Pentair Ltd. announced fourth quarter 2012 sales of $1.8 billion, an increase of 103 percent from the prior year quarter excluding 1 point of foreign exchange impact, reflecting the Flow Control acquisition.
Adjusted fourth quarter 2012 earnings per diluted share ("EPS") were $0.47, down 16 percent from adjusted EPS of $0.56 in the fourth quarter of last year. On a GAAP basis, the company reported a loss per share of $1.31 compared to a loss per share of $1.77 in the fourth quarter last year. Adjusted EPS and operating income exclude certain costs related to transformational activities in 2012, including the Flow Control merger. These costs include acquisition-related expenses, repositioning costs, "mark-to-market" pension expense, impairments, debt extinguishment expense, and certain tax items.
Fourth quarter 2012 adjusted operating income was $150 million, up 59 percent, and operating margins contracted 240 basis points to 8.5 percent. Excluding transition costs, pricing and productivity gains offset material inflation and higher labor costs. On a GAAP basis, the company reported an operating loss of $304 million.
For the full year, the company reported sales of $4.4 billion, adjusted operating income of $489 million, and adjusted EPS of $2.39. On a GAAP basis, the company reported an operating loss of $43 million and a loss per share of $0.84.
During the fourth quarter the company elected to change to a more preferable method of accounting for pension and postretirement benefits. Historically, the company recognized actuarial gains and losses annually as a component of Stockholders Equity, amortizing them into operating results over future periods. The company has now elected to immediately recognize these gains and losses in its operating results in the year in which they occur. These gains and losses will be measured annually as of December 31 and will be recorded in the fourth quarter of each year. For the fourth quarter of 2012, the Company recorded a charge of $146 million for actuarial losses. This change in accounting principle will be applied retrospectively.
During the year, Pentair generated $318 million in adjusted free cash flow; this represented 100 percent conversion of adjusted net income. Adjusted free cash flow excludes the impact of acquisition-related payments, accelerated pension funding, and repositioning costs.
The company paid approximately $112 million in dividends in 2012, or $0.88 per share. The new quarterly dividend effective for the first and second quarters of 2013 is $0.23 per share per quarter. The company intends to seek authorization from its shareholders at its 2013 annual general meeting of shareholders to increase the dividend further for the remainder of 2013. If approved by the shareholders, the 2013 dividend increase will mark the 37th consecutive year in which Pentair has increased its dividend.
"The fourth quarter results were in line with expectations and marked the end of a historic transformational year for Pentair," said Randall J. Hogan, Pentair chairman and chief executive officer. "The integration of the Flow Control businesses continues to gain momentum as the teams have come together and are building upon each other s strengths. While many of our end markets faced some softness in the latter half of 2012, our businesses continued to deliver on the elements within our control, notably price and productivity, capabilities that have become hallmarks of Pentair."
Fourth Quarter Business Highlights
All year over year comparisons against 2011 adjusted results on a pro forma basis for the Flow Control acquisition.
Water & Fluid Solutions sales grew 1 percent year-over-year to $771 million as the impact of foreign exchange was minimal in the quarter. In fast growth regions, Water & Fluid Solutions sales grew 4 percent driven by strength in Latin America and the Middle East.
- Residential & Commercial sales, which accounted for roughly 45 percent of Water & Fluid Solution sales, grew 2 percent. While there was continued weakness in western Europe and distributors guarded inventory levels closely, an improving North American residential market gained momentum.
- Infrastructure sales, which includes the former Flow Control WES business, and which accounted for nearly 25 percent of Water & Fluid Solutions sales, were down 3 percent percent as the European infrastructure markets remained weak. However, the backlog in North American infrastructure projects continued to grow.
- Food & Beverage sales, which accounted for nearly 15 percent of Water & Fluid Solutions sales, grew 2 percent led by continued gains with food service customers. Global agriculture sales were down in the quarter due to the timing of orders, but the company believes the 2013 outlook for global agriculture remains sound. There were several project delays from beverage customers in the quarter with most of this work moved to 2013.
Water & Fluid Solutions fourth quarter adjusted operating income of $58 million represented a 24 percent decline as compared to $77 million in the same period last year. Adjusted operating margins decreased by 250 basis points to 7.5 percent. While price and productivity largely offset inflation in the quarter, the segment incurred substantial transition costs. Including repositioning, impairment, and acquisition related charges, Water & Fluid Solutions reported a fourth quarter GAAP operating loss of $57 million.
Valves & Controls delivered fourth quarter 2012 sales of $547 million, up 3 percent versus the prior year quarter, excluding a 1 percent unfavorable impact from foreign exchange. Backlog increased 2 percent to $1.4 billion compared to third quarter 2012.
- Energy sales, which accounted for roughly 60 percent of Valves & Controls sales, grew 2 percent. Oil & gas industry sales had strong double-digit growth in the quarter, but some project delays impacted orders in the quarter. Power industry sales remained weak and mining industry sales had continued growth.
- Industrial sales, which accounted for roughly 30 percent of Valves & Controls sales, grew 2 percent. Process sales in Asia were weak, but orders and backlog grew in the quarter.
Valves & Controls delivered fourth quarter adjusted operating income of $42 million down 3 percent compared to $43 million in the same quarter last year. Fourth quarter 2012 adjusted operating margins decreased 40 basis points to 7.6 percent. Price and productivity generally offset inflation, but mix and transition costs contributed to margin contraction in the quarter. Including repositioning and acquisition related charges, Valves & Controls reported a GAAP operating loss of $77 million in the fourth quarter.
Technical Solutions delivered fourth quarter 2012 sales of $434 million, up 1 percent versus the prior year quarter including modest unfavorable impact from foreign exchange.
- Industrial sales, which accounted for roughly 50 percent of Technical Solutions sales, declined 2 percent.
- Energy sales, which accounted for roughly 30 percent of Technical Solutions sales, grew 6 percent.
- Residential & Commercial sales, which accounted for roughly 15 percent of Technical Solutions sales, grew 1 percent percent.
Technical Solutions delivered adjusted fourth quarter operating income of $76 million, up 1 percent compared to $75 million in the same quarter last year. Fourth quarter 2012 adjusted operating margins were flat at 17.4 percent compared to the prior year quarter. Pricing and productivity gains driven by a better mix of standard products more than offset material and labor inflation. Transition costs impacted the year-over-year comparison negatively. Including repositioning, impairment, and acquisition related charges, Technical Solutions fourth quarter reported GAAP operating income was $12 million.
Outlook
Pentair continues to expect full year 2013 adjusted EPS to be between $3.10 and $3.30, which represents an increase of approximately 22 to 30 percent from 2012 adjusted pro forma EPS of $2.54. The company anticipates full year 2013 sales to be approximately $7.6 billion, or up approximately 3 to 5 percent over 2012 adjusted pro forma sales. The company expects to generate free cash flow in excess of 100 percent of net income once again.
Pentair is initiating first quarter 2013 adjusted EPS guidance of $0.54 to $0.56. This compares to first quarter 2012 adjusted pro-forma EPS of $0.54 and historical adjusted EPS of $0.64. The company expects first quarter 2013 revenue to be about $1.8 billion, which is up slightly compared to first quarter 2012 adjusted pro-forma revenue and up significantly versus historical first quarter 2012 revenue of $858 million. These results include around $10 million of costs associated to drive synergy benefits and only around $5 million of expected realized synergies. Synergies driven by fourth quarter 2012 repositioning actions and functional standardization efforts are on track to deliver $90 million for the full year of 2013 and are expected to ramp to $35 million by fourth quarter 2013.
"Despite much of the global economic uncertainty that persists, we are seeing signs of momentum building in several end markets, such as global energy and North American residential, which combined are just under half of Pentair s revenue," said Hogan. "Our focus remains on driving PIMS and improving our cost structure while continuing to invest in our businesses for growth. We remain committed to delivering $90 million in synergies in 2013 and $230 million cumulatively by the end of 2015, in addition to our goal of $5.00 of EPS in 2015."
