Pentair, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2010, ended October 2, 2010; comparative periods ended September 26, 2009. The interim financial statements are unaudited. Pentair reported two segments: Water and Technical Products.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $773.7 | $662.7 | $2,276.9 | $1,990.2 |
| Gross profit / margin | $236.5 / 30.6% | $207.0 / 31.2% | $698.4 / 30.7% | $572.7 / 28.8% |
| Operating income / margin | $90.8 / 11.7% | $66.7 / 10.1% | $254.6 / 11.2% | $167.5 / 8.4% |
| Net income attributable to Pentair | $55.1 | $36.9 | $151.5 | $86.1 |
| Diluted EPS from continuing operations | $0.55 | $0.38 | $1.51 | $0.88 |
| Net interest expense | $9.0 | $9.7 | $27.0 | $31.3 |
- Q3 sales rose 16.8%; nine-month sales rose 14.4%. Volume drove most of the increase: 18.5 percentage points in Q3 and 14.3 points year to date. Price and currency were modest offsets in Q3.
- Water sales increased 11.1% in Q3 and 12.2% year to date. Technical Products sales increased 29.9% and 19.3%, respectively.
- Q3 gross margin declined 0.6 percentage point year over year, as raw-material, labor and rebate pressures outweighed volume leverage and productivity savings. Nine-month gross margin improved 1.9 points.
- Operating income increased in both segments. Q3 operating margins were 11.4% for Water versus 11.5% prior year, and 16.3% for Technical Products versus 12.1%. Nine-month margins were 11.5% and 15.4%, respectively.
- Nine-month net cash from operating activities was $249.2, versus $238.7 a year earlier. Capital expenditures were $43.0; company-defined free cash flow was $206.6, compared with $201.7. Free cash flow conversion of continuing-operations net income attributable to Pentair was 138%, versus 234%.
- Cash was $57.0 at quarter-end. Total debt was $677.5, down from $805.6 at December 31, 2009; debt less cash was approximately $620.5. The $800.0 revolving facility had $731.8 available, with no commercial paper outstanding. Pentair was in compliance with its debt covenants.
- Total current assets were $1,056.8 and current liabilities were $572.5. Inventories were $410.1, up from $360.6 at year-end 2009; management attributed the increase in operating cash use partly to working capital.
- Dividends paid in the first nine months were $56.6, or $0.57 per share. The board authorized up to $25.0 of repurchases; $2.8 had been used by October 2, 2010.
Changes, outlook and commentary
- Compared with the prior year, stronger volumes, restructuring savings, operating-efficiency initiatives and lower interest expense supported higher earnings. The Technical Products Group posted the strongest sales and margin improvement.
- Management cited recovery or stabilization in some markets, including residential water-related markets, but said commercial and industrial construction remained weak. It expected that construction markets would decline by more than 10% year over year in 2010.
- Raw-material and other cost inflation had emerged in 2010; management expected commodity-cost pressures to be unfavorable for the remainder of the year. Foreign-exchange effects, particularly euro movements, also affected results.
- On October 26, 2010, after quarter-end, Pentair forecast Q4 sales growth in the mid-single digits year over year and diluted EPS of $0.42–$0.47. It raised full-year 2010 continuing-operations diluted EPS guidance to $1.93–$1.98, from $1.86–$1.96, and forecast approximately 12% revenue growth to about $3 billion. These forecasts assumed no significant acquisitions or divestitures.
- Management’s full-year outlook reflected productivity and volume benefits, partly offset by higher raw-material costs, restored employee benefits and wage increases, and increased R&D and sales-and-marketing investment. The company targeted $225 of free cash flow for 2010; the first nine months produced $206.6.
- The company expected a 32.5%–33.5% full-year effective tax rate. Gross uncertain-tax-position liabilities were $24.6; management did not expect significant payments on these obligations within 12 months.
- Key financing consideration: the $800 revolving facility expires in June 2012. Contractual debt maturities shown included $173.2 in 2012 and $200.0 in 2013. Ratings were investment grade, with stable outlooks from S&P and Moody’s.
- Other notable items: 2010 SG&A benefited from insurance proceeds related to Horizon litigation and other legal settlements; the filing does not state the amount. The 2009 period included a $4.8 loss on early debt extinguishment. The company reported no further material developments in legal proceedings or material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether sales growth and the revised EPS outlook were sustained, particularly given uneven recovery across end markets and the stronger Technical Products contribution.
- How commodity inflation, rebates and foreign exchange affected margins after Q3, and whether pricing and productivity initiatives offset those pressures.
- Working-capital trends, especially inventory and receivables, and delivery against the $225 free-cash-flow target.
- Debt repayment and refinancing plans ahead of the 2012 revolving-facility expiration and disclosed 2012–2013 maturities; monitor covenant headroom and ratings.
- The recurring versus nonrecurring contribution of insurance and legal-settlement proceeds to reported SG&A and segment earnings.
- Exposure to pension obligations, uncertain tax positions, and the residential, pool, commercial-construction and industrial markets.