Mueller Industries, Inc. — Q1 2013 Form 10-Q
Reporting period: Quarter ended March 30, 2013; comparisons are with the quarter ended March 31, 2012. Dollar amounts below are in millions, except per-share data.
Business context
Mueller manufactures and distributes copper, brass, plastic, aluminum, and related products. Its reportable segments are Plumbing & Refrigeration and Original Equipment Manufacturers (OEM). Demand is influenced by construction, HVAC and refrigeration markets, metal prices, and product substitution.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $559.7 | $577.7 |
| Operating income | $37.3 | $46.9 |
| Income before taxes | $39.9 | $44.5 |
| Net income attributable to Mueller | $26.2 | $32.6 |
| Basic / diluted EPS | $0.94 / $0.93 | $0.86 / $0.85 |
| Operating cash flow | $(14.9) | $(10.8) |
| Capital expenditures | $9.8 | $9.3 |
| Cash and cash equivalents, quarter-end | $183.9 | $526.9 |
Gross margin was approximately 13.7% versus 14.6%; operating margin was 6.7% versus 8.1%. The higher EPS despite lower earnings reflected the reduction in shares following the 2012 repurchase of 10.4 million shares from Leucadia.
At March 30, 2013, total debt was $260.6 million, or 31.9% of total capitalization; cash less debt was approximately $(76.7) million. Current assets were $785.2 million and current liabilities $281.5 million; management reported a 2.8-to-1 current ratio. The company had a $350 million revolving facility and a $200 million term loan, both maturing December 11, 2017, and was in compliance with debt covenants. Cash dividends were $0.125 per share.
By segment, Plumbing & Refrigeration sales were $311.8 million and operating income $22.6 million, compared with $315.4 million and $28.3 million. OEM sales were $253.8 million and operating income $20.3 million, compared with $271.0 million and $24.7 million.
Changes versus the prior period
- Sales declined 3.1%, principally from lower OEM volume and lower base-metal selling prices. Management attributed approximately $12.1 million of the overall sales decrease to lower volume and $8.8 million to lower prices.
- Mueller-attributable net income fell about 19.6%, while diluted EPS rose from $0.85 to $0.93 because of the substantially lower share count.
- Operating income declined partly because Q1 2012 benefited from an approximately $8.0 million LIFO liquidation gain and a $1.5 million insurance settlement; neither benefit recurred in Q1 2013. Q1 2013 also included a $3.0 million gain on sale of non-operating property in other income.
- Interest expense fell to $0.6 million from $2.6 million. The effective tax rate increased to 34% from 26%.
- Cash declined $15.1 million during the quarter. Operating cash use reflected a $42.7 million increase in receivables, partly offset by earnings and noncash depreciation and amortization. Investing cash use included $14.8 million deposited into restricted cash.
Outlook, risks, contingencies, and unusual items
- No specific earnings or sales guidance was provided. Management said residential construction improved in 2012 and into 2013 but remained below historical averages; it expected conditions to improve gradually and irregularly. High unemployment and tighter lending standards could temper recovery.
- Results remain exposed to copper and brass prices, metal availability, spreads between input costs and selling prices, demand and capacity utilization, competition, substitutes such as plastics and aluminum, foreign exchange, and interest rates. Management noted most manufacturing facilities operated below capacity in 2012 and Q1 2013.
- The company had open copper futures tied to fixed-price sales and inventory, and entered a $200 million forward-starting interest-rate swap effective January 12, 2015. The swap fixes a 1.4% rate component; the company reported an all-in rate of 2.7% based on current variable premium pricing.
- Inventory included a $1.4 million write-down provision, or approximately $0.03 per diluted share after tax. Mueller had partially liquidated LIFO inventory and expected to replenish it by year-end; if not replenished, it estimated a potential $19.8 million reduction to cost of goods sold from liquidation, based on quarter-end quantities.
- Wynne, Arkansas fire-insurance advances totaled $65.0 million; $44.3 million, net of specified amounts, remained recorded as other current liabilities. The company also reserved approximately $3.8 million and $1.1 million for separate antidumping duty matters.
- Environmental obligations include expected spending of approximately $1.7 million for the remainder of 2013 and a potential $9.5 million Southeast Kansas settlement payment whose timing was undetermined. For the East Chicago Lead Refinery site, the company estimated $2.4–$3.6 million of post-closure monitoring and maintenance over 20 years; the potential cost of any further site remediation could not be estimated. EPA estimated $29.9 million for a remedy at surrounding properties, but had not determined that Lead Refinery was responsible for that remedy.
- A Michigan nuisance-related purported class action had a settlement in principle awaiting court approval. UK copper-tube and copper-fittings contribution claims remained pending; the company said the potential impact could not yet be determined for some proceedings. Management stated ordinary-course litigation was not expected to materially affect the company, subject to the disclosed exceptions and uncertainties.
Important facts for investors to verify
- Whether lower OEM volumes and segment operating income stabilize, and how construction recovery translates into demand.
- Operating cash conversion, particularly receivables and restricted-cash movements, and the terms and availability of credit facilities.
- Whether LIFO inventory is replenished by year-end and the resulting cost-of-sales and EPS effects.
- Final outcomes and cash exposure for antidumping duties, environmental matters, the Michigan settlement, and UK contribution claims.
- Effects of metal-price spreads, hedging positions, floating-rate debt, and the 2015-effective interest-rate swap on future margins and cash flows.