Pentair, Inc. — Form 10-Q summary
Business context and reporting period
This filing is for Pentair, Inc. and subsidiaries, covering the 13 weeks ended April 2, 2011, compared with the 13 weeks ended April 3, 2010. The company operated through its Water and Technical Products groups. The filing identifies the registrant as Pentair, Inc., rather than Pentair plc.
Financial results
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $790.3 million | $707.0 million |
| Gross profit / margin | $249.1 million / 31.5% | $213.7 million / 30.2% |
| Operating income / margin | $86.2 million / 10.9% | $63.6 million / 9.0% |
| Net income attributable to Pentair | $50.5 million | $35.3 million |
| Diluted EPS | $0.51 | $0.36 |
| Operating cash flow | $(48.2) million | $(10.3) million |
| Free cash flow | $(61.4) million | $(22.2) million |
Sales increased 11.8% year over year, comprising 10.8 percentage points from volume, 0.4 from price, and 0.6 from currency. Water Group sales rose 7.8% to $515.4 million; Technical Products sales rose 20.1% to $274.9 million. Management attributed growth to stronger demand in several product markets, including residential-related markets, industrial and electronics markets, and fast-growth regions.
Gross margin expanded 1.3 percentage points. Management cited volume leverage, operating-efficiency savings, and selective price increases, partly offset by raw-material and labor inflation. Net interest expense was $9.3 million, down from $9.5 million. The effective tax rate was 32.5%, versus 33.5%.
Balance sheet, liquidity, and debt
At April 2, 2011, cash was $57.1 million, total debt was $808.4 million, and shareholders’ equity was $2.28 billion. Debt was up from $707.5 million at December 31, 2010. Current assets were $1.21 billion and current liabilities were $546.4 million. The company reported $602.7 million available under its $800 million revolving credit facility, which expires in June 2012, and said it was in compliance with its debt covenants, including a maximum leverage ratio of 3.5 to 1.0.
Operating cash use worsened year over year, primarily because of increased working capital, including a $101.5 million use of cash from receivables. The company said first-quarter borrowing is seasonal and typically reverses as demand peaks later in the year. Dividends declared were $0.20 per share, versus $0.19; cash dividends paid totaled $19.8 million.
Material changes, outlook, and risks
- Pentair acquired Brazilian water-filtration company Hidro Filtros on January 31 for $17.0 million; its results were included from the acquisition date.
- On April 2, Pentair agreed to acquire Norit’s Clean Process Technologies division for €503 million (approximately $700 million), plus an expected minimal debt adjustment. Closing was expected in Q2 2011, subject to customary conditions and regulatory approval. The company planned to use cash, its revolver, and new debt.
- Management expected 2011 capital expenditures of approximately $60–$65 million and a full-year effective tax rate of 32%–32.5%. It also expected 2011 free cash flow to exceed net income from continuing operations; first-quarter free cash flow was negative due to seasonal working-capital use.
- Management cited continued economic recovery in many markets, but characterized non-residential construction prospects as mixed. Raw-material inflation and price volatility were expected to continue affecting results.
- Moody’s placed Pentair’s Baa3 issuer rating under review for possible downgrade on April 4, 2011. The company warned that debt would increase materially to fund the CPT acquisition, raising interest costs and financial risk. Acquisition closing, integration, financing, foreign-market exposure, currency movements, and commodity costs were identified as risks.
- The filing reported no material changes in market risk and no further material developments in legal proceedings or contingencies compared with the 2010 Form 10-K. Gross uncertain-tax-position liabilities were $24.5 million; no significant payment was expected within 12 months.
Important facts for investors to verify
- Whether the CPT acquisition closed as expected, its final purchase-price adjustment, financing mix, and resulting leverage.
- Whether working capital—particularly receivables—converted to cash in subsequent quarters and supported management’s full-year free-cash-flow expectation.
- How sales, margins, and pricing responded to continued input-cost inflation and market conditions.
- The outcome of Moody’s rating review and any effect on borrowing costs, commercial-paper access, or liquidity.
- Whether the stated 2011 capital-spending and tax-rate expectations were achieved.