Pentair, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing identifies the registrant as Pentair, Inc., a Minnesota corporation; it is not a standalone Q4 report. Amounts below are U.S. dollars unless noted.
Business context
Pentair operated Water & Fluid Solutions, providing water movement, treatment and pool products, and Technical Products, supplying enclosures and thermal-management products. In May 2011, Pentair acquired Norit’s Clean Process Technologies (CPT) division for $715.3 million. Water & Fluid Solutions represented about two-thirds of 2011 revenue and Technical Products about one-third.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $3,456.7 million | $3,030.8 million |
| Gross profit / margin | $1,073.7 million / 31.1% | $930.6 million / 30.7% |
| Operating income / margin | $168.5 million / 4.9% | $334.2 million / 11.0% |
| Net income attributable to Pentair | $34.2 million | $197.8 million |
| Diluted EPS from continuing operations | $0.34 | $2.00 |
| Cash from operating activities | $320.2 million | $270.4 million |
| Free cash flow | $248.2 million | $211.2 million |
| Total debt at year-end | $1,309.1 million | $707.5 million |
| Cash at year-end | $50.1 million | $46.1 million |
Sales increased 14.1%: reported growth included 7.7 percentage points from acquisitions, principally CPT, with volume, price and currency also contributing. Water & Fluid Solutions sales rose 16.1% to $2,369.8 million; Technical Products sales rose 9.8% to $1,086.9 million. Technical Products operating income improved to $185.2 million, or 17.0% of sales, from $151.5 million, or 15.3%. Water & Fluid Solutions operating income fell to $58.3 million, or 2.5% of sales, from $231.6 million, or 11.3%.
Current assets were $1,237.8 million and current liabilities $641.8 million at year-end. The company reported $480.3 million of available capacity under its primary credit facility after the leverage-covenant limit. Equity was $2,047.4 million, down from $2,205.0 million.
Material changes and unusual items
- Fourth-quarter 2011 included a $200.5 million non-cash goodwill impairment charge for the Residential Filtration reporting unit. The charge contributed to a Q4 operating loss of $120.0 million and net loss attributable to Pentair of $134.1 million; full-year diluted EPS was $0.34 versus $2.00 in 2010.
- The 2011 effective tax rate was 65.5%, primarily reflecting the tax impact of the goodwill impairment; management stated that excluding the impairment, the rate would have been 29.6%.
- Debt increased by about $601.6 million year over year, primarily to fund CPT. Pentair issued $500 million of 5.00% senior notes due 2021 and used its revolving facility; net interest expense rose 62.9% to $58.8 million.
- Goodwill and intangible assets totaled approximately $2,866.2 million, or 62.5% of total assets. The CPT purchase-price allocation included $451.8 million of goodwill and $197.2 million of identifiable intangibles.
- Research and development expense was $78.2 million, up from $67.2 million. Restructuring costs were $13.0 million, including reductions of about 210 employees.
Outlook, risks and contingencies
The filing does not provide formal 2012 revenue or earnings guidance. Management expected 2012 free cash flow to exceed net income from continuing operations and estimated capital expenditures of $75–$85 million. It anticipated higher pension expense in 2012, expected pension contributions of $40–$45 million, and announced an increase in the annual dividend rate from $0.80 to $0.88 per share.
Management described housing and new-pool construction as stabilized but still historically weak, and the industrial-market outlook as mixed. It cited continued raw-material price volatility, potential weakness in residential and industrial demand, foreign-exchange exposure and the European debt crisis, acquisition integration and leverage, and the possibility of further goodwill impairment. Pension underfunding was $241.8 million; management attributed a $41 million increase in unfunded pension liabilities primarily to lower discount rates. Environmental reserves were $1.5 million, and outstanding standby letters of credit and bonds totaled $136.2 million. The company said material litigation impacts were unlikely, while noting that adverse developments could change estimates.
Management and the auditor reported effective internal control over financial reporting as of year-end; the assessment and audit excluded CPT, which represented about 19% of total assets and 7% of revenue. The auditor issued an unqualified opinion on the consolidated financial statements.
Investor verification priorities
- Separate organic growth from acquired growth and assess CPT’s post-acquisition sales, earnings contribution, integration costs and expected synergies.
- Reconcile the $200.5 million impairment, the reported tax rate and earnings impact; review remaining goodwill valuation sensitivity and the other reporting unit’s disclosed impairment headroom.
- Review debt maturities, refinancing of the $105 million private-placement obligation due in 2012, covenant capacity and cash interest burden.
- Test operating cash-flow and free-cash-flow sustainability, including working-capital needs and the effect of the non-cash impairment on reported earnings.
- Monitor residential and industrial demand, raw-material inflation, pension funding and expense, and any changes in litigation or environmental exposures.