Pentair, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the three and nine months ended October 1, 2011. Pentair reported two segments: Water and Technical Products. The company’s principal strategic development was its May 12 acquisition of Clean Process Technologies (CPT), expanding its water filtration and separation business.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data. Year-over-year comparisons are against the corresponding 2010 periods.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $890.5 | $773.7 | $2,591.0 | $2,276.9 |
| Gross profit | $272.1 | $236.5 | $808.9 | $698.4 |
| Gross margin | 30.6% | 30.6% | 31.2% | 30.7% |
| Operating income | $92.9 | $90.8 | $288.5 | $254.6 |
| Net income attributable to Pentair | $51.1 | $55.1 | $168.3 | $151.5 |
| Diluted EPS | $0.51 | $0.55 | $1.69 | $1.52 |
| Net interest expense | $17.4 | $9.0 | $41.3 | $27.0 |
- Sales and segments: Consolidated sales increased 15.1% in Q3 and 13.8% year to date. Water Group sales rose 19.9% and 14.4%, respectively; Technical Products sales rose 5.7% and 12.5%.
- Cash flow: Nine-month operating cash flow was $240.6 million, versus $249.2 million. Capital expenditures were $53.1 million, versus $43.0 million. Company-defined free cash flow was $187.6 million, versus $206.6 million.
- Liquidity and debt: October 1 cash was $52.7 million. Total debt, including current maturities, was $1.348 billion, compared with $707.5 million at December 31, 2010. The company had $518 million available under its $700 million revolving credit facility and reported compliance with debt covenants.
Material changes and notable items
- Revenue growth reflected the CPT acquisition, pricing, favorable currency and stronger demand in several pump, pool, filtration, industrial, electronics and energy markets. CPT accounted for $142.2 million of sales and a $2.9 million loss from acquisition through October 1; its results included $11.1 million of non-recurring purchase-accounting charges.
- Q3 net income and diluted EPS declined despite higher sales and operating income. Higher debt-related interest expense was a major factor: Q3 interest expense increased 94% year over year. SG&A rose to 17.9% of sales from 16.7%, including CPT integration costs and intangible amortization.
- Technical Products operating margin improved to 17.6% in Q3 from 16.3%; Water Group margin declined to 9.7% from 11.4%, reflecting CPT’s lower margins and acquisition-related costs, inflation and prior-year legal settlement proceeds.
- The $715.3 million CPT purchase was funded in part through a $500 million issue of 5.00% senior notes due 2021 and revolving-credit borrowings. Goodwill increased substantially, including $451.8 million recorded for CPT, none tax deductible.
Outlook, risks and contingencies
- Management expected 2011 capital expenditures of approximately $70 million and continued to expect free cash flow to exceed income from continuing operations. The filing provides no specific revenue or EPS guidance.
- Management described housing and pool markets as stabilized but still historically weak, and the industrial outlook as mixed. Material and other cost inflation and raw-material price volatility remained concerns; pricing and operating-efficiency initiatives were intended to offset cost pressures.
- Key risks include CPT integration and increased leverage, economic and end-market weakness, competition and pricing pressure, input-cost inflation, foreign currency and international operating risks, and potential goodwill or intangible-asset impairment. The company reported $1.348 billion of debt and noted that its leverage covenant becomes more restrictive after October 1.
- The company reported no material changes in market risk, no further material developments in legal proceedings or contingencies from its 2010 Form 10-K, and effective disclosure controls.
Important facts for investors to verify
- Whether CPT integration delivers expected sales, cost savings and margins, and how much of reported growth is organic versus acquisition-related.
- Debt reduction, interest costs, covenant headroom and refinancing plans, including $105 million of private-placement debt maturing in May 2012.
- Cash conversion and working-capital trends, given lower year-to-date operating cash flow and free cash flow than in 2010.
- Water Group margin recovery amid CPT purchase-accounting charges, inflation and weak residential end markets.
- Future impairment exposure: goodwill and intangible assets totaled approximately $3.136 billion, about 64% of reported assets.