Mueller Industries, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter ended March 31, 2018; comparisons are with the quarter ended April 1, 2017. Mueller manufactures and distributes copper, brass, aluminum, plastic and related products through Piping Systems, Industrial Metals and Climate segments. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $640.1 million | $577.9 million |
| Operating income | $47.4 million | $45.6 million |
| Income attributable to Mueller | $24.1 million | $30.0 million |
| Diluted EPS | $0.42 | $0.52 |
| Net cash used in operating activities | $26.5 million | $11.4 million |
- Sales increased 10.8%; management attributed the increase mainly to higher selling prices (+10.5% in core product lines), higher domestic core volumes, and Heatlink sales. These gains were partly offset by lower non-domestic volume and the prior-year comparison with Mueller-Xingrong, sold in 2017.
- Operating income rose 4.0%, but operating margin declined to approximately 7.4% from 7.9%. Cost of goods sold was 85.3% of sales versus 84.5% a year earlier. The filing reports no gross-profit subtotal; these percentages imply gross margins of approximately 14.7% and 15.5%, respectively.
- Net income attributable to Mueller fell 19.5%. Key factors included $10.3 million of losses from unconsolidated affiliates versus $1.2 million a year earlier and interest expense of $5.9 million versus $2.5 million. The effective tax rate was 18%, compared with 27%.
- Operating cash outflow reflected a $72.8 million increase in receivables and a $23.9 million decrease in current liabilities, partly offset by earnings and noncash items. Investing cash outflow was $17.9 million, including the Die-Mold acquisition and capital expenditures. Cash, cash equivalents and restricted cash decreased $32.8 million to $93.8 million.
- At March 31, cash and cash equivalents were $91.6 million; total debt was approximately $487.9 million, or 46.9% of total capitalization. Debt included $185.0 million drawn under the revolving facility and $284.5 million of 6% subordinated debentures. The company reported a 3.6-to-1 current ratio and compliance with debt covenants.
Segments and material changes
- Piping Systems: Sales rose 8.1% to $431.0 million and operating income rose 7.7% to $32.9 million. Higher prices and domestic core volumes, plus Heatlink, were partly offset by the absence of Mueller-Xingrong sales.
- Industrial Metals: Sales rose 18.3% to $177.3 million and operating income rose 11.2% to $22.6 million, primarily on higher prices and core volume. Cost of goods sold increased faster than sales.
- Climate: Sales rose 5.2% to $36.1 million, while operating income declined 1.1% to $5.5 million, with higher volume and a changed product mix contributing to higher costs.
- Mueller acquired Die-Mold, a Canadian manufacturer of PEX and plumbing fittings and injection tooling, for approximately $12.5 million on March 31, 2018. Purchase-price allocation remained provisional.
Outlook, risks and unusual items
- Management expects housing and commercial construction conditions to continue improving and believes cash from operations, available credit and cash on hand will meet liquidity needs. The filing provides no earnings or revenue guidance.
- Management forecasts an annual effective tax rate of 21%–23%. Accounting for certain Tax Cuts and Jobs Act effects remained incomplete; the company had recorded a provisional $12.9 million transition-tax liability and a $12.1 million deferred-tax benefit.
- A $3.5 million impairment charge related to a corporate aircraft taken out of service and classified as held for sale.
- Losses from unconsolidated affiliates included $6.2 million of Tecumseh net losses and $3.0 million of labor-claim contingency charges, plus $1.1 million of losses related to the Bahrain joint venture.
- Environmental remediation reserves were $23.1 million. The company spent approximately $2.4 million on remediation in Q1 and expected to spend a further $2.4 million during the remainder of 2018. Management said ordinary-course litigation was not expected to materially adversely affect the company; letters of credit could require up to $8.0 million in payments.
- Principal business risks include copper and other input-cost and availability swings, the ability to pass costs through to customers, construction demand, competition and product substitution, and foreign-exchange exposure. The company reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether selling-price increases and core volume gains persist, and how metal prices affect margins and pass-through timing.
- The performance and final purchase accounting of Die-Mold, and the ongoing effects of the Mueller-Xingrong disposal.
- The drivers and potential duration of Tecumseh and other affiliate losses, including the labor-claim contingencies.
- Working-capital trends, particularly receivables, and the company’s capacity to fund operations, remediation, debt service and share repurchases.
- Final tax-reform accounting, including transition-tax and GILTI effects, and the annual effective tax rate.