Pentair plc — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. Pentair reported continuing operations in two segments, Water and Electrical. The former Valves & Controls business is presented as discontinued operations following its sale in April 2017. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $4,936.5 | $4,890.0 | +1.0% |
| Gross profit / margin | $1,829.1 / 37.1% | $1,794.1 / 36.7% | Margin +0.4 pts |
| Operating income / margin | $680.8 / 13.8% | $700.7 / 14.3% | Income −2.8% |
| Continuing-operations net income | $480.0 | $451.6 | +6.3% |
| Diluted EPS, continuing operations | $2.61 | $2.47 | +5.7% |
| Net income, including discontinued operations | $666.5 | $522.2 | +27.6% |
| Operating cash flow, continuing operations | $674.0 | $702.4 | −4.0% |
| Free cash flow, continuing operations | $611.0 | $609.3 | +0.3% |
| Total debt at year-end | $1,440.7 | $4,279.2 | Down $2,838.5 |
| Cash and cash equivalents at year-end | $113.3 | $238.5 | Down $125.2 |
Full-year net income included $181.1 million, net of tax, from the Valves & Controls sale and $5.4 million of income from discontinued operations. The continuing-operations tax provision was $9.2 million, an effective rate of 1.9%, reflecting a provisional $84.8 million benefit from U.S. tax reform. Management expected an effective tax rate of approximately 18% in future periods.
Segments and operating drivers
- Water: Sales of $2,844.4 million, up 2.4%; segment income of $546.0 million, up 10.5%; segment margin rose to 19.2% from 17.8%. Growth included U.S. industrial and residential/commercial demand, pricing, acquisitions and currency; infrastructure and food/beverage project delays and job adjustments partly offset gains.
- Electrical: Sales of $2,097.9 million, down 0.9%; segment income was essentially flat at $447.0 million; segment margin increased to 21.3% from 21.1%. Lower project sales, including the nonrecurrence of large Canadian Oil Sands projects, offset U.S. industrial growth, acquisitions, pricing and currency benefits.
- Backlog was $687.3 million at year-end, up 7.0% year over year; the company expected most of it to ship in 2018.
Material changes and unusual items
- Pentair sold Valves & Controls to Emerson for $3.15 billion cash on April 28, 2017. It recorded a $181.1 million after-tax gain and $56.4 million of sale-related transaction costs. Proceeds supported debt repayment, including repurchase of $1,659.3 million principal of notes; the early extinguishment generated a $101.4 million loss.
- Debt fell substantially, and year-end commercial paper declined to $34.0 million from $398.7 million. The company reported compliance with debt covenants and $1,897.5 million of available credit after leverage-based limitations.
- Operating income was pressured by $53.1 million of separation costs, $58.7 million of restructuring costs, $32.0 million of trade-name and other impairment charges, and the debt-extinguishment loss below operating income. The filing identifies $25.2 million of the impairments as trade-name charges.
- Gross margin improved through pricing, favorable mix and PIMS productivity savings, but raw-material and labor inflation continued. Large job adjustments reduced 2017 gross profit by $16.4 million.
- The company completed $59.5 million of acquisitions in 2017, repurchased $200.0 million of shares and paid $251.7 million in dividends. The Board approved a planned 2018 annual dividend of $1.40 per share.
Outlook, risks and contingencies
- Proposed separation: Pentair targeted April 30, 2018 to spin off Electrical as a separate public company, subject to board approval, tax opinions and rulings, SEC filings and other conditions. Timing and completion were not assured. Management said restructuring and realignment actions were expected to support margin growth in 2018.
- 2018 priorities: Complete the separation; pursue operating excellence, sourcing and cash-flow management; grow through new products and market expansion; and develop global talent. Planned 2018 capital expenditures were approximately $85 million. The filing provides no clear numeric sales or earnings guidance.
- Key operating risks: Cyclical industrial and project demand, competitive pricing, inflation in materials and labor, foreign-exchange exposure, seasonality and weather, execution of growth and restructuring initiatives, and the costs and disruption associated with the proposed separation.
- Legal and tax exposures: Approximately 600 asbestos-related claims were pending against subsidiaries. Environmental reserves were described as not material, but future costs could exceed current reserves. The company also disclosed potential shared pre-distribution tax liabilities under its tax-sharing agreement; the ultimate resolution is uncertain.
- Other obligations: Contractual obligations totaled $1,827.4 million, including $1,447.5 million of debt maturities and $128.1 million of net operating lease commitments. Bonds, letters of credit and bank guarantees totaled $201.5 million. The company reported no off-balance-sheet financing arrangements.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Whether the Electrical spin-off closed as planned, its final tax treatment, separation costs and the resulting debt and capital allocation between the companies.
- How much of the unusually low 2017 effective tax rate was nonrecurring, and the eventual finalized accounting for U.S. tax reform and uncertain tax positions.
- Whether Water and Electrical sales, margins and backlog converted to profitable growth, particularly given project delays, inflation and seasonality.
- Cash generation after the asset sale and debt paydown, including the continuing-operations cash-flow trend and capacity to fund dividends, capital spending and debt service.
- Developments in asbestos claims, environmental matters and shared tax liabilities, along with the costs and timing of pension-plan termination.