Business context and reporting period
Mueller Industries, Inc. filed this unaudited Form 10-Q for the quarter ended September 26, 2015. The company manufactures and distributes copper, brass, aluminum, and plastic products, primarily through its Plumbing & Refrigeration and OEM segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $535.2 | $602.8 | $1,628.0 | $1,826.9 |
| Operating income | $27.0 | $37.7 | $118.3 | $124.2 |
| Net income attributable to Mueller | $17.8 | $23.8 | $73.4 | $83.6 |
| Diluted EPS | $0.31 | $0.42 | $1.29 | $1.47 |
| Gross margin | 12.7% | 13.5% | 14.1% | 13.8% |
| Operating margin | 5.1% | 6.3% | 7.3% | 6.8% |
- For the nine months, operating income included a $15.4 million gain on an asset sale; severance costs were $3.4 million. The prior-year period included a $1.4 million asset-sale gain and $3.1 million of severance.
- Cash provided by operations for the first nine months was $95.5 million, versus $4.2 million a year earlier. Capital expenditures were $22.5 million, implying operating cash flow less capital expenditures of approximately $73.0 million, versus negative $24.2 million in 2014.
- Investing activities used $188.5 million, principally for acquisitions ($107.4 million), the Tecumseh joint-venture investment ($65.9 million), and capital expenditures. Financing activities used $34.8 million. Cash fell $131.4 million to $220.7 million.
- At September 26, cash was $220.7 million and total debt was $218.3 million; debt was 20.5% of total capitalization. Current ratio was 3.6, and management reported compliance with all debt covenants. The company had a $200 million revolving facility and a $200 million term loan, both maturing December 2017.
- Quarterly dividend was $0.075 per share. Nine-month dividends paid totaled $12.7 million.
Material changes versus the prior comparable period
- Q3 sales declined 11.2%; nine-month sales declined 10.9%. Management attributed the declines mainly to lower selling prices in core lines—especially copper tube and brass rod—and lower unit volumes. Acquisitions partly offset these decreases.
- Q3 operating income fell 28.4% and Mueller-attributable net income fell 25.3%. For the nine months, operating income fell 4.8% and attributable net income fell 12.1%.
- OEM Q3 sales declined 14.2% and operating income 44.6%, reflecting lower volume and prices, particularly for brass rod and commercial tube. Plumbing & Refrigeration sales fell 9.2%; operating income fell 3.0%.
- Q3 effective tax rate decreased to 20% from 33%, mainly due to a $4.2 million reduction in deferred tax liabilities associated with a foreign-subsidiary acquisition and the U.S. production activities deduction. Nine-month effective tax rates were 32% and 30%, respectively.
Outlook, commentary, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management expects most construction conditions to continue improving, while noting that residential construction remains below long-term historical averages.
- Management considers cash on hand, operating cash flow, and credit availability adequate for normal operating and capital needs. Future dividends depend on financial condition, cash flows, capital needs, earnings, and other factors.
- 2015 acquisitions included Turbotec, Sherwood, and Great Lakes Copper; Great Lakes contributed $40.4 million of Q3 sales. Mueller also invested $65.9 million for a 50% interest in the joint venture that acquired Tecumseh and recorded $2.2 million of equity-method losses related to transaction costs.
- Key operating exposures include copper and brass prices, raw-material availability, commodity spreads, demand and sales volumes, competition and product substitution, interest rates, and foreign exchange. The company uses derivatives to manage certain exposures.
- Environmental reserves were $21.6 million. Cash remediation spending was about $0.9 million in the first nine months, with approximately $0.2 million expected for the remainder of 2015. Timing of a potential $9.5 million settlement payment related to the Southeast Kansas Sites was undetermined. Letters of credit supporting guarantees had a maximum potential payment of $8.8 million.
- Management said ordinary-course litigation was not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether lower core-product prices and volumes persist, and whether acquisitions can offset those pressures without weakening margins.
- The final purchase-price allocations and integration results for Turbotec, Sherwood, and Great Lakes, and the performance and funding needs of the Tecumseh joint venture.
- Cash conversion and liquidity after the substantial acquisition and joint-venture outlays; confirm debt maturities, facility availability, and covenant headroom.
- The timing and eventual cost of the Southeast Kansas Sites matter, other environmental obligations, and any changes in legal or tax-audit exposures.
- The effect of commodity, currency, and interest-rate movements, including derivative positions and deferred hedge losses.