Pentair plc — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 27, 2014; comparative periods ended September 28, 2013. Financial statements are unaudited. Pentair operates through Valves & Controls, Process Technologies, Flow Technologies and Technical Solutions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,758.4 million | $1,713.3 million | $5,236.5 million | $5,168.7 million |
| Gross profit | $624.7 million | $614.7 million | $1,835.1 million | $1,739.6 million |
| Gross margin | 35.5% | 35.9% | 35.0% | 33.7% |
| Operating income | $267.4 million | $230.0 million | $675.9 million | $501.3 million |
| Operating margin | 15.2% | 13.4% | 12.9% | 9.7% |
| Net income from continuing operations attributable to Pentair | $192.5 million | $165.0 million | $477.2 million | $348.8 million |
| Diluted continuing-operations EPS | $1.00 | $0.81 | $2.43 | $1.70 |
| Net income (loss) attributable to Pentair | $(186.0) million | $172.8 million | $94.1 million | $378.6 million |
| Diluted EPS, total | $(0.95) | $0.85 | $0.48 | $1.84 |
Cash flow, debt and liquidity
- Nine-month operating cash flow from continuing operations was $688.2 million, versus $611.4 million a year earlier. Capital expenditures were $92.5 million, down from $126.3 million; reported free cash flow was $599.8 million, compared with $488.8 million.
- Cash and cash equivalents were $156.6 million at September 27, 2014, down from $256.0 million at year-end 2013. Total debt was $2,963.2 million, up from $2,550.4 million; commercial paper outstanding increased to $945.6 million from $528.9 million.
- At quarter-end, availability under the then-existing revolving credit facility was $494.9 million. In October 2014, the company amended and restated that facility, increasing maximum availability to $2.1 billion and extending maturity to October 3, 2019. Pentair reported compliance with debt covenants at September 27.
- Nine-month financing cash use was $687.3 million, including $850.0 million of share repurchases, $156.2 million of dividends paid and $134.7 million to acquire the remaining 19.9% interest in Pentair Residential Filtration; debt proceeds partly offset these uses.
Material changes and segment results
- Q3 sales increased 2.6%; nine-month sales rose 1.3%. Management cited volume and selective pricing, partly offset by weaker energy, Flow Technologies and certain infrastructure/residential markets, divestiture effects and currency impacts.
- Q3 gross margin declined 0.4 percentage point, primarily due to raw-material and labor inflation. Nine-month gross margin improved 1.3 points, helped by the non-recurrence of merger purchase-accounting inventory and backlog charges, productivity savings and pricing.
- SG&A fell to 18.7% of sales in Q3 from 20.7%; for nine months it was 20.4% versus 22.2%. Savings from restructuring, back-office consolidation and lean initiatives contributed; nine-month costs included $10.3 million related to the redomicile and $53.0 million of restructuring expense.
- Q3 segment sales and operating income: Valves & Controls $613.4 million and $96.4 million; Process Technologies $437.8 million and $58.1 million; Flow Technologies $274.5 million and $38.8 million; Technical Solutions $438.8 million and $96.5 million. Technical Solutions had the strongest Q3 sales growth, up 8.1%; Flow Technologies sales declined 2.5%.
- Comprehensive loss attributable to Pentair was $364.0 million for Q3, including a $178.8 million adverse currency translation adjustment.
Outlook, unusual items and risks
- The company decided to exit its Australian Water Transport business and expected disposal by early to mid-2015. It recorded a $380.1 million after-tax impairment/loss in Q3, based on Level 3 fair-value inputs. The business was classified as discontinued operations; its nine-month sales were $235.4 million, versus $403.0 million.
- Management expected 2014 capital expenditures of approximately $140 million and continued to expect full-year free cash flow above 100% of net income. Its longer-term objective is free cash flow equal to or greater than net income. No specific earnings-per-share or revenue guidance is stated in the provided filing text.
- Management cited ongoing integration and operating-excellence efforts, price actions to mitigate inflation, and focus on growth markets, product development and working-capital reduction. It noted continuing raw-material and labor cost inflation and uncertainty about commodity-price trends.
- Principal disclosed risks include economic and end-market weakness, competition and pricing pressure, project/backlog timing and cancellations, foreign exchange, inflation, acquisition integration, and the uncertain disposition of Water Transport. Other material exposures include asbestos litigation and estimates of related insurance recoveries, environmental matters, tax-sharing obligations and challenges to prior transaction tax treatment.
- Asbestos claims outstanding were approximately 3,200; recorded asbestos liabilities were $250.5 million and related insurance receivables were $116.1 million. Environmental reserves were $33.1 million. The filing cautions actual exposures and recoveries may differ from estimates.
Key facts for investors to verify
- Whether the Australian Water Transport sale closes on the expected timetable and at a value consistent with the recorded impairment.
- Whether continuing-operations growth and margin gains persist after accounting for purchase-accounting comparisons, restructuring and other costs.
- Commercial-paper refinancing, use of the amended $2.1 billion credit facility, debt levels and covenant headroom.
- Cash conversion and progress toward the stated free-cash-flow objective, including working-capital and inventory trends.
- Changes in asbestos claims, insurance recoverability, environmental obligations and shared tax liabilities.