Pentair, Inc. — 2010 second-quarter Form 10-Q
Business context and reporting period. The filing identifies the registrant as Pentair, Inc., a Minnesota corporation, with Water and Technical Products operating segments. The quarter ended July 3, 2010; comparisons are with the quarter ended June 27, 2009. Financial statements are unaudited and were reviewed by the independent accountant, not audited.
Financial performance
| Metric | Three months ended July 3, 2010 | Six months ended July 3, 2010 |
|---|---|---|
| Net sales | $796.2 million; up 14.8% | $1,503.2 million; up 13.2% |
| Gross profit / margin | $248.2 million / 31.2% (28.3% prior year) | $461.9 million / 30.7% (27.6% prior year) |
| Operating income | $100.1 million (versus $63.6 million) | $163.7 million (versus $100.8 million) |
| Net income attributable to Pentair | $61.1 million (versus $31.9 million) | $96.4 million (versus $49.2 million) |
| Diluted EPS | $0.61 (versus $0.33) | $0.97 (versus $0.50) |
| Net interest expense | $8.6 million (down 12.9%) | $18.1 million (down 16.3%) |
Quarterly sales rose 12.8% in Water to $549.3 million and 19.4% in Technical Products to $246.8 million. For the first half, segment sales rose 12.8% and 14.2%, respectively. Consolidated operating margin was approximately 12.6% for the quarter, compared with 9.2% a year earlier.
Cash flow and liquidity. First-half operating cash flow was $156.4 million, versus $125.2 million; capital expenditures were $28.9 million. Company-defined free cash flow was $127.7 million, compared with $98.3 million, equal to 134% conversion of continuing-operations net income attributable to Pentair (199% prior year). Cash was $38.6 million at July 3. Current assets were $995.6 million and current liabilities $525.7 million.
Total debt was $737.0 million, down from $805.6 million at December 31, 2009; long-term debt was $734.5 million. The company reported $670.6 million available under its $800 million revolving facility, no commercial paper outstanding, and compliance with debt covenants. Its maximum leverage covenant was 3.5-to-1.0. First-half dividends paid were $37.7 million, or $0.19 per share.
Material changes and management commentary
- Sales recovery and higher volumes, fixed-cost leverage, prior restructuring savings, operating-efficiency initiatives, and selective price increases lifted gross and operating margins. Management also cited an insurance recovery related to Horizon litigation as reducing SG&A in the second quarter.
- Raw-material and labor inflation began to emerge in the first half; selective price increases partly offset it. The company expected higher commodity costs to weigh on results in the rest of 2010.
- Management described housing and pool markets as stabilizing, while expecting overall commercial and industrial construction to decline by more than 10% year over year in 2010. It cited continuing uncertainty about demand, foreign exchange, and the economic recovery.
- Management expected full-year revenue of approximately $2.95 billion, about 10% growth, and raised 2010 diluted EPS guidance on July 29, 2010 to $1.86–$1.96 from $1.75–$1.90. Third-quarter guidance was sales growth above 10% and diluted EPS of $0.49–$0.52. The outlook assumes no significant acquisitions or divestitures.
- Expected 2010 capital expenditures were $55–$65 million. The company reported a $27.9 million gross liability for uncertain tax positions but did not expect a significant related payment within 12 months. No material new developments in legal proceedings or risk factors were reported.
Risks, contingencies, and unusual items
Key risks identified include weaker-than-expected recovery or demand, continued housing weakness, pricing pressure, commodity and sourcing costs, currency movements, customer financial condition, competition, and the ability to realize savings and growth from operating initiatives. Pension obligations, product claims, tax matters, litigation, environmental matters, and potential goodwill or intangible-asset impairment are also relevant risks. No material changes in market risk were reported.
The prior-year comparison includes a $4.8 million loss on early extinguishment of debt in second-quarter 2009; there was no such charge in 2010. First-half restructuring accruals declined to $7.0 million from $14.5 million at year-end 2009, with no restructuring costs incurred in first-half 2010. On July 27, 2010, the board authorized up to $25 million of share repurchases, expiring in July 2011.
Important facts for investors to verify
- Confirm whether improving volume and margin trends persist and whether the stated full-year and third-quarter guidance is achieved.
- Track raw-material inflation, pricing effectiveness, foreign-exchange effects, and the health of housing, pool, industrial, and commercial markets.
- Assess working-capital needs and cash conversion, particularly receivables and inventory, against the company’s free-cash-flow target of $225 million for 2010.
- Monitor debt reduction, revolving-facility availability, covenant headroom, and the 2012 maturity concentration.
- Review the tax-position liability, warranty accruals, pension funding, and any developments in litigation or other contingencies.
- Note that the filing is for Pentair, Inc.; the supplied request metadata names “PENTAIR Plc.”