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MLI > SEC Filings for MLI > Form 10-Q on 28-Oct-2013All Recent SEC Filings

Show all filings for MUELLER INDUSTRIES INC

Form 10-Q for MUELLER INDUSTRIES INC


28-Oct-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 (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 throughout 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.

Subsequent to the end of the third quarter of 2013, the Company closed on the acquisition of Howell and entered into a definitive agreement to acquire Yorkshire, subject to regulatory approval in the United Kingdom. Howell manufactures copper tube and line sets for U.S. distribution while Yorkshire produces European standard copper distribution tubes.

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.


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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 below capacity during 2012 and the first nine months 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 considerably 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 nine months 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 616 thousand for the first eight months of 2013, up from 502 thousand for the first eight months of 2012. The August 2013 seasonally adjusted annual rate of new housing starts was 891 thousand, compared with the August 2012 rate of 749 thousand. While mortgage rates have risen in the first nine months of 2013, they remain at historically low levels, as the average 30-year fixed mortgage rate was approximately 3.89 percent for the first nine months of 2013 and 3.66 percent for the 12 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 the improvement appears to have slowed through August 2013. According to the U.S. Census Bureau, the seasonally adjusted annual value of private nonresidential construction put in place was $300.3 billion in August 2013 compared to actual private non-residential value of construction put in place of $287.7 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 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.

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.


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Results of Operations

Third Quarter 2013 compared with Third Quarter 2012

During the third quarter of 2013, the Company's net sales were $528.9 million, which compares with net sales of $514.2 million over the same period of 2012. Of the $14.7 million increase in net sales, approximately $18.6 million was due to higher unit sales volume in the Company's core product lines, partially offset by an $8.2 million decrease due to lower net selling prices 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 third quarter of 2013 was approximately $3.23 per pound, or eight percent lower than the 2012 average of $3.53 per pound.

Cost of goods sold was $456.3 million in the third quarter of 2013 compared with $449.7 million in the same period of 2012. This increase was due primarily to the increase in unit volume, offset by the decrease in the price of copper, the Company's principal raw material.

Depreciation and amortization and selling, general, and administrative expenses for the third quarter of 2013 remained consistent with those recorded in the third quarter of 2012. During the third quarter of 2013, the Company sold certain of its plastic fittings manufacturing assets and recognized a pre-tax gain of $39.8 million, or 81 cents per diluted share after tax. The Company also recognized fixed asset impairment charges of $4.3 million primarily related to real property retained that was associated with the aforementioned plastic sale transaction.

Interest expense increased to $1.2 million in the third quarter of 2013 from $0.4 million for the same period in 2012. The Company redeemed its 6% Subordinated Debentures during June 2012 and did not enter into the Term Loan Facility Credit Agreement until September 2012.

The Company's effective tax rate for the third quarter of 2013 was 40 percent compared with 36 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 third quarter of 2013 were increases related to: (i) goodwill impairment of $1.8 million; (ii) increases in the valuation allowance of $1.0 million; (iii) the provision for state income taxes, net of federal benefit of $1.2 million; and (iv) the effect of foreign adjustments of $0.4 million. These items were partially offset by the U.S. production activities deduction of $1.0 million.

Based on the items described above, net income increased to $39.9 million in the third quarter of 2013 from $15.5 million in the third 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

Third quarter net sales by the Plumbing & Refrigeration segment increased to $301.6 million in 2013 from $297.9 million in 2012. Of the $3.7 million increase in net sales, approximately $9.7 million was due to higher unit sales volume in the segment's core product lines consisting primarily of copper tube, line sets, and fittings, partially offset by a decrease of $8.2 million related to lower net selling prices. Cost of goods sold and depreciation and amortization expenses for the third quarter of 2013 were consistent with 2012. Selling, general, and administrative expenses increased from $18.3 million in the third quarter of 2012 to $20.7 million in the third quarter of 2013. The $2.4 million increase was primarily due to increased employment costs, including incentive compensation, of $1.3 million, and foreign currency transaction losses of $0.7 million. During the third quarter of 2013, the segment sold certain of its plastic fittings manufacturing assets and recognized a pre-tax gain of $39.8 million. It also recognized fixed asset impairment charges of $4.2 million. Operating income for the segment increased $36.7 million in the third quarter of 2013 over the third quarter of 2012 primarily as a result of these items.


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OEM Segment

The OEM segment's third quarter net sales were $230.4 million in 2013 compared with $221.5 million in 2012. The $8.9 million increase in net sales was primarily attributable to higher unit sales volume in the segment's core product lines of brass rod, forgings, impacts, and commercial tube. Cost of goods sold increased to $201.4 million in the third quarter of 2013 from $196.8 million in the same period of 2012, which was primarily due to the increase in unit sales volume. Depreciation and amortization remained relatively consistent for both quarters. Selling, general, and administrative expenses were $5.8 million in the third quarter of 2013 and $6.8 million in the third quarter of 2012. The $1.0 million decrease was primarily due to higher bad debt expense in 2012. Operating income increased from $14.4 million in the third quarter of 2012 to $19.9 million in the same period of 2013, due primarily to higher unit sales volume for 2013 in core products.

Nine Months Ended September 28, 2013, compared with Nine Months Ended September 29, 2012

During the nine months ended September 28, 2013, the Company's net sales were $1.67 billion, which compares with net sales of $1.69 billion over the same period of 2012. Of the $15.1 million decrease in net sales, approximately $34.7 million was due to lower net selling prices in the Company's core product lines and approximately $13.1 million was attributable to lower unit sales volume in the OEM segment. This was partially offset by a $22.8 million increase in unit sales volume in the Plumbing and Refrigeration segment and a $10.7 million increase in the OEM segment related to the sales recorded for Westermeyer, acquired in August of 2012. The Comex average copper price in the first nine months of 2013 was approximately $3.36 per pound, or seven percent lower than the 2012 average of $3.62 per pound.

Cost of goods sold was $1.44 billion in the first nine months of 2013 compared with $1.47 billion in the same period of 2012. The year-over-year decrease was due primarily to the decrease in the cost of copper, the Company's principal raw material.

Depreciation and amortization increased from $23.3 million in the first nine months of 2012 to $24.4 million in 2013. This is due to an increase in capital spending during 2012 and 2013. Selling, general, and administrative expenses increased to $99.1 million in the first nine months of 2013 from $97.2 million in 2012; this $1.9 million increase was primarily due to increased employment costs, including incentive compensation, of approximately $3.1 million, partially offset by higher bad debt expense in 2012.

During the nine months ended September 28, 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. The Company also sold certain of its plastic fittings manufacturing assets and recognized a pre-tax gain of $39.8 million, or 81 cents per diluted share after tax, and recognized fixed asset impairment charges of $4.3 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.

Interest expense decreased to $2.9 million for the nine months ended September 28, 2013, from $5.7 million for the same period in 2012. This decrease was related to the redemption of the 6% Subordinated Debentures during the second quarter of 2012.

The Company's effective tax rate for the first nine months of 2013 was 37 percent compared with 31 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 increases related to (i) goodwill impairment of $1.8 million and (ii) the provision for state income taxes, net of the federal benefit, of $7.4 million. These items were partially offset by reductions related to: (i) the effect of foreign tax rates lower than statutory tax rates and other foreign items of $1.1 million; (ii) decreases in valuation allowances of $0.4 million; and (iii) the U.S. production activities deduction of $3.9 million.


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The Company's effective tax rate for the first nine months of 2012 was 31 percent. 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 of 2012 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.

Plumbing & Refrigeration Segment

Net sales by the Plumbing & Refrigeration segment in the nine months ended September 28, 2013 were $942.1 million, consistent with net sales of $945.0 million in the same period of 2012. There was a decrease of $24.1 million due to lower net selling prices, which was partially offset by an increase of $22.8 million attributable to higher unit sales volume in the segment's core product lines consisting primarily of copper tube, line sets, and fittings. Cost of goods sold decreased from $808.6 million in the first nine months of 2012 to $800.8 million in the same period of 2013, which was also due to decreasing raw material costs, primarily copper, offset by higher unit sales volume. Depreciation and amortization remained relatively consistent for both quarters. Selling, general, and administrative expenses increased $4.2 million primarily due to increased compensation, including incentive compensation, of $4.0 million. During the first nine months of 2013, the segment recognized a $103.9 million gain related to the settlement of the insurance claim for the September 2011 fire at the Wynne, Arkansas manufacturing operation. It also sold certain of its plastic fittings manufacturing assets and recognized a pre-tax gain of $39.8 million, and recognized fixed asset impairment charges of $4.2 million. Operating income for the segment increased $138.3 million in the third quarter of 2013 over the third quarter of 2012 primarily as a result of these items.

OEM Segment

The OEM segment's net sales were $741.2 million for the nine months ended September 28, 2013, compared with $761.0 million in 2012. Of the $19.8 million decrease in net sales, approximately $10.7 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 $13.1 million was due to lower unit volume. This was partially offset by a $10.7 million increase related to the sales recorded for Westermeyer, acquired in August of 2012. Cost of goods sold decreased to $651.9 million in the first nine months of 2013 from $676.6 million in the same period of 2012, which was also due to the decrease in average cost of raw materials and decreases in sales volume. Depreciation and amortization remained relatively consistent for both quarters. Selling, general, and administrative expenses were $18.2 million in the first nine months of 2013 compared with $20.2 million in the first nine months of 2012. The $2.0 million decrease was due primarily to decreased employment costs, including incentive compensation, of $1.3 million and higher bad debt expense in 2012. Operating income increased from $54.2 million in the first nine months of 2012 to $61.2 million in the same period of 2013 primarily as a result of higher margins.

Liquidity and Capital Resources

Cash provided by operating activities during the nine months ended September 28, 2013, totaled $70.0 million, which was primarily attributable to consolidated net income of $158.3 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 the $39.8 million gain on the sale of the plastic fittings manufacturing assets. There were also increases due to the non-capital related insurance proceeds of $32.4 million, depreciation and amortization of $24.6 million, an increase in other current liabilities of $19.6 million, and deferred income taxes of $14.2 million. These cash increases were, offset by increased receivables of $38.4 million.

During the first nine months of 2013, cash provided by investing activities totaled $59.0 million. The major components of net cash provided by investing activities included $65.0 million for proceeds from the sale of assets, including the plastic fittings manufacturing assets, and $29.9 million for insurance proceeds for property and equipment related to the fire at our Wynne, Arkansas manufacturing operation. These increases were partially offset by $33.4 million used for capital expenditures.

Net cash used in financing activities totaled $6.0 million, which consisted primarily of $10.4 million for payment of regular quarterly dividends to stockholders of the Company, partially offset by $4.9 million received from the net issuance of debt by Mueller-Xingrong.


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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 $0.8 million during the first nine months of 2013. The Company expects to spend approximately $1.1 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 September 28, 2013, the Company's total debt was $239.6 million or 25.7 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 28, 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 third 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 Agreement, cash generated by operations, and currently available cash of $322.2 million will be adequate to meet the Company's normal future capital expenditures and operational needs. The Company's current ratio was 3.8 to 1 at September 28, 2013.

The Company's Board of Directors has extended, until October 2014, 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 28, 2013, the Company had repurchased approximately 2.4 million shares under this authorization.

On October 17, 2013, the Company announced the acquisition of Howell. The purchase price of $58.5 million was funded by cash on-hand. In addition, the Company expects to fund the 18.0 million acquisition of Yorkshire with cash on-hand.

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

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