Mueller Industries, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 29, 2012 (52 weeks), compared with the 53-week year ended December 31, 2011. The filing is an annual report; quarterly figures below cover Q4 2012.
Business context and performance
Mueller manufactures and distributes copper, brass, plastic, and aluminum products for plumbing, HVAC, refrigeration, construction, and OEM markets. Its reportable segments are Plumbing & Refrigeration and OEM. Most manufacturing facilities operated below capacity amid weak end-market demand, although U.S. housing starts and nonresidential construction improved in 2012.
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Net sales | $2.190 billion | $2.418 billion | Down 9%; lower copper prices and slightly lower unit volumes |
| Gross profit | $285.5 million | $302.1 million | Gross margin about 13.0%, versus 12.5%; gross profit is sales less cost of goods sold, excluding D&A |
| Operating income | $126.7 million | $139.8 million | Down 9%; operating margin about 5.8%, versus 5.8% |
| Net income attributable to Mueller | $82.4 million | $86.3 million | Down 5% |
| Diluted EPS | $2.31 | $2.26 | Up 2%; benefited from the reduced share count after the repurchase |
| Operating cash flow | $108.3 million | $153.7 million | Lower year over year |
| Capital expenditures | $56.8 million | $18.8 million | Substantially higher |
| Cash and cash equivalents | $198.9 million | $514.2 million | Down $315.2 million |
| Total debt | $234.9 million | $197.7 million | Debt was 30.4% of total capitalization; net debt was about $36.0 million |
Q4 2012 sales were $504.0 million, versus $491.4 million in Q4 2011. Net income attributable to Mueller was $16.4 million versus $12.9 million, and diluted EPS was $0.58 versus $0.34. Q4 2012 EPS benefited from the 2012 share repurchase.
Plumbing & Refrigeration segment sales fell 7% to $1.238 billion, while operating income rose to $87.0 million from $84.8 million. OEM sales declined to $974.6 million from $1.120 billion, and operating income fell to $67.1 million from $72.7 million, mainly due to lower volume, spreads, and higher per-unit conversion costs.
Liquidity, capital allocation, and material changes
- Cash provided by operations was $108.3 million. Investing activities used $16.4 million, including $56.8 million of capital expenditures and $11.6 million for the Westermeyer acquisition, partly offset by $42.3 million of insurance proceeds related to the Wynne fire.
- Financing activities used $408.6 million, primarily reflecting the $427.3 million repurchase of 10.4 million shares from Leucadia and redemption of $148.2 million of 6% subordinated debentures; these outflows were partly funded by $200 million of new term-loan borrowing.
- At year-end, the company had $200 million outstanding under a term loan, no revolver borrowings, and approximately $10.9 million of letters of credit backed by its revolving facility. The amended credit agreement provides a $350 million revolver and a $200 million term loan, with maturity on December 11, 2017. The company reported compliance with debt covenants.
- The current ratio was 2.9:1. Management said cash, operating cash generation, and credit availability should be sufficient for normal operating and capital needs. About $95.2 million of cash was held by foreign subsidiaries.
- The quarterly dividend increased to $0.125 per share in Q4 2012 from $0.10 in prior quarters. The board’s authorization to repurchase up to 10 million shares was extended through October 2013; repurchases under that authorization are discretionary.
Outlook, risks, contingencies, and unusual items
- Management expected housing and commercial construction conditions to improve gradually but irregularly; recovery could be constrained by unemployment and tighter lending standards. No quantified earnings or revenue guidance was provided.
- Lower copper prices drove much of the sales decline, as selling prices generally move with raw-material costs. Copper price volatility, supply disruptions, energy costs, customer demand, capacity utilization, imports, substitute materials, and foreign exchange movements can affect margins and cash flow.
- The 2012 results included an $8.0 million deferred LIFO-liquidation gain recognized in cost of sales, a $4.1 million net litigation-settlement gain, a $1.5 million insurance-settlement gain, and $3.4 million of severance charges. The LIFO gain contributed about $0.13 per diluted share after tax.
- Westermeyer was acquired in August 2012 for approximately $11.6 million, adding refrigeration components to the OEM business.
- The environmental reserve was $24.6 million at year-end. A $9.5 million potential settlement related to former Kansas smelter sites remained under negotiation, with payment timing undetermined. At the East Chicago Lead Refinery site, EPA estimated a $28.9 million remedy for adjacent properties; Mueller said the scope and potential liability for its site were not yet determinable.
- Other legal matters include a Belding, Michigan putative class action, U.K. contribution claims related to prior European copper investigations, and Mexican steel-pipe antidumping reviews. The company recorded reserves of approximately $3.8 million and $1.1 million for two Mexican antidumping review periods. Management said the Canadian copper-fittings antidumping matter was not expected to have a material effect.
- A 2011 fire at the Wynne, Arkansas facility damaged production operations and eliminated redundant copper-tube casting capacity. The company had received $65 million in insurance advances by year-end; final settlement and recognition of related deferred items remained outstanding.
- In Q4 2012, the company disclosed that a material weakness in Standard Products Division financial controls had existed at year-end 2011. It reported remediation during Q4 2012; management and the auditor concluded internal control over financial reporting was effective as of December 29, 2012. The weakness did not result in a material misstatement of 2011 financial statements.
Most important facts for investors to verify
- Whether operating cash flow and liquidity remain adequate after the large share repurchase, higher capital spending, and reduction in cash balances.
- Whether unit volumes, segment margins, and capacity utilization improve as construction markets recover, and how results respond to copper-price movements.
- The final insurance settlement and accounting treatment for the Wynne fire, including any remaining business-interruption or property claims.
- Updates to environmental reserves and the potential exposure from the Kansas sites, Lead Refinery matter, and Belding class action.
- Debt maturities, variable-rate exposure, covenant compliance, and the company’s capital-allocation plans, including further buybacks and dividends.
- Ongoing effectiveness of the remediated SPD controls and any subsequent material weaknesses or restatements.