Mueller Industries, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 28, 2013; comparative quarter ended September 29, 2012. Nine-month figures compare the periods ended on those dates. Unless noted, amounts below are in millions of U.S. dollars.
Business context and results
Mueller manufactures and distributes copper, brass, plastic, and aluminum products. Its reportable segments are Plumbing & Refrigeration and Original Equipment Manufacturers (OEM). Performance is exposed to construction and HVAC demand, copper and other input prices, and product-market spreads.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $528.9 | $514.2 | $1,670.8 | $1,685.9 |
| Operating income | $67.2 | $24.5 | $248.9 | $101.2 |
| Income before taxes | $66.8 | $24.3 | $250.3 | $96.4 |
| Net income attributable to Mueller | $39.9 | $15.5 | $157.2 | $66.0 |
| Diluted EPS | $1.41 | $0.41 | $5.57 | $1.72 |
| Operating margin | 12.7% | 4.8% | 14.9% | 6.0% |
Reported margins and earnings include significant gains and charges described below; they should not be viewed as a straightforward measure of recurring performance. Q3 sales rose 2.9%, with higher core-product unit volume partly offset by lower Plumbing & Refrigeration selling prices. Nine-month sales declined 0.9%, reflecting lower selling prices and lower OEM volume, partly offset by higher Plumbing & Refrigeration volume and Westermeyer sales.
- Q3 segment sales and operating income: Plumbing & Refrigeration sales were $301.6 million and operating income $54.3 million; OEM sales were $230.4 million and operating income $19.9 million. Plumbing & Refrigeration operating income included the asset-sale gain and impairment charge. OEM operating income increased from $14.4 million, primarily on higher volume.
- Margins and inputs: Calculated gross margin was approximately 13.7% in Q3 versus 12.5% a year earlier, and 13.8% for the first nine months versus 13.1%. Average copper prices were down 8% year over year in Q3 and 7% for the nine-month period; selling prices generally move with raw-material costs.
- Shares and tax: The September 2012 repurchase of 10.4 million shares materially reduced the weighted-average share count, supporting year-over-year EPS comparisons. Effective tax rates were 40% in Q3 and 37% for the first nine months of 2013, compared with 36% and 31%, respectively, in 2012.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $70.0 million, versus $72.8 million. Increased receivables used $38.4 million of cash. Net income included large noncash gains, which were removed in the operating cash flow reconciliation.
- Investing activities provided $59.0 million, including $65.0 million of asset-sale proceeds and $29.9 million of property-and-equipment insurance proceeds, partly offset by $33.4 million of capital expenditures. Financing activities used $6.0 million; the 2012 comparison included substantial share repurchases.
- Cash was $322.2 million at September 28, 2013, up from $198.9 million at year-end 2012. Total debt was $239.6 million, implying approximately $82.6 million of net cash. The current ratio was 3.8 to 1; the company reported compliance with debt covenants.
- Management expected 2013 capital expenditures of approximately $40 million and said available cash, operating cash flow, and credit facilities should cover normal operating and capital needs. The regular quarterly dividend was $0.125 per share.
Unusual items, outlook, and risks
- Q3 included a $39.8 million pretax gain on the sale of certain plastic-fittings manufacturing assets and $4.3 million of impairment charges, mainly on retained real property. The gain equaled $0.81 per diluted share after tax.
- The first nine months included a $106.3 million pretax insurance-settlement gain related to the 2011 Wynne, Arkansas fire, in addition to the plastic-assets sale gain and impairment charges. The insurance gain equaled $2.33 per diluted share after tax.
- Management expected housing and other market conditions to improve gradually but irregularly. U.S. housing starts improved, but remained below historical averages; the company cited unemployment, tighter lending standards, and rising mortgage rates as potential constraints. No specific earnings or revenue guidance was provided.
- After quarter-end, Mueller completed its $58.5 million cash acquisition of Howell Metal, which had $156.3 million in sales of copper tube and line sets for the 12 months ended August 31, 2013. It also agreed to acquire Yorkshire’s copper-tube business for £18.0 million, subject to U.K. regulatory approval and other closing conditions.
- Key operating risks include copper and brass price or availability, the ability to pass through input costs, demand and construction cycles, competition and substitution, foreign exchange, and interest rates. The company had $239.6 million of variable-rate debt and a swap intended to fix interest-rate exposure on $200 million beginning in 2015.
- Environmental exposure remains uncertain. Estimated monitoring and maintenance costs at the Lead Refinery site are $2.4–$3.6 million over 20 years. The EPA estimated a $29.9 million remedy for surrounding properties, but had not investigated the company’s site or identified Lead Refinery as a potentially responsible party; the company could not estimate its potential exposure. Management also noted a potential $9.5 million environmental settlement offer whose payment timing was undetermined.
- Mueller reported U.K. copper-tube and copper-fittings contribution claims and a $1.1 million reserve related to an antidumping review; it did not believe the U.K. claims would materially affect its financial position, results, or cash flows. A Michigan class action was settled and dismissed. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Separate recurring operating performance from the $106.3 million insurance gain, $39.8 million disposal gain, and $4.3 million impairment charge.
- Assess operating cash conversion, particularly the effect of receivables growth and the difference between reported net income and operating cash flow.
- Review integration, funding, and expected contribution from the Howell acquisition and the proposed Yorkshire acquisition, including regulatory approval for Yorkshire.
- Monitor the unresolved environmental exposure, including the potential settlement and the EPA’s next steps regarding the Lead Refinery site and surrounding properties.
- Track housing and commercial construction demand, copper-price pass-through and spreads, and the impact of competition and substitution on volume and margins.