Mueller Industries, Inc. — 2011 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2011; comparable years ended December 25, 2010 and December 26, 2009. Mueller manufactures and distributes copper, brass, plastic and aluminum products for plumbing, HVAC, refrigeration and OEM markets. Its reportable segments are Plumbing & Refrigeration and OEM. The filing is an annual report, not a standalone fourth-quarter filing.
Financial performance and liquidity
| Metric | 2011 | 2010 | Change/comment |
|---|---|---|---|
| Net sales | $2,417.8 million | $2,059.8 million | Up 17%; primarily higher copper prices, with slightly higher volumes in many core products. |
| Operating income | $139.8 million | $136.1 million | Up 3%; includes a $10.5 million litigation settlement gain in 2011, versus $22.7 million in insurance settlement gains in 2010. |
| Net income attributable to Mueller | $86.3 million | $86.2 million | Approximately flat. |
| Diluted EPS | $2.26 | $2.28 | Down slightly. |
| Operating margin | 5.8% | 6.6% | Calculated as operating income divided by sales. |
| Operating cash flow | $153.7 million | $56.4 million | Improved, including a $28.7 million reduction in receivables; inventories used $15.7 million. |
| Cash and cash equivalents | $514.2 million | $394.1 million | Increased $120.0 million. |
| Total debt | $197.7 million | $190.2 million | Company reported debt at 18% of capitalization; cash exceeded debt by about $316 million. |
| Current ratio | 4.8 to 1 | Not stated here | Management said liquidity was adequate for normal operating and capital needs. |
Fourth-quarter 2011 sales were $491.4 million versus $526.9 million in fourth-quarter 2010; gross profit was $63.4 million versus $69.4 million; net income attributable to Mueller was $12.9 million versus $17.7 million; diluted EPS was $0.34 versus $0.47. Quarterly sales declined through 2011, while fourth-quarter earnings were above third-quarter 2011 levels.
Plumbing & Refrigeration sales rose to $1,330.4 million from $1,115.6 million and operating income increased to $84.8 million from $83.7 million. OEM sales increased to $1,119.8 million from $958.9 million, but operating income fell to $72.7 million from $80.1 million, reflecting slightly lower unit volume and spreads and higher per-unit conversion costs.
Material changes versus the prior comparable period
- Sales growth largely reflected higher selling prices that tracked higher raw-material costs: average Comex copper was about $4.01 per pound in 2011, up 17% from 2010. Management reported only modest volume improvement in many core products; OEM volume was slightly lower.
- Despite higher sales, consolidated net income was nearly unchanged and operating margin declined. Higher selling prices therefore did not translate into comparable profit growth.
- Cash from operations rose substantially, supported in part by receivables collection. Capital expenditures were $18.8 million; investing cash use also included $6.9 million for Tube Forming assets. Dividends paid were $15.1 million.
- Long-term debt was $156.5 million; total debt included $41.3 million current debt, primarily borrowings of the Chinese joint venture. The company had no borrowings on its $350 million revolving facility at year-end, with $11.3 million of letters of credit backed by it.
Outlook, commentary, risks and unusual items
- Management expected most business conditions to improve gradually during 2012, while describing residential construction recovery as likely modest. U.S. housing starts remained historically low at 609,000 in 2011; most facilities continued to operate significantly below capacity.
- A September 2011 fire damaged part of the Wynne, Arkansas operation, affecting copper tube, line sets and plastic fittings. The company recorded related damaged-property and cleanup receivables and received a $10 million insurance advance in 2011 and a further $40 million in January 2012. Further recovery depends on claim settlement; lost sales and other business-interruption costs were recognized as incurred.
- Environmental reserves were $22.9 million at year-end. A potential $9.5 million settlement relating to Kansas sites remained under negotiation, with payment timing undetermined. A separate Lead Refinery site’s potential CERCLA exposure could not be estimated; the EPA had not yet investigated or proposed remedies.
- Antidumping reviews on Mexican steel pipe imports resulted in reserves of approximately $4.2 million and $1.0 million for two review periods; related appeals remained pending. The company also identified commodity-price and availability, weak construction demand, competition and substitutes, currency movements, labor negotiations, and environmental compliance as material risks.
- Other notable items: the 2011 $10.5 million litigation settlement gain; 2010’s $22.7 million insurance settlement gains; and a 2011 $8.0 million LIFO-layer liquidation gain deferred because it arose from intercompany sales.
- The company paid a $0.10-per-share quarterly dividend throughout 2011 and maintained authorization to repurchase up to 10 million shares through October 2012. Management reported compliance with debt covenants; the auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of 2011’s sales increase came from metal-price pass-through versus sustainable unit growth, and whether segment spreads and margins recover.
- The timing and amount of final insurance recovery for the Wynne fire, remaining operational capacity, and any ongoing business-interruption effects.
- Progress on the $9.5 million Kansas environmental matter, the unquantified Lead Refinery exposure, and the company’s broader environmental spending assumptions.
- Final antidumping review and appeal outcomes, including whether recorded reserves adequately cover duties and related cash payments.
- Whether operating cash flow remains strong after working-capital movements, and how the company manages the $41.3 million current debt and other contractual obligations.
- Whether the expected gradual 2012 improvement materializes given persistently weak housing and commercial construction markets and substantial unused manufacturing capacity.