795)
Net change in pension and postretirement obligation adjustments, net of tax of $1, $31, $12, and $(103)
9 (299)1 121 
Attributable to unconsolidated affiliates, net of tax of $(103), $(656), $(476), and $(1,280)
353 2,261 1,638 4,409 
Total other comprehensive income (loss), net5,408 (27,044)17,890 (21,172)
Consolidated comprehensive income184,959 180,480 372,534 345,600 
Comprehensive (income) loss attributable to noncontrolling interests(1,546)584 (3,658)(315)
Comprehensive income attributable to Mueller Industries, Inc.$183,413 $181,064 $368,876 $345,285 

See accompanying notes to condensed consolidated financial statements.




4


MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)July 1,
2023
December 31,
2022
Assets  
Current assets:  
Cash and cash equivalents
$771,317 $461,018 
Short-term investments127,051 217,863 
Accounts receivable, less allowance for doubtful accounts of $2,905 in 2023 and $2,687 in 2022
459,467 380,352 
Inventories
465,729 448,919 
Other current assets
28,172 26,501 
Total current assets1,851,736 1,534,653 
Property, plant, and equipment, net386,928 379,950 
Operating lease right-of-use assets31,164 22,892 
Goodwill, net158,769 157,588 
Intangible assets, net52,926 54,785 
Investments in unconsolidated affiliates73,412 72,364 
Other assets21,485 20,167 
Total assets$2,576,420 $2,242,399 
Liabilities  
Current liabilities:  
Current portion of debt
$670 $811 
Accounts payable
155,096 128,000 
Accrued wages and other employee costs
45,148 61,915 
Current portion of operating lease liabilities
6,951 4,942 
Other current liabilities
136,683 152,627 
Total current liabilities344,548 348,295 
Long-term debt, less current portion1,267 1,218 
Pension liabilities2,929 4,078 
Postretirement benefits other than pensions9,237 8,977 
Environmental reserves15,729 16,380 
Deferred income taxes18,821 16,258 
Noncurrent operating lease liabilities23,596 16,880 
Other noncurrent liabilities17,355 16,349 
Total liabilities433,482 428,435 
Equity  
Mueller Industries, Inc. stockholders' equity:  
Preferred stock - $1.00 par value; shares authorized 5,000,000; none outstanding
  
 Common stock - $.01 par value; shares authorized 100,000,000; issued 80,183,004; outstanding 56,777,485 in 2023 and 57,001,617 in 2022
802 802 
Additional paid-in capital309,705 297,270 
Retained earnings2,376,618 2,059,796 
Accumulated other comprehensive loss(46,249)(64,175)
Treasury common stock, at cost(524,646)(502,779)
Total Mueller Industries, Inc. stockholders' equity2,116,230 1,790,914 
Noncontrolling interests26,708 23,050 
Total equity2,142,938 1,813,964 
Commitments and contingencies  
Total liabilities and equity$2,576,420 $2,242,399 
See accompanying notes to condensed consolidated financial statements.
5


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

 For the Six Months Ended
(In thousands)July 1, 2023June 25, 2022
Cash flows from operating activities  
Consolidated net income$354,644 $366,772 
Reconciliation of consolidated net income to net cash provided by operating activities:  
Depreciation and amortization21,252 22,322 
Stock-based compensation expense12,459 5,171 
Provision for doubtful accounts receivable(80)151 
Loss (income) from unconsolidated affiliates269 (5,012)
Insurance proceeds - noncapital related9,854  
Gain on disposals of properties(141)(6,800)
Unrealized gain on short-term investments(20,820) 
Gain on insurance settlement(19,466) 
Deferred income tax expense (benefit)2,406 (373)
Changes in assets and liabilities:  
Receivables(77,701)(146,438)
Inventories(12,149)(49,354)
Other assets(5,571)(6,095)
Current liabilities(14,460)28,906 
Other liabilities(976)(4,283)
Other, net1,310 (433)
Net cash provided by operating activities250,830 204,534 
Cash flows from investing activities  
Capital expenditures(29,221)(23,248)
Insurance proceeds - capital related24,646  
Purchase of short-term investments(106,231) 
Proceeds from the maturity of short-term investments217,863  
Proceeds from sales of assets142 7,561 
Dividends from unconsolidated affiliates797 1,609 
Net cash provided by (used in) investing activities107,996 (14,078)












6


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

For the Six Months Ended
(In thousands)July 1, 2023June 25, 2022
Cash flows from financing activities
Dividends paid to stockholders of Mueller Industries, Inc.(33,402)(27,968)
Repurchase of common stock(19,303)(33,469)
Repayments of debt(130)(111)
(Repayment) issuance of debt by consolidated joint ventures, net(143)360 
Net cash used to settle stock-based awards(2,588)(95)
Net cash used in financing activities(55,566)(61,283)
Effect of exchange rate changes on cash4,825 (2,234)
Increase in cash, cash equivalents, and restricted cash308,085 126,939 
Cash, cash equivalents, and restricted cash at the beginning of the period465,296 90,376 
Cash, cash equivalents, and restricted cash at the end of the period$773,381 $217,315 

See accompanying notes to condensed consolidated financial statements.
7


MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

For the Quarter EndedFor the Six Months Ended
(In thousands)July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Common stock:    
Balance at beginning of period$802 $802 $802 $802 
Balance at end of period$802 $802 $802 $802 
Additional paid-in capital:    
Balance at beginning of period$303,133 $288,802 $297,270 $286,208 
Acquisition (issuance) of shares under incentive stock option plans208 272 434 293 
Stock-based compensation expense6,822 2,598 12,459 5,171 
Issuance of restricted stock(458)(444)(458)(444)
Balance at end of period$309,705 $291,228 $309,705 $291,228 
Retained earnings:     
Balance at beginning of period$2,215,939 $1,602,496 $2,059,796 $1,458,489 
Net income attributable to Mueller Industries, Inc.177,711 206,552 350,950 364,868 
Dividends paid or payable to stockholders of Mueller Industries, Inc.(17,032)(14,237)(34,128)(28,546)
Balance at end of period$2,376,618 $1,794,811 $2,376,618 $1,794,811 
Accumulated other comprehensive loss:    
Balance at beginning of period$(51,951)$(47,442)$(64,175)$(53,347)
Total other comprehensive income (loss) attributable to Mueller Industries, Inc.5,702 (25,488)17,926 (19,583)
Balance at end of period$(46,249)$(72,930)$(46,249)$(72,930)
8


MUELLER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

For the Quarter EndedFor the Six Months Ended
(In thousands)July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Treasury stock:    
Balance at beginning of period$(505,616)$(474,258)$(502,779)$(470,034)
(Acquisition) issuance of shares under incentive stock option plans(185)(137)(3,022)(389)
Repurchase of common stock(19,303)(29,497)(19,303)(33,469)
Issuance of restricted stock458 444 458 444 
Balance at end of period$(524,646)$(503,448)$(524,646)$(503,448)
Noncontrolling interests:    
Balance at beginning of period$25,162 $35,744 $23,050 $34,845 
Net income attributable to noncontrolling interests1,840 972 3,694 1,904 
Foreign currency translation(294)(1,556)(36)(1,589)
Balance at end of period$26,708 $35,160 $26,708 $35,160 

See accompanying notes to condensed consolidated financial statements.

9


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

General

Certain information and note 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. 

Note 1 – Recent Accounting Standards

Adopted

In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-08, Business Combinations (Topic 805): An Amendment of the FASB Accounting Standards Codification. The new guidance was issued to improve accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the (i) recognition of an acquired contract liability, and (ii) payment terms and their effect on subsequent revenue recognized by the acquirer. The ASU is effective for fiscal years beginning after December 15, 2022 for public entities. The updated guidance requires prospective adoption, and early adoption is permitted. The Company adopted the ASU during the first quarter of 2023. The adoption of the ASU did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

Issued

In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The new guidance was issued to clarify existing guidance measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduce new disclosure requirements for applicable equity securities. The ASU is effective for fiscal years beginning after December 15, 2023 for public entities. The updated guidance requires prospective adoption, and early adoption is permitted. The Company does not expect the adoption of the ASU to have a material impact on its Condensed Consolidated Financial Statements.

Note 2 – Earnings per Common Share

Basic per share amounts have been computed based on the average number of common shares outstanding.  Diluted per share amounts reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options and vesting of restricted stock awards, computed using the treasury stock method. There were no stock-based awards excluded from the computation of diluted earnings per share for the quarter ended July 1, 2023 because they were antidilutive. Approximately eight thousand stock-based awards were excluded from the computation of diluted earnings per share for the quarter ended June 25, 2022 because they were antidilutive.

Note 3 – Segment Information

Each of the Company’s reportable segments is composed of certain operating segments that are aggregated primarily by the nature of products offered as follows:

Piping Systems

Piping Systems is composed of the following operating segments: Domestic Piping Systems Group, Great Lakes Copper, Heatlink Group, European Operations, Trading Group, Jungwoo-Mueller (the Company’s South Korean joint venture), and Mueller Middle East (the Company’s Bahraini joint venture).  The Domestic Piping Systems Group manufactures and distributes copper tube, fittings, and line sets.  These products are manufactured in the U.S., sold in the U.S., and exported to markets worldwide.  Outside the U.S., Great Lakes Copper manufactures copper tube and line sets in Canada and sells the
10


products primarily in the U.S. and Canada. Heatlink Group produces a complete line of products for PEX plumbing and radiant systems in Canada and sells these products in Canada and the U.S. European Operations manufactures copper tube in the U.K. which is sold primarily in Europe.  The Trading Group manufactures pipe nipples 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.  Mueller Middle East manufactures copper tube and serves markets in the Middle East and Northern Africa. The Piping Systems segment’s products are sold primarily to plumbing, refrigeration, and air-conditioning wholesalers, hardware wholesalers and co-ops, building product retailers, and air-conditioning original equipment manufacturers (OEMs).

Industrial Metals

Industrial Metals is composed of the following operating segments: Brass Rod, Impacts & Micro Gauge, Brass Value-Added Products, and Precision Tube.  These businesses manufacture brass rod, impact extrusions, and forgings, specialty copper, copper alloy, and aluminum tube, as well as a wide variety of end products including plumbing brass, automotive components, valves, fittings, and gas assemblies.  These products are manufactured in the U.S. and sold primarily to OEMs in the U.S., many of which are in the industrial, transportation, construction, heating, ventilation, and air-conditioning, plumbing, refrigeration, and energy markets.

Climate

Climate is composed of the following operating segments: Refrigeration Products, Westermeyer, Turbotec, Flex Duct, and Linesets, Inc. The segment manufactures and sells refrigeration valves and fittings, high pressure components, coaxial heat exchangers, insulated HVAC flexible duct systems, and line sets primarily for the heating, ventilation, air-conditioning, and refrigeration markets in the U.S.

Summarized segment information is as follows:

 For the Quarter Ended July 1, 2023
(In thousands)Piping SystemsIndustrial MetalsClimateCorporate and EliminationsTotal
Net sales$638,005 $146,266 $123,954 $(11,241)$896,984 
Cost of goods sold452,866 123,097 77,064 (13,755)639,272 
Depreciation and amortization5,252 1,804 2,202 1,158 10,416 
Selling, general, and administrative expense28,745 3,394 7,087 16,836 56,062 
Gain on insurance settlement  (19,466) (19,466)
Operating income151,142 17,971 57,067 (15,480)210,700 
Interest expense    (135)
Interest income7,732 
Unrealized gain on short-term investments20,820 
Other income, net    1,841 
Income before income taxes    $240,958 

11


Segment information (continued):

 For the Quarter Ended June 25, 2022
(In thousands)Piping SystemsIndustrial MetalsClimateCorporate and EliminationsTotal
Net sales$824,807 $179,175 $164,484 $(18,424)$1,150,042 
Cost of goods sold585,090 150,940 103,110 (18,226)820,914 
Depreciation and amortization5,930 1,846 2,348 1,178 11,302 
Selling, general, and administrative expense22,208 2,221 8,279 16,248 48,956 
Operating income211,579 24,168 50,747 (17,624)268,870 
Interest expense    (147)
Interest income103 
Other income, net    2,100 
Income before income taxes    $270,926 

For the Six Months Ended July 1, 2023
(In thousands)Piping SystemsIndustrial MetalsClimateCorporate and EliminationsTotal
Net sales$1,300,484 $311,500 $276,908 $(20,716)$1,868,176 
Cost of goods sold920,476 256,267 165,876 (24,549)1,318,070 
Depreciation and amortization10,810 3,576 4,355 2,332 21,073 
Selling, general, and administrative expense54,202 6,471 15,088 32,932 108,693 
Gain on insurance settlement  (19,466) (19,466)
Operating income314,996 45,186 111,055 (31,431)439,806 
Interest expense(278)
Interest income13,967 
Unrealized gain on short-term investments20,820 
Other income, net4,077 
Income before income taxes$478,392 

12


Segment information (continued):

For the Six Months Ended June 25, 2022
( In thousands)Piping SystemsIndustrial MetalsClimateCorporate and EliminationsTotal
Net sales$1,528,237 $353,487 $305,106 $(26,786)$2,160,044 
Cost of goods sold1,099,277 296,650 197,067 (27,569)1,565,425 
Depreciation and amortization11,330 3,790 4,700 2,323 22,143 
Selling, general, and administrative expense45,563 5,620 15,892 29,337 96,412 
Gain on sale of assets   (5,507)(5,507)
Operating income372,067 47,427 87,447 (25,370)481,571 
Interest expense(305)
Interest income263 
Other income, net2,720 
Income before income taxes$484,249 

The following table presents total assets attributable to each segment:

(In thousands)July 1,
2023
December 31, 2022
Segment assets:
Piping Systems$1,218,810 $1,088,940 
Industrial Metals165,534 160,702 
Climate263,666 279,940 
General Corporate928,410 712,817 
$2,576,420 $2,242,399 

13


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

For the Quarter Ended July 1, 2023
(In thousands)Piping SystemsIndustrial MetalsClimateTotal
Tube and fittings$518,712 $ $ $518,712 
Brass rod and forgings 113,563  113,563 
OEM components, tube & assemblies 21,073 33,007 54,080 
Valves and plumbing specialties119,293   119,293 
Flex duct and other HVAC components  90,947 90,947 
Other 11,630  11,630 
 638,005 146,266 123,954 908,225 
Intersegment sales(11,241)
Net sales$896,984 

For the Quarter Ended June 25, 2022
(In thousands)Piping SystemsIndustrial MetalsClimateTotal
Tube and fittings$674,579 $ $ $674,579 
Brass rod and forgings 142,788  142,788 
OEM components, tube & assemblies 20,254 32,526 52,780 
Valves and plumbing specialties150,228   150,228 
Flex duct and other HVAC components  131,958 131,958 
Other 16,133  16,133 
 824,807 179,175 164,484 1,168,466 
Intersegment sales(18,424)
Net sales$1,150,042 
14


Disaggregation of revenue from contracts with customers (continued):

For the Six Months Ended July 1, 2023
(In thousands)Piping SystemsIndustrial MetalsClimateTotal
Tube and fittings$1,062,940 $ $ $1,062,940 
Brass rod and forgings 243,903  243,903 
OEM components, tube & assemblies 43,582 66,409 109,991 
Valves and plumbing specialties237,544   237,544 
Flex duct and other HVAC components  210,499 210,499 
Other 24,015  24,015 
 1,300,484 311,500 276,908 1,888,892 
Intersegment sales(20,716)
Net sales$1,868,176 

For the Six Months Ended June 25, 2022
(In thousands)Piping SystemsIndustrial MetalsClimateTotal
Tube and fittings1,246,089   1,246,089 
Brass rod and forgings 279,321  279,321 
OEM components, tube & assemblies 40,350 61,618 101,968 
Valves and plumbing specialties282,148   282,148 
Flex duct and other HVAC components  243,488 243,488 
Other 33,816  33,816 
1,528,237 353,487 305,106 2,186,830 
Intersegment sales(26,786)
Net sales$2,160,044 

Note 4 – Cash, Cash Equivalents, and Restricted Cash

(In thousands)July 1,
2023
December 31,
2022
Cash & cash equivalents$771,317 $461,018 
Restricted cash included within other current assets1,962 4,176 
Restricted cash included within other assets102 102 
Total cash, cash equivalents, and restricted cash$773,381 $465,296 

Amounts included in restricted cash relate to required deposits in brokerage accounts that facilitate the Company’s hedging activities as well as imprest funds for the Company’s self-insured workers’ compensation program.

15


Note 5 – Inventories

(In thousands)July 1,
2023
December 31,
2022
Raw materials and supplies$158,302 $133,189 
Work-in-process79,601 64,177 
Finished goods239,635 265,842 
Valuation reserves(11,809)(14,289)
Inventories$465,729 $448,919 

Note 6 – Financial Instruments

Short-Term Investments

The fair value of short-term investments at July 1, 2023, consisting of marketable securities, approximates the carrying value on that date. These marketable securities are stated at fair value and classified as level 1 within the fair value hierarchy. This classification is defined as a fair value determined using observable inputs that reflect quoted prices in active markets for identical assets.

The fair value of short-term investments at December 31, 2022, consisting of U.S. treasury bills with maturities exceeding three months at the time of purchase, approximates the carrying value on that date. These treasury bills are stated at fair value and are classified as trading securities. The fair value of treasury bills is classified as level 1 within the fair value hierarchy. This classification is defined as a fair value determined using observable inputs that reflect quoted prices in active markets for identical assets.

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 values.  On the date the derivative contract is entered into, it is either a) designated as a hedge of a forecasted transaction or the variability of cash flow to be paid (cash flow 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 undesignated derivatives executed as economic hedges 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
16


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 1, 2023, the Company held open futures contracts to purchase approximately $24.7 million of copper over the next nine months related to fixed price sales orders.  The fair value of those futures contracts was a $0.5 million 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 July 1, 2023, this amount was approximately $0.4 million 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 July 1, 2023, the Company held $0.5 million open futures contracts to sell copper over the next 11 months related to copper inventory.  The fair value of those futures contracts was a $3 thousand net gain position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).

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 DerivativesLiability Derivatives
   Fair Value Fair Value
(In thousands)Balance Sheet LocationJuly 1,
2023
December 31,
2022
Balance Sheet LocationJuly 1,
2023
December 31,
2022
      
Commodity contracts - gains
Other current assets
$74 $3,746 
Other current liabilities
$305 $ 
Commodity contracts - losses
Other current assets
(9)(1,483)
Other current liabilities
(814) 
Total derivatives (1)
 $65 $2,263  $(509)$ 
(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 EndedFor the Six Months Ended
(In thousands)LocationJuly 1, 2023June 25, 2022July 1, 2023June 25, 2022
Undesignated derivatives: 
Gain (loss) on commodity contracts (nonqualifying)Cost of goods sold427 12,457 (2,057)15,882 

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

 For the Quarter Ended July 1, 2023
(In thousands)(Loss) Gain Recognized in AOCI (Effective Portion), Net of TaxClassification Gains (Losses)Gain Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:   
Commodity contracts$(1,961)Cost of goods sold$(742)
Other24 Other 
Total$(1,937)Total$(742)
17


Amounts recognized in and reclassified from AOCI (continued):

 For the Quarter Ended June 25, 2022
(In thousands)(Loss) Gain Recognized in AOCI (Effective Portion), Net of TaxClassification Gains (Losses)Gain Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:   
Commodity contracts$(11,107)Cost of goods sold$(792)
Other13 Other 
Total$(11,094)Total$(792)

 For the Six Months Ended July 1, 2023
(In thousands)Gain (Loss) Recognized in AOCI (Effective Portion), Net of TaxClassification Gains (Losses)Gain Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:   
Commodity contracts$1,008 Cost of goods sold$(2,731)
Other(2)Other 
Total$1,006 Total$(2,731)

 For the Six Months Ended June 25, 2022
(In thousands)(Loss) Gain Recognized in AOCI (Effective Portion), Net of TaxClassification Gains (Losses)Gain Reclassified from AOCI (Effective Portion), Net of Tax
Cash flow hedges:   
Commodity contracts$(7,326)Cost of goods sold$(2,514)
Other45 Other 
Total$(7,281)Total$(2,514)

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 1, 2023 and December 31, 2022, the Company had recorded restricted cash in other current assets of $1.9 million and $4.0 million, respectively, as collateral related to open derivative contracts under the master netting arrangements.

Long-Term Debt

The fair value of long-term debt at July 1, 2023 approximates the carrying value on that date.  The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities.  The fair
18


value of long-term debt is classified as level 2 within the fair value hierarchy.  This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.  

Note 7 – Investments in Unconsolidated Affiliates

Tecumseh

The Company owns a 50 percent interest in an unconsolidated affiliate that acquired Tecumseh Products Company LLC (Tecumseh) and an entity that provides financing to Tecumseh.  This investment is 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 entity.  Under the equity method of accounting, this investment is stated at initial cost and is 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 investee’s net income or loss, net of foreign taxes, one quarter in arrears as income (loss) from unconsolidated affiliates, net of foreign tax, in the Condensed Consolidated Statements of Income and its proportionate share of the investee’s other comprehensive income (loss), net of income taxes, in the Condensed Consolidated Statements of Comprehensive Income and the Condensed Consolidated Statements of Changes in Equity. The U.S. tax effect of the Company’s proportionate share of Tecumseh’s income or loss is recorded in income tax expense in the Condensed Consolidated Statements of Income. In general, the equity investment in unconsolidated affiliates is equal to the current equity investment plus the investee’s net accumulated losses. 

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

(In thousands)July 1,
2023
December 31,
2022
Current assets$230,018 $248,808 
Noncurrent assets94,763 77,395 
Current liabilities182,462 190,746 
Noncurrent liabilities51,391 43,003 

 For the Quarter EndedFor the Six Months Ended
(In thousands)July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Net sales$111,741 $126,337 $225,159 $252,304 
Gross profit 22,822 26,257 42,638 45,032 
Net (loss) income(1,244)7,375 (5,961)6,169 

The Company’s income from unconsolidated affiliates, net of foreign tax, for the quarter ended July 1, 2023 included net losses of $0.6 million for Tecumseh. The Company’s loss from unconsolidated affiliates, net of foreign tax, for the six months ended July 1, 2023 included net losses of $3.0 million for Tecumseh.

The Company’s income from unconsolidated affiliates, net of foreign tax, for the quarter and six months ended June 25, 2022 included net income of $3.7 million and $3.1 million, respectively, for Tecumseh.

Retail Distribution

The Company owns a 17 percent noncontrolling equity interest in a limited liability company in the retail distribution business. This investment is recorded using the equity method of accounting. The Company records its proportionate share of the investee’s net income or loss one month in arrears as income (loss) from unconsolidated affiliates in the Condensed Consolidated Statements of Income. The Company’s proportionate share of the investee’s other comprehensive income (loss), net of income taxes, is recorded in the Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Statement of Changes in Equity.

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The Company’s income from unconsolidated affiliates, net of foreign tax, for the quarter ended July 1, 2023 included net income of $1.3 million for the retail distribution business. The Company’s loss from unconsolidated affiliates, net of foreign tax, for the six months ended July 1, 2023 included net income of $2.7 million for the retail distribution business.

The Company’s income from unconsolidated affiliates, net of foreign tax, for the quarter and six months ended June 25, 2022 included net income of $1.2 million and $1.9 million, respectively, for the retail distribution business.

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 EndedFor the Six Months Ended
(In thousands) July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Pension benefits:    
Interest cost$595 $393 $1,189 $787 
Expected return on plan assets(842)(967)(1,683)(1,934)
Amortization of net loss 243  487 
Net periodic benefit income$(247)$(331)$(494)$(660)
Other benefits:   
Service cost$50 $72 $101 $144 
Interest cost128 103 256 206 
Amortization of prior service cost (credit) (79)(1)(197)
Amortization of net gain(99)(60)(196)(118)
Curtailment gain