Mueller Industries, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Mueller manufactures and distributes copper, brass, plastic, and aluminum products through its Plumbing & Refrigeration and Original Equipment Manufacturers (OEM) segments. Demand is tied in part to residential and commercial construction, HVAC, plumbing, and refrigeration markets. The company reported improving U.S. housing activity, but construction remained below historical levels and recovery was expected to be gradual and uneven.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $582.3 | $594.1 | $1,142.0 | $1,171.8 |
| Operating income | $144.3 | $29.8 | $181.7 | $76.7 |
| Net income attributable to Mueller | $91.2 | $17.9 | $117.4 | $50.5 |
| Diluted EPS | $3.23 | $0.47 | $4.16 | $1.31 |
| Operating cash flow | Not stated separately | Not stated separately | $49.2 | $17.3 |
- Q2 gross profit was approximately $81.2 million, or 13.9% of sales, versus approximately $71.2 million, or 12.0%, a year earlier. Q2 operating margin was 24.8%, but included a large insurance gain; excluding that $106.3 million gain, operating income was approximately $38.0 million and operating margin approximately 6.5%.
- Q2 interest expense was $1.1 million versus $2.7 million. The six-month effective tax rate was 36%, compared with 29% in the prior-year period.
- At June 29, cash and cash equivalents were $261.7 million; total debt was $250.6 million, including $43.8 million current and $206.8 million long-term. Total debt equaled 27.8% of total capitalization. The company reported a 3.5:1 current ratio and compliance with debt covenants.
- Total assets were $1,209.9 million and total liabilities were $560.2 million. Cash rose $62.7 million from year-end 2012. Six-month capital expenditures were $21.7 million; management expected approximately $40 million for full-year 2013.
- Six-month operating cash flow included $32.4 million of non-capital insurance proceeds and was reduced in the reconciliation by the $106.3 million insurance gain and a $35.1 million increase in receivables. Investing cash flow was $6.5 million and financing cash flow was $8.4 million.
Changes versus the prior comparable periods
- Sales declined 2.0% in Q2 and 2.5% for the first half. Lower copper prices reduced selling prices; lower OEM unit volumes also weighed on sales. Plumbing & Refrigeration volume increased, partly offsetting these declines.
- Reported operating income and earnings rose sharply, principally because Q2 2013 included a $106.3 million pre-tax gain from settlement of the 2011 Wynne, Arkansas fire insurance claim. Management said the gain was $65.6 million after tax, or $2.33 per diluted share. Comparisons also reflect a $1.5 million insurance gain in first-half 2012.
- Excluding the Wynne settlement, Q2 operating income was approximately $38.0 million versus $29.8 million in Q2 2012. OEM operating income improved to $20.9 million from $15.1 million, primarily due to higher margins. Plumbing & Refrigeration reported $129.8 million operating income, including a $103.9 million segment-allocated insurance gain.
- Average diluted shares fell to 28.2 million from 38.5 million, reflecting the September 2012 repurchase of 10.4 million shares from Leucadia. This materially benefited per-share comparisons.
- First-half 2012 cost of goods sold included an approximately $8.0 million benefit from recognition of a prior LIFO inventory-layer liquidation; no equivalent benefit was recognized in first-half 2013.
Outlook, risks, and unusual items
- Management expected gradual but irregular improvement in market conditions and anticipated continued near-term housing recovery, while noting risks from unemployment, tighter lending standards, and rising mortgage rates. No specific earnings or revenue guidance was provided.
- Raw-material spreads and copper prices affect selling prices and profitability. Other identified risks include metal and energy availability/cost, competition and substitution by plastics or aluminum, construction demand, foreign exchange, and interest rates.
- The company held $250.6 million of variable-rate debt. A $200 million forward-starting interest-rate swap is scheduled to become effective January 12, 2015, with a stated all-in fixed rate of 2.7% based on current pricing.
- Environmental remediation is a material uncertainty. The Lead Refinery site and surrounding properties are on the EPA National Priorities List; the EPA estimated $29.9 million for a remedy for surrounding properties, but had not investigated or proposed a remedy for the company’s site or informed the subsidiary it was a potentially responsible party. The company could not estimate the likelihood or range of potential loss for that site. It estimated $2.4–$3.6 million of post-closure monitoring and maintenance costs over 20 years and disclosed a separate $9.5 million settlement offer with payment timing undetermined.
- The company had a $3.8 million reserve for one Mexican steel-pipe antidumping matter and a $1.1 million reserve for another under appeal. A settlement in principle was reached in an Extruded Metals class action, subject to court approval. Management did not expect the disclosed U.K. copper competition contribution claims to materially affect results or financial position.
- Management expected 2013 capital expenditures of approximately $40 million, funded by existing cash and operations. A share-repurchase authorization for up to 10 million shares was extended through October 2013; the company had repurchased approximately 2.4 million shares under this authorization through quarter-end. Future dividends and repurchases remain discretionary.
- The company expected to replenish partially liquidated LIFO inventory by year-end. If it did not, it estimated a cost-of-goods-sold reduction of approximately $4.6 million based on quarter-end quantities.
Key facts for investors to verify
- Separate recurring operating performance from the $106.3 million Wynne insurance gain and assess the effect of the prior-year LIFO benefit.
- Track sales volumes, copper-related selling prices, margins, and OEM performance as construction and end-market demand evolve.
- Monitor receivables, operating cash conversion, capital spending, and whether insurance-related cash receipts recur.
- Review variable-rate debt exposure, swap terms, covenant headroom, and the use of cash for dividends or share repurchases.
- Follow environmental exposures, including the Lead Refinery site and the unresolved $9.5 million settlement offer, along with antidumping reserves and litigation developments.