Pentair, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter ended June 30, 2012; year-to-date results cover the six months ended June 30, 2012. Comparisons are with the three and six months ended July 2, 2011. The filing identifies the registrant as Pentair, Inc., despite the request metadata naming Pentair Plc. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Net sales | $941.5 | $910.2 | $1,799.7 | $1,700.4 |
| Gross profit | $312.1 | $287.7 | $592.8 | $536.8 |
| Operating income | $117.8 | $109.4 | $202.7 | $195.6 |
| Net income attributable to Pentair | $71.8 | $66.7 | $132.6 | $117.3 |
| Diluted EPS | $0.71 | $0.67 | $1.32 | $1.17 |
| Gross margin | 33.2% | 31.6% | 32.9% | 31.6% |
- Q2 sales increased 3.4% and H1 sales increased 5.8%. H1 growth reflected acquisition contribution and price increases, partly offset by currency effects and lower Technical Products volume.
- Water & Fluid Solutions sales grew 6.9% in Q2 and 10.0% in H1; Technical Products sales declined 4.4% and 2.9%, respectively. Technical Products softness was concentrated in Western Europe and communications.
- Gross margin expanded year over year, supported by operating-efficiency savings, pricing, and the absence of 2011 acquisition-accounting inventory and backlog charges. SG&A rose to 18.4% of Q2 sales from 17.4%, and 19.4% of H1 sales from 17.8%, reflecting merger, acquisition-integration, restructuring and labor costs.
- Net interest expense rose 10.0% in Q2 and 28.9% in H1, primarily because of debt associated with the CPT acquisition. H1 effective tax rate fell to 21.9% from 30.4%, partly due to tax-audit resolutions and global earnings mix.
- H1 operating cash flow was $166.8, versus $152.6; free cash flow, as defined by the company, was $140.3 versus $117.5. Capital expenditures were $31.3 versus $35.2. Cash at June 30 was $60.6.
- Total debt was $1,235.2 at June 30, down from $1,309.1 at year-end 2011; long-term debt was $1,233.8. Net debt, calculated as total debt less cash, was approximately $1,174.6. The company reported $487.4 of availability under its $700 million revolving facility and compliance with debt covenants. Current assets were $1,276.0 and current liabilities $661.7.
- Comprehensive loss attributable to Pentair was $10.2 in Q2, despite net income, mainly reflecting currency translation and other comprehensive items.
Material changes, outlook and risks
- In April 2012, Pentair acquired Brazilian pool-products business Sibrape for $19.9 net of cash acquired. H1 acquisitions used $19.9, compared with $733.1 in the prior-year period, which included the $715.3 CPT acquisition.
- H1 restructuring actions reduced approximately 140 positions and generated $10.4 in restructuring costs; the restructuring accrual was $13.9 at June 30.
- Management anticipated 2012 capital expenditures of approximately $75–$85 million and continued to expect full-year free cash flow to exceed net income before noncontrolling interest. The company’s long-term objective is free cash flow at least equal to net income. No specific revenue or EPS guidance is stated in the provided filing text.
- Management described the second-half 2012 industrial-market outlook as mixed. It cited continued uncertainty from weak housing and pool construction, raw-material and labor inflation, foreign exchange, and global economic conditions. Commodity prices had begun to moderate, but timing and impact were uncertain.
- Pentair had agreed to an all-stock merger with Tyco’s Flow Control business, then expected to close around the end of September 2012, subject to shareholder, regulatory and other approvals. The transaction was valued at approximately $4.4 billion, including assumed net debt of $275 million; existing Pentair shareholders were expected to own approximately 47.5% of New Pentair. Failure to complete could trigger a $145 million termination fee, depending on circumstances. Integration, approval, execution, dilution and market-price risks were disclosed.
- The filing reports no further material developments in legal proceedings or commitments and contingencies compared with the 2011 Form 10-K. Market-risk disclosures had no material quarterly changes. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the Tyco Flow Control transaction received required approvals and closed on the anticipated terms and timetable, including final financing and debt assumptions.
- Whether Water & Fluid Solutions growth and margin gains persist, and whether Technical Products’ volume declines stabilize.
- Whether the company achieves its stated 2012 free-cash-flow and capital-expenditure expectations as working capital and seasonal demand evolve.
- How merger-related expenses, restructuring costs, debt and interest expense affect profitability and liquidity.
- Whether residential-market weakness, currency movements, inflation, pension costs or goodwill impairment assumptions materially change.