Mueller Industries, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 27, 2014; comparisons are with the periods ended September 28, 2013. Mueller manufactures and distributes copper, brass, plastic, and aluminum products through its Plumbing & Refrigeration and Original Equipment Manufacturers (OEM) segments.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $602.8 million | $528.9 million | $1,826.9 million | $1,670.8 million |
| Operating income | $37.7 million | $67.2 million | $124.2 million | $248.9 million |
| Net income attributable to Mueller | $23.8 million | $39.9 million | $83.6 million | $157.2 million |
| Diluted EPS | $0.42 | $0.71 | $1.47 | $2.79 |
- Sales increased 14% in the quarter and 9% year to date. Acquisitions contributed approximately $64.5 million of Q3 sales and $171.4 million of nine-month sales. Lower copper prices and selling prices partly offset volume growth.
- Q3 operating margin was approximately 6.3% versus 12.7%; nine-month operating margin was approximately 6.8% versus 14.9%. Comparisons are materially affected by prior-year gains and charges described below.
- Operating cash flow was $4.2 million for the first nine months, versus $70.0 million in 2013. Increased receivables ($62.9 million), other assets ($15.3 million), and inventories ($14.9 million), plus lower current liabilities, absorbed cash as sales and acquired-business working-capital needs grew.
- Investing activities used $51.1 million, including $30.1 million for Yorkshire and $28.4 million of capital expenditures. Financing activities used $4.7 million, including $12.6 million of dividends.
- At September 27, cash was $259.9 million; total debt was $242.7 million, or 23.1% of capitalization. Current assets were $924.2 million and current liabilities $233.3 million (reported current ratio 4.0:1). Mueller was in compliance with debt covenants.
- The company declared and paid a quarterly dividend of $0.075 per share. Its share-repurchase authorization covers up to 20 million shares through October 2015; no obligation to repurchase is stated.
Material changes and notable items
- Prior-year results included a $39.8 million pretax gain on the sale of plastic-fittings manufacturing assets and $4.3 million of impairment charges in Q3 2013. Nine-month 2013 results also included a $106.3 million pretax insurance settlement gain related to the 2011 Wynne, Arkansas fire. These items significantly elevate the comparison-period earnings.
- For Q3 2014, Plumbing & Refrigeration sales were $357.8 million and operating income $20.2 million; OEM sales were $247.9 million and operating income $24.0 million. OEM operating income improved from $19.9 million, reflecting higher volumes and improved margins. Plumbing & Refrigeration operating income fell from $54.3 million, principally reflecting the prior-year asset-sale gain and impairment.
- In the first nine months, segment operating income was $76.4 million for Plumbing & Refrigeration and $68.5 million for OEM. The prior-year segment comparison included the fire insurance gain and asset-sale gain.
- Howell Metal was acquired in October 2013 and Yorkshire Copper Tube in February 2014. Mueller recorded $0.9 million of Yorkshire severance costs in Q3 and $3.1 million year to date; additional rationalization costs were expected over the next six months and were not expected to be material.
- Effective tax rates were 33% for Q3 and 30% for the first nine months of 2014, compared with 40% and 37% in 2013. A $4.8 million valuation-allowance release in Q2 2014 benefited earnings by $0.08 per diluted share.
Outlook, risks, and contingencies
- Management expected gradual but irregular improvement in market conditions. Housing activity had improved but remained below historical averages; most manufacturing facilities had operated below capacity amid subdued demand.
- Management believed available cash, operating cash flow, and credit facilities would meet normal operating and capital needs for the next 12 months. The Chinese joint venture’s credit facility matured September 24, 2014; Mueller-Xingrong was negotiating a replacement. Management said available cash and operating cash generation should fund near-term operations pending a new agreement. Its borrowings were approximately $24.5 million at 5.6%.
- The $200 million revolving facility and $200 million term loan mature in December 2017. A separate U.K. receivables facility had approximately $11.7 million outstanding. Reported total debt was variable-rate; management characterized a hypothetical 10% interest-rate increase as having an insignificant pretax impact.
- Environmental reserves were $21.6 million. Mueller reported a pending $9.5 million environmental settlement offer with payment timing undetermined. At its East Chicago Lead Refinery site, EPA had not completed a CERCLA investigation, proposed a remedy, or identified the subsidiary as a potentially responsible party; the company could not estimate likelihood or potential loss. Ongoing permit-related costs were estimated at $2.1–$3.9 million over 20 years.
- U.K. copper-tube and copper-fittings contribution claims were settled and dismissed during 2014; payments were not material. Letters of credit supporting guarantees could require payments of up to $10.6 million.
- Principal business risks include copper and brass costs and availability, raw-material-to-selling-price spreads, demand and construction activity, competition and substitution by plastics or aluminum, foreign exchange, and financing availability. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- How much of sales growth and future performance is attributable to the Howell and Yorkshire acquisitions, and how those businesses are integrating.
- Underlying profitability excluding the 2013 insurance and asset-sale gains, impairment charges, and other unusual items.
- Whether working-capital investment continues to constrain cash conversion, and the timing of the Chinese joint venture’s replacement credit facility.
- The eventual scope and cost of environmental obligations, including the $9.5 million settlement offer and potential Lead Refinery-site CERCLA exposure.
- Future copper-price spreads, end-market demand, and any additional Yorkshire rationalization costs.