Mueller Industries, Inc. — Q1 2014 10-Q
Business context and period. The filing covers the quarter ended March 29, 2014. Mueller manufactures and distributes copper, brass, plastic, and aluminum products through Plumbing & Refrigeration and Original Equipment Manufacturers (OEM) segments. Results are unaudited; interim performance is not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $574.4 million | $559.7 million |
| Operating income | $38.3 million | $37.3 million |
| Income before taxes | $37.4 million | $39.9 million |
| Net income attributable to Mueller | $24.7 million | $26.2 million |
| Diluted EPS | $0.44 | $0.46 |
| Cash from operating activities | $(44.7) million | $(14.9) million |
- Sales increased 2.6%, while operating income rose 2.6%. Gross margin was approximately 13.7% in both periods; operating margin was approximately 6.7% in both.
- Net income attributable to Mueller declined about 5.7%; diluted EPS declined from $0.46 to $0.44. The filing retroactively adjusted share and per-share data for a two-for-one stock split distributed March 28, 2014.
- Revenue growth reflected $46.3 million of higher core-product sales volume, including $34.4 million from Howell and Yorkshire, partly offset by $37.3 million of lower selling prices. Average copper prices were about 10% lower year over year.
- Plumbing & Refrigeration sales were $338.0 million, up 8.4%, and operating income was $23.9 million versus $22.6 million. OEM sales were $240.0 million, down from $253.8 million, while operating income increased to $21.3 million from $20.3 million.
- Cash used in operations was driven chiefly by increases in receivables ($49.5 million), other assets ($14.5 million), and inventories ($10.1 million), partly offset by net income and noncash depreciation. Capital expenditures were $9.2 million; operating cash flow less capital expenditures was approximately $(53.9) million.
- Cash and equivalents were $233.5 million at quarter-end, down from $311.8 million at year-end 2013. Current assets were $885.2 million and current liabilities $235.4 million; the reported current ratio was 3.8 to 1.
- Total debt was $238.1 million, or 23.9% of total capitalization. The company had a $350 million revolver and $200 million term loan, both maturing in December 2017, plus a newly established UK invoice facility with capacity of £40 million; $4.4 million was drawn under that facility. Mueller reported compliance with all debt covenants.
- The quarterly dividend was $0.075 per share. Management said available cash, operating cash generation, and the credit agreement should meet normal capital expenditure and operating needs.
Material changes, outlook, and risks
- Yorkshire Copper Tube was acquired for approximately $30.1 million in cash on February 28, 2014. Its results are included from the acquisition date; purchase accounting remained provisional for certain long-lived assets. Howell, acquired in October 2013, also contributed to sales growth.
- Cost of goods sold included a $3.1 million reduction in import-duty accruals. Q1 2013 other income included a $3.0 million gain on the sale of non-operating property, contributing to the year-over-year decline in other income. Interest expense rose to $1.0 million from $0.6 million, partly because interest had been capitalized on projects in the prior-year quarter.
- Management expected market conditions to improve gradually but irregularly. Many facilities were operating below capacity. Housing starts remained below historical averages and were lower than a year earlier; unemployment, tighter lending standards, and mortgage-rate increases could temper improvement. No quantified earnings or revenue guidance was provided.
- Profitability is exposed to copper and brass costs, selling-price spreads, demand, competition, imports, and substitution by plastic or aluminum products. Management uses commodity and currency hedges; hedge values and underlying raw-material prices may affect results.
- Environmental remediation is expected to continue for at least 20 years. The company spent about $1.1 million in Q1 and expected about $1.0 million more during the rest of 2014. Timing of a potential $9.5 million Southeast Kansas Sites settlement payment was undetermined.
- The company reserved approximately $1.1 million for anticipated antidumping duties related to the November 2008–October 2009 review period; an appeal was pending. It stated that it had met payment requests for the earlier review period and had no liability for review periods after October 2009. Letters of credit could require payments up to $7.5 million.
- The board extended through October 2014 authorization to repurchase up to 20 million shares; repurchases are discretionary. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether working-capital outflows reverse and operating cash flow recovers, given the substantial Q1 cash use.
- How much reported sales and segment performance depend on the Howell and Yorkshire acquisitions versus underlying volume, pricing, and margins.
- Whether reduced import-duty accruals and other hedge or purchase-accounting effects are recurring or materially influence comparability.
- The outcome and potential payment timing of the Southeast Kansas environmental matter and the antidumping-duty appeal.
- Debt, covenant headroom, and the extent to which variable-rate exposure is offset by the interest-rate swap, which becomes effective in January 2015.