Mueller Industries, Inc. — Q2 2021 Form 10-Q
Business and period: Mueller manufactures and distributes copper, brass, aluminum, plastic, HVAC and plumbing products through Piping Systems, Industrial Metals and Climate segments. This unaudited report covers the quarter and six months ended June 26, 2021; comparisons are with the periods ended June 27, 2020.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,012.6 million | $500.2 million | $1,830.7 million | $1,103.1 million |
| Operating income | $157.8 million | $52.3 million | $250.4 million | $111.6 million |
| Net income attributable to Mueller | $108.8 million | $28.0 million | $171.9 million | $60.4 million |
| Diluted EPS | $1.92 | $0.50 | $3.03 | $1.07 |
- Q2 gross margin was 21.0%, versus 19.4%; first-half gross margin was 19.8%, versus 17.3%.
- Q2 sales increased 102.5%; first-half sales increased 66.0%. Management attributed the gains to higher prices and volumes in core products, acquisitions, and growth in non-core products. In Q2, net selling prices contributed 55.7 percentage points of growth and unit volume 22.1 points.
- Each segment grew sales and operating income year over year in Q2. Piping Systems was the largest segment, with $711.6 million in sales and $124.5 million in operating income. Industrial Metals’ Q2 gross margin declined to 13.7% from 15.1% as rising material costs weighed on margins.
Cash flow, liquidity and debt
- First-half operating cash flow was $9.3 million, down from $142.8 million. Higher earnings were largely offset by increases in receivables of $190.9 million and inventory of $63.9 million, which management linked to higher sales, volume and material costs.
- First-half investing cash outflow was $21.6 million, including $18.0 million of capital expenditures and $13.9 million for H&C Flex, partly offset by $8.5 million collected on notes receivable. Financing provided $9.7 million.
- At June 26, cash and cash equivalents were $110.7 million; cash, cash equivalents and restricted cash totaled $125.7 million. The current ratio was 3.0, and management reported $126.1 million available under its credit agreement.
- Total debt was $357.4 million; borrowings under the new credit agreement were $350.0 million. The agreement provides a $400 million revolver maturing in 2026 and a $100 million term loan maturing in 2022. The company redeemed $291.4 million of subordinated debentures in April and recorded a $5.7 million redemption premium. It reported compliance with debt covenants.
- Quarterly dividends were $0.13 per share. Management said operating cash, available credit and cash on hand should meet liquidity needs.
Material changes, outlook and risks
- Management cited strong demand, inflation and industry-wide supply constraints that contributed to higher selling prices, growing backlogs and improved margins. Raw-material costs, especially copper and brass, are generally passed through to customers, but timing, inventory accounting and supply availability can affect margins.
- The comparison with first-half 2020 includes a $21.9 million litigation settlement benefit and $3.0 million of asset impairments in 2020. These items affect year-over-year comparability. Q2 2021 also included the $5.7 million debenture redemption premium.
- Acquisitions contributed to growth: Kessler added $59.7 million of Q2 sales and $96.4 million in the first half; H&C Flex added $12.4 million and $20.0 million, respectively. H&C’s purchase-price allocation remained provisional.
- No specific earnings or revenue guidance was provided. Management identified housing and construction demand, COVID-19 impacts, commodity prices and availability, competition, financing and acquisition conditions as factors that could cause actual results to differ from expectations.
- Environmental matters include a $5.6 million reserve for three Kansas sites, estimated remediation spending of $13.9–$18.0 million over 30 years for Shasta-area mines, and Lead Refinery site proceedings. The company said it could not estimate the likelihood or amount of potential losses beyond current reserves for certain Lead Refinery matters; potential losses at the Bonita Peak site also could not be estimated. A separate antidumping-duty dispute involving approximately $3.0 million of invoices remained pending, with liability not estimable.
- Commodity, interest-rate and foreign-currency exposures are managed in part through derivatives. At quarter-end, copper futures covered approximately $83.9 million of purchases and $66.7 million of sales. The company also had variable-rate debt of $350 million and reported that a hypothetical 10% interest-rate increase would have an insignificant unfavorable impact on pretax earnings and cash flows.
Investor facts to verify
- Whether elevated selling prices and margins can be sustained as supply constraints, commodity costs and customer pass-through timing change.
- Whether working-capital investment and the sharp decline in operating cash flow normalize as sales and inventory levels evolve.
- Credit-facility availability, the 2022 term-loan maturity, and debt levels following the debenture redemption.
- Updates to environmental reserves, Lead Refinery and Bonita Peak exposures, and the pending antidumping-duty matter.
- Final H&C Flex acquisition valuation and the contribution of acquisitions versus organic volume and pricing to future results.