Business context and reporting period
Mueller Industries, Inc. manufactures and distributes copper, brass, plastic, and aluminum products. Its reportable segments are Plumbing & Refrigeration and Original Equipment Manufacturers (OEM). This unaudited 10-Q covers the quarter ended March 31, 2012; the quarter had 13 weeks versus 14 weeks in the prior-year quarter ended April 2, 2011. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2012 | Prior-year quarter |
|---|---|---|
| Net sales | $577.7 | $687.7 |
| Operating income | $46.9 | $63.2 |
| Income before taxes | $44.5 | $61.0 |
| Net income attributable to Mueller | $32.6 | $40.6 |
| Diluted EPS | $0.85 | $1.07 |
| Operating margin | 8.1% | 9.2% |
| Gross margin | 14.6% | 14.2% |
- Sales declined about 16%; operating income declined about 26%; Mueller-attributable net income declined about 20%. The shorter quarter contributed to the sales comparison.
- Operating cash flow was negative $10.8, versus positive $25.8 a year earlier, primarily reflecting a $67.0 increase in receivables and a $13.7 increase in inventory. Investing cash flow was positive $25.4, including $32.5 of insurance proceeds and $9.3 of capital spending. Financing cash flow was negative $3.1, mainly dividends.
- Cash and cash equivalents were $526.9 at quarter-end, up from $514.2 at year-end 2011. Current assets were $1,122.2 and current liabilities $275.8; management reported a 4.1-to-1 current ratio.
- Total debt was $198.8, or 17.7% of total capitalization. The company had a $350 revolving credit facility maturing in 2016, with about $11.7 of letters of credit outstanding, and reported compliance with debt covenants. Cash exceeded reported debt by approximately $328.1.
- The quarterly dividend was $0.10 per share. The effective tax rate was 26%, compared with 33% in the prior-year quarter.
Material changes versus the prior comparable period
- Management attributed lower sales mainly to reduced unit volumes across most core product lines, lower base-metal prices—especially copper—and the one-week difference in quarter length. Average Comex copper was about $3.78 per pound, 14% below the prior-year quarter.
- Plumbing & Refrigeration sales fell to $315.4 from $380.6; operating income was $28.3 versus $29.7. OEM sales fell to $271.0 from $319.3; operating income was $24.7 versus $29.6. Both segments cited lower volumes, weaker spreads, and higher per-unit conversion costs in certain products.
- Reported results included an $8.0 LIFO-related benefit to cost of sales and a $1.5 gain on settlement of the Fulton, Mississippi business-interruption claim. The prior-year quarter included a $10.5 litigation settlement gain. Excluding the identified items, diluted EPS was $0.69 in 2012 versus $0.89 in 2011, per the company’s non-GAAP reconciliation.
- Receivables and inventory increased from December 31, 2011, while cash increased. Capital expenditures were $9.3, compared with $5.1 in the prior-year quarter.
Outlook, risks, contingencies, and unusual items
- Management expected most business conditions to improve gradually during 2012, while describing near-term residential construction recovery as modest. Housing and commercial construction remained weak, and many facilities operated significantly below capacity.
- Results are sensitive to copper and brass prices, raw-material availability, selling-price spreads, production volumes, demand, and substitution by plastics or aluminum. The company uses commodity hedges; at quarter-end it held contracts to purchase about $25.6 of copper over 21 months for fixed-price sales orders.
- Following a September 2011 fire at its Wynne, Arkansas facility, the company had received $50.0 in insurance advances, including $40.0 during Q1. A net $33.1 was recorded in other current liabilities after specified offsets. The total loss and final insurance settlement remained undetermined.
- A proposed EPA remedy for the former USS Lead site in East Chicago was estimated at $43.9 and would address contaminated soil at approximately 680 residential properties. The proposal remained subject to review and public comment; no funding demand had been received. Mueller said it could not predict its potential liability or whether it would be material.
- The company reported a $9.5 environmental settlement offer with payment timing undetermined, alongside long-term remediation obligations. It estimated about $0.8 of environmental remediation spending for the remainder of 2012.
- A new purported Belding, Michigan nuisance and negligence class action seeks damages and injunctive relief; the company said it could not yet assess the impact. In separate supplier litigation, the court sustained the unfair-competition claim, dismissed RICO claims with leave to amend, and set trial for April 16, 2013.
- Other items to monitor include $3.9 of unrecognized tax benefits, possible decreases of up to $1.0 over the next 12 months, and the possibility of a $19.5 cost-of-sales reduction if specified LIFO inventory layers are not replenished. The company stated that risk factors had not materially changed from its 2011 Form 10-K.
Most important facts for investors to verify
- Whether lower unit volumes and weak construction demand persist, and how the shorter quarter affects comparisons.
- Whether raw-material costs, selling prices, and product spreads support margins as copper prices and working-capital needs change.
- Final insurance recovery and accounting for the Wynne fire, including the $33.1 liability balance and deferred costs.
- Developments and potential exposure in the East Chicago Superfund matter, Belding class action, environmental settlement offer, and supplier litigation.
- Whether LIFO inventory is replenished and how the identified LIFO and settlement items affect comparisons with recurring earnings.
- Cash conversion, capital spending, debt covenants, and the company’s capacity to sustain dividends or repurchase shares.