Corporate Analyisis Of Pentair

Corporate Analyisis Of Pentair

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Pentair, Inc.

Headquartered in Golden Valley, Minnesota, Pentair owns and operates fifty facilities throughout eleven different countries. Pentair’s Technical Products Group is a leader in global enclosures, thermal management products, and custom enclosures that house and protect sensitive electrical components. The Water Group manufactures innovative products used in the movement, treatment, storage and enjoyment of water. Pentair’s local ties include two manufacturing facilities. The Sheboygan operation molds plastic and extruder block water filters, while the Brookfield location manufactures custom enclosures.
Our group will analyze Pentair’s financial position at year-end in 2002 and compare that to the most recent year-end report in 2006. This analysis will include Pentair’s financial condition with respect to: accounts receivable and inventory turnover, current ratio and working capital, operating ratios and percentages, the rate of return on sales, fixed assets and capital, along with competitive strategies and the financial strengths and weaknesses. We will be using Pentair’s annual 10K report found on www.sec.gov, to support our comparisons.
In 2002, Pentair reported their total current assets as $2,514,450,000 compared to $3,364,979,000 in 2006. This 34 percent increase was equally distributed between accounts receivable, inventories, goodwill and property, plant and equipment. Goodwill and property, plant and equipment reported the largest increases. This means Pentair’s value grew based on their ability to purchase or maintain their property, plant and equipment.
Accounts receivable was reported at $223,778,000 in 2002 and grew to $422,134,000 in 2006. To compare the average collection period in both years, we need to divide accounts receivable by Pentair’s average credit sales per day. With net sales of $1,488,453,000 in 2002, our average credits sales per day equal $4,077,950. In 2006, Pentair reported net sales of $3,154,469,000 and average credit sales per day of $8,642,380.
2002 Average Collection Period $223,778,000 / $4,078,000 = 55 days
2006 Average Collection Period $422,134,000 / $8,642,000 = 49 days

While Pentair’s 10K does not report their collection terms, they do report the amount of days sales are left outstanding in receivables. Assuming collection terms are 60 days, Pentair’s average collection period is strong. On the other hand, if Pentair’s terms are 30 days, their average collection period is poor.
To calculate how efficiently Pentair converts inventory to sales, we divided their sales by inventory.
2002 Inventory Turnover $1,488,453,000 / $165,389,000 = 8.99
2006 Inventory Turnover $3,154,469,000 / $398,857,000 = 7.

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In 2002, Pentair turned its inventory into sales 8.99 times during the year. That number declined slightly in 2006 to 7.91. However, these numbers are favorable, while Pentair’s inventory sells well the ratio will continue to climb.
Analyzing the current assets of the firm with the company’s current liabilities will give us Pentair’s current ratio. In 2002, Pentair reported current assets as $810,808,000 and current liabilities as $476,200,000. This gives us a current ratio of 1.70. In 2006, Pentair reported current assets of $957,628,000 and current liabilities of $521,282,000. The current ratio in 2006 equaled 1.84.
2002 Current Ratio $810,808,000 / $476,200,000 = 1.70
2006 Current Ratio $957,628,000 / $521,282,000 = 1.84

This ratio analysis tells us that in 2002, Pentair has $1.70 of current assets for every dollar of current liabilities. In 2006, they have $1.84 of current assets for every dollar of current liabilities. Pentair could pay its short-term debt by liquidating about half of its current assets. To be comfortable with our current ratio, we would like to see this number increase.
The quick ratio is another way of analyzing the current assets of the firm with the company’s current liabilities. The only difference is between the quick ratio and the current ratio is that in the quick ratio the inventory is not included in the current assets. As shown in the graph above, the current ratio and the quick ratio have similar trends. A quick ratio is typically used with company’s that have a large inventory in comparison to it total assets. This is not that case for Pentair and the current ratio is probably better ratio to use for analysis.
The sum of all current assets, often referred to as working capital, are assets that Pentair expects to convert into cash within one year. Current assets are considered liquid because they can be transformed into cash in a relatively short amount of time. If Pentair wanted to use all current assets to pay current liabilities, the remaining balance would be net working capital. In 2002, Pentair would have a net working capital of $334,608,000 compared to $436,346,000 in 2006. It’s important for Pentair to monitor cash, inventory and accounts receivable because these items will dictate many financing decisions. Pentair’s financial position seems to be stable based on their recent working capital.
Over the last five year, Pentair has grown as a company. Looking at the total assets of the company can show this growth. In 2002, Pentair’s total assets were about 2.51 billion dollars and in 2006 the company’s assets totaled 3.36 billion dollars. These figures represent a growth of over 30% in five years. It can also be shown that Pentair has done well on making sure that they are receiving a return on their assets. Over the past five years, Pentair has achieved a rate of return of over 5% even with the massive growth. To hold a consistent rate of return while expanding as they have is quite a significant achievement.
One of the most important types of ratios that managers look into is a profitability ratio. These ratios measure how the company’s returns compare with sales, investments, and equity. Managers need to watch the profitability ratios to make sure that the firm’s value holds. The graph below shows three profitability ratios calculated from Pentair’s financial statements. These profitability ratios are described in the following paragraphs.

One profitability ratio is called the Gross Profit Margin. This measurement shows how much profit is being generated by every sales dollar. This is calculated by dividing the Gross profit by the sales.
2002 Gross Profit Margin $381,241,000 / $1,488,453,000 = 25.61%
2006 Gross Profit Margin $906,250,000 / $3,154,469,000 = 28.73%
In this case, Pentair has increased its profit margin in the over the years. A higher profit margin equals higher profits. Although, in the last three years this has leveled off profit margin has remained the same, but the profit margin seems fairly strong at this point.
The Operating Profit Margin ratio is another way to profit margin. This ratio is very similar to the Gross Profit Margin. In this case, we use EBIT instead of gross profit in the numerator. This calculated ratio will always be lower than the Gross Profit Margin. Example calculations for 2002 and 2006 are shown below.
2002 Operating Profit Margin $131,295,000 / $1,488,453,000 = 8.82%
2006 Operating Profit Margin $306,986,000 / $3,154,469,000 = 9.73%
The Operating Profit Margin has increase slightly over the last few years, but I am sure management would like to see this ratio to be higher in the future.
The third profitability shown on the graph above is the Return on Equity ratio. The Return on Equity ratio measures how well Pentair has been able to return money to its stakeholders. This is an important ratio for investors and stakeholders. This is calculated by dividing the Net Earnings Available to Common Stockholders by the Common Stockholders Equity. Of course, the firm is always trying to achieve the highest return possible. Calculations from 2002 and 2006 are shown below.
2002 Return on Equity Ratio $129,902,000 / 1,105,724,000 = 11.75%
2006 Return on Equity Ratio $183,731,000 / $1,669,999,000 = 11.00%
In this case the Return on Equity is a little lower in 2006 than in 2002. This small change may not be too significant and I am sure that investors would like to see an increase in rather a decrease. Investors cannot be too upset over this small decrease, because an 11.00% Return on Equity is pretty good.
Another type of ratios is debt ratios. These ratios measure the ability of Pentair to payoff their debt. Banks and bondholder are especially interested in these ratios. If these ratios are unacceptable, the lenders of Pentair’s fund may withhold their lending. Two types of debt ratios are Debt to Total Assets and Times Interest Earned ratios.

The Debt to Total Asset ratio measures the percentage of Pentair’s that are financed with debt. This is easily calculated by taking the company’s total debt and dividing it by the total assets. Example calculations are shown below for the 2002 and 2006 years.
2002 Debt to Total Assets $1,408,729,000 / $2,514,450,000 = 0.56 or 56%
2006 Debt to Total Assets $1,694,980,000 / $3,364,979,000 = 0.50 or 50%
The trend from graph above shows that Pentair is doing well at managing their debt. The company is reducing debt linearly year after year. Lenders would probably feel fairly comfortable lending to Pentair using this analysis.
The company saw flat sales for the first time in four years in 2006. This mainly came from the downturn in the North American new home market, which that had been leveraging a great deal of their business plan on. The only thing that kept 2006 in great shape was that Pentair has really developed the technical side of their business. They have taken the filtration system to higher industry standards, but they have also focused on heat exchangers and cabinets to house electrical equipment. These cabinets can be found in factories, medical facilities, food production sites and even on security equipment. Pentair’s Integrated Management system wasn’t even around in 2002 and they were able to beat all sales forecasts in the first year. Pentair was also able to mitigate some of their losses in the North American market by shifting the focus to the Middle East, Africa and Europe. The home markets are actually growing there and the focus shows unlimited growth potential.
Pentair was also able to realize that the market they had in 2002 was not going to be available at the end of 2006. The fallout from the mortgage crisis impacted them, as many people were leery about taking on the risk of a new home. They developed new products and moved some to Africa, but they also are redirecting their efforts in North America. Pentair has actually purchased six different companies that have financials that are made up of 85% of North American business. The rise in the value of the Euro to the dollar has made the products more attractive to the European market, so the forecast is calling for higher sales in Europe as well.
The financial strength of the company is incredible. It is even more amazing when the yearly financials are examined as a journey from 2002 through 2006. The most impressive is the jump of the net sales from $1,488,453,000 in 2002 to $3,154,469,000 in 2006. This is an increase of 212%. Another entry on the financial summary that stands out is the diluted earning per share. In 2002, the value was .75 per share and in 2006 we see an increase to $1.81 per share. This shows the earnings per share have increased by 241%. The other factors to consider when examining the financials are the amount of debt the company has taken on in 2006 versus earlier years and what amount of shareholder’s equity is available. The total debt has only risen slightly from $735,000,000 in 2002 to $744,000,000 in 2006, while the total equity has risen from $1,105,724,000 to $1,669,999,000. All of these factors point to a company that is in great financial shape and is trending in the right direction. It is a key factor that the company keeps growing while maintaining a low debt load of 30.8%. As a human resource professional it is important to look at how many employees a company has as well. A company could be automating or streamlining and this would reduce employment numbers slightly, but when a company is hiring more people or acquiring more businesses, the payroll is expected to increase. The amount of employees at Pentair increased over 172% from 8600 in 2002 to 14800 in 2006.
As this paper has shown, Pentair Incorporated is a very solid investment. The financial statements show a healthy increase in all major categories and that the all important stockholders equity is increasing. The company has made very solid business choices, while keeping the best interests of the stockholders in mind. The company has run into barriers in North America, but their management team has developed a plan that should allow them continued success in 2007.

Bibliography

Pentair Annual Report. (2002). Retrieved December 10th, 2007 from
http://www.pentair.com
Pentair Annual Report. (2006). Retrieved December 10th, 2007 from
http://www.pentair.com
Pentair 10k Report. Retrieved December 10th, 2007 from http://www.sec.gov
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