Mueller Industries, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 28, 2019; comparisons are with the periods ended September 29, 2018. Mueller manufactures and distributes copper, brass, aluminum, plastic, HVAC, refrigeration, and plumbing products. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $608.6 | $646.0 | $1,886.8 | $1,948.8 |
| Operating income | $46.3 | $33.7 | $147.0 | $133.0 |
| Net income attributable to Mueller | $29.1 | $20.3 | $72.8 | $77.6 |
| Diluted EPS | $0.52 | $0.35 | $1.29 | $1.35 |
| Operating cash flow | Not stated separately | Not stated separately | $131.9 | $122.5 |
Q3 sales declined 5.8%, while operating income rose 37.4% and Mueller-attributable net income rose 43.4%. For the first nine months, sales fell 3.2%, operating income increased 10.5%, and attributable net income declined 6.2%. Derived operating margins were approximately 7.6% versus 5.2% in Q3 and 7.8% versus 6.8% year to date. Derived gross margins were approximately 16.1% versus 12.2% in Q3 and 15.9% versus 14.0% year to date.
- Sales drivers: Q3 core-product volume and pricing reduced sales by approximately $34.6 million and $14.9 million, respectively; non-core sales partly offset the decline. Year to date, core volume and price reduced sales by $96.6 million and $80.1 million, partly offset by $98.7 million of ATCO sales and higher non-core sales.
- Segments, Q3: Piping Systems sales were $390.9 million (down 4.8%) and operating income $36.0 million (up 41.7%); Industrial Metals sales were $135.4 million (down 14.7%) and operating income $12.6 million (down 16.6%); Climate sales were $90.9 million (up 11.4%) and operating income $8.0 million (up 37.9%).
- Margins and costs: Lower metal costs and sales mix contributed to lower cost of goods sold relative to sales. SG&A increased, including expense for acquired-business contingent consideration: $3.1 million in Q3 and $5.7 million year to date. Q3 2018 included $2.7 million in asset-sale gains and a $1.5 million insurance recovery, which did not recur.
- Equity-method affiliates: Losses were $2.5 million in Q3 and $23.7 million year to date, compared with $3.1 million and $13.6 million in 2018. Tecumseh accounted for $21.8 million of the 2019 year-to-date affiliate loss.
Cash, liquidity, and debt
- Cash and cash equivalents were $100.3 million at September 28, 2019, compared with $72.6 million at year-end 2018; cash, cash equivalents, and restricted cash totaled $102.5 million.
- Nine-month operating cash flow was $131.9 million. Investing activities used $27.3 million, including $20.2 million of capital expenditures and $11.0 million invested in unconsolidated affiliates. Financing activities used $77.7 million, primarily reflecting debt reduction, dividends, and other payments.
- Total debt was $441.5 million, down $55.2 million from year-end 2018; reported debt was 41.4% of total capitalization. This included $284.5 million of debentures and $145.0 million drawn on the $350 million revolving facility. The facility matures December 6, 2021. The company reported compliance with all debt covenants.
- Current assets were $730.7 million and current liabilities $246.8 million; management reported a 3.0-to-1 current ratio. Operating lease liabilities totaled $26.5 million following adoption of the new lease standard.
- Quarterly dividends were $0.10 per share. The company repurchased $1.8 million of common stock year to date.
Outlook, commentary, and risks
- Management gave no specific earnings or revenue forecast. It said operating cash flow, cash on hand, and available credit were expected to meet liquidity needs, including working capital, capital expenditures, and debt payments.
- Management identified housing and commercial construction, demand and volumes, copper and brass prices and availability, product substitution, imports, and competitive conditions as important business drivers. Raw-material price increases that cannot be passed through to customers could adversely affect results.
- Environmental remediation cash spending was approximately $3.9 million in the first nine months; approximately $0.4 million was expected for the remainder of 2019. The company’s recorded environmental reserves were $19.8 million. Potential Lead Refinery and Bonita Peak outcomes could not be reliably estimated beyond current reserves or at all, as applicable.
- A $27.4 million Deepwater Horizon settlement award to a subsidiary remained under appeal; receipt was uncertain and any recovery would be reduced by contingency-based legal and advisory fees of approximately 20% and applicable taxes.
- A customs dispute could involve approximately $3.0 million in asserted antidumping duties and interest, but the company said potential liability, if any, could not be estimated. Other forward-looking risks include market and financing conditions, foreign exchange, interest rates, and acquisition opportunities.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the deterioration in core-product volumes and selling prices continues, particularly in Piping Systems and Industrial Metals.
- Whether Climate’s growth and margins persist after the ATCO acquisition, and how contingent consideration affects SG&A and cash flow.
- Whether Tecumseh’s losses moderate; affiliate losses materially reduced year-to-date net income despite higher operating income.
- Debt repayment, available revolver capacity, covenant headroom, and cash requirements for environmental remediation and other obligations.
- Developments in the Deepwater Horizon appeal, Lead Refinery and Bonita Peak environmental matters, and the antidumping-duty dispute.