Mueller Industries, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Mueller manufactures and distributes copper, brass, aluminum, plastic, and other building and industrial products. Its reportable segments are Piping Systems, Industrial Metals, and Climate. Financial figures below are in U.S. dollars; dollar amounts are millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $662.8 | $614.3 | $1,302.8 | $1,192.2 |
| Operating income | $51.9 | $46.7 | $99.3 | $92.3 |
| Income attributable to Mueller | $33.2 | $27.6 | $57.3 | $57.6 |
| Diluted EPS | $0.58 | $0.48 | $1.00 | $1.00 |
| Operating margin | 7.8% | 7.6% | 7.6% | 7.7% |
| Gross margin | 14.9% | 14.6% | 14.8% | 15.1% |
Quarterly sales rose 7.9% and operating income rose 11.2%; first-half sales increased 9.3%, while operating income increased 7.7%. First-half attributable income was nearly flat, chiefly reflecting a $10.5 million loss from unconsolidated affiliates versus $1.4 million a year earlier. Q2 effective tax rate was 27% versus 31%; first-half rate was 22% versus 29%.
Cash flow and liquidity: First-half operating cash flow was $36.2 million, compared with $12.5 million. Working capital movements included a $90.3 million increase in receivables and a $33.4 million decrease in inventory. Investing cash outflow was $12.6 million; capital expenditures were $10.9 million, Die-Mold acquisition spending was $12.5 million, and aircraft-sale proceeds were $11.4 million. Cash, cash equivalents, and restricted cash ended at $284.4 million, up $157.9 million from year-end 2017. Current ratio was 3.4 to 1.
Debt and capital: Total debt was $618.5 million, or 51.9% of capitalization, at June 30. This included $284.5 million of 6% subordinated debentures. Borrowings under the $350 million revolving facility were $315 million at quarter-end, including $150 million borrowed to fund the subsequent ATCO acquisition. The company paid down $75 million of facility borrowings in July. It reported compliance with debt covenants. Quarterly dividends were $0.10 per share.
Material changes and segment performance
- Sales growth reflected higher selling prices, mainly for copper tube and brass rod, and stronger domestic core-product volumes. Higher metal prices generally flowed through to selling prices.
- Q2 Piping Systems sales rose 7.2% and operating income rose 20.8%; first-half sales rose 7.6% and operating income rose 14.7%. Results included the Die-Mold and Heatlink acquisitions and were affected by the 2017 sale of Mueller-Xingrong.
- Q2 Industrial Metals sales increased 13.8%, but operating income declined 1.8%; first-half sales grew 16.1% and operating income 5.4%. Higher prices and volumes supported sales, while costs of goods sold rose faster than sales in Q2.
- Q2 Climate sales grew 6.9%, while operating income fell 12.6%; first-half sales rose 6.1% and operating income declined 7.1%. Management attributed sales growth to volume and product mix; cost of goods sold increased as well.
- Die-Mold was acquired in March for approximately $14.8 million, including contingent consideration of up to $2.3 million. On July 2, after quarter-end, Mueller acquired ATCO Rubber Products for approximately $157.7 million in cash, plus potential contingent consideration of up to $12 million. ATCO had approximately $166 million of 2017 revenue and will join the Climate segment.
Outlook, risks, and unusual items
- Management stated that operating cash flow, facility availability, and cash on hand should be adequate for working capital, capital expenditures, and debt obligations. It expected most housing and commercial construction conditions to continue improving, but gave no quantified earnings or sales guidance.
- Key operating exposures include copper and brass prices and availability, metal-price spreads, construction activity, substitution by plastics and aluminum, imports, and foreign exchange. The company uses derivatives for hedging and reports it does not trade them for speculative purposes.
- Environmental reserves were $23.0 million. The filing describes multiple remediation matters, including Kansas smelter sites, California mine sites, and the Lead Refinery Superfund site. Mueller said it could not estimate potential loss beyond current reserves for certain Lead Refinery matters or the Bonita Peak Mining District site. It expected approximately $1.4 million of environmental spending in the remainder of 2018.
- Other contingencies include a disputed approximately $3.0 million antidumping-duty claim; management said it could not estimate any resulting liability. An EEOC consent decree provides for up to $1.0 million in monetary relief, within insurance limits, plus compliance measures.
- Tecumseh-related investees reported combined first-half net losses of $17.9 million. Mueller’s first-half affiliate loss included $12.9 million of net losses and $3.0 million of labor-claim charges, partly offset by a $7.0 million Brazilian tax settlement gain. Foreign currency translation reduced Q2 other comprehensive income by $11.6 million.
- The company had not completed its accounting for certain Tax Cuts and Jobs Act effects; the transition-tax liability and deferred-tax benefit were provisional. Its accounting policy for GILTI deferred taxes was still under evaluation.
Important facts for investors to verify
- Whether sales growth and margins persist as metal costs, selling prices, and volumes change; note Q2 Industrial Metals and Climate operating-income declines.
- Integration and financing of ATCO, the final acquisition purchase-price allocation, contingent consideration, and debt reduction after quarter-end.
- Performance and potential further losses at Tecumseh and other unconsolidated affiliates.
- Environmental exposure beyond recorded reserves, particularly Lead Refinery and Bonita Peak, and the status of the antidumping-duty dispute.
- The statement lists first-half 2017 dividends per share as $8.20, while Q2 dividends were $0.10 and the filing separately describes a 2017 special dividend of $3.00 cash plus $5.00 principal amount of debentures per share; verify the reported comparative dividend figure.