Mueller Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020. Comparisons are with the quarter and six months ended June 29, 2019. Amounts are in U.S. dollars unless noted.
Business context and results
Mueller manufactures copper, brass, aluminum, and plastic products across Piping Systems, Industrial Metals, and Climate. Its markets include plumbing, construction, HVAC and refrigeration, and industrial applications. Management said second-quarter sales were significantly affected by the COVID-19 pandemic.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $500.2 million | $666.4 million | $1,103.1 million | $1,278.2 million |
| Operating income | $52.3 million | $51.5 million | $111.6 million | $100.7 million |
| Net income attributable to Mueller | $28.0 million | $28.0 million | $60.4 million | $43.7 million |
| Diluted EPS | $0.50 | $0.50 | $1.07 | $0.78 |
Financial position and cash flow
- Margins: Q2 gross margin rose to 19.4% from 15.4%. Management attributed the improvement to sales mix, lower costs, and gains on open copper contracts. First-half gross margin was approximately 17.3%, versus 15.9% a year earlier.
- Cash flow: First-half operating cash flow was $142.8 million, up from $64.0 million. Cash, cash equivalents, and restricted cash increased $26.5 million to $124.5 million. Capital expenditures were $22.2 million.
- Liquidity: At June 27, cash and cash equivalents were $123.6 million; $295.5 million was available under the credit agreement. The current ratio was 2.9 to 1.
- Debt: Total debt was $329.7 million, down $56.6 million from year-end 2019, and represented 32.3% of total capitalization. Debt included $284.5 million of debentures and $35.0 million drawn on the $350 million revolving facility. The company reported compliance with debt covenants.
- Shareholder returns: Dividends were $0.10 per share per quarter. First-half dividends paid were $11.2 million; share repurchases were $5.6 million.
Changes versus the prior period
- Q2 sales declined 24.9%; management attributed the decrease primarily to lower core-product volume (16.9 percentage points) and lower core-product selling prices (4.3 points), with declines in non-core sales also contributing. First-half sales fell 13.7%.
- Q2 operating income increased 1.5% despite the sales decline, while net income attributable to Mueller was essentially unchanged. For the first half, operating income rose 10.8% and attributable net income rose 38.1%.
- Industrial Metals was particularly weak: Q2 sales fell 40.0% and operating income fell 40.5%. Piping Systems sales fell 21.6%, but operating income rose 14.4%. Climate sales fell 10.4% and operating income fell 5.2%.
- First-half results included a $21.9 million gain from the Deepwater Horizon settlement, partly offset by $3.0 million of asset impairment charges for idled production equipment. Excluding such items, reported operating-income growth does not represent a straightforward comparison of underlying performance.
Outlook, risks, and unusual items
- Management said the pandemic’s future effect on operations could not be predicted. It believes operating cash flow, available credit, and cash on hand will meet liquidity needs, including working capital, capital spending, and debt payments.
- Management cited cost reduction, restrained capital spending, and working-capital management as actions that helped mitigate the pandemic’s liquidity impact. The filing provides no earnings or revenue guidance.
- Unconsolidated affiliates generated losses of $8.6 million in Q2 and $14.8 million in the first half. Tecumseh accounted for most of these losses; its reported combined net loss was $17.3 million for the quarter.
- Environmental reserves were $19.8 million. The company disclosed additional uncertain exposure at the Lead Refinery and Bonita Peak sites and said it could not estimate the likelihood or range of potential losses there beyond recorded reserves. It also estimated future remediation spending at certain other sites.
- Key business risks include pandemic-related demand and operating disruption, copper and brass cost and availability, product substitution, construction-market conditions, foreign exchange, and losses or adverse conditions at unconsolidated affiliates.
Important facts for investors to verify
- Whether sales volumes and margins recover as pandemic-related disruption changes, particularly in Industrial Metals and core copper and brass products.
- How much first-half earnings and operating-income growth depended on the $21.9 million settlement gain, and the recurring impact of idled-equipment impairments.
- Whether affiliate losses, especially at Tecumseh, persist or require further investment or support.
- The ultimate cost and timing of environmental obligations and other unresolved legal matters, including the Lead Refinery and Bonita Peak sites.
- Credit availability, debt repayment requirements, covenant compliance, and the continuation of dividends and repurchases under uncertain conditions.