Mueller Industries, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013 (52 weeks). This is an annual filing, not a standalone fourth-quarter report; unaudited fourth-quarter results are also disclosed. Mueller manufactures and distributes copper, brass, aluminum, and plastic products, principally for plumbing, HVAC, refrigeration, and OEM markets.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $2.159 billion | $2.190 billion |
| Operating income | $270.9 million | $126.7 million |
| Net income attributable to Mueller | $172.6 million | $82.4 million |
| Diluted EPS | $6.11 | $2.31 |
| Operating cash flow | $128.5 million | $108.3 million |
| Cash and cash equivalents, year-end | $311.8 million | $198.9 million |
| Total debt, year-end | $235.3 million | $234.9 million |
- Reported gross profit, calculated as sales less cost of goods sold, was $296.5 million, or approximately 13.7% of sales, versus $285.5 million, or approximately 13.0%, in 2012. Reported operating margin was approximately 12.6%, up from 5.8%; the 2013 measure includes significant gains described below.
- Net cash used in investing activities was $3.0 million and net cash used in financing activities was $13.6 million. Capital expenditures were $41.3 million; the Howell acquisition used $55.3 million, while asset-sale and insurance proceeds provided cash.
- Current assets were $874.7 million and current liabilities were $219.3 million; the reported current ratio was 4.0-to-1. Total debt was 24.2% of total capitalization. The company reported compliance with debt covenants.
- Debt includes a $200 million term loan maturing in 2017 and other borrowings. The $350 million revolving facility backed approximately $10 million of letters of credit at year-end.
Fourth-quarter snapshot
Fourth-quarter 2013 sales were $487.7 million, compared with $504.0 million in fourth-quarter 2012. Net income attributable to Mueller was $15.4 million versus $16.4 million, and diluted EPS was $0.54 versus $0.58. Fourth-quarter 2013 dividends were $0.125 per share.
Material changes versus prior periods
- Annual sales fell about 1% year over year. Management attributed the decline principally to lower selling prices, reflecting lower metal prices, and lower OEM unit volume; higher Plumbing & Refrigeration volumes and acquired-business sales partly offset these factors. Average COMEX copper was approximately $3.34 per pound, down 7% from 2012.
- Operating income and earnings rose sharply, but results were materially affected by a $106.3 million pretax insurance-settlement gain for the 2011 Wynne, Arkansas fire and a $39.8 million pretax gain on the sale of plastic-fittings manufacturing assets. The company also recorded $4.3 million of impairment charges. These items make reported year-over-year profit growth a poor proxy for underlying operating trends.
- Plumbing & Refrigeration sales were $1.225 billion, down from $1.238 billion; reported segment operating income increased to $219.1 million from $87.0 million, substantially reflecting the insurance and asset-sale gains. OEM sales declined to $947.8 million from $974.6 million, while segment operating income increased to $76.6 million from $67.1 million, primarily on higher margins.
- Cash increased by $112.9 million during the year. The company acquired Howell Metal Company in October for approximately $55.3 million and signed an agreement to acquire the Yorkshire Copper Tube business; U.K. regulatory approval followed in February 2014, after year-end.
Outlook, risks, and contingencies
- Management expected housing and construction conditions to improve gradually but irregularly. U.S. housing starts increased to 923,000 in 2013 from 781,000 in 2012, but remained below long-term historical averages; private nonresidential construction showed a slower pace of improvement. No specific earnings or revenue guidance was provided.
- Management stated that cash, operating cash generation, and credit availability were expected to meet normal operating and capital needs. The board extended authorization to repurchase up to 10 million shares through October 2014; repurchases are discretionary. Quarterly dividends were $0.125 per share in 2013.
- Key business exposures include cyclicality in housing and commercial construction, interest rates and credit availability, copper and other commodity costs and supply, competition from imports and substitute materials, foreign-exchange movements, and labor disruptions. Many facilities operated significantly below capacity in 2012 and 2013. A 2011 fire at Wynne destroyed copper-tube casting capacity; loss of remaining casting operations could significantly impair domestic production.
- Environmental reserves were $23.6 million at year-end. The company estimated additional spending on existing environmental matters, including $9.4 million after 2018; timing of a potential $9.5 million Kansas-sites settlement payment was undetermined. Potential remediation exposure at the Lead Refinery site remains unquantifiable to the company; the EPA estimated a $30 million remedy for adjacent properties, and the company noted multiple potentially responsible parties.
- Antidumping-duty matters include reserves of approximately $3.1 million and $1.1 million for separate reviews involving Mexican steel pipe imports. Further copper-tube administrative reviews were pending. Management did not expect the U.K. contribution claims or Canadian dumping measures to have a material financial impact.
- The reported effective tax rate was 36%, including state taxes and the tax impact of goodwill disposition. Approximately $123.8 million of cash was held by foreign subsidiaries; most foreign earnings were considered permanently reinvested, and the potential deferred tax liability was not practicable to calculate.
Important facts for investors to verify
- Assess earnings and margins excluding the $106.3 million insurance gain and $39.8 million asset-sale gain, and distinguish those items from continuing operating performance.
- Review segment trends in unit volumes, selling-price spreads, and capacity utilization, especially the OEM sales decline and the underlying performance of Plumbing & Refrigeration.
- Confirm the timing, funding, and integration of the Yorkshire acquisition, and monitor Howell’s contribution following its October 2013 acquisition.
- Track environmental and legal exposures, especially the Kansas sites, Lead Refinery site, and antidumping reviews; some potential losses are not estimable from the filing.
- Monitor cash availability, foreign-held cash, debt maturities and interest-rate exposure. The filing reported effective disclosure and internal controls and an unqualified financial-statement audit opinion; Howell was excluded from management’s internal-control assessment.