Mueller Industries, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the quarter and nine months ended September 25, 2021; comparatives are the quarter and nine months ended September 26, 2020. Mueller manufactures and distributes copper, brass, aluminum, and plastic products across its Piping Systems, Industrial Metals, and Climate segments. Results are affected by construction and HVAC demand, metal prices, and the ability to pass raw-material costs through to customers.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Net sales | $982.2 million | $619.1 million | $2,813.0 million | $1,722.2 million |
| Operating income | $233.4 million | $69.2 million | $483.7 million | $180.8 million |
| Net income attributable to Mueller | $171.0 million | $42.7 million | $342.9 million | $103.1 million |
| Diluted EPS | $3.01 | $0.76 | $6.04 | $1.83 |
| Gross margin | 24.2% | 19.1% | 21.4% | 18.0% |
| Operating cash flow | Not separately provided | Not separately provided | $181.5 million | $196.9 million |
Q3 sales rose 58.7% year over year; nine-month sales rose 63.3%. Management attributed the increases largely to higher selling prices in core products, with additional contributions from core unit volumes, acquisitions, and non-core products. Core-product price changes contributed 42.7 percentage points of Q3 sales growth and 39.6 points year to date; core unit volume contributed 5.5 and 9.0 points, respectively. The filing attributes higher prices primarily to increased metal costs.
Reported operating income includes a $54.8 million gain on the sale of businesses in Q3. The comparable nine-month 2020 period included a $21.9 million Deepwater Horizon settlement gain, presented as a reduction of litigation settlement expense. These unusual items affect year-over-year comparisons. Q3 interest expense fell to $1.1 million from $4.9 million, primarily following redemption of the subordinated debentures; nine-month 2021 also includes a $5.7 million redemption premium. Effective tax rates were 26% for Q3 and the first nine months of 2021, versus 24% and 25%, respectively, in 2020.
Segments and material changes
- Piping Systems: Q3 sales were $688.2 million and operating income $152.2 million, versus $409.4 million and $44.9 million a year earlier. Q3 gross margin improved to 26.4% from 17.0%; management cited higher pricing, volume, and Kessler acquisition sales.
- Industrial Metals: Q3 sales were $182.2 million and operating income $19.1 million, compared with $118.8 million and $18.3 million. Q3 gross margin declined to 12.9% from 19.5% as rising material costs pressured margins.
- Climate: Q3 sales were $122.3 million and operating income $21.1 million, compared with $97.6 million and $18.2 million. Sales benefited from price and volume increases and H&C Flex; sales and operating results also reflect the disposal of Fabricated Tube Products and Shoals Tubular.
In September 2021, Mueller sold Fabricated Tube Products and Shoals Tubular and exchanged Die-Mold for a 17% equity-method interest in a retail distribution company. The transactions generated a combined $54.8 million reported gain. Mueller acquired H&C Flex in January 2021 and had acquired Kessler in 2020.
Cash, debt, liquidity, and capital
- At September 25, 2021, cash and cash equivalents were $104.8 million; total cash, cash equivalents, and restricted cash were $108.2 million. Total debt was $122.1 million, down $205.8 million from year-end 2020. Current and long-term debt on the balance sheet totaled approximately $122.1 million.
- Current assets were $1,037.9 million and current liabilities $380.1 million; management reported a current ratio of 2.7 to 1. Working capital, net of cash and current debt, increased $146.2 million during the first nine months.
- Nine-month operating cash flow was $181.5 million, versus $196.9 million. Increased receivables ($155.1 million) and inventory ($96.5 million) absorbed cash, partly offset by net income and higher current liabilities. Investing activities provided $43.8 million, including $74.3 million of net sale proceeds, and financing activities used $244.1 million.
- The March 2021 credit agreement provides a $400 million revolving facility and a $100 million term loan. Borrowings were $120 million at quarter-end, with $356.1 million available under the agreement. On October 6, 2021, the term loan was repaid using revolver borrowings. The company reported covenant compliance at quarter-end.
- Dividends were $0.13 per share in each of the first three quarters of 2021, versus $0.10 in the comparable 2020 quarters. The share repurchase authorization was extended through July 2022; no shares were repurchased under the public program during the reported quarter.
Outlook, risks, and contingencies
Management stated that operating cash flow, credit-agreement availability, and cash on hand were expected to be adequate for working capital, capital expenditures, and debt obligations. The filing gives no numerical earnings or revenue guidance. Management described strong demand, inflationary pressures, industry-wide supply constraints, and growing backlogs as contributing to higher selling prices and improved margins for most businesses; it did not provide a quantified forecast for these conditions.
Key exposures include copper and brass price and availability, the ability to pass material costs through, interest rates, foreign exchange, construction and HVAC demand, competition and substitute materials, and the COVID-19 business environment. The company uses derivatives to manage certain commodity and currency exposures and reported no open natural-gas futures at quarter-end. It estimated approximately $5.2 million of environmental remediation spending over the next 12 months. Environmental reserves and proceedings include Kansas remediation, inactive California mine sites, and the Lead Refinery site; the company said it could not determine the likelihood or amount of potential losses in excess of its current Lead Refinery reserve. It also could not estimate potential liability, if any, in a pending antidumping-duty dispute. Maximum payments under guarantees, primarily letters of credit, were $23.9 million.
The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the sharp sales and margin improvement reflects sustainable unit demand and operating performance versus metal-price pass-through, supply constraints, and inflationary pricing.
- The effect of the $54.8 million disposal gain and prior-year settlement gain when comparing reported operating income and earnings.
- Whether working-capital growth, especially receivables and inventory, converts to cash as market conditions and sales normalize.
- The post-quarter refinancing of the $100 million term loan, revolving-facility utilization, available borrowing capacity, and covenant headroom.
- Potential environmental and legal costs beyond recorded reserves, particularly at the Lead Refinery and Bonita Peak sites and in the antidumping-duty matter.
- Segment performance after the divestitures and the company’s ability to sustain margins amid commodity volatility, supply constraints, and substitution risks.