Mueller Industries, Inc. — Q1 2020 Form 10-Q
Business context and period: The filing covers the quarter ended March 28, 2020, compared with the quarter ended March 30, 2019. Mueller manufactures and distributes copper, brass, aluminum, and plastic products across Piping Systems, Industrial Metals, and Climate segments. The company acquired Shoals Tubular, Inc. (STI) in January 2020 for approximately $15.4 million; STI is included in Climate.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $602.9 million | $611.8 million |
| Operating income | $59.3 million | $49.2 million |
| Net income attributable to Mueller | $32.4 million | $15.7 million |
| Diluted EPS | $0.57 | $0.28 |
| Operating cash flow | $28.1 million | $(24.7) million |
| Capital expenditures | $17.1 million | $6.8 million |
Sales declined 1.4%. Gross margin was approximately 15.6% versus 16.4%; operating margin was approximately 9.8% versus 8.0%, and net margin attributable to Mueller was approximately 5.4% versus 2.6%. Results include a $21.9 million Deepwater Horizon settlement gain, partly offset by $3.0 million in asset impairment charges. Without the settlement gain, reported operating income would have been materially lower.
Segment results: Piping Systems sales rose 2.3% to $385.0 million and operating income rose 29.8% to $36.7 million. Industrial Metals sales fell 13.0% to $131.2 million and operating income fell 41.7% to $11.2 million, primarily on weaker brass-rod volume and margin pressure. Climate sales increased 3.8% to $93.3 million and operating income increased 5.1% to $13.0 million, including $3.4 million of STI sales.
Cash, debt, and liquidity
Cash and cash equivalents were $154.3 million at quarter-end; cash, cash equivalents, and restricted cash totaled $172.0 million. Current assets were $774.1 million and current liabilities $229.9 million; the reported current ratio was 3.4 to 1. Operating cash flow improved from use of cash in the prior-year quarter, but included working-capital movements, including a $46.3 million increase in receivables and a $17.5 million decrease in inventories.
Total debt was $475.8 million, or 41.7% of total capitalization. This included $284.5 million of debentures and $180.0 million drawn on the $350.0 million revolving credit facility. The company reported compliance with debt covenants. After quarter-end, it paid down $40 million and $30 million on the revolver on April 17 and April 20, respectively. Dividends were declared at $0.10 per share.
Material changes and management commentary
- Core-product selling prices declined 1.6% and unit volumes declined 1.6% year over year. Lower prices in copper tube and brass rod and lower brass-rod volume drove the sales decrease.
- Operating income benefited from the settlement gain; interest expense fell to $5.4 million from $7.0 million, while the effective tax rate rose to 26% from 23%.
- Losses from unconsolidated affiliates improved to $6.1 million from $15.4 million, including lower Tecumseh losses.
- Management said COVID-19 had a mild impact on Q1 but anticipated April and May sales could be down as much as 30% to 40%. It said cash, operating cash flow, and available credit were expected to meet liquidity needs.
Risks, contingencies, and unusual items
Key risks include pandemic-related demand, production, supply-chain, and customer disruptions; swings in copper and brass prices and raw-material availability; construction-market conditions; foreign exchange and interest-rate exposure; and competition from substitute products. Copper futures held for fixed-price sales had a reported net liability of approximately $12.5 million; the filing states that about $3.0 million of deferred net losses, net of tax, was expected to be reclassified into earnings over the next 12 months.
Environmental matters include a $5.6 million reserve for three Southeast Kansas sites, estimated Shasta-area remediation spending of $12.7 million to $17.7 million over 30 years, and other site obligations. For the Lead Refinery NPL site, the company states it cannot determine the likelihood or amount of a material loss beyond its current reserve. It also reports unresolved potential antidumping duties for which it cannot estimate any liability. The company’s ordinary-course litigation is not expected by management to materially adversely affect results, but outcomes are uncertain.
Important facts for investors to verify
- Actual April–May sales and subsequent COVID-19 effects compared with management’s 30%–40% decline estimate.
- Underlying operating performance excluding the $21.9 million settlement gain and the effect of impairment charges.
- Post-quarter revolver repayments, remaining borrowing availability, and covenant compliance.
- Exposure to environmental and legal claims, particularly the Lead Refinery and Bonita Peak matters, and whether reserves change.
- Industrial Metals volume and margin trends, and losses or funding needs associated with unconsolidated affiliates.