Pentair plc — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 27, 2015; comparative quarter ended June 28, 2014. Six-month figures compare the first half of 2015 with the first half of 2014. Amounts are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $1,661.2m | $1,834.1m | $3,136.2m | $3,478.1m |
| Gross profit / margin | $566.2m / 34.1% | $646.3m / 35.2% | $1,076.4m / 34.3% | $1,210.4m / 34.8% |
| Operating income / margin | $217.9m / 13.1% | $226.4m / 12.3% | $389.1m / 12.4% | $408.5m / 11.7% |
| Income from continuing operations | $153.9m | $159.2m | $272.1m | $284.7m |
| Net income, including discontinued operations | $147.8m | $161.5m | $261.7m | $280.1m |
| Diluted EPS | $0.81 | $0.82 | $1.43 | $1.41 |
| Operating cash flow from continuing operations | Not presented quarterly | $195.1m | $417.2m | |
| Free cash flow | Not presented quarterly | $151.4m | $360.3m |
Q2 sales fell 9.4% and first-half sales fell 9.8%. Lower volumes and unfavorable currency were the principal pressures; reported sales-change components were volume -3.1% and currency -6.9% for Q2, and volume -3.8% and currency -6.6% for the first half. Price contributed 0.6% in each period. Operating income declined in dollars, but operating margin improved as SG&A fell faster than sales, reflecting lower restructuring costs and cost savings. Net interest expense increased to $18.6m in Q2 and $36.8m for the half. The effective tax rate was 23.0% for the first half, versus 24.1%.
Segments and material changes
- Valves & Controls: Q2 sales declined 21.0% to $496.4m and segment income fell 41.7% to $51.1m. Weak oil and gas, industrial, and mining activity and currency weighed on results.
- Flow & Filtration Solutions: Q2 sales decreased 11.8% to $374.6m; segment income decreased 8.0% to $49.7m. Agricultural weakness, slower capital spending, customer de-stocking, currency and loss of a residential retail customer affected sales. Segment margin improved 0.6 percentage points.
- Water Quality Systems: Q2 sales grew 2.6% to $387.7m and segment income rose 4.5% to $85.7m, supported by pool products and food and beverage solutions; segment margin rose 0.4 percentage points.
- Technical Solutions: Q2 sales were down 0.4% to $407.1m, while segment income rose 5.5% to $80.8m and segment margin increased 1.1 percentage points. Currency offset core growth.
First-half SG&A was $628.5m, down 15.3% year over year; it included $24.0m of restructuring costs versus $52.9m in the prior-year half. The company said it reduced approximately 650 employees during the first half as part of restructuring initiatives.
Liquidity, debt and capital allocation
- At June 27, 2015, cash was $147.3m and total debt was $3,266.2m, up from $3,004.1m at year-end 2014. Long-term debt was $3,260.9m. Commercial paper outstanding was $1,248.4m.
- Availability under the $2.1bn revolving credit facility was $839.1m; the facility backs all commercial paper. Pentair reported compliance with its debt covenants. A $350m senior note matures in December 2015, and the company said it intended and was able to refinance it on a long-term basis.
- First-half operating cash flow from continuing operations declined to $195.1m, primarily reflecting a $184.8m working-capital increase. Free cash flow was $151.4m, compared with $360.3m.
- Capital expenditures were $66.8m; management anticipated approximately $150m for full-year 2015. The company acquired Nuheat for $96.0m net of cash acquired.
- Pentair repurchased $200m of shares in the first half, with $800m remaining under its authorization; management said no additional share repurchases were planned for the remainder of 2015. First-half dividends paid were $115.6m, or $0.64 per share. A $0.32-per-share dividend was declared for payment in August.
Outlook, risks and unusual items
- Management expected the strong U.S. dollar to continue to weigh on results through the rest of 2015. It cited soft project orders, especially in energy and industrial markets, broad global capital-spending weakness, volatile oil prices, customer de-stocking and continuing raw-material and labor inflation.
- Management planned further cost take-out actions during the remainder of 2015 and continued to target full-year free cash flow above 100% of net income. This is a target, not a formal earnings or revenue forecast.
- The company was exiting its Australian Water Transport business. First-half discontinued operations included a $5.6m operating loss and a $4.8m after-tax sale/impairment loss; management expected to dispose of the remainder by year-end 2015.
- Asbestos claims stood at approximately 3,600. Recorded asbestos liabilities were $243.6m, with $112.4m of estimated insurance recoveries. Pentair cautioned that actual liabilities or recoveries could differ materially from estimates. Environmental reserves were $23.0m; the company did not expect environmental matters to materially adversely affect its financial position, results or cash flows.
- Currency translation reduced first-half comprehensive income by $152.6m. Management identified currency movements, end-market conditions, cost savings execution, acquisitions and integration, and completion of the Water Transport disposal among forward-looking risks.
Important facts for investors to verify
- Whether second-half sales and orders stabilize, particularly in Valves & Controls and energy-related markets, and how much currency continues to reduce reported results.
- Whether working capital and inventory improve enough to support management’s full-year free-cash-flow target.
- Debt refinancing, commercial-paper funding and remaining revolving-facility capacity, given higher debt and the December 2015 note maturity.
- Progress and costs from restructuring, integration of Nuheat, and the planned completion of the Water Transport disposal.
- Developments in asbestos claims, insurance recoverability and environmental obligations.