Pentair plc — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual filing, not a standalone Q4 report. Pentair is a diversified industrial manufacturer with four reporting segments: Valves & Controls, Flow & Filtration Solutions, Water Quality Systems, and Technical Solutions.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $6.449 billion | $7.039 billion |
| Gross profit / margin | $2.186 billion / 33.9% | $2.463 billion / 35.0% |
| Operating income / margin | $177.2 million / 2.7% | $851.9 million / 12.1% |
| Net income (loss) attributable to Pentair | $(76.4) million | $214.9 million |
| Continuing-operations EPS, diluted | $(0.36) | $3.14 |
| Cash from continuing operating activities | $750.0 million | $1.005 billion |
| Free cash flow (company-defined, non-GAAP) | $643.0 million | $888.5 million |
| Total debt | $4.710 billion | $3.004 billion |
| Cash and cash equivalents | $126.3 million | $110.4 million |
| Total equity | $4.009 billion | $4.664 billion |
Net sales fell 8.4%: core sales declined 3.9%, currency translation reduced sales 6.6%, and acquisitions contributed 2.1%. The effective tax rate was 187.7%, largely reflecting the non-deductible goodwill impairment and other tax items.
Segment results
| Segment | 2015 sales | Change vs. 2014 | 2015 segment income margin |
|---|---|---|---|
| Valves & Controls | $1.840 billion | (22.6%) | 12.1% |
| Flow & Filtration Solutions | $1.442 billion | (10.1%) | 12.8% |
| Water Quality Systems | $1.382 billion | +1.9% | 20.4% |
| Technical Solutions | $1.809 billion | +4.7% | 21.8% |
Segment income is a company-defined measure that excludes specified items, including intangible amortization, restructuring and impairments; it is not equivalent to GAAP operating income.
Material changes and unusual items
- Fourth-quarter non-cash impairment charges totaled $554.7 million: $515.2 million of goodwill and $39.5 million of trade names in Valves & Controls. The charge followed further deterioration in oil and gas markets and a reduced outlook for that business.
- Operating income also reflected $117.8 million of restructuring costs, $35.7 million of inventory fair-value step-up costs related to 2015 acquisitions, and $14.3 million of deal costs. A $23.0 million pension and post-retirement mark-to-market gain partly offset expenses.
- Pentair acquired ERICO for approximately $1.8 billion in September and Nuheat for $96.0 million in April. ERICO contributed $147.0 million of sales and $12.7 million of net income after acquisition. The ERICO purchase-price allocation remained preliminary.
- Debt increased to $4.710 billion, primarily to finance ERICO. Pentair issued senior notes in September 2015 and repaid $350.0 million of notes due that year.
- The Water Transport business in Australia was sold during 2015 and reported as discontinued operations. The 2014 comparison included a $380.1 million after-tax loss on its sale/impairment.
Liquidity, outlook and management commentary
At year-end, current assets were $2.781 billion and current liabilities were $1.487 billion. The amended revolving credit facility had $1.139 billion of stated availability, constrained to $640.6 million by its leverage covenant. Pentair reported compliance with all debt covenants. Cash of $64.2 million was held in countries where repatriation was restricted or could have significant tax consequences. Management stated it expected available cash, operating funds and credit facilities to meet foreseeable needs.
Management expected depressed oil prices and headwinds in energy and industrial markets to continue through 2016, and expected the strong U.S. dollar to remain a headwind. It planned continued restructuring into 2016, with anticipated margin benefits, and identified debt reduction, operating efficiency, product innovation and market expansion as priorities. The filing does not provide specific 2016 revenue or earnings guidance. Expected 2016 capital expenditures were approximately $140 million. The Board approved a planned 2016 annual dividend of $1.34 per share, subject to applicable approvals and conditions.
Risks, contingencies and other matters
- Approximately 52% of 2015 sales were outside the U.S.; foreign currency translation reduced 2015 results by 6.6%. Oil and gas weakness, lower industrial capital spending, economic slowdowns in developing markets, and seasonal or weather-driven demand are key business risks.
- Goodwill and intangible assets totaled $7.746 billion, approximately 65% of total assets. Further deterioration in cash-flow expectations could lead to additional impairment.
- Approximately 4,100 asbestos claims were outstanding. The recorded asbestos liability was $237.9 million, with an estimated insurance-recovery receivable of $111.0 million; actual claims and recoveries may differ materially from estimates.
- Environmental reserves were $22.8 million. The company cautioned that unknown conditions or changing requirements could increase costs beyond recorded reserves.
- Legacy tax-sharing arrangements and historical Tyco tax examinations create potential exposure. Tyco announced a tentative IRS settlement in January 2016, but it was conditional; Pentair stated it could not assure final resolution or quantify any potential future effect with certainty.
- Financial leverage increased following the ERICO acquisition; covenant headroom, refinancing needs and the ability to generate cash for debt service and investment merit attention.
Important facts for investors to verify
- Whether Valves & Controls demand, valuation assumptions and margins stabilized after the 2015 impairment.
- ERICO integration progress, realized synergies, final purchase accounting and the effect of acquisition financing on leverage.
- Debt reduction, covenant capacity, cash generation and the sustainability of dividends amid lower operating cash flow.
- Developments in asbestos claims and insurance recoveries, environmental obligations, and the contingent tax-sharing matters.
- Whether 2016 restructuring savings and planned capital expenditures translated into improved operating performance.