Mueller Industries, Inc. — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 27, 2021; unaudited results compared with the quarter ended March 28, 2020.
Business context and results
Mueller manufactures and distributes copper, brass, aluminum, plastic, and related products, primarily for plumbing, HVAC/refrigeration, construction, and industrial markets. Its reportable segments are Piping Systems, Industrial Metals, and Climate.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $818.1 million | $602.9 million | +35.7% |
| Gross margin | 18.3% | 15.6% | +2.7 percentage points |
| Operating income | $92.5 million | $59.3 million | +56.0% |
| Net income attributable to Mueller | $63.1 million | $32.4 million | +94.7% |
| Diluted EPS | $1.11 | $0.57 | +$0.54 |
| Dividends per share | $0.13 | $0.10 | — |
Revenue growth reflected higher core-product selling prices, chiefly copper tube and brass rod (24.9% contribution to growth), higher core unit volume (3.3%), acquisitions (3.8%), and other factors (3.7%). Management attributed improved gross margin to year-over-year material-cost effects for FIFO businesses, a richer product mix, lower manufacturing costs, and lower employee healthcare costs.
Segment sales and operating income were: Piping Systems $547.7 million and $67.1 million; Industrial Metals $164.9 million and $18.8 million; Climate $111.0 million and $17.3 million. Sales rose 42.3%, 25.6%, and 19.0%, respectively. Acquisitions contributed, including Kessler in Piping Systems and H&C Flex in Climate.
Cash flow, liquidity, and debt
- Operating cash flow was a use of $22.6 million, versus $28.1 million provided in Q1 2020. The main uses were a $90.0 million increase in receivables and a $45.6 million increase in inventories, partly offset by earnings and higher current liabilities.
- Investing cash use was $21.5 million, including $14.0 million for H&C Flex and $9.2 million of capital expenditures. Financing provided $65.0 million, including $100.0 million of debt issuance and $35.3 million of repayments.
- At March 27, cash and cash equivalents were $129.9 million; cash, cash equivalents, and restricted cash totaled $149.0 million. Current assets were $986.5 million and current liabilities $444.5 million; the reported current ratio was 2.2 to 1. Management said cash, operating cash flow, and available credit were expected to meet liquidity needs.
- Total debt was $392.7 million, or 31.2% of total capitalization. The company reported $230.7 million available under its then-current credit agreement and compliance with debt covenants.
- After quarter-end, Mueller entered a new $500 million credit agreement: a $400 million revolver maturing March 2026 and a $100 million term loan maturing March 2022. It also redeemed its $291.4 million of outstanding subordinated debentures on April 15, 2021, paying accrued interest and a $5.7 million premium.
Material changes, outlook, and risks
- Q1 2020 included a $21.9 million gain from the Deepwater Horizon settlement and $3.0 million of asset impairments; neither recurred in Q1 2021. The prior-year comparison therefore includes unusual items. Q1 2020 also included $22.1 million of settlement proceeds collected during 2020, not Q1 2021.
- Mueller acquired H&C Flex for $14.0 million in January 2021. Kessler, acquired in August 2020, also contributed to the year-over-year comparison.
- No specific earnings or revenue guidance was provided. Management cited housing starts, construction activity, repair/remodel demand, raw-material spreads, and product volumes as important business drivers. It noted substitution risks from plastics in plumbing and aluminum-based systems in some HVAC applications.
- Key exposures include copper and brass prices and availability, energy costs, interest rates, foreign currencies, market competition, and economic conditions including COVID-19. The company uses derivatives to manage some exposures; at quarter-end it held copper futures tied to fixed-price sales and inventory and reported a $14.6 million net loss position on inventory-related contracts.
- Environmental and legal matters include remediation reserves and potentially uncertain additional exposure at the Lead Refinery and Bonita Peak sites. The company stated it could not estimate the likelihood or range of potential loss beyond its current Lead Refinery reserve. It also reported a $5.6 million reserve for three Kansas sites and estimates of long-term remediation costs at other properties.
- Environmental remediation spending was approximately $0.3 million in Q1; management expected approximately $2.4 million for the remainder of 2021. The board’s share-repurchase authorization was extended through July 2021. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether higher copper-related selling prices and improved spreads persist, and how metal-cost movements affect FIFO margins and working capital.
- Whether receivables and inventory growth converts to cash; Q1 operating cash flow was negative despite higher earnings.
- The post-quarter impact of the debenture redemption, including the premium, interest expense, debt maturity profile, and borrowing availability under the new facility.
- Final purchase-price allocations for H&C Flex and Kessler, and the acquired businesses’ ongoing contribution to results.
- Developments in environmental remediation and litigation, particularly uncertain Lead Refinery exposure and the company’s ability to recover costs from other responsible parties.