Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MLI > SEC Filings for MLI > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for MUELLER INDUSTRIES INC

Form 10-Q for MUELLER INDUSTRIES INC


26-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

General Overview

The Company is a leading manufacturer of copper, brass, plastic, and aluminum products. The range of these products is broad: copper tube and fittings; brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic pipe, fittings and valves; refrigeration valves and fittings; fabricated tubular products; and steel nipples. The Company also resells imported brass and plastic plumbing valves, malleable iron fittings, faucets and plumbing specialty products. Mueller's operations are located throughout the United States and in Canada, Mexico, Great Britain, and China.

The Company's businesses are aggregated into two reportable segments: the Plumbing & Refrigeration segment and the Original Equipment Manufacturers (OEM) segment. For disclosure purposes, as permitted under ASC 280, Segment Reporting, certain operating segments are aggregated into reportable segments. The Plumbing & Refrigeration segment is composed of Standard Products (SPD), European Operations, and Mexican Operations. The OEM segment is composed of Industrial Products (IPD), Engineered Products (EPD), and Mueller-Xingrong. Certain administrative expenses and expenses related primarily to retiree benefits at inactive operations are combined into the Corporate and Eliminations classification. These reportable segments are described in more detail below.


Index

SPD manufactures and sells copper tube, copper and plastic fittings, line sets, plastic pipe, and valves in North America and sources products for import distribution in North America. European Operations manufacture copper tube in Europe, which is sold in Europe and the Middle East; activities also include import distribution in the U.K. and Ireland. Mexican Operations consist of pipe nipple manufacturing and import distribution businesses including product lines of malleable iron fittings and other plumbing specialties. The Plumbing & Refrigeration segment sells products to wholesalers in the HVAC (heating, ventilation, and air-conditioning), plumbing, and refrigeration markets, to distributors to the manufactured housing and recreational vehicle industries, and to building material retailers.

The OEM segment manufactures and sells brass and copper alloy rod, bar, and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; refrigeration valves and fittings; fabricated tubular products; and gas valves and assemblies. Mueller-Xingrong manufactures engineered copper tube primarily for air-conditioning applications; these products are sold primarily to OEM's located in China. The OEM segment sells its products primarily to original equipment manufacturers, many of which are in the HVAC, plumbing, and refrigeration markets.

New housing starts and commercial construction are important determinants of the Company's sales to the HVAC, refrigeration, and plumbing markets because the principal end use of a significant portion of the Company's products is in the construction of single and multi-family housing and commercial buildings. Repairs and remodeling projects are also important drivers of underlying demand for these products.

The majority of the Company's manufacturing facilities operated at significantly below capacity during 2011 and the first nine months of 2012 due to reduced demand for the Company's products arising from the general economic conditions in the U.S. and foreign markets that the Company serves. The U.S. housing and residential construction market has not recovered from the economic downturn during 2008 and 2009. The recent years from 2009 through 2011 had the lowest recorded housing starts since recordkeeping began in 1959. From 1959 through 2007, annual housing starts averaged over 1.5 million units. Per the U.S. Census Bureau, actual housing starts in the U.S. were 583 thousand for the first nine months of 2012, up from 460 thousand for the first nine months of 2011. The September 2012 seasonally adjusted annual rate of new housing starts was 872 thousand, which is an increase of 35 percent compared with the September 2011 rate of 647 thousand. Mortgage rates have remained at low levels during 2012 and 2011, as the average 30-year fixed mortgage rate was approximately 3.75 percent for the first nine months of 2012 and 4.45 percent for the twelve months ended December 2011. Commercial construction has also remained at low levels. According to the U.S. Census Bureau, the seasonally adjusted annual value of private nonresidential construction put in place was $288.7 billion in August 2012, significantly less than the activity levels during 2007 and 2008. Business conditions in the U.S. automotive industry were also exceptionally difficult in the economic downturn during 2008 and 2009, which affected the demand for various products in the Company's OEM segment; however, some improvements have recently occurred. These conditions have significantly affected the demand for virtually all of the Company's core products in recent years.

Residential construction activity is still at historical lows and recovery in the near-term is expected to be modest due to continuing high rates of unemployment, the impact of mounting foreclosures, and tighter lending standards. The private non-residential construction sector, which includes offices, industrial and retail projects, showed slight improvement in 2011 after declines of almost 25 percent in 2010 and 13 percent in 2009. The Company expects that most of these conditions will gradually improve, but at an irregular pace.

Profitability of certain of the Company's product lines depends upon the "spreads" between the costs of raw materials and the selling prices of its products. The open market prices for copper cathode and scrap, for example, influence the selling price of copper tube, a principal product manufactured by the Company. The Company attempts to minimize the effects on profitability from fluctuations in material costs by passing through these costs to its customers. The Company's earnings and cash flow are dependent upon these spreads that fluctuate based upon market conditions.


Index

Earnings and profitability are also impacted by unit volume that is subject to market trends, such as substitute products, imports, technologies, and market share. In core product lines, the Company intensively manages its pricing structure while attempting to maximize its profitability. From time-to-time, this practice results in lost sales opportunities and lower volume. For plumbing systems, plastics are the primary substitute product; these products represent an increasing share of consumption. U.S. consumption of copper tube is still predominantly supplied by U.S. manufacturers. For certain air-conditioning and refrigeration applications, aluminum based systems are the primary substitution threat. The Company cannot predict the acceptance or the rate of switching that may occur. In recent years, brass rod consumption in the U.S. has declined due to the outsourcing of many manufactured products from offshore regions.

Results of Operations

Third Quarter 2012 compared with Third Quarter 2011

During the third quarter of 2012, the Company's net sales were $514.2 million, which compares with net sales of $585.8 million over the same period of 2011. The decrease was primarily attributable to decreased selling prices, which are a result of the decrease in base metal prices. Of the $71.6 million decrease in net sales, approximately $58.0 million was due to lower net selling prices, while $10.9 million was attributable to lower unit volume in the Company's core product lines. Net selling prices generally fluctuate with changes in raw material costs. Changes in raw material costs are generally passed through to customers by adjustments to selling prices. The Comex average copper price in the third quarter of 2012 was approximately $3.53 per pound, or 13 percent lower than the 2011 average of $4.07 per pound.

Cost of goods sold was $449.7 million in the third quarter of 2012 compared with $524.0 million in the same period of 2011. This decrease was due primarily to the decrease in the price of copper, the Company's principal raw material. During the quarter ended October 1, 2011, the Company recorded provisions of approximately $6.8 million to write-down certain inventories valued using the first-in, first-out (FIFO) and average cost methods to lower-of-cost-or-market. No such provision was necessary in 2012.

Depreciation and amortization declined from $8.7 million in 2011 to $7.9 million in 2012. The reduction is due to certain assets becoming fully depreciated. Selling, general, and administrative expenses decreased to $32.1 million in the third quarter of 2012; this $2.1 million decrease was primarily due to decreased employment costs including incentive compensation of $2.3 million and foreign currency transaction gains of $1.5 million, partially offset by increased bad debt expense of $1.6 million.

Interest expense decreased to $353 thousand in the third quarter of 2012 from $2.8 million for the same period in 2011. This decrease was related to the redemption of the 6% Subordinated Debentures during the second quarter of 2012 and decreased borrowings by Mueller-Xingrong. The Company's effective tax rate was 36 percent for the third quarter of 2012 and 33 percent in 2011.

Plumbing & Refrigeration Segment

Third quarter net sales by the Plumbing & Refrigeration segment decreased 9 percent to $297.9 million in 2012 from $325.8 million in 2011. Of the $27.9 million decrease in net sales, approximately $30.4 million was due to lower net selling prices in the segment's core product lines consisting primarily of copper tube, line sets, and fittings, partially offset by an increase of $5.8 million related to unit volume mix. Cost of goods sold decreased from $285.2 million in the third quarter of 2011 to $258.0 million in the same period of 2012, which was also due to lower raw material prices, primarily copper. During the quarter ended October 1, 2011, the Company recorded provisions of approximately $3.5 million to write-down certain inventories valued using the FIFO and average cost methods to the lower-of-cost-or-market. Depreciation and amortization in the third quarter decreased from $4.9 million in 2011 to $4.0 million in 2012 resulting from certain assets becoming fully depreciated. Selling, general, and administrative expenses decreased from $21.8 million in the third quarter of 2011 to $18.3 million in the third quarter of 2012. The $3.5 million decrease is primarily due to decreased employment costs, including incentive compensation of $1.4 million, and foreign currency transaction gains of $1.6 million. Operating income for the segment increased $3.7 million in the third quarter of 2012 over the third quarter of 2011. This increase was due primarily to decreased selling, general, and administrative costs.


Index

OEM Segment

The OEM segment's third quarter net sales were $221.5 million in 2012 compared with $266.6 million in 2011. Of the $45.1 million decrease in net sales, approximately $27.5 million was attributable to lower net selling prices in the segment's core product lines of brass rod, forgings, impacts, and commercial tube, while $16.7 million related to lower unit volume. Cost of goods sold decreased to $196.8 million in the third quarter of 2012 from $245.2 million in the same period of 2011, which was primarily due to the decrease in cost of raw materials. During the quarter ended October 1, 2011, the Company recorded provisions of approximately $3.3 million to write-down certain inventories valued using the FIFO cost method to the lower-of-cost-or-market. Depreciation and amortization remained relatively consistent for both quarters. Selling, general, and administrative expenses were $6.8 million in the third quarter of 2012 and $5.6 million in the third quarter of 2011. The $1.2 million increase is primarily due to increased foreign currency transaction losses, and bad debt expense. Operating income increased from $12.2 million in the third quarter of 2011 to $14.4 million in the same period of 2012, due primarily to higher spreads for 2012 in core products, primarily brass rod.

Nine Months Ended September 29, 2012, compared with Nine Months Ended October 1, 2011

During the nine months ended September 29, 2012, the Company's net sales were $1.69 billion, which compares with net sales of $1.93 billion over the same period of 2011. The decrease was primarily attributable to decreased selling prices, which are a result of the decrease in base metal prices, primarily copper, and lower unit sales volume in most of the Company's core product lines. Of the $240.5 million decrease in net sales, approximately $153.6 million was due to lower net selling prices in the Company's core product lines and approximately $79.2 million was attributable to lower unit volume in the Company's core product lines. The Comex average copper price in the first nine months of 2012 was approximately $3.62 per pound, or 14 percent lower than the 2011 average of $4.20 per pound.

Cost of goods sold was $1.47 billion in the first nine months of 2012 compared with $1.69 billion in the same period of 2011. The year-over-year decrease was due primarily to the decrease in the cost of copper, the Company's principal raw material, and decreased sales volume in core product lines. During the nine months ended October 1, 2011, the Company recorded provisions of approximately $6.8 million to write-down certain inventories valued using the FIFO and average cost methods to the lower-of-cost-or-market.

Depreciation and amortization declined from $27.6 million in the first nine months of 2011 to $23.3 million in 2012. This reduction is due to certain assets becoming fully depreciated. Selling, general, and administrative expenses decreased to $97.2 million in the first nine months of 2012 from $102.9 million in 2011; this $5.7 million decrease was primarily due to decreased compensation expense including incentive compensation of approximately $7.6 million and foreign currency transaction gains of $1.1 million, offset by an increase in professional fees of $1.4 million and bad debt expense of $1.2 million.

During the nine months ended September 29, 2012, the Company settled the business interruption portion of its insurance claim related to the July 2009 explosion at the copper tube facility in Fulton, Mississippi, and recognized a $1.5 million gain. During the nine months ended October 1, 2011, the Company recorded a gain of $10.5 million upon receipt of payment related to the December 10, 2010, settlement of a lawsuit against Peter D. Berkman, Jeffrey A. Berkman, and Homewerks Worldwide LLC.

Interest expense decreased to $5.7 million for the nine months ended September 29, 2012, from $9.0 million for the same period in 2011. This decrease was related to the redemption of the 6% Subordinated Debentures during the second quarter of 2012 and decreased borrowings by Mueller-Xingrong.

The Company's effective tax rate for the first nine months of 2012 was 31 percent compared with 33 percent for the same period last year. Factors that explain the difference between the effective tax rate and what would be computed using the U.S. federal statutory tax rate for the first nine months were reductions related to: (i) the effect of foreign tax rates lower than statutory tax rates and other foreign items of $3.7 million; (ii) decreases in unrecognized tax benefits of $1.3 million; (iii) decreases in valuation allowances of $0.5 million; and (iv) the U.S. production activities deduction of $2.2 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $2.7 million.


Index

Plumbing & Refrigeration Segment

Net sales by the Plumbing & Refrigeration segment decreased 10 percent to $945.0 million in the nine months ended September 29, 2012, from $1.05 billion in 2011. Of the $108.5 million decrease in net sales, approximately $91.3 million was due to lower net selling prices in the segment's core product lines consisting primarily of copper tube, line sets, and fittings, and approximately $17.1 million was attributable to lower unit volume. Cost of goods sold decreased from $904.5 million in the first nine months of 2011 to $808.6 million in the same period of 2012, which was also due to decreasing raw material costs, primarily copper and to lower sales volume. During the nine months ended October 1, 2011, the Company recorded provisions of approximately $3.5 million to write-down certain inventories valued using the FIFO and average cost methods to the lower-of-cost-or-market. Depreciation and amortization decreased from $16.0 million in 2011 to $12.3 million in 2012 resulting from certain assets becoming fully depreciated. Selling, general, and administrative expenses decreased $7.5 million primarily due to decreased compensation including incentive compensation of $4.7 million, foreign currency transaction gains of $1.2 million, and professional fees of $600 thousand. Operating income for the segment remained consistent at $68.4 million in the first nine months of 2012 and 2011.

OEM Segment

The OEM segment's net sales were $761.0 million for the nine months ended September 29, 2012, compared with $900.0 million in 2011. Of the $139.0 million decrease in net sales, approximately $62.2 million was attributable to lower net selling prices in the segment's core product lines of brass rod, forgings, impacts, and commercial tube and approximately $62.1 million was due to lower unit volume. Cost of goods sold decreased to $676.6 million in the first nine months of 2012 from $810.0 million in the same period of 2011, which was also due to the decrease in average cost of raw materials and decreases in sales volume. During the nine months ended October 1, 2011, the Company recorded provisions of approximately $3.3 million to write-down certain inventories valued using the FIFO cost method to the lower-of-cost-or-market. Depreciation and amortization in the first nine months of 2012 decreased from $10.6 million in 2011 to $9.9 million in 2012 resulting from certain assets becoming fully depreciated. Selling, general, and administrative expenses were $20.2 million in the first nine months of 2012 compared with $18.8 million in the first nine months of 2011. The $1.4 million increase was due primarily to increased pension expense of $327 thousand, bad debt expense of $770 thousand and foreign currency transactions losses of $233 thousand. Operating income decreased from $60.6 million in the first nine months of 2011 to $54.2 million in the same period of 2012, due primarily to lower spreads.

Liquidity and Capital Resources

Cash provided by operating activities during the nine months ended September 29, 2012, totaled $72.8 million, which was primarily attributable to consolidated net income of $66.9 million plus depreciation and amortization of $23.7 million and insurance proceeds of $14.3 million related primarily to the 2011 fire at the Wynne, Arkansas facility. These cash increases were partially offset by increased receivables of $15.8 million and decreased current liabilities of $21.1 million. The increase in receivables primarily resulted from increased selling prices. Fluctuations in the cost of copper and other raw materials affect the Company's liquidity. Changes in material costs directly impact components of working capital, primarily inventories and accounts receivable. During September 2012, the average Comex copper price was approximately $3.72 per pound, which represents an 8 percent increase over the average price during December 2011. This increase in the price of copper cathode has also resulted in increases in the open market price for copper scrap and, to a lesser extent, the price of brass scrap.

During the first nine months of 2012, cash used in investing activities totaled $5.7 million. The major components of net cash used in investing activities included $43.8 million used for capital expenditures and $11.5 million used for the acquisition of Westermeyer, offset by insurance proceeds of $42.3 million related to the 2011 fire at our Wynne, Arkansas facility and withdrawals of $6.9 million from restricted cash balances.

During the third quarter of 2012, the Company entered into an agreement with Leucadia National Corporation (Leucadia) pursuant to which the Company repurchased from Leucadia 10.4 million shares of the Company's common stock on September 24, 2012 at a total cost of $427.3 million. The Company funded the purchase price for the share repurchase using a combination of available cash on hand and borrowings of $200 million under its Credit Facility.

Net cash used in financing activities totaled $417.0 million, which consisted primarily of $427.4 million used to repurchase common stock and $148.9 million used to redeem the 6% Subordinated Debentures, $29.0 million used for the repayment of debt by Mueller-Xingrong, and $11.4 million used for payment of regular quarterly dividends to stockholders of the Company, offset by the issuance of $200.0 million of debt under the Credit Facility for the repurchase of common stock.


Index

The Company has significant environmental remediation obligations. The performance of these obligations is expected to occur over a minimum of 20 years. Cash used for environmental remediation activities was approximately $998 thousand during the first nine months of 2012. The Company expects to spend approximately $704 thousand for the remainder of 2012 for ongoing environmental remediation activities. The timing of a potential payment for a $9.5 million settlement offer has not yet been determined. The Company's Credit Agreement provides for an unsecured $350.0 million revolving line of credit (the Credit Facility) maturing on March 7, 2016, of which $200.0 million was drawn during the quarter to partially fund the purchase price for the share repurchase. The Credit Facility backed approximately $10.9 million in letters of credit at the end of the quarter, leaving $139.1 million of availability under its $350.0 million Credit Facility expiring in 2016. As of September 29, 2012, the Company's total debt was $220.1 million or 29.5 percent of its total capitalization.

Covenants contained in the Company's financing obligations require, among other things, the maintenance of minimum levels of tangible net worth and the satisfaction of certain minimum financial ratios. As of September 29, 2012, the Company was in compliance with all of its debt covenants.

The Company declared and paid a regular quarterly cash dividend of ten cents per common share in the third quarter of 2012. Payment of dividends in the future is dependent upon the Company's financial condition, cash flows, capital requirements, earnings, and other factors.

Management believes that the Credit Facility, cash generated by operations, and currently available cash of $165.8 million will be adequate to meet the Company's normal future capital expenditures and operational needs. The Company's current ratio was 3.3 to 1 at September 29, 2012.

The Company's Board of Directors has extended, until October 2013, its authorization to repurchase up to ten million shares of the Company's common stock through open market transactions or through privately negotiated transactions. The Company has no obligation to repurchase any shares and may cancel, suspend, or extend the time period for the repurchase of shares at any time. Any repurchases will be funded primarily through existing cash and cash from operations. The Company may hold any shares repurchased in treasury or use a portion of the repurchased shares for employee benefit plans, as well as for other corporate purposes. From its initial authorization in 1999 through September 29, 2012, the Company had repurchased approximately 2.4 million shares under this authorization. The Company's repurchase transaction with Leucadia was completed outside of this authorization.

During 2012, the Company redeemed 100 percent of its 6% Subordinated Debentures. In addition to the principal, this redemption eliminated all future interest on fixed rate debt reporting as of December 31, 2011. In addition, the Company borrowed $200 million on its Credit Facility, due 2016. There were no other significant changes to contractual cash obligations.


Index

Non-GAAP Measurements

The following table illustrates the effects of the stock repurchase transaction (10,422,859 shares at $41.00 per share) on reported earnings as if it had occurred on the first day of the third quarter of 2012. Earnings including the effects of the stock repurchase transaction is a measurement not derived in accordance with generally accepted accounting principles. Including the effects of the stock repurchase transaction is useful as it measures the effects of increased borrowings and decreased available cash on hand to the operating results, and measures the impact of the decreased share count in the weighted average shares computation. These adjustments are helpful in illustrating the impact of these transactions on the reported earnings and diluted earnings per share. The reconciliation of pro forma earnings including the effects of the stock repurchase transaction to net income as reported is as follows:

                                                                For the Three Months Ended
                                                                    September 29, 2012
                                                                       Effect of
                                                                         Stock
(In thousands, except per share data)                 As Reported      Repurchase          Pro Forma
                                                                        Unaudited
Operating income                                     $      24,457   $            -       $    24,457

Interest expense                                              (353 )         (1,731 ) a        (2,084 )
Other income, net                                              219             (121 ) b            98

Income before income taxes                                  24,323           (1,852 )          22,471
Income tax expense                                          (8,753 )            648            (8,105 )

Consolidated net income                                     15,570           (1,204 )          14,366

Net income attributable to noncontrolling interest             (59 )              -               (59 )

Net income attributable to Mueller Industries,
Inc.                                                 $      15,511   $       (1,204 )     $    14,307

Weighted average shares for basic earnings per
share                                                       37,505                             27,655
Effect of dilutive stock-based awards                          452                                452

Adjusted weighted average shares for diluted
earnings per share                                          37,957                             28,107

Diluted earnings per share                           $        0.41                        $      0.51

(a) Represents the estimated increase in interest expense for the quarter, assuming an all-in borrowing rate of 3.75% applied to the amount borrowed to fund the stock repurchase transaction.

(b) Represents the estimated decrease in interest income for the quarter, assuming a weighted average return of 0.21% on the amount of the cash portion of the repurchase transaction.

. . .

  Add MLI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MLI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.