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

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Form 10-Q for MUELLER INDUSTRIES INC


26-Jul-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.


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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 Accounting Standards Codification (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.

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, 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 original equipment manufacturers 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 half 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 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. These conditions have significantly affected the demand for virtually all of the Company's core products in recent years.

Residential construction activity improved in 2012 and the improvement continued in the first half of 2013, but is still at levels below historical averages. Continued recovery in the near-term is expected, but may be tempered by continuing high rates of unemployment, tighter lending standards, and rising mortgage rates. Per the U.S. Census Bureau, actual housing starts in the U.S. were 453 thousand for the first half of 2013, up from 364 thousand for the first half of 2012. The June 2013 seasonally adjusted annual rate of new housing starts was 836 thousand compared with the June 2012 rate of 781 thousand. While mortgage rates have risen in the first half 2013 they remain at historically low levels, as the average 30-year fixed mortgage rate was 3.60 percent for the first six months of 2013 and 2.66 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 declining each year from 2009 to 2011. However, the pace of improvement appears to have slowed through May 2013. According to the U.S. Census Bureau, the seasonally adjusted annual value of private nonresidential construction put in place was $283.1 billion in May 2013 compared to actual private non-residential value of construction put in place of $297.7 billion for 2012. The Company expects that most of these conditions will gradually improve, but at an irregular pace.


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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

Second Quarter 2013 compared with Second Quarter 2012

During the second quarter of 2013, the Company's net sales were $582.3 million, which compares with net sales of $594.1 million over the same period of 2012. The decrease was mostly attributable to the decrease in base metal prices, primarily copper, and lower unit sales volume in the OEM segment. Of the decrease, $23.8 million was attributable to lower net selling prices in the Company's core product lines and $7.4 million was attributable to lower unit volume in the OEM segment, partially offset by a $16.9 million increase in volume in the Plumbing and Refrigeration segment. 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 second quarter of 2013 was approximately $3.25 per pound, or eight percent less than the second quarter of 2012 average of $3.54 per pound.

Cost of goods sold was $501.1 million in the second quarter of 2013 compared with $522.9 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 the decrease in the price of copper, the Company's principal raw material.

Depreciation and amortization increased from $7.9 million in the second quarter of 2012 to $8.3 million in the second quarter of 2013. This is due to an increase in capital spending in 2012. Selling, general, and administrative expenses increased to $34.8 million in the second quarter of 2013; this $1.3 million increase was primarily due to increased compensation expense, including incentive compensation.

During the second quarter of 2013, the Company settled the insurance claim related to the September 2011 fire at its Wynne, Arkansas manufacturing operation and recognized a one-time $106.3 million pre-tax gain, or $65.6 million after tax, equal to $2.33 per diluted share.

Interest expense decreased to $1.1 million in the second quarter of 2013 from $2.7 million for the same period in 2012. This decrease was primarily related to the redemption of the Company's 6% Subordinated Debentures on June 25, 2012.

The Company's effective tax rate for the second quarter of 2013 was 36 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 second quarter of 2013 were decreases related to: (i) the U.S. production activities deduction of $1.7 million; (ii) decreases in valuation allowances of $0.8 million; and (iii) the effect of foreign tax rates lower than statutory tax rates and other foreign adjustments of $1.1 million. These items were offset by the provision for state income taxes, net of the federal benefit, of $5.1 million.


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Based on the items described above, operating income increased to $144.3 million in the second quarter of 2013 from $29.8 million in the second quarter of 2012.

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. After giving effect to this purchase, the outstanding shares were reduced from 38.5 million shares to 28.1 million shares.

Plumbing & Refrigeration Segment

Second quarter net sales of $328.7 million by the Plumbing & Refrigeration segment were consistent with the net sales of $331.7 million for the second quarter of 2012. There was a $17.4 million decrease due to lower net selling prices, which was offset by an increase of $16.9 million attributable to higher unit volume in the segment's core product lines consisting primarily of copper tube, line sets, and fittings. Cost of goods sold decreased from $285.2 million in the second quarter of 2012 to $277.9 million in the same period of 2013, which was also due to decreasing raw material prices, primarily copper, offset by higher volume. Operating income for the segment increased to $129.8 million in the second quarter of 2013 from $22.6 million in the second quarter of 2012. This increase was primarily due to the recognition of a $103.9 million gain related to the settlement of the insurance claim for the September 2011 fire at the Wynne, Arkansas manufacturing operation during the second quarter of 2013.

OEM Segment

The OEM segment's second quarter net sales were $257.0 million in 2013 compared with $268.6 million in 2012. Of the $11.6 million decrease in net sales, approximately $7.5 million was attributable to lower sales volume and approximately $6.3 million was due to lower net selling prices in the segment's core product lines of brass rod, forgings, impacts, and commercial tube resulting from lower average costs of raw materials. Cost of goods sold decreased to $226.6 million in the second quarter of 2013 from $243.6 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 expenses and selling, general, and administrative expenses for the second quarter of 2013 remained consistent with those recorded in the same period of 2012. Operating income increased from $15.1 million in the second quarter of 2012 to $20.9 million in the same period of 2013 primarily as a result of higher margins in 2013.

Six Months Ended June 29, 2013, compared with Six Months Ended June 30, 2012

During the six months ended June 29, 2013, the Company's net sales were $1.14 billion, which compares with net sales of $1.17 billion over the same period of 2012. Of the $29.8 million decrease in net sales, approximately $26.3 million was due to lower net selling prices and approximately $22.4 million was attributable to lower unit volume in the OEM segment. This was partially offset by a $13.4 million increase in volume in the Plumbing and Refrigeration segment. The Comex average copper price in the first half of 2013 was approximately $3.43 per pound, or seven percent less than the average of $3.67 per pound in the first half of 2012.

Cost of goods sold was $0.98 billion in the first half of 2013 compared with $1.02 billion in the same period of 2012. The year-over-year decrease was due primarily to the decrease in the price of copper, the Company's principal raw material. Additionally, during the first half of 2012, the Company recognized a gain from liquidation of a LIFO inventory layer that resulted in a reduction of approximately $8.0 million to cost of sales, or $0.13 per diluted share after tax.

Depreciation and amortization expense increased from $15.4 million in the first half of 2012 to $16.5 million in the first half of 2013. This is due to an increase in capital spending during 2012 and 2013. Selling, general, and administrative expenses increased to $66.2 million in the first half of 2013 from $65.1 million in 2012; this $1.1 million increase was primarily due to increased compensation expense, including incentive compensation.

During the six months ended June 29, 2013, the Company settled the insurance claim related to the September 2011 fire at its Wynne, Arkansas manufacturing operation and recognized a $106.3 million gain. During the six months ended June 30, 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.


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Interest expense decreased to $1.7 million for the six months ended June 29, 2013, from $5.4 million for the same period in 2012. This decrease was primarily related to the redemption of the Company's 6% Subordinated Debentures on June 25, 2012. Other income, net totaled $3.5 million in the first half of 2013 compared with $0.7 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 half of 2013 was 36 percent compared with 29 percent for the same period last year. The difference between the effective tax rate in the first half of 2013 and the rate in the first half of 2012 is primarily attributable to reductions to the rate in the first half of 2012 related to the effect of foreign tax rates lower than statutory rates and other foreign items. 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 half were reductions related to: (i) the effect of foreign tax rates lower than statutory tax rates and other foreign items of $1.4 million;
(ii) decreases in valuation allowances of $1.3 million; and (iii) the U.S. production activities deduction of $2.9 million. These items were offset by the provision for state income taxes, net of the federal benefit, of $6.2 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. After giving effect to this purchase, the outstanding shares were reduced from 38.5 million shares to 28.1 million shares.

Plumbing & Refrigeration Segment

Net sales by the Plumbing & Refrigeration segment were $640.5 million in the six months ended June 29, 2013, consistent with net sales of $647.0 million in the same period of 2012. There was a decrease of $16.2 million due to lower net selling prices, which was partially offset by an increase of $13.4 million attributable to higher unit volume in the segment's core product lines consisting primarily of copper tube, line sets, and fittings. Cost of goods sold decreased from $550.7 million in the first half of 2012 to $542.7 million in the same period of 2013, which was also due to decreasing raw material prices, primarily copper, partially offset by higher sales volume. Selling, general, and administrative expenses increased from $38.7 million in the first half of 2012 to $40.5 million in the first half of 2013. The $1.8 million increase was primarily due to increased compensation expense, including incentive compensation. Operating income for the segment increased to $152.4 million in the first half of 2013 from $50.9 million in the first half of 2012. This increase was primarily due to the recognition of a $103.9 million gain related to the settlement of the insurance claim for the September 2011 fire at the Wynne, Arkansas manufacturing operation during the first half of 2013.

OEM Segment

The OEM segment's net sales were $510.8 million in the six months ended June 29, 2013, compared with $539.5 million in 2012. Of the $28.7 million decrease in net sales, approximately $22.4 million was attributable to lower unit volume and approximately $10.1 million was due to lower net selling prices in the segment's core product lines of brass rod, forgings, impacts, and commercial tube. Cost of goods sold decreased to $450.5 million in the first half of 2013 from $479.8 million in the same period of 2012, which was also due to decreases in sales volume and a decrease in the average costs of raw materials. Selling, general, and administrative expenses decreased from $13.4 million in the first half of 2012 to $12.4 million in the first half of 2013, which was mostly due to lower employment costs. Operating income increased from $39.8 million in the first half of 2012 to $41.3 million in the same period of 2013 primarily as a result of higher margins in 2013.

Liquidity and Capital Resources

Cash provided by operating activities during the six months ended June 29, 2013 totaled $49.2 million, which was primarily attributable to consolidated net income of $118.3 million plus non-capital related insurance proceeds of $32.4 million and depreciation and amortization of $16.6 million, partially offset by the gain related to the settlement of the insurance claim for the September 2011 fire in Wynne, Arkansas of $106.3 million and increased receivables of $35.1 million.


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During the first six months of 2013, cash provided by investing activities totaled $6.5 million. The major components of net cash provided by investing activities included insurance proceeds for property and equipment of $29.9 million related to the September 2011 fire at our Wynne, Arkansas manufacturing operation, partially offset by $21.7 million used for capital expenditures.

Net cash provided by financing activities totaled $8.4 million, which consists primarily of $15.5 million received from the issuance of debt by Mueller-Xingrong, offset by $7.0 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 $562 thousand during the first half of 2013. The Company expects to spend approximately $1.4 million for the remainder of 2013 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 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 $10.0 million in letters of credit at the end of the quarter. As of June 29, 2013, the Company's total debt was $250.6 million or 27.8 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 June 29, 2013, the Company was in compliance with all of its debt covenants.

The Company declared and paid a regular quarterly cash dividend of 12.5 cents per common share in the second 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.

The Company has initiated capital expenditure programs in its copper tube and brass rod mills to upgrade equipment and implement new manufacturing technologies with the primary objective of reducing costs. These programs will be completed in phases over several years. In 2013, the Company expects capital expenditures to total approximately $40.0 million, which will be funded by existing cash and cash from operations.

Management believes that the Credit Facility, cash generated by operations, and currently available cash of $261.7 million will be adequate to meet the Company's normal future capital expenditures and operational needs. The Company's current ratio was 3.5 to 1 at June 29, 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 June 29, 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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