Mueller Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Quarter ended April 1, 2017 (13 weeks), compared with the quarter ended April 2, 2016 (14 weeks). Mueller manufactures and distributes copper, brass, aluminum, plastic, and climate-related products across three segments: Piping Systems, Industrial Metals, and Climate. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $577.9 million | $532.8 million | +8.5% |
| Operating income | $45.6 million | $41.5 million | +10.0% |
| Net income attributable to Mueller | $30.0 million | $28.6 million | +4.7% |
| Diluted EPS | $0.52 | $0.50 | +4.0% |
| Cash from operations | $(11.4) million | $10.3 million | Declined |
Gross margin was approximately 15.5%, versus 16.2% a year earlier; operating margin was approximately 7.9%, versus 7.8%. Sales growth reflected higher core-product selling prices (+12.5%) and Jungwoo-Mueller acquisition sales, partly offset by lower core unit volume (-3.7%). The filing cautions that selling prices generally move with raw-material costs.
By segment, Piping Systems sales rose 8.1% to $398.8 million, while operating income fell 2.5% to $30.4 million. Industrial Metals sales rose 11.4% to $149.8 million and operating income rose 3.8% to $20.7 million. Climate sales rose 11.6% to $34.3 million and operating income rose 44.6% to $5.6 million.
Cash, liquidity, and debt
- Cash and equivalents were $146.9 million at April 1, down $204.4 million from year-end 2016. Operating cash use was driven primarily by a $53.8 million increase in receivables and higher working-capital needs.
- Investing cash use was $7.1 million, including $7.3 million of capital expenditures. Financing cash use was $188.4 million, principally reflecting the special and regular dividends.
- Total debt was $504.7 million, including $200.0 million drawn under the $350 million revolving credit facility and $284.5 million of subordinated debentures. Debt was 49.9% of total capitalization. The company reported compliance with debt covenants.
- Current assets were $756.1 million and current liabilities were $231.7 million; management reported a 3.3-to-1 current ratio. Management believes cash, operating cash flow, and available credit will meet liquidity needs.
Material changes, outlook, and risks
The principal unusual item was the March 2017 special dividend: shareholders received $3.00 cash and $5.00 principal amount of 6% subordinated debentures per share, due 2027. The distribution reduced cash by approximately $174.2 million, increased long-term debt by approximately $284.5 million, and reduced stockholders’ equity by approximately $458.7 million. The debentures begin paying interest semiannually in September 2017. Interest expense increased partly because of these debentures.
The effective tax rate decreased to 27% from 35%, with benefits including equity-compensation deductions and lower foreign tax rates. Equity-method affiliates generated a $1.2 million loss, compared with $2.9 million of income in Q1 2016; the prior-year result included a purchase-price allocation gain.
No specific earnings or revenue guidance was provided. Management expected residential and private nonresidential construction conditions to continue improving, while noting housing remained below long-term historical levels. Key exposures include copper and brass prices and availability, metal-price spreads, construction demand, competition and product substitution, interest rates, foreign exchange, and working-capital requirements. The EEOC matter alleges disability-related discrimination; conciliation ended without resolution, and the company could not estimate the likelihood or range of loss beyond insurance. Management expected approximately $0.5 million of environmental remediation spending during the remainder of 2017.
Important facts for investors to verify
- How much of sales and earnings growth reflects price pass-through versus underlying volume and mix, particularly given the shorter quarter and lower core unit sales.
- Whether receivables and inventory convert to cash and operating cash flow recovers from the Q1 working-capital outflow.
- The ongoing interest burden and debt terms following the debenture-funded portion of the special dividend, as well as remaining revolver availability and covenant headroom.
- The outcome and potential financial exposure of the unresolved EEOC matter and the adequacy of insurance coverage.
- The filing’s income statement reports dividends per share of $8.100 for Q1 2017; investors should verify the presentation and treatment of the cash and debenture special distribution against the dividend disclosures.