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MLI > SEC Filings for MLI > Form 10-Q on 25-Apr-2014All Recent SEC Filings

Show all filings for MUELLER INDUSTRIES INC

Form 10-Q for MUELLER INDUSTRIES INC


25-Apr-2014

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.


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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 primarily in Europe; 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 2013 and the first quarter of 2014 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. These conditions have significantly affected the demand for virtually all of the Company's core products in recent years.

Residential construction activity in 2013 and into the first quarter of 2014 is at levels below historical averages. Improvement in the near-term is expected, but may be tempered by continuing high rates of unemployment, tighter lending standards, and rising mortgage rates. According to the U.S. Census Bureau, the March 2014 seasonally adjusted annual rate of new housing starts was 0.9 million compared with the March 2013 rate of 1.0 million. While mortgage rates have risen in 2013 and 2014, they remain at historically low levels, as the average 30-year fixed mortgage rate was 4.36 percent for the first three months of 2014 and 3.98 percent for the twelve months ended December 2013.

The private non-residential construction sector, which includes offices, industrial, health care 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 moderated in 2013. According to the U.S. census Bureau, the actual (not seasonally adjusted) value of private non-residential construction put in place was $297.7 billion in 2012 compared to $296.6 billion in 2013. The seasonally adjusted annual value of private non-residential construction put in place was $319.6 billion in February 2014 compared to the February 2013 rate of $284.2 billion and the December 2013 rate of $319.1 billion. 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.


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Results of Operations

During the first quarter of 2014, the Company's net sales were $574.4 million, which compares with net sales of $559.7 million over the same period of 2013. The $14.7 million increase was primarily attributable to net increases in unit sales volume in the Company's core product lines of $46.3 million, of which approximately $34.4 million was attributable to sales recorded by Howell Metal Company (Howell), acquired in October 2013, and Yorkshire Copper Tube (Yorkshire), acquired in February 2014. This increase was offset by lower net selling prices of $37.3 million 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 2014 was approximately $3.24 per pound, or 10 percent less than the first quarter of 2013 average of $3.60 per pound.

Cost of goods sold was $495.8 million in the first quarter of 2014 compared with $482.9 million in the same period of 2013. Consistent with the factors noted above regarding net sales, the year-over-year increase was due primarily to increased sales volume, offset by a decrease in the price of copper, the Company's principal raw material, and a decrease in accruals related to import duties of $3.1 million.

Depreciation and amortization of $8.1 million for the first quarter of 2014 was consistent with $8.2 million in the first quarter of 2013. Selling, general, and administrative expenses increased slightly from $31.3 million in the first quarter of 2013 to $32.2 million in the first quarter of 2014. This increase was primarily related to increased professional fees of $0.7 million.

Interest expense increased to $1.0 million in the first quarter of 2014 from $0.6 million for the same period in 2013. This increase was primarily due to the capitalization of interest in the first quarter of 2013 related to certain capital projects.

Other income, net was $0.1 million in the first quarter of 2014 compared with income of $3.2 million for the same period in 2013. This decrease was primarily related to a $3.0 million gain on the sale of non-operating property recorded during 2013.

The Company's effective tax rate for the first quarter of 2014 was 33 percent compared with 34 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 2014 were reductions related to the U.S. production activities deduction of $1.2 million and decreases in valuation allowances of $0.9 million. These items were partially offset by the provision for state income taxes, net of the federal benefit, of $1.3 million.

Plumbing & Refrigeration Segment

First quarter net sales by the Plumbing & Refrigeration segment increased 8.4 percent to $338.0 million in 2014 from $311.8 million in 2013. The $26.2 million increase was primarily attributable to higher unit sales volume, offset by the decrease in base metal prices, primarily copper. Of the $49.5 million increase in sales volume, approximately $34.4 million was attributable to sales recorded by Howell, acquired in October 2013, and Yorkshire, acquired in February 2014. This was offset by lower net selling prices of $28.2 million in the Company's core product lines consisting primarily of copper tube, line sets, and fittings. Cost of goods sold increased from $264.8 million in the first quarter of 2013 to $289.0 million in the same period of 2014, which was also due to higher volumes, offset by decreasing raw material prices, primarily copper. Depreciation and amortization of $4.4 million for the first quarter of 2014 was consistent with $4.2 million in the first quarter of 2013. Selling, general, and administrative expenses increased slightly from $20.1 million in the first quarter of 2013 to $20.7 million in the first quarter of 2014. Operating income for the segment increased to $23.9 million in the first quarter of 2014 from $22.6 million in the first quarter of 2013.

OEM Segment

The OEM segment's first quarter net sales were $240.0 million in 2014 compared with $253.8 million in 2013. Of the $13.8 million decrease in net sales, approximately $9.0 million was attributable to lower net selling prices and approximately $8.0 million was due to lower sales volume at the Company's Chinese joint venture, offset by higher sales volumes in the segment's other core product lines. Cost of goods sold decreased to $210.4 million in the first quarter of 2014 from $223.9 million in the same period of 2013, which was also due to the decrease in the average costs of raw materials and sales volume. Depreciation and amortization decreased slightly from $3.4 million to $3.1 million. First quarter selling, general, and administrative expenses were $5.3 million in 2014, compared to $6.2 million for the same period in 2013. The decrease is primarily due to decreased employment costs. Operating income increased from $20.3 million in the first quarter of 2013 to $21.3 million in the same period of 2014.


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Liquidity and Capital Resources

Cash used in operating activities during the three months ended March 29, 2014 totaled $44.7 million, which was primarily attributable to increased receivables of $49.5 million, other assets of $14.5 million, and inventories of $10.1 million, partially offset by consolidated net income of $25.0 million plus depreciation and amortization of $8.2 million. The fluctuations in receivables, other assets, and inventories are primarily due to increased sales volume in certain businesses in the first quarter of 2014.

During the first three months of 2014, cash used in investing activities totaled $32.7 million. The major components of net cash used in investing activities included $30.1 million for the acquisition of Yorkshire and capital expenditures of $9.2 million, offset by $4.8 million in proceeds from the sale of properties and net withdrawals from restricted cash balances of $1.8 million.

Net cash used in financing activities totaled $1.1 million, which consists primarily of $4.2 million used for payment of regular quarterly dividends to stockholders of the Company and $1.4 million used for the repayment of debt by Mueller-Xingrong, partially offset by $4.4 million received for the issuance of debt by Mueller Europe, Limited (MEL).

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 $1.1 million during the first three months of 2014. The Company expects to spend approximately $1.0 million for the remainder of 2014 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 $7.5 million in letters of credit at the end of the quarter. Additionally, MEL's credit agreement (the Invoice Facility) has a total borrowing capacity of 40.0 million, or approximately $65.9 million. The Invoice Facility has an initial term of two years. Borrowings outstanding under the Invoice Facility are secured by MEL's trade account receivables denominated in British pounds.As of March 29, 2014, the Company's total debt was $238.1 million or 23.9 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 29, 2014, the Company was in compliance with all of its debt covenants.

The Company declared and paid a quarterly cash dividend of 7.5 cents per common share in the first quarter of 2014. 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 $233.5 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 March 29, 2014.

The Company's Board of Directors has extended, until October 2014, its authorization to repurchase up to 20 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 29, 2014, the Company had repurchased approximately 4.7 million shares under this authorization.

There have been no significant changes in the Company's contractual cash obligations reported at December 28, 2013.


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