Mueller Industries, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The quarter ended April 2, 2016. Mueller manufactures and distributes copper, brass, aluminum, plastic, and related products serving plumbing, construction, industrial, and HVAC/refrigeration markets. The quarter contained 14 weeks versus 13 weeks in the prior-year quarter, a comparability factor. The company reorganized its reporting into Piping Systems, Industrial Metals, and Climate, and recast prior-period segment data.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $532.8 | $537.2 | (0.8%) |
| Operating income | $41.5 | $35.7 | +16.1% |
| Operating margin | 7.8% | 6.6% | +1.2 percentage points |
| Net income attributable to Mueller | $28.6 | $22.0 | +30.3% |
| Diluted EPS | $0.50 | $0.39 | +$0.11 |
| Operating cash flow | $10.3 | $3.9 | +$6.4 |
- Gross margin, calculated from reported sales and cost of goods sold, was approximately 16.2%, versus 14.2%. Cost of goods sold fell to $446.6 million from $460.8 million, principally reflecting lower average copper costs.
- Core-product selling prices fell 14.0% and unit volume fell 1.1%; acquisitions contributed 14.0% to the sales change. Acquired businesses contributed sales, but lower metal-linked prices largely offset that growth.
- Segment sales and operating income: Piping Systems $368.9 million and $31.2 million; Industrial Metals $134.5 million and $19.9 million; Climate $30.7 million and $3.9 million. Versus the prior year, sales rose 2.0% in Piping Systems and 19.0% in Climate, while Industrial Metals sales declined 10.9%. Operating income increased in all three segments.
- Income from unconsolidated affiliates was $2.9 million, compared with none in the prior-year quarter. It included the company’s equity-method share of Tecumseh-related results; the underlying investee quarter included a $17.1 million purchase-price-allocation gain, partly offset by restructuring and impairment charges and operating losses.
Balance sheet, cash flow, and liquidity
- At April 2, cash and cash equivalents were $270.1 million, total debt was $210.6 million, and total assets were $1.361 billion. Cash exceeded reported debt by approximately $59.6 million.
- Current assets were $820.8 million and current liabilities $202.6 million; management reported a 4.1-to-1 current ratio. Working capital, net of cash and current debt, was $352.6 million, versus $421.8 million in the prior-year comparison.
- Operating cash flow of $10.3 million reflected net income and noncash depreciation and amortization, partly offset by a $25.1 million increase in receivables associated with higher quarter-end sales. Capital expenditures were $5.9 million; investing cash outflow was $5.8 million.
- Cash declined $4.7 million during the quarter. Financing cash outflow was $9.1 million, including $7.0 million of joint-venture debt repayment and $4.2 million of dividends, partly offset by $2.0 million of debt issuance.
- The $200 million revolving credit facility and $200 million term loan both mature December 11, 2017. The revolving facility had approximately $6.6 million of letters of credit outstanding. Mueller-Xingrong reported $3.6 million of borrowings. The company said it was in compliance with debt covenants.
- The quarterly dividend was $0.075 per share. The board’s repurchase authorization extends through October 2016; approximately 4.7 million shares had been repurchased under the authorization since 1999. The quarter’s reported 84,303 shares were tendered in connection with stock awards, not purchases under the public program.
Outlook, risks, and notable items
- Management believes operating cash flow, available credit, and cash on hand will be adequate for working capital, capital spending, and debt obligations. It expected residential and nonresidential construction conditions to continue improving, while noting residential construction remained below long-term historical averages. No quantitative earnings or revenue guidance was provided.
- Key exposures include copper and brass price and availability, the ability to pass raw-material costs through to customers, interest rates, foreign exchange, construction demand, competition, and substitution by plastics or aluminum-based systems. The company uses commodity, currency, and interest-rate derivatives for risk management, not trading. It reported $210.6 million of variable-rate debt and stated a hypothetical 10% rate increase would have an insignificant unfavorable effect on pretax earnings and cash flows.
- The company had an approximately $2.3 million interest-rate-swap liability. At quarter end it held copper futures related to fixed-price orders and inventory, and currency forwards; derivative exposures and valuation are subject to market movements.
- Environmental reserves were $20.9 million. Environmental remediation cash spending was approximately $0.2 million in the quarter, with approximately $0.5 million expected for the remainder of 2016. Letters of credit supporting guarantees could require maximum payments of $6.6 million.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The IRS was auditing the 2013 federal tax return; final audit outcomes could differ from current estimates. The filing reported no material changes to previously disclosed risk factors.
- After quarter end, Mueller completed its purchase of a 60% interest in South Korea’s Jungwoo Metal for approximately $22 million on April 26, 2016. The purchase commitment was funded in Q2.
Important facts for investors to verify
- How much of the earnings improvement came from the longer fiscal quarter, acquisitions, lower copper costs, and the $2.9 million affiliate contribution, including the purchase-accounting gain in investee results.
- Whether acquired businesses and segment operating improvements can offset continued declines in core selling prices, Industrial Metals volumes, and metal-related sales values.
- Receivables, working-capital requirements, and cash conversion as sales and acquisitions evolve; Q1 operating cash flow remained below reported net income.
- Jungwoo’s post-acquisition performance and integration, as well as the company’s remaining liquidity and financing position ahead of the December 2017 facility maturities.
- Developments in the IRS audit, environmental remediation obligations, derivative positions, and construction-market conditions.