Mueller Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2019. Mueller manufactures and distributes copper, brass, aluminum, and plastic products across Piping Systems, Industrial Metals, and Climate. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $666.4 | $662.8 | $1,278.2 | $1,302.8 |
| Operating income | $51.5 | $51.9 | $100.7 | $99.3 |
| Net income attributable to Mueller | $28.0 | $33.2 | $43.7 | $57.3 |
| Diluted EPS | $0.50 | $0.58 | $0.78 | $1.00 |
| Dividends per share | $0.10 | $0.10 | $0.20 | $0.20 |
- Q2 gross margin was approximately 15.4% versus 14.9% a year earlier; operating margin was approximately 7.7% versus 7.8%. For the first half, gross margin was approximately 15.9% versus 14.8%, and operating margin approximately 7.9% versus 7.6%.
- First-half operating cash flow was $64.0 million, compared with $36.2 million in 2018. Capital expenditures were $13.0 million; net cash used in investing activities was $19.7 million and net cash used in financing activities was $27.4 million.
- Cash, cash equivalents, and restricted cash totaled $94.1 million at June 29, 2019. Current assets were $734.5 million and current liabilities $226.8 million; the company reported a 3.2-to-1 current ratio.
- Total debt was $482.2 million, or 44.4% of total capitalization. This included $284.5 million of debentures and $185.0 million borrowed under the $350 million revolving credit facility. Mueller reported compliance with its debt covenants.
Material changes versus prior period
- Q2 sales increased 0.5%, but first-half sales declined 1.9%. Core product price and volume declines were partly offset by ATCO acquisition sales and growth in non-core products. Management attributed Q2 sales growth in part to $49.9 million of ATCO sales; first-half ATCO sales were $95.4 million.
- Piping Systems sales fell 6.0% in Q2 and 9.3% in the first half; segment operating income fell 14.6% and 14.4%, respectively. Lower copper tube prices and core-product volumes weighed on results.
- Industrial Metals sales fell 16.0% in Q2 and 15.5% in the first half; operating income declined 7.3% and 12.0%. Management cited lower brass-rod volumes and selling prices.
- Climate sales rose 145.3% in Q2 and 147.1% in the first half, primarily reflecting the ATCO acquisition; segment operating income rose 143.8% and 133.3%. Comparisons are substantially affected by ATCO being acquired in July 2018.
- Net income declined more sharply than operating income, principally reflecting equity-method losses from unconsolidated affiliates: $5.8 million in Q2 and $21.2 million for the first half, versus $0.1 million and $10.5 million, respectively, in 2018. Tecumseh accounted for $5.3 million and $19.9 million of the 2019 losses.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management stated that cash from operations, available credit, and cash on hand should be adequate for working capital, capital expenditures, and debt obligations.
- Key business exposures include copper and brass prices and availability, metal-to-product pricing spreads, housing and commercial construction, demand and unit volumes, substitution by plastics or aluminum, competition, interest rates, and foreign currency movements. Management noted that residential construction remained below long-term historical averages.
- Environmental reserves were $19.9 million. Disclosed matters include estimated remediation costs of $12.8 million–$17.5 million over 30 years for Shasta-area mine sites and unresolved potential liabilities at the Lead Refinery and Bonita Peak sites; the company said it could not estimate certain potential losses beyond current reserves. It also reported a $5.6 million reserve for three Kansas sites.
- A $27.4 million Deepwater Horizon settlement award to a subsidiary remains under appeal. If upheld, it is subject to approximately 20% contingency-based legal and advisory fees; Mueller will recognize any net recovery when settled and cautioned the award could be reduced or reversed.
- Mueller adopted lease accounting in Q1 2019, recognizing $28.6 million of operating-lease right-of-use assets and $29.2 million of lease liabilities at quarter-end. It also recorded $1.5 million of additional transition-tax expense and a $2.6 million benefit related to a prior-period foreign subsidiary sale in the first half.
- The company’s share-repurchase authorization, covering up to 20 million shares, was extended through August 2019. It had repurchased approximately 6.2 million shares under the authorization since 1999.
Important facts for investors to verify
- Whether weaker core-product pricing and volumes persist, particularly in Piping Systems and Industrial Metals, and how metal spreads affect margins.
- The sustainability and cash implications of Tecumseh and other affiliate losses, including the $21.2 million first-half equity-method loss.
- Debt repayment capacity, borrowing costs, covenant headroom, and the revolving facility’s December 2021 maturity.
- Potential environmental and litigation exposure beyond recorded reserves, and the outcome and timing of the $27.4 million Deepwater Horizon award appeal.
- How much Climate’s acquired growth translates into ongoing organic growth and profitability after ATCO integration costs.