Business context and reporting period
Mueller Industries, Inc. filed this unaudited Form 10-Q for the quarter ended March 28, 2015, comparing results with the quarter ended March 29, 2014. The company manufactures and distributes plumbing, HVAC, refrigeration, and industrial products. Its reportable segments are Plumbing & Refrigeration and OEM. Unless otherwise stated, financial figures below are in millions of U.S. dollars.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Net sales | $537.2 | $574.4; down 6.5% |
| Operating income | $35.7 | $38.3; down 6.7% |
| Net income attributable to Mueller | $22.0 | $24.7; down 11.0% |
| Diluted EPS | $0.39 | $0.44 |
| Gross margin | 14.2% | 13.7% |
| Operating margin | 6.7% | 6.7% |
| Net margin attributable to Mueller | 4.1% | 4.3% |
| Operating cash flow | $3.9 | $(44.7) |
| Capital expenditures | $7.4 | $9.2 |
| Cash and cash equivalents, March 28 | $326.9 | $233.5 |
| Total debt, March 28 | $236.7 | $238.1 |
Cash exceeded reported total debt by approximately $90.2 million. The company reported a 4.2:1 current ratio and $421.8 million of working capital net of cash and current debt. Debt was 22.7% of total capitalization; the company said it complied with all debt covenants. Its $200 million revolving facility and $200 million term loan mature December 11, 2017. The board paid a $0.075-per-share dividend.
Material changes versus the prior period
- Lower selling prices reduced sales by $52.2 million, principally in copper tube and brass rod; higher core unit volumes added $34.3 million. The Primaflow disposition reduced sales by $15.9 million.
- Plumbing & Refrigeration sales fell 9.8% to $305.0 million and segment operating income fell 18.4% to $19.5 million. OEM sales declined 2.0% to $235.3 million, while operating income increased 5.9% to $22.5 million.
- Consolidated gross margin improved despite lower revenue, but operating margin was essentially unchanged and attributable net income declined. The prior-year period included a $3.1 million benefit from reduced import-duty accruals and a $1.4 million gain on a property sale.
- Interest expense rose to $2.1 million from $1.0 million, which management attributed mainly to the interest-rate swap becoming effective and higher Mueller-Xingrong working-capital borrowing costs.
- Operating cash flow turned positive from a year-earlier outflow, but remained modest as receivables increased $36.7 million, primarily reflecting higher sales late in the quarter. Investing cash use included $12.6 million of net deposits into restricted cash.
- Other comprehensive loss was $7.2 million, primarily from foreign-currency translation; this reduced comprehensive income attributable to Mueller to $15.5 million.
Outlook, risks, contingencies, and unusual items
Management said residential construction had improved but remained below historical averages, and expected construction conditions to improve gradually but irregularly. It considered cash on hand, operating cash flow, and available credit adequate for normal operating and capital needs. No quantified earnings or revenue guidance was provided.
Results depend on copper and brass prices, the ability to pass raw-material costs through to customers, product-price spreads, sales volumes, construction activity, competition, and substitution by plastics or aluminum. The company also identified raw-material availability, energy costs, interest rates, foreign exchange, and market demand as risks. It reported copper futures for fixed-price sales and inventory, currency forwards, and a LIBOR swap; the swap had a $2.4 million fair-value loss at quarter-end.
Environmental remediation spending was approximately $0.3 million in Q1, with about $0.6 million expected for the remainder of 2015. Timing of a potential $9.5 million settlement offer concerning the Southeast Kansas Sites was undetermined. The company had recorded an approximately $1.1 million reserve for anticipated antidumping duties; an amended 13.70% rate was published in February 2015, and it reported no subject shipments after October 31, 2009. Letters of credit could require payments of up to $10.2 million.
After quarter-end, on March 30, 2015, Mueller agreed to acquire Turbotec for approximately $14.2 million in cash, subject to working-capital adjustments. It also expected approximately $2.7 million of Yorkshire severance costs during the remainder of 2015. Management said ordinary-course litigation was not expected to have a material adverse effect; it reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether sales-volume gains and improved gross margin can persist amid lower copper and brass prices, pricing pressure, and construction-market uncertainty.
- How working-capital needs, especially receivables, affect cash conversion and the availability of restricted cash.
- The funding, integration, and expected contribution of the Turbotec acquisition, as well as Yorkshire restructuring costs.
- The timing and ultimate cost of the Kansas environmental matter, other remediation obligations, and the antidumping-duty reserve.
- Debt costs and refinancing plans ahead of the December 2017 maturities, including exposure to floating rates despite the interest-rate swap.