Mueller Industries, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 26, 2015 (52 weeks). This is an annual report; fourth-quarter figures are noted separately below. Mueller manufactures and distributes copper, brass, aluminum, plastic, and related products for plumbing, HVAC, refrigeration, and OEM markets, principally through Plumbing & Refrigeration and OEM segments.
Financial performance and position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $2,100.0 million | $2,364.2 million | -11.2% |
| Operating income | $137.3 million | $154.0 million | -10.9% |
| Net income attributable to Mueller | $87.9 million | $101.6 million | -13.5% |
| Diluted EPS | $1.54 | $1.79 | Down $0.25 |
| Operating margin | 6.5% | 6.5% | Approximately flat |
| Cash from operating activities | $159.6 million | $90.6 million | Up $69.0 million |
| Capital expenditures | $28.8 million | $39.2 million | Down $10.3 million |
| Cash and equivalents at year-end | $274.8 million | $352.1 million | Down $77.3 million |
| Total debt at year-end | $216.0 million | $241.4 million | Down $25.4 million |
- Gross profit, calculated as sales less cost of goods sold, was $290.3 million, or 13.8% of sales, versus $320.5 million, or 13.6%, in 2014. Net margin was approximately 4.2%, versus 4.3%.
- Operating cash flow benefited from lower receivables and inventory, reflecting lower copper prices and reduced working-capital needs; lower current liabilities partly offset those benefits.
- Year-end current ratio was 3.8:1. Current assets were $800.4 million and current liabilities $209.4 million. Cash less total debt was approximately $58.8 million.
- Debt was 20.1% of total capitalization. The company reported compliance with all debt covenants and no year-end borrowings on its $200 million revolving facility; approximately $8.8 million of availability was used for letters of credit.
- Quarter four sales were $472.0 million versus $537.3 million in Q4 2014; Mueller-attributable net income was $14.4 million versus $18.0 million, and diluted EPS was $0.25 versus $0.32.
Changes versus prior periods
- Sales declined principally due to lower core-product selling prices ($221.5 million impact) and lower core-product unit volume ($102.3 million impact), plus the absence of Primaflow sales after its 2014 sale. Acquisitions partly offset the decline.
- Plumbing & Refrigeration sales fell 11.0% to $1,260.3 million; segment operating income declined 3.4% to $90.1 million. OEM sales fell 11.5% to $849.5 million; segment operating income fell 15.2% to $72.6 million.
- The lower average copper price reduced reported sales and cost of goods sold. Core selling prices generally track raw-material prices, but profitability also depends on product spreads and volume.
- Cash from operations rose substantially, but cash declined as investing outflows increased, including $105.9 million for 2015 acquisitions and $65.9 million invested in the Tecumseh joint venture.
- FY2013 comparisons include unusually large gains: a $106.3 million insurance-settlement gain and a $39.8 million gain on sale of plastic-fittings assets. FY2015 included a $15.4 million pre-tax asset-sale gain and $3.4 million in Yorkshire rationalization severance charges.
Outlook, risks, and unusual items
- Management said residential construction had improved but remained below long-term historical averages; U.S. housing starts were 1.1 million in 2015 versus 1.0 million in 2014. Private nonresidential construction also improved. Management expected these conditions to continue improving, while identifying interest rates, lending standards, household formation, and labor participation as potential constraints.
- No specific earnings or revenue guidance was provided. Management expected cash, operating cash generation, and available credit to meet liquidity needs; it anticipated approximately $30 million of 2016 capital expenditures and $2.7 million of pension and postretirement contributions.
- Acquisitions in 2015 were Great Lakes Copper ($70.0 million), Sherwood Valve Products ($21.8 million), and Turbotec ($14.1 million). The company also invested $65.9 million for a 50% interest in the Tecumseh acquisition joint venture. Purchase-price allocations for the three acquired companies remained provisional.
- After year-end, Mueller agreed to invest approximately $5.5 million for a 40% interest in a planned Bahrain copper-tube joint venture. In February 2016 it agreed to buy a 60% interest in South Korea’s Jungwoo Metal for approximately $21 million, subject to closing conditions.
- Environmental reserves were $21.7 million at year-end. Expected environmental spending includes $0.6 million in each of 2016–2018, $0.7 million in each of 2019–2020, and $18.5 million thereafter. The company cautioned that remediation estimates may change; it could not estimate potential loss from EPA matters concerning the Lead Refinery site and nearby properties.
- A customs dispute seeks $3.0 million in antidumping duties and interest on certain 2007–2008 imports. The company protested the invoices and said it could not estimate any potential liability. A separate 2008–2009 duty matter also involved protests of certain liquidations.
- Principal risks include copper and other raw-material price and supply volatility, housing and commercial-construction cycles, competition and substitute materials, foreign-exchange movements, labor negotiations, environmental obligations, litigation, and successful integration and performance of acquired businesses. About 1,865 of 4,104 employees were union-represented; several contracts were due to expire in 2016.
- Management and the auditor concluded internal control over financial reporting was effective. Controls at Turbotec, Sherwood, and Great Lakes—11.4% of year-end assets—were excluded from management’s assessment and the auditor’s controls audit.
Important facts for investors to verify
- Whether the decline in core volumes and OEM operating income persists, and whether lower commodity prices continue to pressure sales and spreads.
- Acquired-business results, final purchase-price allocations, integration costs, and the returns expected from the Tecumseh, Bahrain, and Jungwoo investments.
- Cash conversion and liquidity after acquisitions, planned capital spending, debt maturities, dividends, and any share repurchases.
- Environmental-reserve assumptions and developments in the Kansas, Shasta, Lead Refinery, Wynne, and antidumping matters.
- That reported earnings include the $15.4 million asset-sale gain and a $4.2 million deferred-tax-liability adjustment; assess underlying results apart from these items.