Mueller Industries, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 27, 2014 (52 weeks). The filing also reports unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Mueller manufactures and distributes plumbing, HVAC, refrigeration, and industrial products through Plumbing & Refrigeration and OEM segments.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $2,364.2 million | $2,158.5 million |
| Operating income | $154.0 million | $270.9 million |
| Net income attributable to Mueller | $101.6 million | $172.6 million |
| Diluted EPS | $1.79 | $3.06 |
| Cash from operating activities | $90.6 million | $128.5 million |
| Capital expenditures | $39.2 million | $41.3 million |
| Cash and cash equivalents, year-end | $352.1 million | $311.8 million |
| Total debt, year-end | $241.4 million | $235.3 million |
Annual sales rose 9.5%, while operating income fell 43.2% and net income fell 41.2%. Gross profit, calculated as sales less cost of goods sold, was $320.5 million (13.6% of sales), versus $296.5 million (13.7%) in 2013. Operating margin was 6.5%, versus 12.6%; the prior-year figure was substantially boosted by a $106.3 million insurance-settlement gain and a $39.8 million gain on sale of plastic fittings assets. 2014 included a $6.3 million net gain on asset sales and $7.3 million of Yorkshire-related severance charges.
Operating cash flow less capital expenditures was approximately $51.4 million, compared with $87.2 million in 2013. The current ratio was 4.0:1; working capital, net of cash and current debt, was $387.2 million. Debt was 23.3% of total capitalization, and the company reported compliance with all debt covenants. Cash of $91.6 million was held by foreign subsidiaries.
By segment, Plumbing & Refrigeration sales increased 15.6% to $1,416.7 million, but operating income declined 57.5% to $93.2 million, reflecting the absence of the prior-year insurance gain and asset-sale gain, plus 2014 severance. OEM sales increased 1.3% to $959.9 million and operating income rose 11.9% to $85.7 million.
Material changes and unusual items
- Sales growth chiefly reflected the acquisitions of Yorkshire Copper Tube ($91.7 million of 2014 sales) and Howell Metal ($109.1 million), higher unit sales in other core products, and higher non-core sales; lower core-product selling prices offset part of the increase.
- Yorkshire was acquired in February 2014 for approximately $30.1 million and recorded a $5.9 million net loss for the year, according to the auditor’s report. Mueller recorded $7.3 million of reorganization severance and expected another $2.7 million in 2015.
- Mueller sold its U.K. import-distribution business Primaflow in November 2014 for approximately $24.9 million; it had $57.5 million in FY2014 sales and $4.4 million in after-tax income. The sale’s net gain was described as immaterial. The company also sold ABS plastic pipe assets, recording a $4.1 million pretax gain.
- Fiscal 2013 earnings included a $106.3 million pretax insurance gain related to the 2011 Wynne, Arkansas fire and a $39.8 million pretax gain on a plastic fittings asset sale. Those nonrecurring gains materially distort year-over-year comparisons.
- Fourth-quarter 2014 sales were $537.3 million versus $487.7 million in Q4 2013; net income attributable to Mueller was $18.0 million versus $15.4 million, and diluted EPS was $0.32 versus $0.27. Q4 2014 included asset-sale gains and severance charges.
- The company paid $0.30 per share in dividends for FY2014, up from $0.25 in FY2013. A two-for-one stock split was completed in 2014; per-share figures are adjusted for the split.
Outlook, risks, and contingencies
- Management expected gradual improvement in housing and commercial construction, while noting residential construction remained below historical averages and outlook could be affected by labor participation, household formation, interest rates, and tighter lending standards. No earnings or revenue guidance was provided.
- Management expected FY2015 capital expenditures of approximately $35–$40 million and stated that cash on hand, operating cash flow, and available credit should cover normal operating and capital needs.
- Key risks include volatile copper and other raw-material and energy costs, the ability to pass cost changes through to customers, construction-market cyclicality, imports and substitute materials, foreign-exchange movements, labor negotiations, and operational interruptions. A 2011 fire destroyed copper-tube casting capacity at Wynne; loss of remaining domestic casting capacity could significantly impair production.
- Environmental reserves were $22.7 million at year-end. The company disclosed a potential $9.5 million settlement payment relating to the Southeast Kansas Sites, with timing undetermined, and estimated $9.4 million of ongoing environmental spending thereafter. It also cited unresolved potential EPA exposure at the Lead Refinery site that it could not quantify.
- All $241.4 million of year-end debt was variable-rate. A $200 million interest-rate swap was scheduled to become effective January 12, 2015; the principal term loan and revolving facility mature in December 2017. The filing reported no borrowings on the main revolving facility at year-end.
- Auditors issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded acquired Yorkshire from the 2014 internal-control assessment; Yorkshire represented 3% of year-end assets and 4% of 2014 sales.
Important facts for investors to verify
- Assess underlying earnings and margins excluding the unusually large FY2013 insurance and asset-sale gains, and account for FY2014 asset gains and Yorkshire severance.
- Review Yorkshire’s post-acquisition performance, planned restructuring costs, and integration progress; the acquisition contributed sales but operated at a net loss in 2014.
- Track copper-price spreads, input-cost pass-through, construction demand, and the growth of plastic or aluminum substitutes.
- Examine environmental liabilities and the status, potential cost, and timing of the Southeast Kansas and Lead Refinery matters.
- Confirm subsequent debt refinancing and the effective operation of the interest-rate swap, and monitor the large 2017 debt maturity.