Mueller Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter ended July 1, 2017; comparisons are with the quarter ended July 2, 2016. First-half 2017 comprised 26 weeks versus 27 weeks in first-half 2016. The company manufactures and distributes copper, brass, aluminum, and plastic products across Piping Systems, Industrial Metals, and Climate segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $614.3 million | $544.1 million | $1,192.2 million | $1,076.9 million |
| Operating income | $46.8 million | $44.4 million | $92.4 million | $85.9 million |
| Net income attributable to Mueller | $27.6 million | $27.8 million | $57.6 million | $56.4 million |
| Diluted EPS | $0.48 | $0.49 | $1.00 | $0.99 |
| Operating margin | 7.6% | 8.2% | 7.7% | 8.0% |
- Q2 sales rose 12.9%; first-half sales rose 10.7%. Management attributed most growth to higher selling prices—primarily reflecting metal costs—and acquisitions. Core unit volume was flat in Q2 but fell 1.9% for the first half.
- Gross margin was approximately 14.6% in Q2 versus 16.2% a year earlier, and 15.0% for the first half versus 16.2%. Higher copper costs contributed to cost of goods sold rising faster than sales.
- Q2 operating income increased 5.3%, while attributable net income decreased 0.6%, partly as interest expense rose to $6.4 million from $1.7 million. The first-half interest expense was $9.0 million versus $3.5 million.
- Segment Q2 sales and operating income: Piping Systems $422.8 million and $34.6 million; Industrial Metals $154.5 million and $16.8 million; Climate $36.6 million and $6.1 million. Industrial Metals operating income declined 2.1% despite sales growth; Climate operating income rose 4.8%.
Cash flow, debt, and liquidity
- First-half operating cash flow was $12.5 million, down from $41.9 million. Receivables absorbed $47.1 million and inventories absorbed $10.9 million, primarily reflecting sales and working-capital needs.
- Investing activities used $6.7 million, including $18.4 million for Pexcor and Heatlink and $11.9 million in capital expenditures, partly offset by $17.5 million of net proceeds from the Mueller-Xingrong sale.
- Financing activities used $193.2 million, principally due to $185.5 million of dividends. Cash declined from $351.3 million at year-end to $167.6 million at July 1.
- Total debt was $503.6 million at July 1, including $284.5 million of 6% subordinated debentures and $200.0 million drawn on the revolving credit facility. Debt was 49.9% of total capitalization. The company reported compliance with debt covenants and a 3.4-to-1 current ratio.
- After quarter-end, the company paid $50 million on July 10 and $30 million on July 21 to reduce Credit Agreement borrowings. Management said cash, operating funds, and available credit should meet liquidity needs.
Material changes, outlook, and risks
- In March 2017, Mueller distributed a special dividend of $3 cash and $5 principal amount of 6% debentures per common share. The transaction reduced equity by approximately $458.7 million, increased long-term debt by approximately $284.5 million, and reduced cash by approximately $174.2 million. Reported first-half dividends per share of $8.20 reflect this special distribution and regular dividends.
- Mueller acquired Canadian PEX businesses Pexcor and Heatlink for approximately $18.5 million in May. It sold its 50.5% interest in Chinese joint venture Mueller-Xingrong for approximately $18.3 million in June and recorded a $1.6 million gain.
- Management said residential construction had improved but remained below long-term historical levels, and expected most housing and commercial-construction conditions to continue improving. The filing provides no specific earnings or revenue guidance.
- Key business exposures include copper and brass prices and availability, the ability to pass input costs through to customers, construction demand, competition and product substitution, interest rates, and foreign exchange. Hedging contracts address some commodity and currency exposure.
- Environmental matters include the Lead Refinery site: the company is evaluating an EPA request for a remedial investigation and feasibility study and cannot estimate the likelihood or amount of a potential loss. The EEOC matter alleges discriminatory terminations and policies; conciliation did not resolve it, and potential loss is not estimable. Management believes ordinary-course litigation will not materially harm the company.
- Ongoing Lead Refinery post-closure costs are estimated at $2.1–$4.7 million over 20 years; the potential cost of the separate EPA site investigation/remediation request remains unclear. Management estimated $0.4 million of environmental spending for the remainder of 2017.
Important facts for investors to verify
- Whether price-driven sales growth translates into improved margins as commodity costs and selling prices change, and whether core unit volumes recover.
- Cash conversion and working-capital trends, particularly receivables and inventory, following weak first-half operating cash flow.
- Debt and interest costs after the special dividend, including the effect of the subsequent $80 million repayment and upcoming debenture interest payments.
- Final purchase accounting for Pexcor and Heatlink, and the continuing performance of acquired businesses and unconsolidated affiliates.
- Developments and any estimable exposure from the EPA and EEOC matters, plus environmental remediation spending.