Mueller Industries, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016, a 53-week year; comparative fiscal 2015 ended December 26, 2015. This is an annual filing, not a standalone fourth-quarter report. Mueller manufactures and distributes copper, brass, aluminum, plastic, and related products for plumbing, HVAC, refrigeration, industrial, and OEM markets.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $2,055.6 million | $2,100.0 million |
| Operating income | $152.7 million | $137.3 million |
| Operating margin | 7.4% | 6.5% |
| Net income attributable to Mueller | $99.7 million | $87.9 million |
| Diluted EPS | $1.74 | $1.54 |
| Cash from operating activities | $157.8 million | $159.6 million |
| Capital expenditures | $37.5 million | $28.8 million |
| Cash and cash equivalents at year-end | $351.3 million | $274.8 million |
| Total debt at year-end | $227.4 million | $216.0 million |
Cost of goods sold was $1,723.5 million; gross profit on the filing’s basis (sales less cost of goods sold, excluding depreciation and amortization) was $332.1 million, or 16.2% of sales. Income tax expense was $48.1 million, a 33.0% effective rate. The current ratio was 4.1 to 1. Debt was 19.5% of total capitalization; the company reported compliance with all debt covenants.
Year-end current assets were $894.3 million and current liabilities were $219.0 million. Net cash from operations remained strong, while cash increased by $76.5 million during 2016. Of $351.3 million in cash, $73.9 million was held by foreign subsidiaries.
Changes versus the prior comparable period
- Sales declined 2.1%, despite acquisition contributions. Lower selling prices in core product lines reduced sales by $189.0 million and lower core unit volume by $33.0 million; acquisitions and new products partly offset the decreases.
- Operating income rose 11.3% and attributable net income rose 13.5%. Lower copper costs contributed to improved cost of goods sold as a share of sales; 2016 also included $6.8 million of fixed-asset impairment charges. FY 2015 included a $15.4 million asset-sale gain and $3.4 million of severance charges.
- Operating cash flow was nearly flat year over year. Investing cash outflow improved to $53.1 million from $190.8 million, largely because 2015 included acquisitions and a $65.9 million investment in an unconsolidated joint venture.
- Segment reporting was reorganized in 2016 into Piping Systems, Industrial Metals, and Climate; prior-period segment figures were recast. Segment sales and operating income were respectively: Piping Systems $1,429.6 million and $103.9 million; Industrial Metals $521.1 million and $78.2 million; Climate $119.8 million and $17.7 million. Corporate and eliminations reduced consolidated operating income.
Outlook, commentary, risks, and unusual items
- Management said operating cash flow, cash on hand, and credit availability should meet working-capital, capital-expenditure, and debt-payment needs. It anticipated 2017 capital expenditures of approximately $25–35 million and pension/postretirement contributions of approximately $2.1 million.
- Management expected continued improvement in housing and nonresidential construction conditions, while noting residential construction remained below long-term historical averages. Housing starts rose to 1.2 million in 2016 from 1.1 million in 2015. No specific earnings or sales guidance was provided.
- On January 25, 2017, the company announced a special dividend payable in March 2017: $3.00 cash plus $5.00 principal amount of 6% subordinated debentures per share. The stated expected effect was a $460 million reduction in equity, $287 million increase in long-term debt, and $173 million reduction in cash.
- Key operating exposures include copper and other raw-material price and availability, energy costs, demand tied to construction and housing, competition and substitute products, foreign-exchange movements, labor agreements, and acquisition integration. The filing specifically identifies potential uncertainty and currency/market disruption related to Brexit.
- Environmental reserves were $21.9 million at year-end; the company estimated $18.6 million of future spending thereafter 2021, in addition to annual spending estimates through 2021. Certain environmental and legal matters remain uncertain, including EPA notices concerning the Lead Refinery site, an EEOC conciliation process, and a dispute over approximately $3.0 million in asserted antidumping duties and interest; management could not estimate potential losses for these matters.
- Other notable items: 2016 fixed-asset impairment charges were $6.8 million; a $1.2 million pension settlement charge followed a lump-sum window; and $2.5 million of a $3.3 million LIFO liquidation loss was deferred and expected to increase cost of goods sold in Q1 2017. The independent auditor gave unqualified opinions on the financial statements and internal controls; management excluded the acquired Jungwoo-Mueller business from its internal-control assessment.
Important facts for investors to verify
- Whether core pricing and unit-volume trends stabilize, and whether the 2016 operating-income improvement is sustainable after excluding acquisition effects and one-time items.
- The cash, leverage, interest expense, and equity effects of the announced special dividend and debentures once issued.
- Actual environmental remediation costs and developments in the Lead Refinery, EEOC, and antidumping matters, including potential exposure beyond recorded reserves or insurance.
- Progress integrating Jungwoo-Mueller and other acquisitions, and the associated control, valuation, and impairment risks.
- Commodity-price pass-through effectiveness, foreign-currency exposure, and construction-market conditions relative to management’s outlook.