Mueller Water Products(MWA) - 2021 Q4 - Annual Report

PART I Business Overview Mueller Water Products, Inc. is a leading North American manufacturer of water infrastructure products, operating through Infrastructure and Technologies segments, with fiscal 2021 net sales of $1,111.0 million - The company operates through two primary business segments: Infrastructure and Technologies[18] - Recent strategic acquisitions include Krausz Industries in 2018 to bolster the Infrastructure segment and i2O Water Ltd in 2021 to enhance the Technologies segment's pressure management solutions[19][21] Business Strategy The company's strategy focuses on accelerating new product development, implementing intelligent technology, driving operational excellence, modernizing facilities, and pursuing strategic acquisitions - Key strategic pillars include accelerating new product development, developing an integrated intelligent technology platform (Sentryx), driving operational excellence, modernizing manufacturing facilities, and seeking strategic acquisitions[24][25][26] - The company is making significant capital investments to modernize manufacturing, including a new brass foundry in Decatur, IL (production in late 2022) and expanding capabilities at its new facility in Kimball, TN[27] Description of Products and Services The company offers a wide range of water infrastructure products, including valves, hydrants, metering systems, and leak detection solutions across its Infrastructure and Technologies segments Infrastructure Gross Sales by Product (2019-2021) | Product Line | 2021 Gross Sales (in millions) | 2020 Gross Sales (in millions) | 2019 Gross Sales (in millions) | | :--- | :--- | :--- | :--- | | Water and Gas Valves | $681.1 | $583.2 | $576.4 | | Fire Hydrants | $236.7 | $201.4 | $199.7 | - The Technologies segment's water metering products and systems accounted for 78% of its net sales in fiscal 2021, down slightly from 79% in 2020 and 81% in 2019[41] Sales, Marketing and Distribution The company primarily sells through non-exclusive distributors, with significant customer concentration in both its Infrastructure and Technologies segments - The Infrastructure segment's two largest distributors accounted for approximately 38% of its gross sales in fiscal 2021, representing a significant customer concentration[57] - The Technologies segment's five largest customers accounted for approximately 48% of its gross sales in fiscal 2021[58] Backlog The company's total backlog doubled at the end of fiscal 2021, primarily driven by a substantial increase in the Infrastructure segment's orders Backlog by Segment (as of September 30) | Segment | 2021 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | | Infrastructure | $391.2 | $147.6 | | Technologies | $49.0 | $72.8 | | Total Backlog | $440.2 | $220.4 | Competition The company faces strong competition in its mature valve and hydrant markets and from larger players in the water metering systems market, while the leak detection market is highly fragmented - Principal competitors for fire hydrants and iron gate valves include McWane, Inc. and American Cast Iron Pipe Company[62] - In the water metering market, key competitors are Sensus, Itron, Inc., Neptune Technology Group Inc., Badger Meter, Inc., and Master Meter, Inc[65] Human Capital As of September 30, 2021, Mueller Water Products employed approximately 3,400 people, with a significant portion of its hourly workforce covered by collective bargaining agreements, and emphasizes diversity in its Board of Directors - As of September 30, 2021, the company employed approximately 3,400 people, with 66% of its hourly workforce represented by collective bargaining agreements[81] - The Board of Directors' composition as of September 30, 2021, included 27% women and 36% minorities[78] Risk Factors The company faces various risks including dependence on municipal spending, intense competition, customer concentration, supply chain disruptions, cybersecurity threats, and the ongoing impact of the COVID-19 pandemic - A significant portion of the business depends on municipal spending for water infrastructure repair and replacement, as well as new residential construction, making it sensitive to economic conditions, interest rates, and government funding levels[88][93] - The company faces concentration risk, with a small group of key distributors and customers accounting for a significant portion of sales in both the Infrastructure and Technologies segments[94] - Operational risks include reliance on single-source suppliers, potential disruptions in the supply chain, interruptions at key manufacturing facilities, and cybersecurity threats to information technology systems and technology-enabled products[113][115][120] - The COVID-19 pandemic continues to pose risks, including potential plant closures, supply chain disruptions, cost increases, and labor availability challenges, with the full impact remaining uncertain[146] Properties The company operates numerous manufacturing, distribution, R&D, and administrative facilities primarily in the United States, with key manufacturing sites in Alabama, Tennessee, Illinois, and North Carolina, and corporate headquarters in Atlanta, GA Principal Properties Overview | Segment | Activity | Key Locations | | :--- | :--- | :--- | | Infrastructure | Manufacturing | Albertville, AL; Chattanooga, TN; Decatur, IL; Ariel, Israel | | Technologies | Manufacturing | Cleveland, NC | | Technologies | R&D | Atlanta, GA; Toronto, Ontario; Southampton, UK | | Corporate | Headquarters | Atlanta, GA | Legal Proceedings The company is involved in various legal proceedings arising from normal business operations but does not anticipate any material adverse effects on its business or prospects - The company is involved in various legal proceedings in the normal course of operations but does not believe any will have a material adverse effect on the business[156] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under MWA, and as of September 30, 2021, $135.0 million remained authorized for future share repurchases - The company has a stock repurchase program with $135.0 million remaining authorization as of September 30, 2021[164] Share Repurchases (Quarter Ended Sep 30, 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 1-31, 2021 | — | $ — | | August 1-31, 2021 | 651,271 | $15.33 | | September 1-30, 2021 | — | $ — | | Total | 651,271 | $15.33 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2021 saw consolidated net sales increase to $1,111.0 million, driven by volume and pricing, despite gross margin decline due to inflation and supply chain issues, with 2022 sales growth anticipated amid continued cost pressures - For fiscal year 2022, the company anticipates consolidated net sales will be 4% to 8% higher than fiscal year 2021, driven by higher pricing and increased shipment volumes[176] - In 2021, the business was impacted by raw material and other cost inflation, supply chain disruptions, and labor availability challenges, which are expected to continue into 2022[172][173] Results of Operations For fiscal year 2021, net sales increased 15.2% to $1,111.0 million, driven by higher volume and pricing, while gross margin declined to 32.3% due to increased manufacturing costs and inflation Consolidated Results of Operations (FY 2021 vs. FY 2020) | Metric (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $1,111.0 | $964.1 | | Gross Profit | $358.5 | $328.2 | | Operating Income | $131.7 | $116.8 | | Net Income | $70.4 | $72.0 | - Consolidated net sales for 2021 increased 15.2% year-over-year, driven by higher shipment volume and pricing[178] - Gross margin decreased to 32.3% in 2021 from 34.0% in 2020, primarily due to higher manufacturing costs from inflation, higher labor costs, and a $2.4 million inventory write-off[179] Financial Condition As of September 30, 2021, the company's financial position strengthened with $227.5 million in cash, increased receivables and inventories due to higher sales, and stable total outstanding debt Key Balance Sheet Items (as of September 30) | Account (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $227.5 | $208.9 | | Receivables, net | $212.2 | $180.8 | | Inventories, net | $184.7 | $162.5 | | Property, plant and equipment, net | $283.4 | $253.8 | | Total outstanding debt | $446.9 | $447.6 | Liquidity and Capital Resources The company maintained strong liquidity in fiscal 2021 with $227.5 million in cash and $158.7 million in borrowing capacity, while increasing capital expenditures for facility modernization and refinancing debt - At September 30, 2021, the company had cash and cash equivalents of $227.5 million and approximately $158.7 million of additional borrowing capacity under its ABL Agreement[200] - Capital expenditures are estimated to be between $70 million and $80 million for fiscal 2022, an increase from $62.7 million in 2021, to support facility modernization and expansion[202] - The company refinanced its debt by issuing $450.0 million of 4.0% Senior Notes and redeeming its 5.5% Senior Notes, incurring a $16.7 million loss on early extinguishment of debt[212][215] Quantitative and Qualitative Disclosure About Market Risk The company is exposed to market risks primarily from commodity price fluctuations for raw materials like brass ingot and scrap steel, which saw significant cost increases in 2021, and foreign currency exchange rates due to international operations - The company is exposed to commodity price risk for raw materials such as brass ingot, scrap steel, sand, and resin[239] - In fiscal 2021, the average cost per ton of scrap steel increased by 33% and the average cost of brass ingot increased by 35% compared to 2020[240] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of September 30, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[245] - Management concluded that the company's internal control over financial reporting was effective as of September 30, 2021, based on the COSO framework[249] PART III Directors, Executive Officers and Corporate Governance This section details the names, ages, and positions of the company's executive officers and directors as of September 30, 2021, including biographies for key personnel - Scott Hall serves as the President and Chief Executive Officer, and Marietta Edmunds Zakas serves as the Executive Vice President and Chief Financial Officer[255][257] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on securities authorized for issuance under the company's equity compensation plans, with 8,060,093 securities available for future issuance as of September 30, 2021 Equity Compensation Plan Information (as of Sep 30, 2021) | Plan Name | Securities to be Issued Upon Exercise | Weighted Avg. Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | 2006 Stock Incentive Plan | 2,195,769 | $10.67 | 5,806,070 | | Employee Stock Purchase Plan (ESPP) | 33,381 | — | 2,254,023 | | Total | 2,229,150 | | 8,060,093 | PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K, including an index to the consolidated financial statements and various material contracts - This section provides an index to the audited consolidated financial statements, including the balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows[288]