Pentair plc — Q1 2015 Form 10-Q
Reporting period: Three months ended March 28, 2015; comparative period ended March 29, 2014. Figures are in U.S. dollars unless stated otherwise.
Business context and results
Pentair is a diversified industrial manufacturer with four reporting segments: Valves & Controls, Flow & Filtration Solutions, Water Quality Systems, and Technical Solutions. The company reorganized its segments in Q1 2015 and retrospectively reclassified prior-period segment data.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,475.0 million | $1,644.0 million |
| Gross profit / margin | $510.2 million / 34.6% | $564.1 million / 34.3% |
| Operating income / margin | $171.2 million / 11.6% | $182.1 million / 11.1% |
| Net income from continuing operations | $118.2 million | $125.5 million |
| Net income, including discontinued operations | $113.9 million | $118.6 million |
| Diluted EPS, continuing operations | $0.65 | $0.63 |
| Diluted EPS, total | $0.62 | $0.59 |
| Cash dividends per share | $0.32 | $0.25 |
Revenue fell 10.3%: core growth declined 4.0% (volume down 4.5%, partly offset by price up 0.5%) and currency reduced sales by 6.3%. Gross margin rose 0.3 percentage points and operating margin rose 0.5 points, despite lower sales. SG&A declined to 21.0% of sales from 21.4%; the comparison benefited from $17.4 million of restructuring costs in Q1 2014 that did not recur.
Segments
- Valves & Controls: Sales $429.2 million, down 19.2%; segment income $42.0 million, down 31.0%; margin 9.8%, down 1.7 points. Weak oil and gas, mining, and global capital spending, along with currency, weighed on results.
- Flow & Filtration Solutions: Sales $350.1 million, down 12.7%; segment income $29.1 million, down 16.1%; margin 8.3%, down 0.4 points. Declines reflected agricultural-market weakness, slower capital spending, customer inventory reductions, a lost residential retail customer, and currency.
- Water Quality Systems: Sales $306.9 million, up 1.0%; segment income $49.3 million, up 3.4%; margin 16.1%, up 0.4 points. North American pool and U.S. sales growth helped offset currency.
- Technical Solutions: Sales $395.8 million, down 4.7%; segment income $72.7 million, down 8.0%; margin 18.4%, down 0.7 points. Currency and softer fast-growth-region demand offset growth in North American projects.
Cash flow, debt, and liquidity
- Continuing-operations operating cash flow was a use of $126.2 million, versus a use of $12.7 million a year earlier. Management attributed the outflow primarily to seasonal working-capital investment, including receivables and inventory built ahead of peak sales periods.
- Capital expenditures were $34.8 million; free cash flow, as defined by the company, was negative $158.7 million versus negative $39.5 million. Cash and cash equivalents ended at $131.1 million.
- Total debt was $3,409.0 million, up from $3,004.1 million at year-end; cash-adjusted debt was approximately $3,277.9 million. Long-term debt on the balance sheet was $3,403.4 million. Net interest expense increased 13.0% to $18.2 million.
- Commercial paper outstanding rose to $1,394.1 million from $987.6 million. The $2.1 billion revolving facility backed all commercial paper; reported availability was $696.6 million. Pentair reported compliance with its debt covenants.
- Financing included $406.0 million of net commercial-paper and revolving-debt receipts, $200.0 million of share repurchases, and $57.5 million of dividends paid.
Outlook, commentary, and risks
- Management expected the strong U.S. dollar to continue to pressure results through the rest of 2015, and anticipated continuing market uncertainty and volatile oil prices. It cited softer project orders, particularly in China, Brazil, and the Middle East.
- The company planned further cost take-out actions in 2015 to offset foreign-exchange pressure and core revenue declines. Management continued to target 2015 free cash flow conversion above 100% of net income, while reporting first-quarter free cash flow of negative $158.7 million.
- Fiscal 2015 capital expenditures were expected to be approximately $150 million, primarily for capacity expansion, product development, and maintenance. The filing gives no specific revenue or earnings forecast.
- Management cited continuing raw-material and labor inflation, pricing and competitive pressures, end-market volatility, and risks to planned cost savings, project execution, new-product adoption, and acquisitions. It reported no material change in market risks or previously disclosed risk factors.
- Pentair was exiting its Australian Water Transport business. It sold portions in Q1, receiving $54.9 million, and expected to dispose of the remainder by mid-2015. Discontinued operations generated an after-tax loss of $4.3 million in Q1 2015; Q1 2014 included a $5.6 million after-tax sale/impairment loss.
- Other exposures include approximately 3,500 outstanding asbestos claims, with a recorded liability of $247.5 million and insurance receivable of $112.9 million; environmental reserves were $23.7 million. The company said actual asbestos liabilities or insurance recoveries could differ significantly from estimates.
- In April 2015, after quarter-end, Pentair acquired Nuheat Industries for approximately $96.4 million in cash.
Most important facts for investors to verify
- Whether core demand and project orders recover, particularly in oil and gas, mining, agriculture, and fast-growth regions, and whether currency continues to materially reduce reported sales.
- Whether working capital reverses as seasonal sales peak and the company achieves its full-year free-cash-flow target.
- Debt and commercial-paper trends, revolving-facility availability, covenant headroom, and refinancing of the $350 million senior notes due in 2015.
- Progress and proceeds from the remaining Water Transport disposal, and the financial contribution and integration of the post-quarter Nuheat acquisition.
- Sensitivity of asbestos estimates and insurance recoveries, as well as the resolution of environmental and other indemnification contingencies.