Mueller Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Quarter ended March 30, 2019; comparisons are with the quarter ended March 31, 2018. Amounts are in U.S. dollars.
Business context
Mueller manufactures and distributes copper, brass, aluminum, and plastic products across Piping Systems, Industrial Metals, and Climate. Demand is tied in part to housing, commercial construction, HVACR, and industrial markets. ATCO, acquired in July 2018, contributed $45.5 million of Q1 2019 sales to Climate.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $611.8 million | $640.1 million | Down 4.4% |
| Operating income | $49.2 million | $47.4 million | Up 3.7% |
| Operating margin | 8.0% | 7.4% | Up 0.6 percentage points |
| Net income attributable to Mueller | $15.7 million | $24.1 million | Down 34.8% |
| Diluted EPS | $0.28 | $0.42 | Down $0.14 |
| Dividend per share | $0.10 | $0.10 | Unchanged |
Sales fell mainly because core-product selling prices declined 6.1% and unit volume declined 5.4%; acquisitions partly offset those declines. Cost of goods sold fell to 83.6% of sales from 85.3%, but SG&A increased to 6.7% from 5.3%. Income from operations improved despite lower revenue; net income was pressured by higher taxes and a larger loss from unconsolidated affiliates.
- Piping Systems: Sales of $376.5 million, down 12.6%; operating income of $28.2 million, down 14.3%. Lower copper-tube prices and volumes were the main factors.
- Industrial Metals: Sales of $150.9 million, down 14.9%; operating income of $19.2 million, down 15.2%. Lower brass-rod prices and volumes drove the decline.
- Climate: Sales of $89.8 million, up 149.1%; operating income of $12.4 million, up 123.3%, principally reflecting ATCO, along with volume and mix.
Cash flow, balance sheet, and liquidity
- Operating cash flow was negative $24.7 million, compared with negative $26.5 million a year earlier. Working-capital uses included increases in receivables ($34.1 million) and inventories ($13.3 million), and a decrease in current liabilities ($15.9 million).
- Investing cash flow was negative $14.8 million, including $8.0 million invested in unconsolidated affiliates and $6.8 million of capital expenditures. Financing cash flow was positive $60.5 million, primarily reflecting $100.6 million of debt issuance, partly offset by debt repayments, dividends, and share repurchases.
- Cash and cash equivalents were $97.6 million at March 30, 2019; cash, cash equivalents, and restricted cash totaled $99.0 million. Current assets were $784.5 million and current liabilities $220.5 million; the reported current ratio was 3.6 to 1.
- Total debt was $564.8 million, or 49.3% of total capitalization, versus approximately $496.7 million at year-end 2018. This included $284.5 million of debentures and $265.0 million outstanding under the $350 million revolving credit facility, which matures December 6, 2021. The company reported compliance with debt covenants.
- Operating lease liabilities of $30.2 million were recognized following adoption of ASC 842 in Q1 2019.
Outlook, commentary, and risks
Management said cash from operations, available credit, and cash on hand should be adequate for working capital, capital expenditures, and debt obligations. No earnings or revenue guidance was provided. Management expected approximately $2.3 million of environmental-remediation spending for the remainder of 2019. Future dividends depend on financial condition, cash flows, capital needs, earnings, and other factors.
Key exposures include copper and brass price and availability, raw-material-to-selling-price spreads, housing and commercial construction, competition and substitution by plastics or aluminum, interest rates, foreign exchange, and the results of unconsolidated affiliates. Copper and brass costs are generally passed through to customers, but timing and market conditions can affect margins. The company held copper futures for fixed-price customer orders and inventory, and foreign-currency forward contracts.
- Losses from unconsolidated affiliates were $15.4 million, versus $10.3 million in Q1 2018; the 2019 amount included $14.6 million of Tecumseh losses. The investees reported a combined net loss of $29.2 million.
- Environmental reserves were $20.0 million. Certain site matters, including the Lead Refinery and Bonita Peak matters, have uncertain potential outcomes; the company could not estimate the likelihood or range of potential losses beyond recorded reserves in specified cases.
- A $27.4 million Deepwater Horizon settlement award to a subsidiary remained subject to appeal. If upheld, fees of approximately 20% plus applicable taxes would apply; Mueller said recovery would be recognized when settled.
- The effective tax rate was 23%, versus 18% a year earlier. Q1 2019 tax items included a $1.5 million transition-tax expense and a $2.6 million benefit related to a prior-period foreign-subsidiary sale.
- The Board’s authorization to repurchase up to 20 million shares was extended through August 2019. Mueller repurchased $1.8 million of stock during the quarter.
Important facts for investors to verify
- Whether lower core-product prices and volumes persist, and whether acquisition-related Climate growth offsets weakness in Piping Systems and Industrial Metals.
- Whether working-capital investment converts to cash and how operating cash flow supports debt service, capital spending, and shareholder returns.
- The trajectory of Tecumseh and other affiliate losses, and the resulting effect on earnings and investment carrying values.
- Developments in environmental, legal, and tax contingencies, particularly the Lead Refinery and Bonita Peak matters and the appealed Deepwater Horizon award.
- Debt balances, borrowing costs, covenant headroom, and the company’s ability to maintain liquidity while funding obligations and any share repurchases.