Mueller Industries, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; comparative quarter ended October 1, 2011. The filing also reports nine-month results. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context and results
Mueller manufactures and distributes copper, brass, plastic, aluminum, and related products. Its two reportable segments are Plumbing & Refrigeration and Original Equipment Manufacturers (OEM). Housing, commercial construction, HVAC, refrigeration, and automotive demand affect sales; copper and other raw-material prices influence selling prices and margins.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $514.2m | $585.8m | $1,685.9m | $1,926.4m |
| Operating income | $24.5m | $18.9m | $101.2m | $118.7m |
| Net income attributable to Mueller | $15.5m | $10.5m | $66.0m | $73.4m |
| Diluted EPS | $0.41 | $0.27 | $1.72 | $1.92 |
| Operating margin | 4.8% | 3.2% | 6.0% | 6.2% |
Margins shown are calculated from reported sales and operating income. Q3 gross margin was approximately 12.5%, versus 10.6% a year earlier; nine-month gross margin was approximately 13.1%, versus 12.4%.
Revenue, segments, and period comparisons
- Q3 sales fell $71.6m year over year: approximately $58.0m reflected lower selling prices and $10.9m lower unit volume in core products. The average Comex copper price was 13% lower year over year.
- Q3 Plumbing & Refrigeration sales were $297.9m, down 9%; operating income rose to $17.6m from $13.9m, primarily on lower SG&A. OEM sales were $221.5m, down from $266.6m; operating income increased to $14.4m from $12.2m, mainly on improved spreads, particularly in brass rod.
- Nine-month sales declined $240.5m, reflecting about $153.6m in lower prices and $79.2m in lower unit volume. Plumbing & Refrigeration operating income was essentially unchanged at $68.5m; OEM operating income decreased to $54.2m from $60.6m, primarily due to lower spreads.
- Despite lower sales, Q3 operating income improved year over year, aided by lower SG&A and the absence of prior-year inventory write-downs. Nine-month operating income declined, while reported net income also reflected different settlement items across periods.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $72.8m, versus $68.9m in the prior-year period. Investing cash use was $5.7m; financing cash use was $417.0m. Cash decreased $348.4m to $165.8m, largely reflecting the share repurchase and debt repayments.
- At September 29, 2012, total debt was $220.1m, comprising $12.6m current and $207.6m long-term. Cash was $165.8m. The company had drawn $200m under its $350m revolving facility, with $139.1m available after letters of credit. Management reported compliance with debt covenants and a current ratio of 3.3 to 1.
- On September 24, Mueller repurchased 10.4m shares from Leucadia for $427.3m, funded with cash and $200m of facility borrowings. The company redeemed its $148.2m of 6% subordinated debentures in June. Q3 dividend was $0.10 per share.
- Management said cash, operating cash flow, and facility availability should be adequate for normal operating and capital needs. Pro forma analysis estimated Q3 diluted EPS of $0.51 if the repurchase had occurred at the start of the quarter, versus reported diluted EPS of $0.41; this is a non-GAAP, hypothetical presentation, not guidance.
- Capital expenditures were $43.8m for the nine months. Mueller acquired Westermeyer Industries for approximately $11.5m in cash in August, adding refrigeration components to OEM.
Outlook, unusual items, and risks
- No numerical earnings or sales guidance was provided. Management expected housing recovery to be modest in the near term and broader conditions to improve gradually but irregularly; facilities had operated significantly below capacity amid weak demand. U.S. housing starts had improved from 2011 levels, but residential and commercial construction remained subdued.
- Q3 SG&A benefited from lower compensation and foreign-currency transaction gains, partly offset by higher bad-debt expense. The prior-year quarter included approximately $6.8m of inventory write-downs that were not required in Q3 2012.
- Nine-month 2012 results included a $1.5m insurance gain related to the Fulton facility. Q1 2012 also recognized an approximately $8.0m benefit from a prior-year LIFO inventory liquidation. The comparable 2011 period included a $10.5m litigation settlement gain. These items affect comparisons.
- At the Wynne, Arkansas fire site, the company had received $65m in insurance advances; $45.0m, net of specified book values and costs, was recorded in other current liabilities at quarter-end. The final loss and insurance recovery were not yet determined.
- Key operating risks include copper and brass price and availability, the ability to pass through input costs, demand and utilization, competition and substitution by plastics or aluminum, imports, and foreign exchange. Copper futures hedges included approximately $14.4m of purchases tied to fixed-price sales and $34.0m of sales tied to inventory.
- Environmental and legal exposures remain uncertain. The EPA proposed a residential soil-removal remedy near the Lead Refinery site with an estimated cost of approximately $29m, but Mueller could not estimate its potential liability; cost allocation among potentially responsible parties was unknown. The company also cited a potential $9.5m environmental settlement offer with payment timing undetermined. A Michigan nuisance and property-rights class action had unquantified potential impact, and U.K. contribution claims related to copper-tube and copper-fittings decisions could not yet be estimated.
- In October 2012, after quarter-end, Mueller settled supplier-related litigation and received $5.8m. The company said Canadian antidumping measures were not expected to have a material effect, given the small share of sales exported to Canada. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether lower volumes and weak construction demand persist, and whether higher segment margins can be sustained as metal prices and product spreads change.
- The effect of the Leucadia repurchase on ongoing EPS, liquidity, leverage, and future capital allocation; the pro forma $0.51 EPS is hypothetical.
- The resolution and financial exposure, if any, from the Lead Refinery remedy, environmental settlement offer, Michigan class action, and U.K. contribution proceedings.
- Final insurance accounting for the Wynne fire and whether anticipated inventory replenishment affects the disclosed LIFO liquidation treatment.
- Cash conversion and working-capital needs, including the impact of metal-price movements, alongside remaining credit-facility availability and covenant compliance.