Mueller Industries, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended October 1, 2011; comparisons are with the quarter ended September 25, 2010. Nine-month comparisons are with the period ended September 25, 2010. The company manufactures and distributes copper, brass, plastic, and aluminum products through Plumbing & Refrigeration and OEM segments.
Financial performance
- Q3 revenue: $585.8 million, up 15.5% from $507.2 million. Management attributed the increase to higher selling prices, largely reflecting metal costs; lower unit volume partly offset the increase.
- Q3 earnings: Operating income was $18.9 million, versus $30.9 million; net income attributable to Mueller was $10.5 million, versus $18.9 million. Diluted EPS was $0.27, versus $0.50. The filing reports a $6.8 million pretax inventory write-down; excluding it, management’s non-GAAP diluted EPS was $0.39.
- Q3 operating margin: Approximately 3.2%, compared with 6.1% a year earlier. OEM operating income declined to $12.2 million from $23.0 million, primarily on weaker brass-rod spreads. Plumbing & Refrigeration operating income rose to $13.9 million from $11.5 million.
- Nine-month revenue and earnings: Revenue was $1.926 billion, up 25.7%; operating income was $118.7 million, up from $106.9 million; and Mueller-attributable net income was $73.4 million, versus $68.4 million. Diluted EPS was $1.92, versus $1.81. The prior-year period included a $21.3 million insurance settlement gain; 2011 included a $10.5 million litigation settlement gain and the $6.8 million inventory write-down. Excluding the specified unusual items, management reported non-GAAP diluted EPS of $1.86 for 2011 and $1.22 for 2010.
- Cash flow: Nine-month operating cash flow was $68.9 million, versus $60.7 million. Investing activities used $23.4 million, including $13.1 million of capital expenditures and $6.9 million for the TFI acquisition. Financing activities provided $8.7 million. Cash increased $54.7 million to $448.9 million.
- Liquidity and debt: Current assets were $1.033 billion and current liabilities $232.4 million; the reported current ratio was 4.4:1. Total debt was $209.6 million, including $52.8 million current and $156.7 million long-term; management said debt was 19% of total capitalization. The company had an unsecured $350 million revolving facility maturing in March 2016 and reported compliance with debt covenants.
- Dividends: $0.10 per share for Q3; $0.30 per share for the first nine months. Management said future dividends depend on financial and other factors.
Changes and operating context
- Q3 higher selling prices added approximately $93.2 million to sales, while lower unit volume in core products reduced sales by approximately $27.6 million. Average Q3 copper prices were 23% higher year over year, though copper closed at $3.15 per pound at quarter-end.
- For the first nine months, higher selling prices contributed approximately $284.9 million to sales growth and higher core-product unit volume approximately $48.4 million. Average copper prices were 28% higher year over year.
- Q3 lower-of-cost-or-market inventory provisions totaled approximately $6.8 million: $3.5 million in Plumbing & Refrigeration and $3.3 million in OEM. Management noted that unrecognized LIFO-layer liquidation could reduce cost of goods sold by approximately $18.7 million if inventories are not replenished as expected by year-end.
- Housing starts and commercial construction remained historically weak, and management described the near-term residential outlook as subdued. The company said many facilities operated below capacity.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management said cash on hand and operating cash flow were expected to cover normal capital expenditures and operational needs.
- Raw-material availability and price changes, especially copper and brass, can affect spreads, working capital, earnings, and cash flow. The company uses commodity futures to hedge certain exposures; open contracts included copper purchase hedges of approximately $28.4 million and copper sale hedges of approximately $17.8 million.
- A fire damaged part of the Wynne, Arkansas operation during Q3. The total loss, including business interruption, had not been determined. The company had received a $10.0 million insurance advance and recorded a net receivable of $9.0 million; it expected coverage subject to deductibles.
- Environmental reserves were $23.1 million. The company estimated approximately $0.9 million in remaining 2011 remediation spending and noted that timing of a potential $9.5 million settlement payment was undetermined. Management did not expect the described Belding remediation or draft West Chip Dryer consent order to have a material adverse effect.
- Antidumping matters included approximately $4.2 million and $1.0 million reserves for two Mexican steel-pipe review periods. A separate review was preliminarily set for rescission, but its final outcome was pending. The filing also describes copper-tube trade investigations and appeals.
- Several supplier-related lawsuits and other litigation were pending. Management generally did not expect the disclosed matters to materially affect the company, but outcomes remain uncertain. The company also reported tax audits and $7.3 million of unrecognized tax benefits; up to $3.8 million could decrease in the next 12 months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether unit volumes, metal-price spreads, and demand recover or weaken, and how price changes affect margins and working capital.
- The final cost, insurance recovery, and operational impact of the Wynne fire.
- Whether inventory is replenished by year-end and the resulting treatment of LIFO layers and inventory valuation reserves.
- Developments in environmental obligations, antidumping reviews, litigation, and tax audits, including amounts and timing of potential payments.
- Debt-facility availability, covenant compliance, and the sustainability of cash generation, dividends, and any share repurchases.