Pentair Ltd. — FY 2012 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. Pentair is a diversified industrial manufacturer with Water & Fluid Solutions, Valves & Controls, and Technical Solutions segments. On September 28, 2012, the company completed the spin-off of Tyco Flow Control and its merger with Pentair, Inc. The transaction created a substantially larger combined business, but 2012 consolidated results include Flow Control only from the merger date; prior-year comparisons therefore are not like-for-like.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $4.416 billion | $3.457 billion |
| Gross profit / margin | $1.270 billion / 28.7% | $1.074 billion / 31.1% |
| Operating income (loss) | $(43.1) million | $100.2 million |
| Net income (loss) attributable to Pentair | $(107.2) million | $(7.5) million |
| Diluted EPS | $(0.84) | $(0.08) |
| Cash from operations | $68.0 million | $320.2 million |
| Free cash flow | $(21.1) million | $248.2 million |
Fourth-quarter sales were $1.751 billion; operating loss was $304.1 million and net loss attributable to Pentair was $273.1 million, or $1.31 per diluted share. FY 2012 segment sales were $2.638 billion for Water & Fluid Solutions, $546.7 million for Valves & Controls, and $1.231 billion for Technical Solutions. Valves & Controls was included only after the merger.
At year-end, cash and cash equivalents were $261.3 million, total debt was $2.457 billion, and total assets were $11.795 billion. The company reported $1.025 billion available under its $1.45 billion revolving credit facility and compliance with debt covenants. The current ratio was approximately 2.1, based on reported current assets and current liabilities.
Changes versus the prior comparable period
- Sales increased 27.8%, principally reflecting $886.5 million of post-merger Flow Control sales, the CPT acquisition, and organic growth; currency effects were unfavorable. Growth should not be read as purely organic.
- Gross margin declined 2.4 percentage points, pressured by merger-related inventory and backlog purchase-accounting charges and raw-material and labor inflation.
- Operating results were affected by higher pension actuarial losses, transaction and integration costs, restructuring, and a $60.7 million trade-name impairment. FY 2011 included a $200.5 million goodwill impairment.
- Cash from operations fell by $252.3 million. Management cited accelerated pension funding; pension and post-retirement contributions were $238.0 million, including a $190 million special U.S. pension contribution. Free cash flow was also affected by acquisition-related and repositioning payments.
- Debt increased from $1.309 billion at year-end 2011, largely reflecting the merger and related financing.
Outlook, commentary, and risks
- Management expected 2013 free cash flow to exceed 100% of net income before noncontrolling interest; this is a target, not a quantified earnings forecast. Capital spending guidance was approximately $180–$200 million.
- 2013 priorities included integrating the acquired businesses, expanding in faster-growth regions, new product development, lean operations, and reducing working capital, particularly inventory. Management noted Western European weakness and continuing raw-material price volatility.
- Backlog was $2.491 billion at year-end, with most expected to ship in 2013. Conversion timing, project delays, modifications, and cancellations could affect revenue and cash flow.
- Material exposures include merger integration and synergy execution, substantial goodwill and intangibles (58% of assets), foreign currency and global-market risks, pension obligations, and asbestos litigation. Approximately 1,900 asbestos lawsuits were pending; recorded asbestos liabilities were $234.6 million with $157.4 million of estimated insurance recoveries.
- Environmental reserves were $35.9 million. The acquired Flow Control business was subject to a three-year DOJ compliance reporting arrangement following Tyco’s 2012 settlement and non-prosecution agreement. Pentair also faces potential shared pre-distribution tax liabilities under tax-sharing agreements.
- The auditor and management reported effective internal controls for the assessed business, but excluded Flow Control from the 2012 internal-control assessment because of the acquisition timing and scope.
Key facts investors should verify
- Separate acquired sales and merger-related accounting effects from organic growth and recurring segment profitability.
- Track 2013 integration progress, backlog conversion, and whether the stated free-cash-flow and capital-spending expectations are achieved.
- Review debt maturities, revolving-credit availability, covenant headroom, and the impact of pension contributions on cash generation.
- Monitor asbestos and environmental claim estimates, insurance recoverability, and potential shared tax liabilities.
- Assess whether the acquired-business control systems are brought into the company’s internal-control assessment and whether purchase-price allocation adjustments materially change reported assets or earnings.