Mueller Industries, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; financial statements are unaudited. Mueller manufactures and distributes copper, brass, plastic, aluminum, and related products. Its reportable segments are Plumbing & Refrigeration and Original Equipment Manufacturers (OEM).
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $594.1m | $652.9m | $1,171.8m | $1,340.6m |
| Operating income | $29.8m | $36.6m | $76.7m | $99.8m |
| Net income attributable to Mueller | $17.9m | $22.3m | $50.5m | $62.9m |
| Diluted EPS | $0.47 | $0.59 | $1.31 | $1.65 |
| Operating margin | 5.0% | 5.6% | 6.5% | 7.4% |
Margins and drivers: Gross margin was approximately 12.0% in Q2 2012 versus 12.1% a year earlier, and 13.3% for the first half versus 13.2%. Lower copper prices reduced reported sales and costs as metal costs generally pass through to customers. Lower spreads, weaker volumes, and underutilized capacity pressured operating income. Q2 sales fell about 9%; first-half sales fell about 13%.
Segment results: Q2 Plumbing & Refrigeration sales were $331.7m and operating income $22.6m, versus $347.1m and $24.8m. OEM sales were $268.6m and operating income $15.1m, versus $314.1m and $18.8m. First-half segment operating income was $50.9m for Plumbing & Refrigeration and $39.8m for OEM, compared with $54.5m and $48.5m, respectively, in 2011.
Cash flow and liquidity: First-half operating cash flow was $17.3m, versus cash used of $38.9m in 2011; higher receivables absorbed $55.8m. Investing activities provided $13.6m, including $32.5m of insurance proceeds for the Wynne, Arkansas fire, partly offset by $23.4m of capital expenditures. Financing activities used $171.9m, mainly for debt repayment. Cash was $373.7m at June 30, down from $514.2m at year-end 2011. Current assets were $944.1m, current liabilities $240.4m, and the reported current ratio was 3.9:1.
Debt: Total debt declined to $33.5m from $197.7m at December 31, 2011. Mueller redeemed its $148.2m of 6% subordinated debentures at par on June 25, 2012. Debt was 3.5% of total capitalization; the company reported compliance with all debt covenants. Its unsecured $350m revolving credit facility matures in March 2016 and backed $13.0m of letters of credit.
Changes, unusual items, and management outlook
- First-half earnings included an approximately $8.0m LIFO liquidation gain, or $0.13 per diluted share after tax, and a $1.5m gain from settling a business-interruption insurance claim. Excluding these items, management presented pro forma diluted EPS of $1.16. First-half 2011 included a $10.5m litigation settlement gain; excluding it, pro forma diluted EPS was $1.47.
- For the Wynne facility fire, insurance advances totaled $50m through June 30. The company carried $31.7m of these advances, net of related costs and damaged assets, in other current liabilities pending claim settlement.
- Management said residential construction remained at historically low levels, although U.S. housing starts improved year over year. It expected market conditions to improve gradually but irregularly; it provided no specific financial guidance. Management considered cash, operating cash generation, and the credit facility sufficient for normal capital and operating needs.
- Demand, metal prices and availability, product spreads, capacity utilization, substitution by plastics or aluminum, competition, currency movements, and economic conditions could affect results. Copper and brass price changes can affect both margins and working capital.
Risks, contingencies, and other matters
- A proposed EPA remedy for the Lead Refinery site estimated costs at approximately $29m. The remedy was not final, and Mueller said it could not determine whether it would be liable or estimate any potential liability; cost allocation among potentially responsible parties was unknown.
- Mueller reported $22.6m of environmental reserves on its balance sheet and significant remediation obligations expected to extend at least 20 years. It also disclosed a potential $9.5m settlement offer whose payment timing was undetermined.
- A Michigan class action concerning alleged fallout, dust, and odors from a subsidiary’s operations seeks damages and injunctive relief. Mueller could not estimate the impact.
- Mueller faced potential U.K. contribution claims related to copper-tube and copper-fittings cartel follow-on actions. The company could not estimate potential liability.
- Other disclosed matters included supplier litigation, $13.0m of guarantees primarily backed by the credit facility, and renegotiation of union agreements at three operations due to expire in August 2012.
- Management stated that risk factors had not materially changed from the 2011 Form 10-K. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether demand, segment volumes, spreads, and factory utilization improve, particularly given continuing weakness in construction markets.
- Final outcomes and cost allocation for environmental matters, including the Lead Refinery site, and the status of the potential $9.5m settlement.
- Resolution and potential exposure from the Michigan class action, U.K. cartel contribution claims, and supplier litigation.
- Final insurance recovery and accounting for the Wynne fire, and whether the company replenishes the LIFO inventory layers; failure to replenish could affect reported cost of goods sold.
- Cash generation and working-capital needs, including receivables exposure to changes in metal prices, after the large debenture redemption.