Mueller Industries(MLI) - 2022 Q4 - Annual Report

Part I Business Mueller Industries manufactures copper, brass, aluminum, and plastic products for HVAC, refrigeration, and plumbing, operating globally across three segments - The company is a leading manufacturer of copper, brass, aluminum, and plastic products with operations located throughout the United States and in Canada, Mexico, Great Britain, South Korea, the Middle East, and China[13] - Business operations are organized into three reportable segments: Piping Systems, Industrial Metals, and Climate[14] - Sales are heavily dependent on the construction and remodeling markets, as a significant portion of products are used in single and multi-family housing and commercial buildings[16] Piping Systems Segment This segment manufactures and distributes copper and PEX piping products globally to wholesalers, retailers, and OEMs, facing competition from industry leaders - The Piping Systems segment manufactures and distributes copper tube, fittings, line sets, and PEX plumbing systems, with operations in the U.S., Canada, Europe, South Korea, and the Middle East[17][18][19] - The segment sells to wholesalers in plumbing and refrigeration, distributors for manufactured housing, building material retailers, and air-conditioning OEMs[22] - Key competitors in the U.S. copper tube market include Cerro Flow Products LLC and Cambridge-Lee Industries LLC, while the copper fittings market includes competitors like Elkhart Products Company and NIBCO, Inc[23] Industrial Metals Segment This segment produces brass rod, forgings, and specialty tubing for domestic OEMs in industrial, construction, HVAC, and plumbing markets - This segment manufactures a broad range of products including brass rod, aluminum/brass forgings, and specialty copper/aluminum tube[24][25][27] - Products are sold primarily to domestic OEMs in the industrial, construction, HVAC, plumbing, and refrigeration markets[29] - The primary competitor in the brass rod market is Wieland Chase, LLC, a subsidiary of Wieland-Werke AG[29] Climate Segment The Climate segment manufactures HVAC and refrigeration products, including valves, fittings, and duct systems, primarily for U.S. wholesalers and OEMs - The Climate segment manufactures refrigeration products, high-pressure components, heat exchangers, and insulated HVAC flexible duct systems[30][32] - The segment's customer base consists predominantly of wholesalers and OEMs in the U.S. HVAC and refrigeration markets[34] - The company has expanded this segment through acquisitions, including ATCO in 2018 and H&C Flex in 2021[33] Human Capital and Other Factors The company employs 5,137 people, sources raw materials like copper, is not patent-dependent, and experiences seasonal sales moderation in Q4 - As of December 31, 2022, the company employed approximately 5,137 people, with 1,635 represented by various unions[35] - Primary raw materials, mainly copper, are obtained through short-term supply contracts and the open market, with historically adequate supplies[38][39] - Net sales typically moderate in the fourth quarter due to seasonal construction markets and customer shutdowns for holidays and year-end maintenance[45] Risk Factors The company faces economic, competitive, and operational risks, including commodity volatility, construction market dependence, and regulatory compliance - Economic risks include the impact of volatile raw material and energy costs, which could adversely affect operating margins if not passed on to customers[48] - The business is sensitive to economic conditions in the housing and commercial construction industries, as well as inflation and changes in interest rates[49][50] - Competitive risks stem from imports, substitute products, and new technologies, which could reduce demand and profitability[54] - Operational risks include potential work stoppages from union contract negotiations, business interruptions, and difficulties integrating acquired businesses[57][59] - The company is subject to litigation and regulatory risks, including environmental, health, and safety laws that could result in significant compliance costs and liabilities[55][56] Properties The company owns most of its satisfactory operating facilities, with a detailed list provided across its three segments - The company owns the majority of its principal operating facilities, which are considered to be in satisfactory condition[65] - A detailed table lists major facilities for the Piping Systems, Industrial Metals, and Climate segments, covering locations in the U.S., Canada, Mexico, England, South Korea, and Bahrain[66][67] Legal Proceedings The company is involved in ordinary course legal claims, with material details referenced in Note 14 of the financial statements - The company is involved in litigation from claims arising in the ordinary course of business[68] - Details on material pending legal proceedings are incorporated by reference from Note 14 of the financial statements[69] Part II Market for Common Equity, Stockholder Matters, and Issuer Purchases The company's common stock trades on NYSE, with increased dividends, an active share repurchase program, and performance compared to market indices Quarterly Dividend per Share | Year | Dividend per Share | | :--- | :--- | | 2021 | $0.13 | | 2022 | $0.25 | - The Board of Directors has authorized the repurchase of up to 20 million shares of common stock, with the program extended until July 2023. As of December 31, 2022, approximately 7.2 million shares have been repurchased under this authorization[75] Company Stock Performance vs. Indices (2017-2022) | Year | Mueller Industries, Inc. | Dow Jones U.S. Total Return Index | Dow Jones U.S. Building Materials & Fixtures Index | | :--- | :--- | :--- | :--- | | 2017 | 100.00 | 100.00 | 100.00 | | 2018 | 67.04 | 95.03 | 79.24 | | 2019 | 92.16 | 124.62 | 115.95 | | 2020 | 102.81 | 150.05 | 143.87 | | 2021 | 174.23 | 189.81 | 215.35 | | 2022 | 178.57 | 152.98 | 156.35 | Management's Discussion and Analysis (MD&A) MD&A analyzes 2022 financial performance, highlighting a 5.7% net sales increase, 33.7% operating income growth, strong liquidity, and risk management strategies Results of Operations 2022 saw consolidated net sales increase 5.7% to $4.0 billion, operating income surge 33.7%, and net income grow 40.5%, driven by improved gross margins Consolidated Operating Results (2020-2022) | (In thousands) | 2022 | 2021 | 2020 | % Change (22 vs 21) | % Change (21 vs 20) | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $3,982,455 | $3,769,345 | $2,398,043 | 5.7% | 57.2% | | Operating income | $877,149 | $655,845 | $245,838 | 33.7% | 166.8% | | Net income | $658,316 | $468,520 | $139,493 | 40.5% | 235.9% | Components of Net Sales Change (2022 vs. 2021) | Component | % Change | | :--- | :--- | | Net selling price | 6.1% | | Unit sales volume | (5.9)% | | Acquisitions | 1.9% | | Dispositions | (2.2)% | | Other | 5.8% | | Total | 5.7% | - Gross margin as a percentage of sales increased to 28.1% in 2022 from 22.0% in 2021, driven by strong demand, inflation, and supply constraints which led to higher selling prices and improved margins[134] - The effective tax rate for 2022 was 25.5%, slightly lower than the 25.9% rate in 2021[144][145] Liquidity and Capital Resources The company generated $723.9 million in operating cash flow, maintained strong liquidity with a 4.4:1 current ratio, and kept total debt low at $2.0 million Selected Cash Flow and Liquidity Data (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $723,943 | $311,701 | $245,073 | | Net cash (used in) provided by investing activities | ($242,003) | $29,073 | ($125,622) | | Net cash used in financing activities | ($102,655) | ($376,722) | ($92,264) | | Capital Expenditures | $37,639 | $31,833 | $43,885 | - The company's current ratio was 4.4 to 1 as of December 31, 2022, indicating a strong liquidity position[176] - As of December 31, 2022, total debt was only $2.0 million, representing 0.1% of total capitalization, and the company was in compliance with all debt covenants[186] Market Risks and Critical Accounting Policies The company manages market risks from raw material, interest rate, and foreign currency fluctuations using derivatives, and applies critical accounting policies requiring judgment - The company is exposed to market risks from changes in raw material costs, interest rates, and foreign currency exchange rates, and uses financial instruments to mitigate these risks[189] - At December 31, 2022, the company held open futures contracts to purchase approximately $91.8 million of copper related to fixed-price sales orders[191] - Critical accounting policies include inventory valuation reserves, annual goodwill impairment testing, pension benefit plan assumptions, estimation of environmental reserves, and income tax provisions[197][198][201] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, including income, balance sheets, cash flows, and equity, with accompanying notes and auditor's report Consolidated Statements of Income (in thousands, except per share data) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $3,982,455 | $3,769,345 | $2,398,043 | | Operating income | $877,149 | $655,845 | $245,838 | | Net income attributable to Mueller | $658,316 | $468,520 | $139,493 | | Diluted earnings per share | $11.64 | $8.25 | $2.47 | Consolidated Balance Sheets (in thousands) | Metric | Dec 31, 2022 | Dec 25, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $461,018 | $87,924 | | Total current assets | $1,534,653 | $1,019,003 | | Total Assets | $2,242,399 | $1,728,936 | | Total current liabilities | $348,295 | $382,439 | | Total Liabilities | $428,435 | $471,973 | | Total Mueller Industries, Inc. stockholders' equity | $1,790,914 | $1,222,118 | Consolidated Statements of Cash Flows (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $723,943 | $311,701 | $245,073 | | Net cash (used in) provided by investing activities | ($242,003) | $29,073 | ($125,622) | | Net cash used in financing activities | ($102,655) | ($376,722) | ($92,264) | Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[87] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[89] - Ernst & Young LLP, the independent auditor, issued an unqualified attestation report on the company's internal control over financial reporting[90][94] Part III Directors, Executive Officers, Compensation, and Governance Information on directors, executive officers, compensation, and governance is incorporated by reference from the 2023 Proxy Statement, with equity compensation plan details provided - Most information for Part III (Items 10, 11, 12, 13, and 14) is incorporated by reference from the company's 2023 Proxy Statement[104][106][109] Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise (thousands) | Weighted average exercise price | Securities remaining available for future issuance (thousands) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 442 | $29.20 | 1,204 | | Total | 442 | $29.20 | 1,204 | Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance documents and certifications - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K[112] - Exhibits include corporate governance documents, descriptions of securities, material contracts, and certifications by the CEO and CFO[113][114]