Mueller Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2015. Mueller manufactures and distributes plumbing, HVAC, refrigeration, and industrial products through its Plumbing & Refrigeration and OEM segments. Dollar amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $555.6 | $649.7 | $1,092.8 | $1,224.1 |
| Operating income | $55.6 | $48.2 | $91.3 | $86.5 |
| Net income attributable to Mueller | $33.7 | $35.0 | $55.6 | $59.8 |
| Diluted EPS | $0.59 | $0.62 | $0.98 | $1.05 |
- Sales fell 14.5% in Q2 and 10.7% in the first half. Management attributed the declines mainly to lower core-product selling prices and volumes, and the absence of Primaflow sales following its 2014 sale. Lower copper prices reduced selling prices; Turbotec contributed $5.7 million of sales.
- Gross margin, calculated from reported sales and cost of goods sold, was approximately 15.3% in Q2 versus 14.1% a year earlier, and 14.8% in the first half versus 13.9%. Reported operating income benefited from a $15.4 million asset-sale gain; Q2 also included $3.4 million of Yorkshire severance charges.
- The effective tax rate rose to 37% from 25% in Q2 and to 36% from 29% for the first half. Management cited state and other taxes; prior-year results benefited from valuation-allowance reductions.
- First-half operating cash flow was $17.2 million, compared with cash use of $50.9 million in 2014. Investing used $42.9 million, including $36.0 million for Turbotec and Sherwood and $16.0 million of capital spending. Financing used $26.4 million, including $17.8 million of joint-venture debt repayment and $8.4 million of dividends.
- Cash was $299.1 million at June 27, down from $352.1 million at year-end. Total debt was $222.8 million, including $18.0 million current and $204.8 million long-term; debt equaled 20.9% of total capitalization. Management reported a 4.4-to-1 current ratio and compliance with debt covenants.
- Dividends were $0.075 per share in each of the first two quarters. The filing reports no significant change in contractual cash obligations.
Segments and material changes
- Plumbing & Refrigeration: Q2 sales fell 17.6% to $327.3 million; operating income rose 11.3% to $36.0 million, including the asset-sale gain. First-half sales fell 14.0% to $632.4 million and operating income declined 1.3% to $55.5 million.
- OEM: Q2 sales fell 9.8% to $230.4 million while operating income rose 15.4% to $26.8 million. First-half sales fell 6.0% to $465.7 million while operating income rose 10.9% to $49.3 million. Lower prices and volumes were partly offset by Turbotec sales and lower cost of goods sold.
- On June 1, Mueller sold certain assets for $20.2 million and leased them back for approximately 22 months. It received $5.0 million at closing; the remaining $15.2 million is scheduled for later payment. The sale generated a $15.4 million pretax gain, equivalent to $0.17 per diluted share after tax.
- Mueller acquired Turbotec for approximately $14.2 million and entered into the Sherwood acquisition for $21.8 million, subject to working-capital adjustments. Purchase-price allocations were provisional where disclosed.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Management said it expects construction conditions to improve gradually, while noting residential activity remained below historical averages and could be constrained by labor participation, household formation, interest rates, and lending standards.
- Results remain exposed to copper and brass prices, raw-material availability, pricing spreads, volume and market share, construction demand, substitutes such as plastics and aluminum, foreign exchange, and interest rates. The company uses commodity, currency, and interest-rate hedges; hedge values can affect earnings and accumulated other comprehensive income.
- Environmental remediation cash spending was approximately $0.7 million in the first half; about $0.4 million was expected for the rest of 2015. Timing of a potential $9.5 million settlement offer related to the Southeast Kansas Sites was undetermined.
- Management believes ordinary-course litigation will not materially affect the company. The IRS was auditing the 2013 federal tax return; the company said it was adequately reserved but final outcomes remain uncertain.
- Management considers cash on hand, operating cash flow, and credit availability adequate for normal operational and capital needs. The $200 million revolving facility and $200 million term loan mature in December 2017. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported operating-income growth reflects recurring operations versus the one-time $15.4 million asset-sale gain and other restructuring items.
- Whether weaker core sales volumes and pricing stabilize, particularly in copper tube, brass rod, and plastic DWV fittings.
- Cash conversion and working-capital trends, along with acquisition integration and final purchase-price allocations for Turbotec and Sherwood.
- Collection timing for the deferred asset-sale proceeds and the status and potential cost of the Southeast Kansas environmental matter.
- Outcomes of the 2013 IRS audit and the effect of higher effective tax rates; also monitor debt, covenant compliance, and interest-rate exposure.