Mueller Industries, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2019 (52 weeks); comparative periods ended December 29, 2018 and December 30, 2017. The filing was signed February 26, 2020. Mueller manufactures and distributes copper, brass, aluminum, plastic, and HVAC-related products through Piping Systems, Industrial Metals, and Climate segments.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $2,430.6 million | $2,507.9 million | Down 3.1% |
| Operating income | $191.4 million | $173.0 million | Up 10.7% |
| Net income attributable to Mueller | $101.0 million | $104.5 million | Down 3.3% |
| Diluted EPS | $1.79 | $1.82 | Down 1.6% |
| Cash provided by operations | $200.5 million | $167.9 million | Up $32.7 million |
| Capital expenditures | $31.2 million | $38.5 million | Down $7.3 million |
Gross profit, defined by the filing as sales less cost of goods sold, was $395.0 million, approximately 16.3% of sales, versus $357.5 million, approximately 14.3%, in 2018. Operating margin was approximately 7.9%, compared with 6.9%. Net margin was approximately 4.2% in both years.
Sales declined as core-product unit volume fell 4.4% and net selling prices fell 3.7%; acquisitions contributed 4.2% to the sales comparison. Lower copper costs reduced cost of goods sold and helped operating income rise despite lower revenue. Net income was pressured by a $24.6 million loss from unconsolidated affiliates, versus $12.6 million in 2018; the 2019 loss included $22.0 million attributable to Tecumseh.
- Piping Systems: Sales of $1,542.5 million, down 6.3%; operating income of $131.9 million, up 7.4%. Lower copper-tube prices and volume reduced sales.
- Industrial Metals: Sales of $554.4 million, down 14.9%; operating income of $61.7 million, down 18.4%. Brass-rod volume was a key weakness.
- Climate: Sales of $356.2 million, up 55.5%; operating income of $42.7 million, up 77.2%, principally reflecting the ATCO acquisition.
Fourth-quarter snapshot: Sales were $543.8 million versus $559.1 million in Q4 2018. Net income attributable to Mueller was $28.2 million versus $26.9 million, and diluted EPS was $0.50 versus $0.47. Gross profit was $94.4 million versus $85.1 million.
Cash, debt, and liquidity
- Year-end cash and cash equivalents were $97.9 million; cash, cash equivalents, and restricted cash totaled $98.0 million. The company reported a 3.0-to-1 current ratio.
- Total debt was $386.8 million, down from $497.6 million; debt was 36.8% of total capitalization. Long-term debt on the balance sheet was $378.7 million.
- Debt included $284.5 million of 6% subordinated debentures due 2027 and $90.0 million drawn on the unsecured $350 million revolving facility, which matures in December 2021. Mueller reported compliance with its debt covenants.
- Operating cash flow of $200.5 million benefited from lower inventory and receivables. Financing outflows included $205.0 million of net repayments under the credit agreement and $22.3 million in regular dividends.
- Quarterly dividends were $0.10 per share. The company expected 2020 capital expenditures of $45–$50 million and approximately $1.0 million of contributions to postretirement benefit plans.
Outlook, risks, and notable items
Management said cash from operations, available credit, and cash on hand should meet liquidity needs. It forecast a 2020 effective tax rate of 22%–26%; the filing provides no specific sales or earnings guidance. Management noted that fourth-quarter sales typically moderate seasonally and working capital generally rises in the first quarter ahead of construction season.
- Key operating risks: Copper and other raw-material and energy price volatility or shortages; inability to pass costs through; cyclical housing and commercial construction demand; competition from imports and substitute materials, including plastics and aluminum; and foreign-exchange exposure.
- Other risks: Labor negotiations and work stoppages, acquisition integration and goodwill valuation, environmental and safety requirements, litigation, cyber incidents, and uncertainty around Brexit implementation. Housing starts improved to 1.29 million in 2019 from 1.25 million in 2018, but management said residential construction remained below long-term historical averages.
- Environmental matters: Environmental reserves were $20.9 million at year-end. The company estimated $2.1 million of compliance spending over the next three fiscal years, with $17.3 million of remediation spending expected thereafter. The company said potential additional exposure at the Lead Refinery site could not be estimated; possible Bonita Peak Mining District losses also could not be estimated.
- Other unusual items: The company recognized $3.6 million of net expense from changes in fair value of contingent consideration and a $0.5 million insurance recovery related to the 2017 Port Huron mill fire. Its Mueller Pension Plan was approved for termination effective January 2020, with completion expected by year-end 2020.
- Subsequent events: In February 2020, a subsidiary collected approximately $21.9 million from a Deepwater Horizon settlement claim. In January 2020, Mueller acquired Shoals Tubular for approximately $15.4 million and purchased its headquarters for $10.6 million.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective at year-end. The auditor identified pension-obligation measurement and Heatlink Group goodwill valuation as critical audit matters.
Important facts for investors to verify
- Whether lower core-product volumes and pricing persist, and whether Climate segment growth continues when acquisition contributions are excluded.
- How the $24.6 million affiliate loss, particularly the Tecumseh investment, may affect future earnings, cash needs, or carrying values.
- Whether environmental remediation costs—especially Lead Refinery and Bonita Peak exposure—remain within recorded reserves.
- Progress and financial effects of the pension plan termination, and the assumptions underlying the Heatlink goodwill valuation.
- Execution of the planned $45–$50 million 2020 capital program, expected tax rate, and debt reduction while maintaining dividends and liquidity.