Mueller Industries, Inc. — Q2 2011 Form 10-Q
Business context and period: The company manufactures and distributes copper, brass, plastic, and aluminum products. Its two reportable segments are Plumbing & Refrigeration and Original Equipment Manufacturers (OEM). The quarter ended July 2, 2011; comparisons are with the quarter ended June 26, 2010. Six-month comparisons are also included below. Dollar amounts are in millions unless noted.
Financial results
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $652.9 | $540.4 | $1,340.6 | $1,025.7 |
| Gross profit / gross margin | $79.0 / 12.1% | $73.7 / 13.6% | $176.9 / 13.2% | $146.0 / 14.2% |
| Operating income / margin | $36.6 / 5.6% | $29.0 / 5.4% | $99.8 / 7.4% | $76.0 / 7.4% |
| Net income attributable to Mueller | $22.3 | $15.6 | $62.9 | $49.5 |
| Diluted earnings per share | $0.59 | $0.41 | $1.65 | $1.31 |
| Operating cash flow | Not provided for the quarter | $(38.9) | $32.4 |
Q2 sales rose about 21%; the first-half increase was about 31%. Management attributed most of the sales growth to higher selling prices reflecting higher base-metal costs, with additional first-half growth from higher unit volume. Average copper prices were about 30% higher year over year in Q2 and 32% higher in the first half. Gross margin declined in both comparisons, while Q2 operating margin improved modestly.
In Q2, Plumbing & Refrigeration sales were $347.1 million and operating income was $24.8 million, versus $285.7 million and $19.7 million a year earlier. OEM sales were $314.1 million and operating income was $18.8 million, versus $257.8 million and $16.9 million. Unit volumes were flat in both segments in Q2; improved spreads supported segment operating income.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $345.0 million at July 2, 2011, down from $394.1 million at December 25, 2010. Total debt was $207.6 million; cash exceeded debt by approximately $137.5 million.
- Current assets were $1,016.6 million and current liabilities were $231.7 million; management reported a current ratio of 4.4 to 1. Total assets were $1,358.5 million and total equity was $882.4 million.
- First-half operating cash use of $38.9 million reflected working-capital investment, including $55.0 million of increased receivables and $79.0 million of increased inventories. Inventory included a temporary build of more than 15 million pounds of material ahead of planned maintenance at the Fulton, Mississippi copper tube mill; the company said this build used more than $60 million of cash.
- First-half investing cash use was $19.4 million, including $8.7 million of capital expenditures and $6.9 million for the Tube Forming acquisition. Financing provided $7.4 million, including $16.5 million of Mueller-Xingrong joint-venture borrowing; dividends paid were $7.5 million.
- A new unsecured $350 million revolving credit facility matures March 7, 2016. The company was compliant with debt covenants at quarter-end. Mueller-Xingrong’s credit agreement expired July 16, 2011; negotiations to renew it were ongoing, and management expected a new agreement in Q3 2011.
Changes, outlook, and risks
- First-half reported operating income included a $10.5 million litigation settlement gain in 2011. The comparable 2010 period included a $21.3 million insurance settlement gain related to the 2008 U.K. facility fire. Excluding these respective items, diluted EPS was $1.47 for first-half 2011 and $0.73 for first-half 2010, as presented in the filing’s non-GAAP reconciliation.
- Management described U.S. residential construction as historically weak and expected recovery to be modest, citing unemployment, foreclosures, and tighter lending. Commercial construction remained at historically low levels. Most facilities operated below capacity during 2010 and the first half of 2011. The filing provides no formal numerical earnings or revenue guidance.
- Management stated that cash from operations and available cash should cover normal future capital expenditures and operating needs. The company paid a regular $0.10-per-share Q2 dividend; future dividends depend on financial and other factors. The board’s authorization to repurchase up to 10 million shares was extended through October 2011, but repurchases are discretionary.
- Key operating exposures include copper and brass prices and availability, metal-price spreads, demand and unit volumes, competition from substitutes and imports, energy costs, interest rates, and foreign exchange. The company uses commodity hedges; at quarter-end it had purchase futures associated with about $19.2 million of copper and sale futures for about $67.3 million.
- Environmental reserves were $23.2 million. Management did not expect material effects from the Belding, Michigan lead remediation, but environmental work is expected to continue for at least 20 years. The filing also discusses a potential $9.5 million environmental settlement offer, with payment timing undetermined.
- Antidumping matters include reserves of approximately $4.2 million and $1.0 million for separate reviews involving Mexican steel pipe and tube imports. The impact of another review was not estimable. Other proceedings include copper-tube trade actions and litigation; management generally stated it did not expect material adverse effects, while outcomes remain uncertain.
Important facts for investors to verify
- Whether the inventory build for the Fulton mill maintenance is temporary and when the associated cash is expected to be recovered.
- Renewal terms and status of the Mueller-Xingrong credit agreement, and the effect of joint-venture borrowings on interest expense and cash flows.
- Underlying earnings trends excluding the 2011 litigation gain and the 2010 insurance gain, including segment spreads and margins.
- Final outcomes and potential costs of antidumping reviews, environmental matters, and other disclosed litigation.
- Whether weak construction markets, metal-price volatility, and below-capacity operations affect future demand, spreads, and liquidity.