Mueller Industries(MLI) - 2021 Q4 - Annual Report

Part I Business Mueller Industries, Inc. manufactures copper, brass, aluminum, and plastic products for HVAC, refrigeration, and plumbing markets - The company is a leading manufacturer of copper, brass, aluminum, and plastic products, including tubes, fittings, rods, and valves[13] - Business operations are organized into three reportable segments: Piping Systems, Industrial Metals, and Climate[14] - Key market drivers include new housing starts, commercial construction, and repair/remodeling projects, with products also used in transportation, automotive, and industrial applications[16] Piping Systems Segment The largest segment manufactures and distributes copper and PEX plastic systems globally for plumbing, refrigeration, and HVAC - Manufactures copper tube, fittings, line sets, and PEX plumbing systems. Sells to wholesalers, retailers, and OEMs in the plumbing, refrigeration, and HVAC markets[17][18][22] - Key competitors include Cerro Flow Products, Cambridge-Lee Industries, Elkhart Products Company, and NIBCO, Inc., as well as foreign manufacturers and producers of substitute plastic products[23] - In 2021, the company increased its equity interest in Mueller Middle East to 55% and disposed of Die-Mold Tool Limited[20][21] Industrial Metals Segment The Industrial Metals segment manufactures brass rod, aluminum/brass forgings, and aluminum impact extrusions for various OEMs - Produces brass rod, aluminum/brass forgings, and aluminum impact extrusions for OEMs in various industries including automotive, military, and general manufacturing[24][25][26] - The company disposed of its Copper Bar business on October 25, 2021[28] Climate Segment This segment designs and manufactures products for commercial HVAC and refrigeration, including valves and heat exchangers - Manufactures refrigeration valves, fittings, heat exchangers, and flexible duct systems for the HVAC and refrigeration markets[29][30][32] - Acquired H&C Flex on January 29, 2021, complementing its flexible duct systems business[32] - Disposed of Fabricated Tube Products and Shoals on July 28, 2021[33] Human Capital Resources As of December 25, 2021, the company employed approximately 5,337 people, with 1,803 union members - Employed approximately 5,337 people as of year-end 2021, with 1,803 being union members[34] Raw Material and Energy Availability The company primarily sources copper through short-term contracts, facing potential pricing volatility or supply risks - A substantial portion of base metal requirements, primarily copper, is obtained through short-term supply contracts and the open market[37] - The company has commitments from refined copper producers for a portion of its 2022 metal requirements[39] Environmental Proceedings The company maintains environmental reserves, totaling $27.4 million at year-end 2021, with anticipated future compliance spending Environmental Reserve and Expense | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Provision for Environmental Matters | $5.0 million | $4.2 million | | Year-End Environmental Reserve | $27.4 million | $24.0 million | Risk Factors The company faces multiple risks from economic conditions, raw material costs, competition, litigation, and operations Risks Related to the Economy and Other External Factors The company's financial performance is sensitive to economic conditions, raw material costs, and currency fluctuations - Costs of raw materials (copper, brass, zinc, aluminum) and energy are volatile and may not be fully passed on to customers, potentially impacting operating margins[48][49] - Business is sensitive to economic conditions in housing and commercial construction, with higher interest rates and inflation posing a material adverse risk[50][51][52] - The COVID-19 pandemic continues to create uncertainty, potentially impacting demand, supply chains, and manufacturing operations[55] Market and Competition Risks The company operates in competitive markets, facing risks from lower-cost imports and substitute products - Competitive conditions, including the impact of imports and substitute products (e.g., plastics, aluminum-based systems), could adversely affect demand and margins[58] Litigation and Regulatory Risks The company is subject to legal and regulatory proceedings, with environmental costs potentially exceeding reserves - The company faces risks from claims, litigation, and regulatory proceedings that could result in adverse outcomes and defense costs[59] - Compliance with environmental, health, and safety laws may require significant costs, and future liabilities could have a material adverse effect[60] Operational Risks Operational risks include labor disputes, challenges in integrating acquisitions, and cybersecurity threats - A significant number of employees are covered by collective bargaining agreements, and an inability to renew them favorably could lead to strikes or higher operating costs[61] - Failure to successfully execute, integrate, and grow acquired businesses could negatively impact financial results[63][64] - The company is subject to risks from cyber attacks, which could lead to data misuse, operational disruptions, and legal liability[65] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[67] Properties This section details the company's major operating facilities, including location, primary use, and ownership status - The company owns and/or leases numerous manufacturing, packaging, and distribution facilities across its three segments in the U.S., Canada, Mexico, England, South Korea, and Bahrain[68][69][70] Legal Proceedings The company is involved in certain litigation arising from the ordinary course of business, with details in Note 14 - The company is involved in litigation from claims that arose in the ordinary course of business[71] - For detailed information on material pending legal proceedings, the company incorporates by reference "Note 14 – Commitments and Contingencies"[72] Mine Safety Disclosures This item is not applicable to the company - Not applicable[73] 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, with increased dividends and an ongoing share repurchase program - The company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol "MLI"[76] Quarterly Cash Dividend per Share | Year | Dividend per Share | | :--- | :--- | | 2021 | $0.13 | | 2020 | $0.10 | - The Board authorized a repurchase of up to 20 million shares, extended until July 2022. As of December 25, 2021, approximately 6.5 million shares have been repurchased under this authorization[78] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Program | | :--- | :--- | :--- | :--- | | Sep 26 – Oct 23, 2021 | 33,399 | $48.06 | 32,399 | | Oct 24 – Nov 20, 2021 | 87,218 | $50.84 | 63,915 | | Nov 21 – Dec 25, 2021 | 7,579 | $58.59 | — | Management's Discussion and Analysis of Financial Condition and Results of Operations This section details the company's 2021 financial condition and results, covering sales, income, liquidity, and risks Results of Operations In 2021, the company achieved substantial growth with net sales increasing 57.2% and operating income rising 166.8% Consolidated Results Summary (In thousands) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $3,769,345 | $2,398,043 | 57.2% | | Operating income | $655,845 | $245,838 | 166.8% | | Net income | $468,520 | $139,493 | 235.9% | Components of Net Sales Change (2021 vs. 2020) | Component | % Change | | :--- | :--- | | Net selling price in core product lines | 37.0% | | Unit sales volume in core product lines | 6.4% | | Acquisitions | 8.6% | | Other | 5.2% | - Gross margin as a percentage of sales increased to 22.0% in 2021 from 18.0% in 2020, benefiting from strong demand, higher selling prices, and favorable sales mix[140] - Recognized a pre-tax gain of $57.8 million from the sales of Fabricated Tube Products, Shoals Tubular, Inc., Die-Mold Tool Limited, and Copper Bar[47][143] Liquidity and Capital Resources In 2021, net cash from operating activities was $311.7 million, with significant debt reduction and adequate liquidity Cash Flow Summary (In thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $311,701 | $245,073 | | Net cash provided by (used in) investing activities | $29,073 | $(125,622) | | Net cash used in financing activities | $(376,722) | $(92,264) | - Total debt was reduced by $326.0 million in 2021, bringing year-end total debt to $1.9 million[170][191] - Anticipated capital expenditures for 2022 are between $30.0 million and $40.0 million[188] Contractual Cash Obligations As of December 25, 2021, total contractual cash obligations were approximately $1.09 billion, primarily for raw materials Contractual Cash Obligations by Type (In millions) | Obligation Type | Total | 2022 | | :--- | :--- | :--- | | Total debt | $2.9 | $0.8 | | Operating and capital leases | $26.9 | $7.6 | | Purchase commitments | $1,053.9 | $1,053.7 | | Total | $1,086.6 | $1,063.1 | Market Risks The company is exposed to market risks from raw material costs, interest rates, and foreign currency, using derivatives to hedge - The company uses commodity futures contracts to hedge risks associated with forward fixed-price sales arrangements and to manage price risk for inventory[196] - Primary foreign currency exposures are to the Canadian dollar, British pound sterling, Mexican peso, and South Korean won[200] Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including inventory, goodwill, and environmental reserves - Key estimates include inventory valuation, goodwill impairment, pension obligations, environmental reserves, and income taxes[202] - Goodwill is tested for impairment annually or when circumstances indicate. In Q3 2021, a $2.1 million impairment charge was recognized for the Turbotec reporting unit[206][209] - Environmental reserves are recognized when a loss is probable and estimable; these are not discounted to present value[213] Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Market Risks' discussion within the Financial Review section of the report - Disclosures about market risk are contained under the caption "Financial Review" commencing on page F-2[84] Financial Statements and Supplementary Data This item indicates the company's audited consolidated financial statements and supplementary data are included separately - The required financial statements are contained in a separate section of this Annual Report on Form 10-K commencing on page F-18[85] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[86] Controls and Procedures Management concluded the company's disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 25, 2021[89] - Management concluded that internal control over financial reporting was effective as of December 25, 2021[92] - The assessment of internal controls excluded the 2021 acquisitions of H&C Flex and Mueller Middle East, which represented 4% of total assets[91][98] Other Information The company reports no other information for this item - None[106] Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy - Required information is incorporated by reference from the Company's 2022 Proxy Statement[108] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Required information is incorporated by reference from the Company's 2022 Proxy Statement[110] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on securities authorized for issuance under equity compensation plans and other ownership Equity Compensation Plan Information (as of Dec 25, 2021, shares in thousands) | Plan Category | Securities to be issued upon exercise of outstanding options | Weighted average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 615 | $28.42 | 1,474 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference - Required information is incorporated by reference from the Company's 2022 Proxy Statement[113] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the Company's 2022 Proxy Statement[114] Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K report, including financial statements, schedules, and exhibits - Lists all documents filed as part of the report, including financial statements, schedules, and exhibits[116] - Key exhibits filed include the Credit Agreement dated March 31, 2021, and various stock incentive plans[119] Form 10-K Summary The company reports no information for this item - None[120] Financial Statements and Notes Consolidated Statements of Income The Consolidated Statement of Income details the company's revenues, costs, and expenses, resulting in net income 2021 Statement of Income Highlights (In thousands) | Metric | Amount | | :--- | :--- | | Net sales | $3,769,345 | | Operating income | $655,845 | | Net income attributable to Mueller Industries, Inc. | $468,520 | | Diluted earnings per share | $8.25 | Consolidated Balance Sheets The Consolidated Balance Sheet presents the company's financial position, with total assets of $1.73 billion and equity of $1.22 billion Balance Sheet Highlights (As of Dec 25, 2021, in thousands) | Metric | Amount | | :--- | :--- | | Total current assets | $1,019,003 | | Total assets | $1,728,936 | | Total current liabilities | $382,439 | | Total liabilities | $471,973 | | Total Mueller Industries, Inc. stockholders' equity | $1,222,118 | Consolidated Statements of Cash Flows In 2021, the company generated $311.7 million from operations, with investing providing cash and financing using cash 2021 Cash Flow Summary (In thousands) | Activity | Amount | | :--- | :--- | | Net cash provided by operating activities | $311,701 | | Net cash provided by (used in) investing activities | $29,073 | | Net cash used in financing activities | $(376,722) | | (Decrease) in cash, cash equivalents, and restricted cash | $(37,000) | Notes to Consolidated Financial Statements The notes provide detailed disclosures supplementing primary financial statements, covering policies, acquisitions, segments, debt, and risks Note 2 – Acquisitions and Dispositions In 2021, the company completed two acquisitions and three dispositions, resulting in a pre-tax gain of $57.8 million - Acquired a controlling 55% interest in Mueller Middle East for ~$20.0 million and acquired H&C Flex for ~$15.3 million[293][294] - Sold the FTP and STI businesses for ~$75.7 million, resulting in a pre-tax gain of $46.6 million[303] - Exchanged the Die-Mold business for a 17% equity interest in another company, resulting in a gain of $4.7 million[302] - Sold the Copper Bar business for ~$10.1 million, resulting in a pre-tax gain of $6.5 million[301] Note 3 – Segment Information This note provides a detailed breakdown of financial performance by the company's three reportable segments for 2021 2021 Segment Performance (In thousands) | Segment | Net Sales | Operating Income | | :--- | :--- | :--- | | Piping Systems | $2,600,030 | $486,287 | | Industrial Metals | $703,363 | $85,475 | | Climate | $495,414 | $85,536 | Note 12 – Debt The company significantly restructured its debt in 2021, entering a new credit agreement and redeeming debentures, reducing total debt - On March 31, 2021, entered into a new Credit Agreement providing for a $400.0 million revolving credit facility maturing in 2026[342] - Redeemed all outstanding 6.00% Subordinated Debentures in April 2021 for $291.4 million plus a $5.7 million redemption premium[344] - Total debt outstanding decreased from $328.1 million in 2020 to $2.9 million in 2021[341] Note 14 – Commitments and Contingencies The company is subject to various environmental and legal matters, with environmental reserves totaling $27.4 million - Environmental reserves totaled $27.4 million at December 25, 2021, up from $24.0 million in 2020[370] - The company is a Potentially Responsible Party (PRP) in several environmental cleanup sites, including the Bonita Peak Mining District and the Lead Refinery NPL site[379][383] - In 2020, a subsidiary collected approximately $22.1 million related to a claim under the Deepwater Horizon Economic and Property Damage Settlement Program[386]