Mueller Industries, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 29, 2018 (52 weeks). The filing also provides unaudited fourth-quarter results. Mueller manufactures and distributes copper, brass, aluminum, and plastic products for plumbing, HVAC, refrigeration, industrial, and related markets. Its reportable segments are Piping Systems, Industrial Metals, and Climate.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $2,507.9 million | $2,266.1 million | +10.7% |
| Operating income | $173.0 million | $150.8 million | +14.7% |
| Net income attributable to Mueller | $104.5 million | $85.6 million | +22.0% |
| Diluted EPS | $1.82 | $1.49 | +$0.33 |
| Operating cash flow | $167.9 million | $44.0 million | +$123.9 million |
- Gross profit, defined in the filing as sales less cost of goods sold (excluding depreciation and amortization), was $357.5 million, or about 14.3% of sales, versus $325.5 million, or about 14.4%, in 2017. Operating margin was about 6.9%, compared with 6.7%.
- Net income margin was about 4.2%, versus 3.8%. The 2018 effective tax rate was 20.6%, down from 29.8% in 2017.
- At year-end, cash and cash equivalents were $72.6 million ($77.1 million including restricted cash); total debt was $497.6 million, versus $466.2 million. Total assets were $1.370 billion. Management reported a 3.0-to-1 current ratio and compliance with all debt covenants.
- Capital expenditures were $38.5 million. Operating cash flow benefited in part from a $27.5 million inventory decrease; 2017 operating cash flow had been reduced by an $86.3 million inventory increase.
Fourth-quarter results (unaudited)
Q4 2018 sales were $559.1 million, compared with $523.5 million in Q4 2017. Mueller-attributable net income was $26.9 million versus $5.7 million, and diluted EPS was $0.47 versus $0.10. Q4 gross profit was $85.1 million versus $66.9 million.
Material changes and drivers
- Sales growth reflected higher core-product pricing (+4.4 percentage points) and volume (+3.6 points), acquisitions and new products (+4.7 points), and other factors (+1.0 point), partly offset by dispositions (-3.0 points). Higher copper prices contributed to increased cost of goods sold.
- Piping Systems sales rose 5.2% to $1.646 billion and operating income increased 23.3% to $122.8 million. Industrial Metals sales rose 8.1% to $651.1 million, while operating income increased 1.7% to $75.6 million. Climate sales rose 74.3% to $229.1 million and operating income increased 18.7% to $24.1 million; the increase was largely attributable to ATCO.
- Mueller acquired ATCO for approximately $156.7 million and Die-Mold for approximately $13.6 million in 2018. ATCO contributed $90.0 million of sales from its acquisition date. Acquisition-related cash spending was $167.7 million, net of cash acquired.
- Reported earnings included a $3.7 million insurance recovery related to the 2017 Port Huron mill fire and $12.6 million of losses from unconsolidated affiliates, net of foreign tax. Interest expense rose to $25.2 million from $19.5 million, principally due to the 6% subordinated debentures and higher revolving-credit borrowing costs.
Outlook, risks, and contingencies
- Management expects 2019 capital expenditures of $25–$30 million and an effective tax rate of 22–26%. It believes operating cash flow, cash on hand, and credit availability will be adequate for liquidity needs. The filing provides no specific 2019 revenue or earnings guidance.
- The unsecured revolving credit facility has a $350 million capacity and matures in 2021; $195 million was drawn at year-end. Subordinated debentures of $284.5 million bear 6% interest and mature in 2027. Total debt was 46.9% of capitalization.
- Environmental reserves were $23.6 million at year-end. Management expects approximately $4.8 million of compliance spending over the next three fiscal years; additional remediation estimates include $17.5 million thereafter. The company disputes or contests certain claims, including matters involving the Lead Refinery and Bonita Peak sites, and says potential losses in some proceedings cannot currently be estimated.
- A $27.4 million Deepwater Horizon settlement award to a subsidiary was under appeal. If upheld, it is subject to approximately 20% contingency-based legal and advisory fees; the company stated any recovery would be recognized when settled.
- Key risks include volatile copper and other input costs, the ability to pass cost changes through to customers, construction-market cyclicality, competition and substitute materials, foreign-exchange movements, Brexit uncertainty, labor negotiations, acquisitions and integration, cybersecurity, and environmental liabilities. Several union agreements were due to expire in 2019.
- The company repurchased 1.14 million shares for $33.6 million during 2018 and paid regular dividends of $0.40 per share. The repurchase authorization for up to 20 million shares was extended through August 2019.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded ATCO and Die-Mold from the 2018 internal-control assessment; together they represented 14% of year-end assets and 4% of 2018 sales and operating income.
Most important facts for investors to verify
- Whether acquisition-driven growth and the strong 2018 operating cash flow are sustainable, particularly given the inventory-related cash-flow rebound and copper-price exposure.
- How ATCO and Die-Mold perform after integration, and whether their contribution supports margin improvement.
- Debt levels, interest costs, borrowing availability, and the company’s ability to fund capital spending, dividends, repurchases, and remediation obligations.
- Developments in environmental proceedings and the appeal of the Deepwater Horizon award, including potential cash effects and accounting recognition.
- Whether housing, commercial construction, product substitution, input-cost pass-through, currency movements, and labor negotiations affect sales and margins.
- Progress in bringing the acquired businesses into the internal-control assessment; they were outside the scope of the 2018 assessment.