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MLI > SEC Filings for MLI > Form 10-Q on 26-Apr-2013All Recent SEC Filings

Show all filings for MUELLER INDUSTRIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MUELLER INDUSTRIES INC


26-Apr-2013

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 Division (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.

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 heating, ventilation, and air-conditioning (HVAC), 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 below capacity during 2012 and the first quarter of 2013 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 fully 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. Commercial construction has also declined significantly in recent years, and, in fact, many categories remain at levels lower than a decade ago. These conditions have significantly affected the demand for virtually all of the Company's core products in recent years.


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Residential construction activity improved in 2012 and the improvement continues into 2013, but is still at levels below historical averages. Recovery in the near-term is expected, but may be tempered by continuing high rates of unemployment and tighter lending standards. Per the U.S. Census Bureau, actual housing starts in the U.S. were 211 thousand for the first quarter of 2013, up from 155 thousand for the first quarter of 2012. The March 2013 seasonally adjusted annual rate of new housing starts was 1.0 million compared with the March 2012 rate of 706 thousand. Mortgage rates have remained at low levels during 2013 and 2012, as the average 30-year fixed mortgage rate was 3.50 percent for the first three months of 2013 and 3.66 percent for the twelve months ended December 2012.

The private non-residential construction sector, which includes offices, industrial and retail projects, began showing modest improvement in 2012 after declines of two percent in 2011, 25 percent in 2010 and 16 percent in 2009. According to the U.S. Census Bureau, the seasonally adjusted annual value of private nonresidential construction put in place was $309.6 billion in February 2013 compared to actual private non-residential value of construction put in place of $327.5 billion for 2012. 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 cost of raw material 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.

Earnings and profitability are also impacted by unit volumes that are 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

During the first quarter of 2013, the Company's net sales were $559.7 million, which compares with net sales of $577.7 million over the same period of 2012. The decrease was primarily attributable to lower unit sales volume in the OEM segment and the decrease in base metal prices, primarily copper. Of the $18.0 million decrease in net sales, approximately $12.1 million was attributable to lower unit volume, while $8.8 million was attributable to lower net selling prices 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 first quarter of 2013 was approximately $3.60 per pound, or 4.8 percent less than the first quarter of 2012 average of $3.78 per pound.

Cost of goods sold was $482.9 million in the first quarter of 2013 compared with $493.2 million in the same period of 2012. Consistent with the factors noted above regarding net sales, the year-over-year decrease was due primarily to decreased sales volume in core product lines and the decrease in the price of copper, the Company's principal raw material. In addition, in 2012 the Company recognized a gain from LIFO liquidation that resulted in a reduction of approximately $8.0 million to cost of sales, or $0.13 per diluted share benefit after tax.

Depreciation and amortization increased from $7.5 million in the first quarter of 2012 to $8.2 million in the first quarter of 2013. This is due to an increase in capital spending during 2012. During the first quarter of 2012, the Company settled the business interruption portion of its claim related to the July 2009 explosion at the copper tube facility in Fulton, Mississippi and recognized a $1.5 million gain.

Interest expense decreased to $0.6 million in the first quarter of 2013 from $2.6 million for the same period in 2012. This decrease was primarily due to lower interest rates on outstanding debt at the end of each quarter. In addition, during the first quarter of 2013 the Company capitalized interest expense related to certain capital projects.


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Other income, net was $3.2 million in the first quarter of 2013 compared with income of $0.3 million for the same period in 2012. This increase was primarily related to a $3.0 million gain on the sale of non-operating property during 2013.

The Company's effective tax rate for the first quarter of 2013 was 34 percent compared with 26 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 quarter of 2013 were: (i) the U.S. production activities deduction of $1.2 million; (ii) decreases in valuation allowances of $0.5 million; and (iii) the effect of foreign tax rates lower than statutory tax rates and other foreign adjustments of $0.3 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $1.1 million.

For the first quarter of 2012, the difference between the effective tax rate and the U.S. federal statutory tax rate relates primarily to: (i) the U.S. production activities deduction of $1.2 million; (ii) decreases in tax contingencies of $0.9 million; (iii) decreases in valuation allowances of $0.8 million; and (iv) the effect of foreign tax rates lower than statutory tax rates and other foreign adjustments of $2.6 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $1.3 million.

The Company's earnings per share were favorably affected by the repurchase of 10.4 million shares from Leucadia National Corporation in September of 2012. By this purchase, the outstanding shares were reduced from 38.5 million shares to 28.1 million shares.

Plumbing & Refrigeration Segment

First quarter net sales by the Plumbing & Refrigeration segment decreased 1.1 percent to $311.8 million in 2013 from $315.4 million in 2012. Of the $3.6 million decrease in net sales, approximately $5.1 million was attributable to lower net selling prices in the segment's core product lines consisting primarily of copper tube, line sets, and fittings, offset by an increase of approximately $2.9 million due to higher unit volume. Cost of goods sold decreased from $265.5 million in the first quarter of 2012 to $264.8 million in the same period of 2013, which was also due to decreasing raw material prices, primarily copper, offset by higher volume. Depreciation and amortization in the first quarter increased from $4.1 million in 2012 to $4.2 million in 2013 resulting from an increase in capital spending during 2012, primarily related to the facilities impacted by the fire in Wynne, Arkansas during 2011. Selling, general, and administrative expenses increased from $19.0 million in the first quarter of 2012 to $20.1 million in the first quarter of 2013. The increase is primarily due to increased employment costs, including incentive compensation, offset by foreign currency transaction gains. Operating income for the segment decreased to $22.6 million in the first quarter of 2013 from $28.3 million in the first quarter of 2012. The decrease in operating income from 2012 was primarily due to the recognition of an $8.0 million LIFO gain and the $1.5 million insurance settlement in the first quarter of 2012. This decrease was offset by higher margins in 2013.

OEM Segment

The OEM segment's first quarter net sales were $253.8 million in 2013 compared with $271.0 million in 2012. The decrease was due primarily to lower sales volume and lower net selling prices resulting from lower average costs of raw materials. Of the $17.2 million decrease in net sales, approximately $15.0 million was attributable to lower sales volume and approximately $3.7 million was due to lower net selling prices in the segment's core product lines of brass rod, forgings, impacts, and commercial tube. This was offset by an increase in sales for the other product lines in the segment. Cost of goods sold decreased to $223.9 million in the first quarter of 2013 from $236.2 million in the same period of 2012, which was also due to the decrease in sales volume and average costs of raw materials. Depreciation and amortization increased slightly from $3.1 million to $3.4 million resulting from increased capital spending in 2012. First quarter selling, general, and administrative expenses were $6.2 million in 2013, compared to $7.0 million for the same period in 2012. The decrease is primarily due to decreased employment costs, offset by foreign currency transaction losses. Operating income decreased from $24.7 million in the first quarter of 2012 to $20.3 million in the same period of 2013, due primarily to lower sales volume and decreased unit spreads.


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Liquidity and Capital Resources

Cash used in operating activities during the three months ended March 30, 2013 totaled $14.9 million, which was primarily attributable to increased receivables of $42.7 million and decreased current liabilities of $5.4 million, partially offset by consolidated net income of $26.4 million plus depreciation and amortization of $8.3 million. The fluctuations in receivables and current liabilities are primarily due to an increase in volume in certain businesses during the first quarter of 2013.

During the first three months of 2013, cash used in investing activities totaled $21.6 million. The major components of net cash used in investing activities included deposits of $14.8 million into restricted cash balances and capital expenditures of $9.8 million, offset by $3.0 million in proceeds from the sale of properties.

Net cash provided by financing activities totaled $22.4 million, which consists primarily of $26.1 million received from the issuance of debt by Mueller-Xingrong, partially offset by $3.5 million used for payment of regular quarterly dividends to stockholders of the Company.

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 $244 thousand during the first three months of 2013. The Company expects to spend approximately $1.7 million for the remainder of 2013 for ongoing environmental remediation activities. The timing of a potential payment for a $9.5 million settlement offer related to the Southeast Kansas Sites has not yet been determined.

The Company's credit agreement provides for an unsecured $350.0 million revolving credit facility (the Revolving Credit Facility) and a $200.0 million Term Loan Facility, both maturing on December 11, 2017. The Revolving Credit Facility backed approximately $10.9 million in letters of credit at the end of the quarter. As of March 30, 2013, the Company's total debt was $260.6 million or 31.9 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 March 30, 2013, the Company was in compliance with all of its debt covenants.

The Company declared and paid a quarterly cash dividend of 12.5 cents per common share in the first quarter of 2013. 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 agreement, cash generated by operations, and currently available cash and cash equivalents of $183.9 million will be adequate to meet the Company's normal future capital expenditures and operational needs. The Company's current ratio was 2.8 to 1 at March 30, 2013.

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 March 30, 2013, the Company had repurchased approximately 2.4 million shares under this authorization.

There have been no significant changes in the Company's contractual cash obligations reported at December 29, 2012.


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