Mueller Industries, Inc. — Q3 2020 Form 10-Q
Business context and period: Mueller manufactures and distributes copper, brass, aluminum, and plastic products across Piping Systems, Industrial Metals, and Climate. This unaudited report covers the quarter and nine months ended September 26, 2020; comparisons are with the corresponding 2019 periods.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $619.1 million | $608.6 million | $1,722.2 million | $1,886.8 million |
| Operating income | $69.2 million | $46.3 million | $180.8 million | $147.0 million |
| Net income attributable to Mueller | $42.7 million | $29.1 million | $103.1 million | $72.8 million |
| Diluted EPS | $0.76 | $0.52 | $1.83 | $1.29 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $196.9 million | $131.9 million |
- Q3 sales increased 1.7%, operating income increased 49.7%, and Mueller-attributable net income increased 46.8% year over year. Nine-month sales fell 8.7%, while operating income rose 23.1% and attributable net income rose 41.6%.
- Gross margin was 19.1% in Q3 versus 16.1% a year earlier, and 18.0% for the first nine months versus 15.9%. Management cited improved material spreads, product mix, manufacturing costs, and employee healthcare costs.
- Nine-month investing cash outflow was $111.0 million, primarily for acquisitions ($72.6 million net of cash acquired), capital expenditures ($29.2 million), and notes receivable ($9.2 million). Financing cash outflow was $66.3 million. Cash, cash equivalents, and restricted cash increased $16.3 million.
- At September 26, cash and cash equivalents were $113.6 million; total debt was $349.7 million, or 32.1% of total capitalization. Debt included $284.5 million of debentures and $55.0 million drawn on the $350 million revolving facility. The company reported $275.5 million available under the facility and a 2.9-to-1 current ratio; it was in compliance with debt covenants.
- Quarterly and nine-month dividends were $0.10 and $0.30 per share, respectively.
Material changes and operating drivers
- Q3 sales growth reflected Kessler Sales and Distribution (KSD), acquired in August and contributing $20.9 million of sales, higher core selling prices, and $3.3 million of STI sales. These were partly offset by lower core unit volumes. For the nine months, core unit volume and selling prices declined, with COVID-19 especially affecting demand in Q2.
- Q3 segment operating income was $44.9 million for Piping Systems, $18.3 million for Industrial Metals, and $18.2 million for Climate. Year-over-year, Piping Systems and Climate improved; Industrial Metals sales declined 12.3%, principally from lower brass-rod volume, while operating income nevertheless increased on improved margin and mix.
- For the first nine months, Piping Systems sales declined 5.4% but operating income rose 22.4%; Industrial Metals sales declined 22.0% and operating income declined 17.8%; Climate sales were approximately flat and operating income rose 30.4%.
- Nine-month results included a $21.9 million gain from the Deepwater Horizon settlement and $3.0 million of impairment charges for idled production equipment. The settlement proceeds were collected in February 2020. Two acquisitions were completed in 2020: STI for approximately $15.4 million and KSD for $57.2 million in cash at closing; KSD’s purchase-price allocation remained provisional.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management said cash from operations, facility availability, and cash on hand should be adequate for working capital, capital spending, and debt obligations.
- Management identified COVID-19-related demand, operating, supply-chain, customer and supplier, and commodity-price uncertainty. Other important exposures include copper and brass costs and availability, construction demand, substitution by plastic or aluminum products, competition, foreign exchange, and interest rates.
- The company disclosed environmental reserves and several ongoing matters. It recorded a $5.6 million reserve for three Southeast Kansas sites and estimated Shasta-area remediation spending of $12.7–$17.7 million over 30 years, with a reserve at the low end. For the Lead Refinery NPL matter, the company said it could not estimate the likelihood or range of loss in excess of its reserve. Potential Bonita Peak Mining District exposure also could not be estimated.
- Other uncertainties include a pending customs dispute over approximately $3.0 million of asserted antidumping duties and interest, and federal tax audits of the 2015 and 2017 returns. The company stated ordinary-course litigation was not expected to have a material adverse effect overall, while noting particular matters where outcomes remain uncertain.
Most important facts for investors to verify
- Whether post-Q3 demand and volumes recovered or remained affected by COVID-19, particularly in Industrial Metals and core product lines.
- How much of the year-to-date earnings improvement reflects sustainable operating performance versus the $21.9 million settlement gain and favorable material spreads, mix, and cost reductions.
- Final KSD and STI purchase accounting, subsequent acquired-business contributions, and the return on acquisition spending.
- Environmental and legal developments, especially Lead Refinery and Bonita Peak, including whether exposures exceed recorded reserves.
- Debt maturity and refinancing plans for the revolving facility, which matures December 6, 2021, and the company’s ability to maintain liquidity and covenant compliance.