Mueller Industries, Inc. — FY2017 Form 10-K
Business context and reporting period: Mueller manufactures and distributes copper, brass, aluminum, and plastic products serving plumbing, HVAC, refrigeration, industrial, and construction markets. The fiscal year ended December 30, 2017, and comprised 52 weeks. Operations are reported in Piping Systems, Industrial Metals, and Climate.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $2,266.1 million | $2,055.6 million |
| Operating income | $152.0 million | $152.7 million |
| Operating margin | 6.7% | 7.4% |
| Net income attributable to Mueller | $85.6 million | $99.7 million |
| Diluted EPS | $1.49 | $1.74 |
| Cash from operating activities | $44.0 million | $157.8 million |
| Capital expenditures | $46.1 million | $37.5 million |
Sales increased 10.2%, largely on higher selling prices in copper tube and brass rod; core unit volume declined 1.3%. Operating income was nearly flat, while attributable net income declined 14.2%. The filing’s gross-profit definition excludes depreciation and amortization; on that basis, gross profit was approximately $325.5 million, or 14.4% of sales, versus approximately $332.1 million, or 16.2%, in 2016.
Segment sales and operating income were: Piping Systems $1,565.0 million and $99.6 million; Industrial Metals $602.1 million and $75.8 million; Climate $131.4 million and $20.3 million. Piping Systems and Industrial Metals operating income declined year over year; Climate operating income rose 14.6%.
Liquidity, debt, and capital allocation
- Year-end cash was $120.3 million, down $231.0 million. Operating cash flow fell to $44.0 million, primarily as inventories increased $86.3 million, including a $38.9 million excess build following a brass rod mill casting outage and higher copper prices.
- Total debt was $465.1 million, versus $228.3 million in 2016; reported long-term debt was $448.6 million. Debt equaled 46.5% of total capitalization. The company had $160.0 million outstanding under its $350.0 million revolving facility, maturing in 2021, and reported compliance with debt covenants.
- The current ratio was 3.1 to 1. Management expects operating cash flow, cash on hand, and available credit to meet liquidity needs.
- FY2017 financing cash outflows included $196.9 million of dividends, principally reflecting the special distribution: $3.00 cash and $5.00 principal amount of 6% subordinated debentures per share. The debentures mature in 2027. Regular quarterly cash dividends were $0.10 per share.
Material changes and unusual items
- Sales rose on higher metal-related selling prices, but higher copper costs and weaker core unit volume pressured operating performance.
- Interest expense increased to $19.5 million from $7.4 million, primarily due to the new subordinated debentures. Environmental expense for non-operating properties rose to $7.3 million from $1.3 million.
- The 2017 effective tax rate was 29.8%. Tax reform produced a provisional $12.9 million transition-tax expense, partly offset by a $12.1 million benefit from remeasuring deferred taxes. The company had not completed its accounting for the Act.
- Mueller acquired Heatlink Group in May 2017 for approximately $16.3 million and sold its 50.5% interest in Mueller-Xingrong in June, recognizing a $1.5 million gain.
- Fourth-quarter 2017 net income attributable to Mueller was $5.7 million, versus $17.3 million in fourth-quarter 2016. The 2017 quarter included $6.2 million of non-operating environmental expense, $4.3 million of debenture interest, and $1.1 million of asset impairment charges.
Outlook, risks, and contingencies
- Management expects most housing and commercial construction conditions to continue improving, while noting residential construction remains below long-term historical averages. No specific revenue or earnings guidance is provided.
- Management expects 2018 capital expenditures of $25–30 million and a consolidated effective tax rate of 22–26%. It expects to pay the $12.9 million transition-tax liability over eight years beginning in 2018.
- Environmental reserves were $28.0 million at year-end; anticipated compliance spending for existing matters was approximately $8.6 million over the next three fiscal years. Significant uncertainties remain, particularly concerning the Lead Refinery site, where the company disputes liability and cannot estimate any loss beyond the recorded reserve. The company also disclosed an unresolved EPA matter involving the Bonita Peak Mining District.
- Key risks include volatile and potentially unavailable copper and other inputs, difficulty passing cost increases through to customers, construction-cycle and interest-rate exposure, competition from imports and substitute materials, foreign-exchange fluctuations, labor negotiations, environmental and legal exposure, acquisition integration, and cybersecurity. Brexit and recently enacted U.S. tax reform add uncertainty.
- The company expects to renew union agreements without material operating disruption. It also expects to recognize an approximately $3.3 million impairment charge in first-quarter 2018 for an aircraft classified as held for sale.
Important facts for investors to verify
- Whether lower core unit volumes and margin compression persist as copper prices and customer selling prices change.
- How quickly the inventory build reverses and operating cash flow recovers from its FY2017 decline.
- The final tax-reform accounting, including the transition-tax estimate, foreign earnings treatment, and future effective tax rate.
- Potential additional costs, timing, and recoveries relating to environmental remediation and pending legal matters.
- Debt service, liquidity after the special distribution, and the company’s capital-allocation plans, including share repurchases authorized through August 2018.