MUELLER INDUSTRIES INC quarterly report, Q1 FY2011

Mueller Industries, Inc. — Q1 2011 Form 10-Q

Reporting period: Quarter ended April 2, 2011. Mueller manufactures and distributes copper, brass, plastic, aluminum, and related products through its Plumbing & Refrigeration and OEM segments. Q1 2011 comprised 14 weeks, versus 13 weeks in Q1 2010, which affects year-over-year comparisons.

Financial performance

Metric	Q1 2011	Q1 2010
Net sales	$687.7 million	$485.3 million
Operating income	$63.2 million	$47.1 million
Net income attributable to Mueller	$40.6 million	$34.0 million
Diluted EPS	$1.07	$0.90
Operating cash flow	$25.8 million	$36.6 million

• Sales increased about 42%, driven by higher unit volumes and higher selling prices, principally reflecting higher metal costs. Average COMEX copper was approximately $4.39 per pound, up 34% year over year.
• Gross profit was $97.8 million, approximately 14.2% of sales, versus $72.2 million, approximately 14.9%, in Q1 2010. Reported operating margin was approximately 9.2%, versus 9.7%.
• Reported results include a $10.5 million litigation settlement gain in 2011; Q1 2010 included a $22.5 million insurance gain. Excluding those items, management’s non-GAAP reconciliation shows diluted EPS of $0.89 in 2011 versus $0.28 in 2010, and operating income of $52.7 million versus $24.5 million.
• Operating cash flow declined despite higher earnings, mainly reflecting an $81.0 million increase in receivables and a $13.5 million increase in inventory, partly offset by higher current liabilities. Capital expenditures were $5.1 million; the TFI acquisition used $6.9 million.
• Cash and cash equivalents were $413.9 million at quarter-end. Total debt was $200.3 million; the company reported a 3.7:1 current ratio and said it was in compliance with debt covenants.

Segments and material changes

• Plumbing & Refrigeration sales rose to $380.6 million from $256.7 million. Operating income was $29.7 million, compared with $40.5 million reported in 2010, which included the $22.5 million insurance gain; excluding that gain, prior-year segment operating income was $18.0 million.
• OEM sales increased to $319.3 million from $232.2 million, and operating income rose to $29.6 million from $16.1 million. The filing attributes improvement primarily to higher volume, improved spreads, lower conversion costs in some product lines, and lower SG&A.
• Mueller entered a new unsecured $350 million revolving credit facility, maturing March 7, 2016, replacing its previous facility. It paid $1.9 million in debt issuance costs.
• The company acquired certain Tube Forming, L.P. assets in December 2010 for approximately $6.9 million, extending its OEM product offering. It paid a regular $0.10-per-share quarterly dividend.

Outlook, risks, and unusual items

• Management expected most business conditions to improve gradually during 2011, while noting residential construction remained at historical lows and commercial construction was weak. The filing does not provide quantified earnings or sales guidance.
• Demand is sensitive to housing and commercial construction, automotive conditions, competition and substitutes, and unit volumes. Profitability and working capital are also exposed to copper and other raw-material prices, availability, and the company’s ability to pass costs through to customers.
• Environmental reserves were $23.3 million. The company expected approximately $1.3 million of environmental remediation spending for the remainder of 2011; timing of a potential $9.5 million settlement payment was not determined. It also reported a $4.2 million reserve for a Mexican antidumping review and said the impact of other reviews could not be estimated.
• The Carrier copper-tube antitrust appeal remained pending; the company could not determine the likelihood or range of a potential loss. The Berkman employment litigation was settled, dismissed with prejudice, and the company received $10.5 million in March 2011.
• The company had partially liquidated LIFO inventory layers and expected to replenish them by year-end. If not replenished, it estimated a roughly $26.2 million reduction in cost of goods sold; the filing had not recognized that effect.
• Management stated that available cash and operating cash flow should meet normal operating and capital needs. The company’s risk factors were reported as unchanged from its 2010 Form 10-K.

Important facts for investors to verify

• How much of the sales and earnings improvement reflects sustainable unit demand and operating performance versus metal-price pass-through, the extra reporting week, and the litigation settlement?
• Whether receivables and inventory convert to cash, and whether working-capital needs remain elevated if metal prices or volumes change.
• Whether the LIFO layers are replenished as expected and whether any resulting cost-of-goods-sold effect is recognized.
• Developments in copper-tube antitrust litigation, antidumping reviews, environmental obligations, and the potential $9.5 million settlement payment.
• Whether management’s expectation of gradual market improvement is borne out, given continued weakness in housing and commercial construction.