Mueller Industries, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2014. Dollar amounts below are in millions unless otherwise stated. Mueller manufactures and distributes copper, brass, plastic, and aluminum products through Plumbing & Refrigeration and OEM segments.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $649.7 | $582.3 | $1,224.1 | $1,142.0 |
| Operating income | $48.2 | $144.3 | $86.5 | $181.7 |
| Consolidated net income | $35.2 | $91.8 | $60.2 | $118.3 |
| Net income attributable to Mueller | $35.0 | $91.2 | $59.8 | $117.4 |
| Diluted EPS | $0.62 | $1.62 | $1.05 | $2.08 |
- Quarterly sales grew 11.6%; first-half sales increased 7.2%. Acquisitions of Howell and Yorkshire contributed about $67.1 million of Q2 sales and $106.9 million of first-half sales. Higher unit volume was partly offset by lower selling prices, which generally tracked lower copper costs.
- Reported earnings fell substantially versus 2013 because the prior-year periods included a $106.3 million pretax insurance settlement gain related to the 2011 Wynne, Arkansas fire. The gain was $65.6 million after tax, or $1.17 per diluted share in Q2 2013. Excluding that gain, prior-year operating income was approximately $38.0 million for Q2 and $75.4 million for the first half; current-period operating income was higher in both comparisons.
- Q2 gross margin was approximately 14.1%, versus 13.9% a year earlier. Reported operating margin was 7.4% versus 24.8% in Q2 2013, which included the insurance gain.
- Q2 Plumbing & Refrigeration sales rose to $397.2 million, largely from acquisitions; segment operating income was $32.3 million versus $129.8 million, with the prior period including most of the insurance gain. OEM sales were $255.4 million versus $257.0 million, while operating income improved to $23.2 million from $20.9 million, primarily on better product mix.
- Effective tax rate was 25% for Q2 and 29% for the first half, compared with 36% in each prior-year period. A $4.8 million release of valuation allowance on state tax credits benefited Q2 results by about $0.08 per diluted share.
Cash flow, liquidity, and debt
- First-half cash used in operating activities was $50.9 million, versus $49.2 million provided in the prior-year period. Working-capital increases included receivables of $100.4 million and inventory of $20.6 million, associated mainly with higher sales and operating needs.
- Investing activities used $42.3 million, including $30.1 million for Yorkshire and $18.8 million of capital expenditures. Financing activities provided $23.2 million, including borrowing proceeds, partly offset by $8.4 million of dividends.
- Cash and cash equivalents were $242.2 million at June 28, 2014, down from $311.8 million at year-end 2013. Total debt was $266.1 million, or 25.1% of total capitalization; cash less debt was approximately negative $23.9 million. The filing reports a current ratio of 3.5 to 1.
- Debt included a $200 million term loan and borrowings under an invoice facility; the company reported $23.1 million outstanding on the latter. Its revolving credit facility was reduced from $350 million to $200 million in May, and the term and revolving facilities mature in December 2017. Mueller said it was in compliance with debt covenants and believed available cash, operating cash generation, and credit agreements would meet normal needs.
- The regular quarterly dividend was $0.075 per share. The board’s authorization to repurchase up to 20 million shares was extended through October 2014; the company had repurchased approximately 4.7 million shares under the authorization through the quarter-end.
Outlook, risks, and contingencies
- Management expected housing and most non-residential construction conditions to improve gradually, but at an irregular pace. It noted that residential construction remained below historical levels and cited labor participation, household formation, lending standards, and mortgage rates as constraints. Many facilities operated below capacity amid subdued demand.
- Results depend on sales volume, product mix, metal-price spreads, and the ability to pass raw-material costs through to customers. The filing identifies substitution by plastics and aluminum, imports, technology, competition, and foreign-exchange movements as risks. Copper and brass are major production costs; the company hedges certain commodity, currency, and interest-rate exposures.
- Environmental remediation obligations are expected to continue for at least 20 years. Spending was approximately $1.3 million in the first half; management expected about $0.7 million more in the rest of 2014. Timing of a potential $9.5 million settlement payment had not been determined.
- A reserve of approximately $1.1 million was recorded for a Mexican antidumping-duty review; the filing describes a court remand for reconsideration of the rate. Mueller settled UK copper-tube contribution claims in Q2 without material financial impact; separate copper-fittings claims remained outstanding and management did not expect a material impact.
- Mueller acquired Yorkshire for approximately $30.1 million in February 2014. The purchase-price allocation remained provisional. Howell, acquired in October 2013, had previously reported annual sales of $156.3 million; Yorkshire reported annual revenue of approximately $196.1 million for 2012.
- The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting. Management concluded disclosure controls were effective as of June 28, 2014.
Important facts for investors to verify
- How much of sales growth and future profitability is attributable to acquired businesses versus organic volume, pricing, and mix?
- Whether working-capital investment reverses and operating cash flow returns to positive levels; receivables and inventory increased materially in the first half.
- The final Yorkshire purchase-price allocation, integration costs, and acquired-business contribution to segment margins.
- The resolution, timing, and potential cash impact of the $9.5 million environmental settlement offer and the $1.1 million antidumping-duty reserve.
- Whether construction demand and metal-price spreads improve as management anticipated, and whether debt, liquidity, and covenant compliance remain adequate.