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Welcome and thank you for your support. At this point, all participants are in listen-only mode until today’s Q&A session. [Operator Instructions] I want to inform all parties that today’s meeting is being recorded. If you have any objections, you can disconnect at this time.
Good morning everybody. Thank you for participating in the fourth quarter and end-of-fiscal 2021 conference calls of Mueller Aquatic Products. Yesterday afternoon, we issued a press release reporting the results of our operations for the quarter ending September 30, 2021. A copy of the press release can be found on our website www.muellerwaterproducts.com.
Scott Hall, our President and Chief Executive Officer; our Chief Financial Officer Martie Zakas will discuss our fourth quarter and full year results, end markets, and expectations for the 2022 fiscal year.
This morning’s call is being recorded and webcast live on the Internet. We have also published slides on our website to accompany today’s discussion and resolve forward-looking statements and our non-GAAP disclosure requirements.
In this case, please refer to slide 2. This slide identifies the non-GAAP financial metrics cited in our press releases, slides, and this conference call, and discloses why we believe these metrics provide useful information for investors. Reconciliations between non-GAAP and GAAP financial measures are included in our press release and supplementary information on our website.
Slide 3 presents the forward-looking statements made during the conference call. This slide contains cautionary information that identifies important factors that may cause actual results to differ materially from those contained in forward-looking statements. Please review slides 2 and 3 in full.
In this conference call, unless otherwise stated, all references to a specific year or quarter refer to our fiscal year, which ends on September 30.
Call 1-800-834-5839 to replay this morning’s conference call within 30 days. The archived webcast and corresponding slides will be available in the investor relations section of our website for at least 90 days.
Thanks, Whit. Thank you for joining us today. I hope everyone who hears our call will continue to be safe and healthy. The fourth quarter ended a strong year disappointingly, and despite the ongoing pandemic and other challenges, we achieved this goal. In addition to the pandemic, we have faced many obstacles in the past year, including sharp increases in raw material and other costs, supply chain disruptions and labor supply challenges, which have affected our operations and performance in the fourth quarter.
I want to thank all our team members for their perseverance and dedication in the past year as they continue to execute in this unprecedented operating environment.
Our consolidated net sales for the fourth quarter increased by 11.4% and for the full year increased by 15.2%. After record sales growth in the third quarter, we experienced continued strong demand in the fourth quarter, driven by new residential construction and municipal repair and replacement activities. Compared with pre-pandemic levels, orders in the fourth quarter are still high, and our backlog of infrastructure products at the end of the year hit a record high.
Although our adjusted EBITDA decline in the fourth quarter was mainly due to the challenging operating environment, we still achieved 6.8% growth this year. Although we achieved an improvement in the pricing of most products during the quarter, this was not enough to offset the rising inflation. We do expect our current pricing actions to exceed expected inflation in 2022, assuming that material costs will not exceed current levels.
In addition, during the quarter, our specialty valve product portfolio experienced longer parts delivery times, delayed shipments, and our ongoing factory reorganization was affected by supply chain disruptions and labor challenges. I am particularly satisfied with the cash flow this year. We generated $94 million in free cash flow. After acquiring i2O Water for US$19.7 million and distributing US$44.8 million to shareholders, our cash position at the end of the year was stronger than the previous year.
We repurchased $10 million of common stock in the fourth quarter and recently announced a dividend increase of approximately 5.5%. All in all, although our closing this year was disappointing from the perspective of conversion margins, we have achieved strong revenue growth and continue to focus on overcoming operational challenges.
We believe that our record backlog of short-term products, coupled with the expected realization of higher pricing, will enable us to achieve net sales and adjusted EBITDA growth in 2022. In addition, our three large capital projects are about to be completed, and once they are up and running, we expect to drive gross profit margins.
I believe that as we become a world-class water technology company that provides solutions for critical water infrastructure, we are in a good position to accelerate our strategy and improve our execution culture.
With this, I will transfer the call to Marty to discuss our fourth quarter and full year performance of 2021.
Thanks, Scott, good morning everyone. I hope you and your family continue to be safe and healthy. I will start with our consolidated GAAP and non-GAAP financial results for the fourth quarter of 2021, then review our departmental performance, and finally discuss our cash flow and liquidity.
In the fourth quarter, our consolidated net sales were US$295.6 million, an increase of US$30.3 million or 11.4% compared to the fourth quarter of last year. This increase was mainly due to increased shipments and rising infrastructure prices. Compared with the fourth quarter of 2019 before the pandemic, our consolidated net sales increased by 10.8%, reflecting the improvement in end market demand.
Compared with the fourth quarter of last year, our gross profit for this quarter decreased by US$7.6 million, or 8.1%, to US$86.3 million, with a gross profit margin of 29.2%. The gross profit margin decreased by 620 basis points from the previous year. Rising infrastructure prices and increased shipments have been offset by rising inflation and unfavorable manufacturing performance, including labor challenges, supply chain disruptions and the impact of our factory restructuring.
Our total material cost increased by 18% year-on-year in this quarter, mainly due to the increase in raw materials, and the price of raw materials increased month-on-month and year-on-year. Our main raw materials are scrap steel and brass ingots, the prices of which have increased by more than 50% year-on-year.
Although our prices have improved from the previous quarter, our price/cost relationship has been negative for the third consecutive quarter. In view of the acceleration of raw material pricing this quarter, the price/cost relationship did not improve as expected due to inflation. Scott will discuss in more detail the drivers of the decline in gross margin compared to expectations later in the conference call.
Sales, general and administrative expenses for the quarter were US$56.6 million, an increase of US$4.5 million over the previous year. The main reason for the increase was investment, including i2O Water acquisitions, IT-related activities and personnel-related costs, and the reversal of temporary T&E savings related to the pandemic and general inflation. SG&A’s percentage of net sales in the fourth quarter was 19.1%, compared with 19.6% in the same period last year.
Operating income for the fourth quarter was US$27.8 million, a decrease of US$12.9 million, or 31.7%, compared with US$40.7 million in the same period last year. Operating income for the quarter included strategic restructuring and other expenses of US$1.9 million, mainly related to the factory restructuring we announced earlier.
Now turning to our consolidated non-GAAP results. Adjusted operating income was US$29.7 million, a decrease of US$12.1 million or 28.9% compared with US$41.8 million in the same period last year. Higher inflation, unfavorable manufacturing performance, and higher SG&A costs offset higher pricing and the increase in the amount of infrastructure.
The adjusted EBITDA was US$45.6 million, a decrease of US$12 million or 20.8%. The adjusted EBITDA margin was 15.4%, 630 basis points lower than the previous year. For the full year of 2021, our adjusted EBITDA was US$203.6 million, an increase of 6.8%, and the adjusted EBITDA margin was 18.4%.
The net interest expense in the fourth quarter of 2021 fell to US$4.4 million from US$6 million in the same period last year. The decrease in net interest expense in the quarter was mainly due to the decrease in interest expense due to our refinancing of 5.5% of senior notes and 4% of senior notes.
The effective tax rate for the quarter was 24.3%, compared with 24.8% last year. For the whole year, our effective tax rate was 25.8%, compared with 23.5% in the previous year. This quarter, our adjusted net income per share was $0.12, compared to $0.17 in the same period last year.
Now turn to segmentation performance, starting with infrastructure. Infrastructure net sales were US$271.9 million, an increase of US$29.9 million or 12.4% over the previous year, mainly due to increased shipments, especially our fire hydrants, iron gate valves, service brass and repair products and higher prices .
Adjusted operating income was US$46.2 million, a decrease of US$10.6 million or 18.7% this quarter, due to rising inflation, poor manufacturing performance and increased SG&A spending only partially offset by higher pricing and increased sales. The adjusted EBITDA was US$59.3 million, a decrease of US$10.3 million, or 14.8%, and the adjusted EBITDA margin was 21.8%. The adjusted EBITDA margin for the year was 25.2%.
Turn to technology. Technologies’ net sales were US$23.7 million, an increase of 1.7% over the previous year, mainly due to our acquisition of i2O Water. Organic net sales decreased slightly compared to the previous year, as higher pricing was offset by lower sales. The adjusted operating loss was US$4.3 million, while the adjusted operating loss of the previous year was US$2.3 million. This increase was mainly due to unfavorable performance, including inventory adjustments, increased expenses related to our acquisition of i2O Water, and rising inflation, but was partially offset by price increases. The technically adjusted EBITDA loss was US$2.4 million, while the adjusted EBITDA loss of the previous year was US$200,000.
Continue to talk about cash flow. For the year ended September 30, 2021, net cash provided by operating activities increased by USD 16.4 million to USD 156.7 million, mainly due to the USD 22 million tax paid by Walter Energy the previous year. As of September 30, 2021, our net working capital decreased by US$11.3 million to US$207.1 million. The percentage of net working capital to net sales increased from 22.7% to 18.6%, mainly due to an increase in inventory turnover.
We invested $16.6 million in capital expenditures in the fourth quarter, increasing our total year-to-date expenditures from $67.7 million last year to $62.7 million. The decrease in capital expenditures this year is below our updated guidance range, mainly due to the slowdown in some planned expenditures due to supply chain disruptions, including expenditures on our large capital projects.
Free cash flow for the year increased by US$21.4 million to US$94 million, exceeding adjusted net income. As of September 30, 2021, our total debt was US$446.9 million, and cash and cash equivalents were US$227.5 million.
At the end of the fourth quarter, our net debt leverage ratio increased from 1.3 times at the end of the previous year to 1.1 times. We did not have any borrowings under the ABL agreement at the end of the year, and we did not borrow any amount under our ABL during the year. As a reminder, we currently have no debt due before June 2029.
Our premium 4% notes do not have a financial maintenance contract, and unless we exceed the minimum availability threshold, our ABL agreement is not subject to any financial maintenance contract. According to the data on September 30, 2021, according to the ABL agreement, we have approximately US$158.7 million in excess availability, which brings our total liquidity to US$386.2 million.
In short, we continue to have a strong and flexible balance sheet, as well as sufficient liquidity and capabilities to support our capital allocation opportunities. Scott, come back to you.
Thanks, Marty. I will talk about our fourth quarter results, new management structure, end markets and full-year 2022 guidance. After that, we will open the phone to ask questions.
As mentioned earlier, there were a number of challenges in the quarter that affected our gross profit margin and led to disappointing adjusted EBITDA conversion, which was lower than our expectations. The gross margin gap is approximately US$15 million, and labor challenges account for more than one-third of the gap. Higher inflation, freight and electricity costs combined also accounted for more than one-third of the gap.
Among other factors, the operational challenges of our specialty valve product portfolio and unfavorable inventory adjustments have had the greatest impact. Labor challenges have led to increased costs related to overtime, benefits, and efficiency. We provide additional performance rewards for the factory team members to recognize their hard work and dedication in this extremely challenging operating environment.
In addition, even with progress in vaccination, the pandemic continues to pose labor challenges for us. Our team is working closely to continue to improve our relationship with employees and strengthen our efforts in recruitment, training and retention. Raw material inflation continued to be an unfavorable factor this quarter. We have experienced another successive increase in raw material inflation, resulting in scrap steel and brass ingot prices rising by more than 50% over the previous year.
Raw material prices will not start to accelerate until the second quarter of 2021. Therefore, we expect that if prices do not continue to rise, the increase in raw material prices in the first half of the year will have the greatest impact.
In the past, we have successfully executed price increases as needed to make up for the cost of inflation during the cycle. Our pricing actions in the past year, including free price increases for most product lines, are helping to offset inflation, as we see a significant continuous increase in prices in the fourth quarter. Unfortunately, the record backlog is extending the time to achieve sustained price advantage. Therefore, we expect that the price/cost will not be positive in each quarter until mid-2022. At this time, we expect our current pricing actions to exceed the expected inflation in 2022. This belief assumes that material costs should not increase beyond the current level.
The strong demand we experienced has also led to some manufacturing inefficiencies, which was triggered by the rapid growth in production, especially in the second half of this year. As demand increases, we have to run our foundries during peak periods, resulting in much higher energy costs. The supply chain disruption has also led to higher freight costs and longer delivery times for some third-party purchased parts.
Our supply chain team has always focused on obtaining the required supplies in a timely manner and working hard to find alternative sources when possible. Although we believe that our actions will make us more capable of increasing shipments to meet demand, we expect that supply chain disruption and labor supply will continue to be unfavorable factors next year.
In the fourth quarter, our specialty valve product portfolio faced greater operational challenges, accounting for approximately 15% of annual sales. These products are usually used for large projects with long lead times. Due to longer manufacturing and delivery times, the gap between material cost inflation and price improvement may exceed nine months.
In addition, as a reminder, we announced a major factory restructuring project in the second quarter of 2021. At that time, we expected a different operating environment. Strong demand, supply chain disruptions and labor challenges have affected the shipments of these products and increased the transition costs of our factory restructuring. We remain confident that we will fully complete the transition and accelerate it in 2023, and bring profit margin gains accordingly.
We recently announced a new management structure starting in the first quarter of 2022. The new structure aims to increase revenue growth, promote operational excellence, accelerate new product development and improve profitability. We believe that the new structure allows us to improve long-term growth and increase profit margins, while helping to accelerate the commercialization of our technology products and the Sentryx software platform.
The two newly named business units are Water Flow Solutions and Water Management Solutions. The Water Flow Solutions product portfolio includes iron gate valves, special valves and service brass products. Net product sales from the Water Flow Solutions business accounted for approximately 60% of consolidated net sales in 2021.
Post time: Nov-11-2021
