Mueller Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter ended October 1, 2016 (13 weeks); first nine months of fiscal 2016 (40 weeks). Comparatives are the quarter and nine months ended September 26, 2015; that nine-month period contained 39 weeks. Financial amounts below are in millions of dollars unless stated otherwise.
Business context
Mueller manufactures and distributes copper, brass, aluminum, and plastic products, including piping, fittings, metal rod and bar, and HVACR products. Its reportable segments are Piping Systems, Industrial Metals, and Climate. In April 2016, it acquired a 60% interest in South Korea-based Jungwoo-Mueller for approximately $20.5 million.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Net sales | $506.6 | $535.2 | $1,583.5 | $1,628.0 |
| Operating income | $37.5 | $27.0 | $123.4 | $118.3 |
| Net income attributable to Mueller | $26.0 | $17.8 | $82.4 | $73.4 |
| Diluted EPS | $0.45 | $0.31 | $1.44 | $1.29 |
| Operating cash flow | Not separately stated | Not separately stated | $70.6 | $95.5 |
Q3 sales declined 5.3%, while operating income rose 38.7% and net income attributable to Mueller increased 45.9%. Nine-month sales fell 2.7%, but operating income rose 4.3% and net income increased 12.2%. Gross margin was approximately 16.2% in Q3 versus 12.7% a year earlier, and 16.2% year to date versus 14.1%. Operating margin was approximately 7.4% in Q3 versus 5.0%, and 7.8% year to date versus 7.3%.
Lower copper and other metal selling prices reduced sales, while lower material costs helped reduce cost of goods sold. Q3 core-product selling prices were down 8.1%; unit volumes were up 1.9%. For the first nine months, core-product selling prices were down 11.4% and volumes down 1.8%. Results included a $3.0 million fixed-asset impairment charge in 2016. The 2015 nine-month comparison included a $15.4 million asset-sale gain and $3.4 million of severance costs.
- Segments: Q3 Piping Systems sales were down 4.4% and operating income down 5.1%; Industrial Metals sales fell 5.8%, while operating income more than doubled to $18.7 million; Climate sales rose 5.3% and operating income rose 40.1% to $4.8 million.
- Cash flow: Nine-month operating cash flow was $70.6 million, down from $95.5 million. Higher receivables used $45.8 million of cash and lower current liabilities used $16.0 million. Capital expenditures were $15.6 million.
- Liquidity and debt: Cash and equivalents were $297.8 million; total debt was $230.8 million, or 19.8% of total capitalization. The current ratio was 4.3 to 1. Cash exceeded reported debt by approximately $67.0 million. The company said cash, operating cash flow, and available credit were expected to meet liquidity needs. It was in compliance with debt covenants.
- Capital returns: Dividends were $0.10 per share in each of Q2 and Q3 2016; the Q1 dividend was $0.075. The board extended authorization to repurchase up to 20 million shares through October 2017; approximately 4.7 million shares had been repurchased under the authorization through October 1, 2016.
Outlook, risks, and unusual items
Management provided no numerical earnings or revenue guidance. It expected residential construction to continue improving, while noting that housing activity remained below long-term historical averages; it also anticipated continued improvement in private nonresidential construction. Management stated that available cash, operating cash flow, and credit capacity should be adequate for working capital, capital expenditures, and debt obligations.
Key exposures include copper and brass prices and availability, the ability to pass raw-material costs through to customers, market volumes and product substitution, construction demand, foreign exchange, interest rates, and financing availability. The filing added Brexit-related uncertainty as a risk to exchange rates, markets, and customer, supplier, and employee relationships. The company held commodity, interest-rate, and foreign-currency hedges. Environmental remediation spending was approximately $0.5 million in the first nine months, with about $0.2 million expected for the remainder of 2016. Management said ordinary-course litigation was not expected to materially adversely affect the company; guarantee payments could reach $7.0 million.
The Q3 effective tax rate was 30%, compared with 20% in Q3 2015; the prior-year rate benefited from a $4.2 million reduction in deferred tax liabilities related to a foreign acquisition. The company recognized $1.1 million of income from unconsolidated affiliates in Q3, versus $2.2 million of losses in the prior-year quarter. Its Jungwoo-Mueller purchase-price allocation remained provisional.
Important facts for investors to verify
- Whether lower metal selling prices, volumes, and changing customer demand continue to pressure sales and segment results.
- Whether the improvement in margins is sustainable as raw-material prices and customer pricing change.
- How receivables and working-capital requirements affect operating cash generation, which declined year over year.
- The final Jungwoo-Mueller purchase-price allocation and the acquisition’s contribution to earnings and cash flow.
- Debt maturities and borrowing availability: the $200 million revolving facility and $200 million term loan were both scheduled to mature December 11, 2017.
- Potential effects of Brexit, foreign-currency movements, environmental obligations, and commodity hedges on future results.