Mueller Industries, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 29, 2018; comparisons are with the quarter ended September 30, 2017. The company manufactures and distributes copper, brass, aluminum, plastic, HVAC, refrigeration, and plumbing products through Piping Systems, Industrial Metals, and Climate segments. Amounts below are in millions, except per-share data.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Net sales | $646.0 | $550.4 | $1,948.8 | $1,742.5 |
| Operating income | $33.7 | $37.5 | $133.0 | $129.7 |
| Net income attributable to Mueller | $20.3 | $22.3 | $77.6 | $79.9 |
| Diluted EPS | $0.35 | $0.39 | $1.35 | $1.39 |
| Operating margin | 5.2% | 6.8% | 6.8% | 7.4% |
Gross margin was approximately 12.2% in Q3 versus 14.4% a year earlier, and 14.0% for the nine-month period versus 14.8%. Q3 sales rose 17.4%, primarily from ATCO acquisition sales, higher core-product volumes, and higher selling prices; nine-month sales rose 11.8%. Q3 operating income fell 10.2% and attributable net income fell 8.8%, while nine-month operating income increased 2.5% and attributable net income declined 2.8%.
- Segment results, Q3: Piping Systems sales of $410.5 million and operating income of $25.4 million; Industrial Metals sales of $158.7 million and operating income of $15.1 million; Climate sales of $81.6 million and operating income of $5.8 million. Industrial Metals operating income declined from $22.7 million; higher sales did not translate into higher segment profit.
- Cash flow, first nine months: Operating cash flow was $122.5 million, versus $53.5 million a year earlier. Investing cash outflow was $166.3 million, including $167.7 million for acquisitions, partly offset by $18.7 million of asset-sale proceeds. Financing provided $26.7 million.
- Liquidity and debt: Cash and cash equivalents were $104.7 million at quarter-end, with total debt of $519.3 million, compared with $465.1 million at year-end 2017. Current assets were $761.2 million and current liabilities $244.3 million; management reported a 3.1-to-1 current ratio. The company said available cash, operating cash flow, and its credit facility should meet liquidity needs. It was in compliance with debt covenants.
Material changes and unusual items
- Mueller acquired ATCO Rubber Products on July 2 for approximately $156.7 million, net of working-capital adjustments, plus contingent consideration of up to $12.0 million. ATCO contributed $46.1 million of Q3 sales and was included in Climate. Die-Mold was acquired in March for approximately $13.6 million, plus up to $2.3 million contingent consideration.
- Q3 results included a $2.7 million gain on real-property sales and a $1.5 million insurance recovery related to the 2017 Port Huron mill fire. The Climate segment recorded $2.2 million of expense to step up ATCO inventory to fair value.
- Losses from unconsolidated affiliates were $3.1 million in Q3 and $13.6 million for the nine months, compared with $0.4 million and $1.7 million, respectively, in 2017. The nine-month amount included Tecumseh-related losses and labor-claim charges, partly offset by a settlement gain.
- The effective tax rate declined to 12% in Q3 from 27%, and to 20% for the first nine months from 29%. A $4.3 million reduction in the provisional transition-tax estimate benefited 2018 results; the company said its accounting for certain Tax Act provisions remained under review.
Outlook, risks, and contingencies
Management said it expected housing and commercial construction conditions to continue improving and considered liquidity adequate; it did not provide numerical earnings or revenue guidance. Results remain exposed to copper and other raw-material prices, the ability to pass cost changes through to customers, construction demand, competition and substitution by plastics or aluminum, interest rates, foreign exchange, and acquisition conditions. Copper and brass are major production costs; the company uses derivatives to manage certain exposures.
Environmental reserves were $21.3 million at quarter-end. The filing describes several remediation matters, including Kansas sites, Shasta-area mines, and the Lead Refinery site; the company could not estimate the likelihood or potential loss beyond current reserves for certain Lead Refinery and Bonita Peak matters. A separate antidumping-duty dispute also had an undeterminable potential liability. The EEOC consent decree provides for up to $1.0 million in monetary relief, within applicable insurance limits, and specified workplace measures.
Important facts for investors to verify
- Whether ATCO and Die-Mold deliver the expected contribution and whether provisional purchase-price allocations or contingent consideration change.
- Whether margins recover as metal costs, selling prices, and product mix shift; particularly monitor Industrial Metals operating performance.
- Whether Tecumseh and other unconsolidated affiliates reduce their losses.
- How debt, borrowing costs, and cash generation evolve following the acquisitions; the $350 million revolving facility matures in December 2021.
- Potential changes in environmental, litigation, and antidumping exposures beyond recorded reserves, and the final effects of the Tax Act calculations.