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.
Note 1 – Recent Accounting Standards
Adopted
In January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01, Reference Rate Reform (Topic 848): An Amendment of the FASB Accounting Standards Codification. The new guidance was issued in response to concerns about structural risks of interbank offered rates, and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR). Regulators in numerous jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The Company adopted the ASU during the first quarter of 2022. 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.
In October 2021, the FASB issued 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 5, 2022 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 September 24, 2022 because they were antidilutive. Approximately thirty thousand stock-based awards were excluded from the computation of diluted earnings per share for the quarter ended September 25, 2021 because they were antidilutive.
Note 3 – Acquisitions and Dispositions
Acquisitions
Mueller Middle East
On December 7, 2021 the Company entered into an agreement providing for the purchase of an additional 15 percent equity interest in Mueller Middle East for a total of 55 percent, for approximately $20.1 million. The total purchase price consisted of $15.8 million in cash paid at closing (net of cash acquired), a gain recognized on the settlement of preexisting relationships of $2.6 million, a contingent consideration arrangement of $1.0 million, and the fair value of the Company’s existing investment in the joint venture of $0.7 million. Mueller Middle East, which manufactures copper tube, is headquartered in Bahrain. This business complements the company’s existing copper tube business in the Piping Systems segment. Prior to entering into this agreement, the Company was the technical and marketing lead with a 40 percent ownership in a joint venture with Cayan Ventures and Bahrain Mumtalakat Holding Company and accounted for this investment under the equity method of accounting. The Company began consolidating this business for financial reporting purposes in December 2021. Mueller Middle East manufactures and sells copper coils to certain Mueller subsidiaries.
The provisional fair value of the assets acquired totaled $44.8 million, consisting primarily of property, plant, and equipment of $26.7 million, accounts receivable of $10.7 million, inventories of $4.7 million, and other assets of $2.7 million. The provisional fair value of the liabilities assumed totaled $16.2 million, consisting primarily of other liabilities of $11.6 million and accounts payable of $4.6 million. Of the remaining purchase price, $1.3 million was allocated to non-deductible goodwill and intangible assets. The noncontrolling interest in Mueller Middle East is $9.8 million. The purchase price allocation is provisional as of September 24, 2022 and subject to change upon completion of the final valuation of the long-lived assets and noncontrolling interest during the measurement period. Changes to the purchase price allocation from the amounts presented in the Company’s Q2 2022 Quarterly Report on Form 10-Q included the valuation of the intangible assets and noncontrolling interest. These changes resulted in a net decrease to goodwill of $3.2 million.
H&C Flex
On December 20, 2020, the Company entered into an asset purchase agreement with Hart & Cooley LLC. The transaction closed on January 29, 2021, whereby the Company purchased the Hart & Cooley flexible duct business, which included inventory, manufacturing equipment, and related assets for approximately $15.3 million. The total purchase price consisted of $14.0 million in cash paid at closing and a contingent consideration arrangement of $1.3 million. The Company treated this as a business combination. The acquired business, H&C Flex, is a manufacturer and distributor of insulated HVAC flexible duct systems. It is reported within and complements the Company’s existing businesses in the Climate segment.
The fair value of tangible assets acquired totaled $15.3 million, consisting primarily of property, plant, and equipment of $10.8 million and inventories of $4.5 million. The valuation of the business has been finalized. There were no material changes to the purchase price allocation from the amounts presented in the Company’s 2021 Annual Report on Form 10-K.
Dispositions
Copper Bar
On October 25, 2021, the Company sold its Copper Bar business for approximately $10.1 million. This business manufactured copper bar products used primarily by original equipment manufacturers (OEMs) in the U.S. and was included in the Industrial Metals segment. The carrying value of the assets disposed totaled $3.6 million, consisting primarily of inventories and long-lived assets. Copper Bar reported net sales of $14.8 million and operating income of $0.1 million in the third quarter of 2021 and net sales of $39.6 million and an operating loss of $0.1 million in the first nine months of 2021.
Die-Mold
On September 2, 2021, the Company entered into a contribution agreement with a limited liability company in the retail distribution business, pursuant to which the Company exchanged the outstanding common stock of Die-Mold for a 17 percent equity interest in the limited liability company. Die-Mold manufactures PEX and other plumbing-related fittings and plastic injection tooling in Canada and sells these products in Canada and the U.S. and was included in the Piping Systems Segment. Die-Mold reported net sales of $3.0 million and operating income of $0.8 million in the third quarter of 2021 and net sales of $10.9 million and operating income of $2.2 million in the first nine months of 2021. As a result of the transaction, the Company recognized a gain of $4.7 million in the third quarter of 2021 based on the excess of the fair value of the consideration received (the 17 percent equity interest) over the carrying value of Die-Mold. The Company utilized a market
comparable companies approach using an EBITDA multiple to determine the fair value of the consideration received of $22.8 million, which is recognized within the Investments in unconsolidated affiliates line of the Condensed Consolidated Balance Sheet. The excess of the fair value of the deconsolidated subsidiary over its carrying value resulted in the gain.
Fabricated Tube Products and Shoals Tubular, Inc.
On July 28, 2021, the Company entered into a purchase agreement with J.W. Harris Co., Inc. and Lincoln Electric Holdings, Inc., pursuant to which the Company sold the assets of Fabricated Tube Products (FTP) and all of the outstanding stock of Shoals Tubular, Inc. (STI) for approximately $75.7 million. These businesses manufacture and fabricate valves and assemblies, brazed manifolds, headers, and distributor assemblies used primarily by manufacturers of residential heating and air conditioning units in the U.S. and were included in the Climate segment. They reported combined net sales of $5.1 million and operating income of $0.5 million in the third quarter of 2021 and net sales of $37.0 million and operating income of $5.4 million in the first nine months of 2021. The carrying value of the assets disposed totaled $32.7 million, consisting primarily of accounts receivable, inventories, and long-lived assets. The carrying value of the liabilities disposed totaled $3.6 million, consisting primarily of accounts payable. As a result of the transaction, the Company recognized a pre-tax gain of $46.6 million during the third quarter of 2021 on the sale of these businesses 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, 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 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 OEMs.
Beginning in fiscal year 2022, the results of Precision Tube are included in the Industrial Metals segment prospectively as the impact to prior periods was not material. The business was previously reported in the Piping Systems segment. This change was made to reflect the Company’s internal management reporting structure.
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. These domestic businesses manufacture 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 September 24, 2022 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Corporate and Eliminations | | Total |
| | | | | | | | | | |
Net sales | | $ | 634,808 | | | $ | 144,880 | | | $ | 174,650 | | | $ | (9,508) | | | $ | 944,830 | |
| | | | | | | | | | |
Cost of goods sold | | 440,216 | | | 128,152 | | | 114,850 | | | (4,581) | | | 678,637 | |
Depreciation and amortization | | 5,516 | | | 1,846 | | | 2,289 | | | 1,199 | | | 10,850 | |
Selling, general, and administrative expense | | 21,137 | | | 2,805 | | | 10,049 | | | 16,187 | | | 50,178 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating income | | 167,939 | | | 12,077 | | | 47,462 | | | (22,313) | | | 205,165 | |
| | | | | | | | | | |
Interest expense | | | | | | | | | | (361) | |
| | | | | | | | | | |
Other income (expense), net | | | | | | | | | | 1,030 | |
| | | | | | | | | | |
Income before income taxes | | | | | | | | | | $ | 205,834 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended September 25, 2021 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Corporate and Eliminations | | Total |
| | | | | | | | | | |
Net sales | | $ | 688,200 | | | $ | 182,245 | | | $ | 122,252 | | | $ | (10,449) | | | $ | 982,248 | |
| | | | | | | | | | |
Cost of goods sold | | 506,703 | | | 158,822 | | | 89,175 | | | (10,435) | | | 744,265 | |
Depreciation and amortization | | 5,547 | | | 1,661 | | | 2,484 | | | 1,176 | | | 10,868 | |
Selling, general, and administrative expense | | 23,751 | | | 2,710 | | | 9,521 | | | 12,542 | | | 48,524 | |
| | | | | | | | | | |
Gain on sale of businesses | | — | | | — | | | — | | | (54,759) | | | (54,759) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating income | | 152,199 | | | 19,052 | | | 21,072 | | | 41,027 | | | 233,350 | |
| | | | | | | | | | |
Interest expense | | | | | | | | | | (1,116) | |
| | | | | | | | | | |
Other loss, net | | | | | | | | | | (2,548) | |
| | | | | | | | | | |
Income before income taxes | | | | | | | | | | $ | 229,686 | |
Segment information (continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 24, 2022 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Corporate and Eliminations | | Total |
| | | | | | | | | | |
Net sales | | $ | 2,163,045 | | | $ | 498,367 | | | $ | 479,756 | | | $ | (36,294) | | | $ | 3,104,874 | |
| | | | | | | | | | |
Cost of goods sold | | 1,539,493 | | | 424,802 | | | 311,917 | | | (32,150) | | | 2,244,062 | |
Depreciation and amortization | | 16,846 | | | 5,636 | | | 6,989 | | | 3,522 | | | 32,993 | |
Selling, general, and administrative expense | | 66,700 | | | 8,425 | | | 25,941 | | | 45,524 | | | 146,590 | |
Gain on sale of assets | | | | — | | | — | | | (5,507) | | | (5,507) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating income | | 540,006 | | | 59,504 | | | 134,909 | | | (47,683) | | | 686,736 | |
| | | | | | | | | | |
Interest expense | | | | | | | | | | (666) | |
| | | | | | | | | | |
Other income, net | | | | | | | | | | 4,013 | |
| | | | | | | | | | |
Income before income taxes | | | | | | | | | | $ | 690,083 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 25, 2021 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Corporate and Eliminations | | Total |
| | | | | | | | | | |
Net sales | | $ | 1,947,564 | | | $ | 527,137 | | | $ | 364,986 | | | $ | (26,699) | | | $ | 2,812,988 | |
| | | | | | | | | | |
Cost of goods sold | | 1,515,335 | | | 455,112 | | | 269,560 | | | (27,612) | | | 2,212,395 | |
Depreciation and amortization | | 17,272 | | | 5,098 | | | 7,866 | | | 3,521 | | | 33,757 | |
Selling, general, and administrative expense | | 71,152 | | | 8,529 | | | 23,781 | | | 34,429 | | | 137,891 | |
| | | | | | | | | | |
Gain on sale of businesses | | — | | | — | | | — | | | (54,759) | | | (54,759) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Operating income | | 343,805 | | | 58,398 | | | 63,779 | | | 17,722 | | | 483,704 | |
| | | | | | | | | | |
Interest expense | | | | | | | | | | (7,451) | |
Redemption premium | | | | | | | | | | (5,674) | |
Other loss, net | | | | | | | | | | (1,288) | |
| | | | | | | | | | |
Income before income taxes | | | | | | | | | | $ | 469,291 | |
The following table presents total assets attributable to each segment:
| | | | | | | | | | | | | | |
(In thousands) | | September 24, 2022 | | December 25, 2021 |
| | | | |
Segment assets: | | | | |
Piping Systems | | $ | 1,169,693 | | | $ | 1,160,272 | |
Industrial Metals | | 169,385 | | | 173,290 | |
Climate | | 287,387 | | | 250,107 | |
General Corporate | | 483,286 | | | 145,267 | |
| | | | |
| | $ | 2,109,751 | | | $ | 1,728,936 | |
The following tables represent a disaggregation of revenue from contracts with customers, along with the reportable segment for each category:
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| | For the Quarter Ended September 24, 2022 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Total |
| | | | | | | | |
Tube and fittings | | $ | 520,842 | | | $ | — | | | $ | — | | | $ | 520,842 | |
Brass rod and forgings | | — | | | 114,956 | | | — | | | 114,956 | |
OEM components, tube & assemblies | | — | | | 16,819 | | | 30,180 | | | 46,999 | |
Valves and plumbing specialties | | 113,966 | | | — | | | — | | | 113,966 | |
Flex duct and other HVAC components | | — | | | — | | | 144,470 | | | 144,470 | |
Other | | — | | | 13,105 | | | — | | | 13,105 | |
| | | | | | | | |
| | 634,808 | | | 144,880 | | | 174,650 | | | 954,338 | |
| | | | | | | | |
Intersegment sales | | | | | | | | (9,508) | |
| | | | | | | | |
Net sales | | | | | | | | $ | 944,830 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended September 25, 2021 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | Total |
| | | | | | | | |
Tube and fittings | | $ | 555,161 | | | $ | — | | | $ | — | | | $ | 555,161 | |
Brass rod and forgings | | — | | | 143,788 | | | — | | | 143,788 | |
OEM components, tube & assemblies | | 6,943 | | | 12,076 | | | 29,627 | | | 48,646 | |
Valves and plumbing specialties | | 126,096 | | | — | | | — | | | 126,096 | |
Flex duct and other HVAC components | | — | | | — | | | 92,625 | | | 92,625 | |
Other | | — | | | 26,381 | | | — | | | 26,381 | |
| | | | | | | | |
| | 688,200 | | | 182,245 | | | 122,252 | | | 992,697 | |
| | | | | | | | |
Intersegment sales | | | | | | | | (10,449) | |
| | | | | | | | |
Net sales | | | | | | | | $ | 982,248 | |
Disaggregation of revenue from contracts with customers (continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 24, 2022 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | | | Total |
| | | | | | | | | | |
Tube and fittings | | $ | 1,766,931 | | | $ | — | | | $ | — | | | | | $ | 1,766,931 | |
Brass rod and forgings | | — | | | 394,277 | | | — | | | | | 394,277 | |
OEM components, tube & assemblies | | — | | | 57,169 | | | 91,798 | | | | | 148,967 | |
Valves and plumbing specialties | | 396,114 | | | — | | | — | | | | | 396,114 | |
Flex duct and other HVAC components | | — | | | — | | | 387,958 | | | | | 387,958 | |
Other | | — | | | 46,921 | | | — | | | | | 46,921 | |
| | | | | | | | | | |
| | 2,163,045 | | | 498,367 | | | 479,756 | | | | | 3,141,168 | |
| | | | | | | | | | |
Intersegment sales | | | | | | | | | | (36,294) | |
| | | | | | | | | | |
Net sales | | | | | | | | | | $ | 3,104,874 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 25, 2021 |
(In thousands) | | Piping Systems | | Industrial Metals | | Climate | | | | Total |
| | | | | | | | | | |
Tube and fittings | | $ | 1,548,392 | | | $ | — | | | $ | — | | | | | $ | 1,548,392 | |
Brass rod and forgings | | — | | | 418,024 | | | — | | | | | 418,024 | |
OEM components, tube & assemblies | | 23,954 | | | 35,819 | | | 111,143 | | | | | 170,916 | |
Valves and plumbing specialties | | 375,218 | | | — | | | — | | | | | 375,218 | |
Flex duct and other HVAC components | | — | | | — | | | 253,843 | | | | | 253,843 | |
Other | | — | | | 73,294 | | | — | | | | | 73,294 | |
| | | | | | | | | | |
| | 1,947,564 | | | 527,137 | | | 364,986 | | | | | 2,839,687 | |
| | | | | | | | | | |
Intersegment sales | | | | | | | | | | (26,699) | |
| | | | | | | | | | |
Net sales | | | | | | | | | | $ | 2,812,988 | |
Note 5 – Cash, Cash Equivalents, and Restricted Cash
| | | | | | | | | | | | | | |
(In thousands) | | September 24, 2022 | | December 25, 2021 |
| | | | |
Cash & cash equivalents | | $ | 483,496 | | | $ | 87,924 | |
Restricted cash included within other current assets | | 15,820 | | | 2,349 | |
Restricted cash included within other assets | | 102 | | | 103 | |
| | | | |
Total cash, cash equivalents, and restricted cash | | $ | 499,418 | | | $ | 90,376 | |
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.
Note 6 – Inventories
| | | | | | | | | | | | | | |
(In thousands) | | September 24, 2022 | | December 25, 2021 |
| | | | |
Raw materials and supplies | | $ | 157,497 | | | $ | 130,133 | |
Work-in-process | | 61,080 | | | 64,989 | |
Finished goods | | 246,220 | | | 245,226 | |
Valuation reserves | | (10,286) | | | (10,104) | |
| | | | |
Inventories | | $ | 454,511 | | | $ | 430,244 | |
Note 7 – Financial Instruments
Derivative Instruments and Hedging Activities
The Company’s earnings and cash flows are subject to fluctuations due to changes in commodity prices, foreign currency exchange rates, and interest rates. The Company uses derivative instruments such as commodity futures contracts, foreign currency forward contracts, and interest rate swaps to manage these exposures.
All derivatives are recognized in the Condensed Consolidated Balance Sheets at their fair value. On the date the derivative contract is entered into, it is either a) designated as a hedge of 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 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 24, 2022, the Company held open futures contracts to purchase approximately $80.8 million of copper over the next 12 months related to fixed price sales orders. The fair value of those futures contracts was a $13.5 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 September 24, 2022, this amount was approximately $10.4 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 September 24, 2022, the Company held open futures contracts to sell approximately $11.1 million of copper over the next nine months related to copper inventory. The fair value of those futures contracts was a $1.7 million net gain position, which was determined by obtaining quoted market prices (level 1 within the fair value hierarchy).
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:
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| | Asset Derivatives | | Liability Derivatives |
| | | | Fair Value | | | | Fair Value |
(In thousands) | | Balance Sheet Location | | September 24, 2022 | | December 25, 2021 | | Balance Sheet Location | | September 24, 2022 | | December 25, 2021 |
| | | | | | | | | | | | |
Commodity contracts - gains | | Other current assets | | $ | 1,774 | | | $ | 1,150 | | | Other current liabilities | | $ | 31 | | | $ | — | |
Commodity contracts - losses | | Other current assets | | — | | | (46) | | | Other current liabilities | | (13,529) | | | (353) | |
| | | | | | | | | | | | |
Total derivatives (1) | | | | $ | 1,774 | | | $ | 1,104 | | | | | $ | (13,498) | | | $ | (353) | |
(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 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Undesignated derivatives: | | | | | | | | | | |
Gain (loss) on commodity contracts (nonqualifying) | | Cost of goods sold | | 5,125 | | | 7,282 | | | 21,007 | | | (3,141) | |
The following tables summarize amounts recognized in and reclassified from AOCI during the period:
| | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended September 24, 2022 |
(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 | | $ | (5,984) | | | Cost of goods sold | | $ | 4,767 | |
Other | | 38 | | | Other | | — | |
| | | | | | |
Total | | $ | (5,946) | | | Total | | $ | 4,767 | |
Amounts recognized in and reclassified from AOCI (continued):
| | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended September 25, 2021 |
(In thousands) | | Gain Recognized in AOCI (Effective Portion), Net of Tax | | Classification Gains (Losses) | | Loss (Gain) Reclassified from AOCI (Effective Portion), Net of Tax |
| | | | | | |
Cash flow hedges: | | | | | | |
Commodity contracts | | $ | 845 | | | Cost of goods sold | | $ | 1,265 | |
Other | | 13 | | | Other | | (1) | |
| | | | | | |
Total | | $ | 858 | | | Total | | $ | 1,264 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 24, 2022 |
(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 | | $ | (13,310) | | | Cost of goods sold | | $ | 2,253 | |
Other | | 83 | | | Other | | — | |
| | | | | | |
Total | | $ | (13,227) | | | Total | | $ | 2,253 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 25, 2021 |
(In thousands) | | Gain Recognized in AOCI (Effective Portion), Net of Tax | | Classification Gains (Losses) | | Gain Reclassified from AOCI (Effective Portion), Net of Tax |
| | | | | | |
Cash flow hedges: | | | | | | |
Commodity contracts | | $ | 861 | | | Cost of goods sold | | $ | (1,584) | |
Other | | 1 | | | Other | | — | |
| | | | | | |
Total | | $ | 862 | | | Total | | $ | (1,584) | |
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 24, 2022 and December 25, 2021, the Company had recorded restricted cash in other current assets of $15.6 million and $2.0 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 September 24, 2022 approximates the carrying value on that date. The estimated fair values were determined based on quoted market prices and the current rates offered for debt with similar terms and maturities. The fair value of long-term debt is classified as level 2 within the fair value hierarchy. This classification is defined as a fair value determined using market-based inputs other than quoted prices that are observable for the liability, either directly or indirectly.
Note 8 – Investments in Unconsolidated Affiliates
Tecumseh
The Company owns a 50 percent interest in an unconsolidated affiliate that acquired Tecumseh Products Company LLC (Tecumseh). The Company also owns a 50 percent interest in a second unconsolidated affiliate that provides financing to Tecumseh. These investments are recorded using the equity method of accounting, as the Company can exercise significant influence but does not own a majority equity interest or otherwise control the respective entities. Under the equity method of accounting, these investments are stated at initial cost and are adjusted for subsequent additional investments and the Company’s proportionate share of earnings or losses and distributions.
The Company records its proportionate share of the investees’ 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 investees’ 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 investees’ net accumulated losses.
The following tables present summarized financial information derived from the Company’s equity method investees’ combined consolidated financial statements, which are prepared in accordance with U.S. GAAP.
| | | | | | | | | | | | | | |
(In thousands) | | September 24, 2022 | | December 25, 2021 |
| | | | |
Current assets | | $ | 257,468 | | | $ | 214,550 | |
Noncurrent assets | | 78,402 | | | 76,406 | |
Current liabilities | | 198,557 | | | 169,155 | |
Noncurrent liabilities | | 45,894 | | | 46,059 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended | | For the Nine Months Ended |
(In thousands) | | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
| | | | | | | | |
Net sales | | $ | 135,720 | | | $ | 125,581 | | | $ | 388,024 | | | $ | 326,744 | |
Gross profit | | 25,767 | | | 15,693 | | | 70,799 | | | 40,715 | |
Net (loss) income | | (593) | | | 5,599 | | | 5,576 | | | 262 | |
The Company’s income from unconsolidated affiliates, net of foreign tax, for the quarter and nine months ended September 24, 2022 included net losses of $0.3 million and net income of $2.8 million, respectively, for Tecumseh.
The Company’s loss from unconsolidated affiliates, net of foreign tax, for the quarter and nine months ended September 25, 2021 included net income of $2.8 million and $0.1 million, respectively, for Tecumseh.
Retail Distribution
On September 2, 2021, the Company acquired a 17 percent noncontrolling equity interest in a limited liability company in the retail distribution business by contributing the outstanding common stock of Die-Mold in exchange for the equity method interest. The transaction was recorded as a deconsolidation of a subsidiary and the recognition of an equity method investment at fair value, as described in “Note 3 - Acquisitions and Dispositions.” 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.
The Company’s income from unconsolidated affiliates, net of tax, for the quarter and nine months ended September 24, 2022 included net income of $1.3 million and $3.2 million, respectively, for the retail distribution business.
Note 9 – 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 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
| | | | | | | | |
Pension benefits: | | | | | | | | |
| | | | | | | | |
Interest cost | | $ | 394 | | | $ | 313 | | | $ | 1,181 | | | $ | 939 | |
Expected return on plan assets | | (967) | | | (903) | | | (2,901) | | | (2,711) | |
Amortization of net loss | | 244 | | | 378 | | | 731 | | | 1,135 | |
| | | | | | | | |
Net periodic benefit income | | $ | (329) | | | $ | (212) | | | $ | (989) | | | $ | (637) | |
| | | | | | | | |
Other benefits: | | | | | | | | |
Service cost | | $ | 72 | | | $ | 64 | | | $ | 216 | | | $ | 194 | |
Interest cost | | 104 | | | 87 | | | 310 | | | 261 | |
Amortization of prior service credit | | (1) | | | (118) | | | (198) | | | (353) | |
Amortization of net gain | | (59) | | | (32) | | | (177) | | | (96) | |
Curtailment gain | | — | | | $ | — | | | (1,756) | | | $ | — | |
| | | | | | | | |
Net periodic benefit cost (income) | | $ | 116 | | | $ | 1 | | | $ | (1,605) | | | $ | 6 | |
The components of net periodic benefit cost (income) other than the service cost component are included in other income, net in the Condensed Consolidated Statements of Income.
Note 10 – 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.
Environmental
Non-operating Properties
Southeast Kansas Sites
The Kansas Department of Health and Environment (KDHE) has contacted the Company regarding environmental contamination at three former smelter sites in Kansas (Altoona, East La Harpe, and Lanyon). The Company is not a successor to the companies that operated these smelter sites, but has explored possible settlement with KDHE and other potentially responsible parties (PRP) in order to avoid litigation.
In February 2022, the Company reached a settlement with another PRP relating to these three sites. Under the terms of that agreement, the Company paid $5.6 million, which was previously reserved, in exchange for the other PRP’s agreement to conduct or fund any required remediation within the geographic boundaries of the three sites (namely, the parcel(s) on which the former smelters were located), plus coverage of certain off-site areas (namely, contamination that migrated by surface water runoff or air emissions from the Altoona or East La Harpe site, and smelter materials located within 50 feet of the geographic boundary of each site). The settlement does not cover certain matters, including potential liability related to the remediation of the town of Iola which is not estimable at this time. The other PRP will also provide an indemnity that would cover third-party cleanup claims for those sites, subject to a time limit and a cap.
Altoona. Another PRP conducted a site investigation of the Altoona site under a consent decree with KDHE and submitted a removal site evaluation report recommending a remedy. The remedial design plan, which covers both on-site and certain off-site cleanup costs, was approved by the KDHE in 2016. Construction of the remedy was completed in 2018. Under the terms of the settlement with the other PRP, the Company expects the operations and maintenance costs for this remedy to be paid for entirely by the other PRP.
East La Harpe. At the East La Harpe site, the Company and two other PRPs conducted a site study evaluation under KDHE supervision and prepared a site cleanup plan approved by KDHE. In December 2018, KDHE provided a draft agreement which contemplates the use of funds KDHE obtained from two other parties (Peabody Energy and Blue Tee) to fund part of the remediation, and removes Blue Tee from the PRPs’ agreement with KDHE. Pursuant to the terms of the settlement with the other PRP noted above, the Company expects the remediation to be conducted and paid for entirely by the other PRP, and for that other PRP to negotiate and enter into an agreement with KDHE.
Lanyon. With respect to the Lanyon Site, in 2016, the Company received a general notice letter from the United States Environmental Protection Agency (EPA) asserting that the Company is a PRP, which the Company has denied. EPA issued an interim record of decision in 2017 and has been remediating properties at the site. According to EPA, 1,371 properties in total will be remediated, and the work will be completed near the end of 2022.
Shasta Area Mine Sites
Mining Remedial Recovery Company (MRRC), a wholly owned subsidiary, owns certain inactive mines in Shasta County, California. MRRC has continued a program, begun in the late 1980s, of implementing various remedial measures, including sealing mine portals with concrete plugs in portals that were discharging water. The sealing program achieved significant reductions in the metal load in discharges from these adits; however, additional reductions are required pursuant to an order issued by the California Regional Water Quality Control Board (QCB). In response to a 1996 QCB Order, MRRC completed a feasibility study in 1997 describing measures designed to mitigate the effects of acid rock drainage. In December 1998, the QCB modified the 1996 order extending MRRC’s time to comply with water quality standards. In September 2002, the QCB adopted a new order requiring MRRC to adopt Best Management Practices (BMP) to control discharges of acid mine drainage, and again extended the time to comply with water quality standards until September 2007. During that time, implementation of BMP further reduced impacts of acid rock drainage; however, full compliance has not been achieved. The QCB is presently renewing MRRC’s discharge permit and will concurrently issue a new order. It is expected that the new 10-year permit will include an order requiring continued implementation of BMP through 2032 to address residual discharges of acid rock drainage. The Company currently estimates that it will spend between approximately $14.0 million and $16.0 million for remediation at these sites over the next 30 years and has accrued a reserve at the low end of this range.
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 $1.6 million and $2.3 million over the next 15 years. The Company has recorded a reserve at the low end of this range.
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 NPL 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 NPL site (zones 1 and 3 of operable unit 1) 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 operable unit 2 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 has made a capital contribution to Lead Refinery to conduct the remedial investigation and feasibility study with respect to operable unit 2 and has provided financial assurance in the amount of $1.0 million. The remedial investigation and feasibility study remain ongoing. The EPA has also asserted its position 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.
In January 2018, the EPA issued two unilateral administrative orders (UAOs) directing the Company, Lead Refinery, and four other PRPs to conduct soil and interior remediation of certain residences at the Lead Refinery NPL site (zones 2 and 3 of operable unit 1). The Company and Lead Refinery have reached agreement with the four other PRPs to implement these two UAOs, with the Company agreeing to pay, on an interim basis, (i) an estimated $4.5 million (subject to potential change through a future reallocation process) of the approximately $25.0 million the PRPs currently estimate it will cost to implement the UAOs, which estimate is subject to change, and (ii) $2.0 million relating to past costs incurred by other PRPs for work conducted at the site, as well as the possibility of up to $0.7 million in further payments for ongoing work by those PRPs. As of September 24, 2022, the Company has made payments of approximately $7.6 million related to the aforementioned agreement with the other PRPs. The Company disputes that it was properly named in the UAOs. In March 2022, Lead Refinery entered into an administrative settlement agreement and order on consent with the EPA, along with the four other PRPs, which involves payment of certain past and future costs relating to operable unit 1, in exchange for certain releases and contribution protection for the Company, Lead Refinery and their respective affiliates relating to that operable unit. That settlement became effective in September 2022. The Company reserved $3.3 million for this settlement in the third quarter of 2021. In March 2018, a group of private plaintiffs sued the Company, Arava, MRRC, and Lead Refinery, along with other defendants, in civil tort action relating to the site. The Company, Arava, and MRRC have been voluntarily dismissed from that litigation without prejudice. Lead Refinery’s motion to dismiss the matter was granted without prejudice, but plaintiffs in that case have been granted leave to replead certain of their claims. 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 in excess of the current reserve with respect to any remedial action or litigation relating to the Lead Refinery NPL site, either at Lead Refinery’s former operating site (operable unit 2) or the adjacent residential area (operable unit 1), including, but not limited to, EPA oversight costs for which the EPA may attempt to seek reimbursement from the Company, and past costs for which other PRPs may attempt to seek contribution from the Company.
Bonita Peak Mining District
Following an August 2015 spill from the Gold King Mine into the Animas River near Silverton, Colorado, the EPA listed the Bonita Peak Mining District on the NPL. Said listing was finalized in September 2016. The Bonita Peak Mining District encompasses 48 mining sites within the Animas River watershed, including the Sunnyside Mine, the American Tunnel, and the
Sunbank Group. On or about July 25, 2017, Washington Mining Company (Washington Mining) (a wholly-owned subsidiary of the Company’s wholly-owned subsidiary, Arava), received a general notice letter from the EPA stating that Washington Mining may be a PRP under CERCLA in connection with the Bonita Peak Mining District site and therefore responsible for the remediation of certain portions of the site, along with related costs incurred by the EPA. Shortly thereafter, the Company received a substantively identical letter asserting that it may be a PRP at the site and similarly responsible for the cleanup of certain portions of the site. The general notice letters identify one other PRP at the site, and do not require specific action by Washington Mining or the Company at this time. At this juncture, the Company is unable to determine the likelihood of a materially adverse outcome or the amount or range of a potential loss with respect to any remedial action related to the Bonita Peak Mining District NPL site.
Operating Properties
Mueller Copper Tube Products, Inc.
In 1999, Mueller Copper Tube Products, Inc. (MCTP), a wholly owned subsidiary, commenced a cleanup and remediation of soil and groundwater at its Wynne, Arkansas plant to remove trichloroethylene, a cleaning solvent formerly used by MCTP. On August 30, 2000, MCTP received approval of its Final Comprehensive Investigation Report and Storm Water Drainage Investigation Report addressing the treatment of soils and groundwater from the Arkansas Department of Environmental Quality (ADEQ). The Company established a reserve for this project in connection with the acquisition of MCTP in 1998. Effective November 17, 2008, MCTP entered into a Settlement Agreement and Administrative Order by Consent to submit a Supplemental Investigation Work Plan (SIWP) and subsequent Final Remediation Work Plan (RWP) for the site. By letter dated January 20, 2010, ADEQ approved the SIWP as submitted, with changes acceptable to the Company. On December 16, 2011, MCTP entered into an amended Administrative Order by Consent to prepare and implement a revised RWP regarding final remediation for the Site. The remediation system was activated in February 2014. Costs to implement the work plans, including associated general and administrative costs, are estimated to approximate $0.7 million to $0.9 million over the next four years. The Company has recorded a reserve at the low end of this range.
United States Department of Commerce Antidumping Review
On December 24, 2008, the Department of Commerce (DOC) initiated an antidumping administrative review of the antidumping duty order covering circular welded non-alloy steel pipe and tube from Mexico for the November 1, 2007 through October 31, 2008 period of review. The DOC selected Mueller Comercial as a respondent in the review. On April 19, 2010, the DOC published the final results of the review and assigned Mueller Comercial an antidumping duty rate of 48.33 percent. On May 25, 2010, the Company appealed the final results to the U.S. Court of International Trade (CIT). On December 16, 2011, the CIT issued a decision remanding the Department’s final results. While the matter was still pending, the Company and the United States reached an agreement to settle the appeal. Subject to the conditions of the agreement, the Company anticipated that certain of its subsidiaries would incur antidumping duties on subject imports made during the period of review and, as such, established a reserve for this matter. After the lapse of the statutory period of time during which U.S. Customs and Border Protection (CBP) was required, but failed, to liquidate the entries at the settled rate, the Company released the reserve. Between October 30, 2015 and November 27, 2015, CBP sent a series of invoices to Southland Pipe Nipples Co., Inc. (Southland), requesting payment of approximately $3.0 million in duties and interest in connection with 795 import entries made during the November 1, 2007 through October 31, 2008 period. On January 26, 2016 and January 27, 2016, Southland filed protests with CBP in connection with these invoices, noting that CBP’s asserted claims were not made in accordance with applicable law, including statutory provisions governing deemed liquidation. The Company believes in the merits of the legal objections raised in Southland’s protests, and CBP’s response to Southland’s protests is currently pending. Given the procedural posture and issues raised by this legal dispute, the Company cannot estimate the amount of potential duty liability, if any, that may result from CBP’s asserted claims.
Guarantees
Guarantees, in the form of letters of credit, are issued by the Company generally to assure the payment of insurance deductibles, certain retiree health benefits, and debt at certain unconsolidated affiliates. 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 24, 2022 were $33.1 million.
Note 11 – Income Taxes
The Company’s effective tax rate for the third quarter of 2022 was 25 percent compared with 26 percent for the same period last year. The primary item impacting the effective tax rate for the third quarter of 2022 was an increase related to the provision for state income taxes, net of the federal benefit, of $7.3 million.
The Company’s effective tax rate for the third quarter of 2021 was 26 percent. The items impacting the effective tax rate for the third quarter of 2021 were increases related to the provision for state income taxes, net of the federal benefit, of $8.5 million and the effect of foreign tax rates higher than statutory tax rates and other foreign items of $5.6 million. These items were partially offset by $2.2 million of other items.
The Company’s effective tax rate for the first nine months of 2022 was 25 percent compared with 26 percent for the same period last year. The items impacting the effective tax rate for the first nine months of 2022 were increases related to the provision for state income taxes, net of the federal benefit, of $24.2 million and the effect of foreign tax rates higher than statutory tax rates and other foreign adjustments of $4.3 million.
The Company’s effective tax rate for the first nine months of 2021 was 26 percent. The items impacting the effective tax rate for the first nine months of 2021 were increases related to the provision for state income taxes, net of the federal benefit, of $16.3 million and the effect of foreign tax rates higher than statutory tax rates and other foreign items of $8.7 million. These items were partially offset by $2.5 million of other items.
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 returns for 2018 and all subsequent years. The statutes of limitations for most state returns are open for 2018 and all subsequent years, and some state and foreign returns are also open for some earlier tax years due to differing statute periods. While the Company believes that it is adequately reserved for possible 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 12 – Accumulated Other Comprehensive Income (Loss)
AOCI includes certain foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net deferred gains and losses on certain derivative instruments accounted for as cash flow hedges, adjustments to pension and OPEB liabilities, and other comprehensive income attributable to unconsolidated affiliates.
The following tables provide changes in AOCI by component, net of taxes and noncontrolling interests (amounts in parentheses indicate debits to AOCI):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 24, 2022 |
(In thousands) | | Cumulative Translation Adjustment | | Unrealized Gain (Loss) on Derivatives | | Pension/OPEB Liability Adjustment | | Attributable to Unconsol. Affiliates | | Total |
| | | | | | | | | | |
Balance as of December 25, 2021 | | $ | (42,303) | | | $ | 803 | | | $ | (11,500) | | | $ | (347) | | | $ | (53,347) | |
| | | | | | | | | | |
Other comprehensive (loss) income before reclassifications | | (41,078) | | | (13,227) | | | 1,424 | | | 4,218 | | | (48,663) | |
Amounts reclassified from AOCI | | — | | | 2,253 | | | 305 | | | — | | | 2,558 | |
| | | | | | | | | | |
Net current-period other comprehensive (loss) income | | (41,078) | | | (10,974) | | | 1,729 | | | 4,218 | | | (46,105) | |
| | | | | | | | | | |
| | | | | | | | | | |
Balance as of September 24, 2022 | | $ | (83,381) | | | $ | (10,171) | | | $ | (9,771) | | | $ | 3,871 | | | $ | (99,452) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended September 25, 2021 |
(In thousands) | | Cumulative Translation Adjustment | | Unrealized Gain (Loss) on Derivatives | | Pension/OPEB Liability Adjustment | | Attributable to Unconsol. Affiliates | | Total |
| | | | | | | | | | |
Balance as of December 26, 2020 | | $ | (37,339) | | | $ | 984 | | | $ | (17,203) | | | $ | (1,325) | | | $ | (54,883) | |
| | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | | 763 | | | 862 | | | (98) | | | 2,211 | | | 3,738 | |
Amounts reclassified from AOCI | | — | | | (1,584) | | | 574 | | | — | | | (1,010) | |
| | | | | | | | | | |
Net current-period other comprehensive income (loss) | | 763 | | | (722) | | | 476 | | | 2,211 | | | 2,728 | |
| | | | | | | | | | |
| | | | | | | | | | |
Balance as of September 25, 2021 | | $ | (36,576) | | | $ | 262 | | | $ | (16,727) | | | $ | 886 | | | $ | (52,155) | |
Reclassification adjustments out of AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount reclassified from AOCI |
| | For the Quarter Ended | | For the Nine Months Ended | | |
(In thousands) | | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 | | Affected line item |
| | | | | | | | | | |
Unrealized losses (gains) on derivative commodity contracts | | $ | 6,151 | | | $ | 1,077 | | | $ | 2,906 | | | $ | (2,612) | | | Cost of goods sold |
| | | | | | | | | | |
| | (1,384) | | | 187 | | | (653) | | | 1,028 | | | Income tax (benefit) expense |
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| | $ | 4,767 | | | $ | 1,264 | | | $ | 2,253 | | | $ | (1,584) | | | Net of tax and noncontrolling interests |
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Amortization of net loss and prior service cost on employee benefit plans | | $ | 184 | | | $ | 228 | | | $ | 356 | | | $ | 686 | | | Other income, net |
| | (31) | | | (37) | | | (51) | | | (112) | | | Income tax benefit |
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| | $ | 153 | | | $ | 191 | | | $ | 305 | | | $ | 574 | | | Net of tax and noncontrolling interests |
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