Pentair (PNR)

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Geoffrey Jordan

Pentair Inc. (NYSE: PNR) is a manufacturer of fluid pumps and water treatment systems, in addition to specialized enclosures for electronic equipment. Pentair's Water Group manufactures pumps for commercial and municipal water projects, filtration and water treatment equipment, and water systems for pools and spas.^[1] Pentair also manufactures enclosures and thermal management systems such as cabinets, cases, and heat exchangers for sensitive electrical devices used in the telecommunications industry.^[1] Pentair's revenue in 2009 reached $2.7 billion.^[2]

Increasing competition in the water technology industry has forced Pentair to restructure its business and to focus on filtration and flow technology. In 2008, Pentair formed a joint venture with General Electric called Pentair Residential Filtration.^[3] In 2007, Pentair acquired a number of small companies, including Calmark Corporation, Porous Media Corporation, and Jung Pumpen GmbH.^[4] Pentair has also divested several of its businesses, including its pool tile, spa, and bath businesses.^[4] These divestitures have allowed Pentair's Water Group to focus on its core pool equipment business and to pay off debt.

Pentair's Water Group sales are largely driven by the residential housing market. Pentair estimates that construction of new homes and new pools in North America accounts for 12% of its total sales, and approximately 50% of Pentair's sales are generated by commercial and residential real estate markets.^[5] In 2008, banks' stringent lending standards led to high housing inventories despite falling mortgage rates, depressing housing prices. The overall downturn in the economy has taken a toll on the residential and commercial real estate markets and Pentair's sales in North America. Although the Asia-Pacific market constituted only 7 percent of Pentair's water sales in 2009, growing demand for clean water in emerging markets such as China and India has boosted overseas sales, partially offsetting falling water sales in North America and Europe.^[5]

Company Overview

Pentair's Water Group manufactures products and systems such as pumps and filters for the movement, storage, and treatment of water.^[1] Pentair's Technical Products Group manufactures enclosures and thermal management systems for sensitive electrical devices used in residential, commercial, and industrial applications.^[1]

Business and Financial Metrics

First Quarter 2010 Summary
Pentair reported first quarter sales of $707 million, up 12 percent year-over-year compared with $634 million in the first quarter of 2009.^[6] The company delivered first quarter operating income of $64 million, up 71 percent year-over-year.^[6] Pentair's Water Group delivered $478 million in sales, a 13 percent increase year-over-year.^[6] Pentair's Technical Products Group delivered first quarter 2010 sales of $229 million, an increase of 9 percent versus the year-earlier period.^[6]

^[7]

Acquisitions and Divestitures

Pentair did not have any acquisition activity in 2009. In November 2008, Pentair sold its spa and bath business to Balboa Water Group. Pentair used the cash proceeds from the sale to pay down debt.^[8]

In February 2008, Pentair sold its National Pool Tile business unit to Pool Corporation in a cash transaction.^[9] Pentair sold this business unit in order to focus on its core pool equipment business.

In May 2007, Pentair acquired Calmark Corporation as part of its Technical Products Group for $28.5 million.^[4] Calmark’s product portfolio includes enclosures, guides, card locks, retainers, extractors, card pullers and other products for the aerospace, medical, telecommunications and military markets.

In April 2007, Pentair acquired Porous Media Corporation as part of its Water Group for $224.9 million.^[4] Porous Media is a privately held filtration and separation technologies business. Porous Media’s product portfolio includes high-performance filter media, membranes, and related filtration products and purification systems for liquids, gases and solids. Porous Media enhances the technical capabilities of Pentair's Water Group, especially in engineering, material science, and media development.^[4]

In February 2007, Pentair acquired as part of its Water Group Jung Pumpen GmbH (“Jung Pump”) for $229.5 million.^[4] Jung Pump is a German manufacturer of wastewater products for municipal and residential markets. Jung Pump is known for its new line of water re-use products, submersible wastewater and drainage pumps, and wastewater disposal units and tanks. The acquisition of Jung Pump has expanded Pentair's presence in Europe, as it owns training facilities and sales offices in several countries in Western and Eastern Europe.^[4]

Partnership with General Electric Company (GE)

In June 2008, Pentair announced a partnership with GE Water & Process Technologies. The venture combines the global water softener and residential water filtration businesses of the two companies. The venture, called Pentair Residential Filtration, is 80% owned by Pentair and gives Pentair access to GE's membrane filtration technology.^[3] Pentair Residential Filtration serves as the primary sales channel for Pentair’s and GE’s global residential water filtration and water softener businesses.^[3] It also serves as the manufacturing arm for residential and commercial tanks, valves, and some limited filtration products for the parent companies.^[3] Pentair and GE continue to serve municipal, commercial, and industrial water treatment customers separately, but they both source products from Pentair Residential Filtration.

Business Segments

Water Group (68% of total sales)^[10]

Pentair's Water Group provides products and systems used worldwide in the movement, storage, and treatment of water. In 2009, the Water Group's sales totaled $478 million, a 13% year-over-year increase.^[10] Residential flow sales increased 12% due to demand for de-watering products to protect homes from heavier than normal flooding. Residential filtration sales increased 14% and pool sales increased 25% as the U.S. residential market recovered from the financial crisis. However, commercial water systems were down due to a weak commercial construction market globally.^[10]

Water Segment: Breakdown of Businesses and Geographic Distribution of Revenue^[10]

Technical Products Group (32% of total sales)^[10]

Pentair's Technical Products Group designs and manufactures enclosures that house and protect sensitive electronics and thermal management products. Products include metallic and composite enclosures, cabinets, cases, subracks, backplanes, heat exchangers, and blowers.^[11] The Technical Products Group sells it products for applications in industrial machinery, data communications, networking, telecommunications, automotive, medical, security, defense, and general electronics. The Technical Products Group distributes its products through electrical and data contractors, electrical and electronic components distributors, and original equipment manufacturers. The Technical Products Group generated 2009 revenues of $229 million, an increase of 9% over the year-ago period. The increase in sales was caused by strong sales in the industrial, infrastructure, and general electronics markets.

The Technical Products Group encompasses the following brands: Hoffman, Schroff, McLean Cooling Technology, Calmark, Birtcher, Aspen Motion Technologies, and Taunus.^[7]

Breakdown of Technology Products market and geographic distribution.^[7]

Key Trends and Forces

Weak residential and commercial construction markets contribute to declining sales volume

Pentair estimates that construction of new homes and new pools in North America accounts for 12% of its total sales.^[5] Similarly, approximately 50% of Pentair's sales are generated by commercial and residential real estate markets.^[12] When new construction for residential housing fell over the last three years, Pentair's revenue declined dramatically, especially in the pool/spa and flow technologies market; Pentair's revenue was down 10 percent from the third quarter of 2007 in the third quarter of 2008.^[13] Pentair's consolidated net sales decreased by 19.7% from 2008 to 2009, in large part due to lower sales of pump, pool, and filtration products related to the downturn in residential housing markets in North America and Western Europe.^[14]

Pentair has responded to the downturn in the housing market by scaling back its workforce and closing facilities. In December 2008, Pentair announced that it would cut 1,600 jobs, or 10 percent of its work force.^[15] Pentair also announced that it would freeze hiring and salaries and that it would operate 15 fewer facilities by the end of 2009 than it had at the end of 2007.^[15]

A weak U.S. dollar and growing demand for clean water in developing countries have boosted overseas sales

Pentair has steadily expanded its water treatment business in India and Asia. A weak U.S. dollar and increasing international demand for water filters and pumps boosted Pentair's revenue in Asia. Although the Asia-Pacific region constituted only 7 percent of Pentair's Water Group sales in 2009, double digit growth in sales in this region have partially offset weakening sales in North America and Europe.^[5]

Pentair's water sales in Asia continue to grow due to industrialization and population growth in countries such as China and India. China's water resources are among the lowest in the world per capita, and close to 600 million people in China have water supplies that are contaminated by animal and human waste.^[16] In northern China, a region that produces 45 percent of the country's economic output and is home to 40 percent of its population, the annual renewable per capita water supply falls 50 percent below the United Nations-defined danger threshold for minimum social and economic stability.^[16] Water scarcity continues to constrain China's economic growth and limit economic efficiency: China uses 7-15 times more water to produce a unit of GDP than developed economies.^[16] This represents a tremendous opportunity for Pentair's Water Group to provide filtration solutions to municipalities in developing countries that are increasingly demanding clean water.

Product liability litigation reduces Pentair's profit margin

Pentair has faced litigation for product liability which has resulted in considerable costs to the firm. For example, twenty-eight separate lawsuits involving 29 plaintiffs and a class action suit were brought against Essef Corporation, a company acquired by Pentair in August 1999.^[5] Essef designed, manufactured and marketed two sand swimming pool filters that were installed as a part of the spa system on the Horizon cruise ship, owned by Celebrity Cruise Lines. The filters allegedly contained Legionnaire’s disease bacteria that infected passengers on cruises in July 1994. The individual and class claims by passengers were tried and resulted in an adverse jury verdict finding Essef contributorily liable, and Pentair paid $7.0 million in punitive damages and interest of $1.6 million in January 2004.^[5] In June 2007, Pentair also paid Celebrity Cruise Lines damages for lost revenue of $15.2 million.^[5] Pentair settled the suit by paying $35 million to Celebrity in August 2008, a portion of which was covered by insurance. Pentair recorded a charge of $20.4 million in 2008 as legal settlement.^[17]

Competition

Competition in commercial and residential flow technologies markets focuses on brand names, product performance, quality, and price. While home center and national retailers are important for residential lines of water and wastewater pumps, they are much less important for commercial pumps. For municipal pumps, competition focuses on performance to meet required specifications, service, and price.^[18] Competition in the technical products markets (telecommunications, data) is driven by product design, prototyping, global supply, price competition, and customer service. Pentair's primary competitors include:

• ITT Corporation (ITT) is the largest supplier of pumps and systems in the transport and treatment of water for commercial and industrial applications, reporting $11 billion in revenue in 2009.^[19]
• Flowserve (FLS) competes with Pentair for precision equipment used to regulate fluids through the use of pumps, valves and seals.^[20]
• General Electric Company (GE) has a Water & Process Technologies business that is a supplier of water treatment, wastewater treatment, and process systems. General Electric competes directly with Pentair's Water Group.
• Emerson Electric Company (EMR) has a Process Management business which provides wastewater treatment and other water services that compete with Pentair's Water Group. Emerson also has a Network Power business which provides power and environmental conditioning to telecommunication systems, data networks and critical business applications. This business competes with Pentair's Technical Products Group.

References

1. ↑ ^{1.0 1.1 1.2 1.3} PNR 10-K 2007 Item 1 "General" p.3
2. ↑ Wikinvest: "Pentair"
3. ↑ ^{3.0 3.1 3.2 3.3} "Pentair and GE Water & Process Technologies Form Global Residential Water Filtration Joint Venture" 30 June 2008
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5 4.6} PNR 10-K 2007 Item 1 "Acquisitions" p.6
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6} Pentair 10-k 2009
6. ↑ ^{6.0 6.1 6.2 6.3} Trading Markets: "Pentair Reports First Quarter 2010 Net Income Per Share from Continuing Operations of $0.35 on 12 Percent Growth in Sales" April 27, 2010
7. ↑ ^{7.0 7.1 7.2} Pentair: " 2009 Annual Report
8. ↑ Yahoo Finance: "Pentair sells spa, bath unit to Balboa Water Group" 18 Nov. 2008
9. ↑ PNR 10-K 2007 Item 1 "Discontinued operations/divestitures" p. 7
10. ↑ ^{10.0 10.1 10.2 10.3 10.4} Pentair: "Pentair Reports First Quarter 2010 Net Income Per Share from Continuing Operations of $0.35 on 12 Percent Growth in Sales
11. ↑ PNR 10-K 2007 Item 1 "Technical Products Group" p.5
12. ↑ Star Tribune: "Pentair's growth starts overseas"
13. ↑ PNR 10-K 2007 Item 1A "Risk Factors" p.9
14. ↑ Pentair 10-K 2009: "Results of Operations" p. 23
15. ↑ ^{15.0 15.1} Minneapolis Business Journal: "Pentair cutting 1,600 jobs, 110 in MN"
16. ↑ ^{16.0 16.1 16.2} China's Imminent Water Crisis
17. ↑ Pentair 10-K 2009: "Horizon Litigation" p. 76
18. ↑ ITT 10-K 2007 Item 1 "Competition" p.5
19. ↑ ITT Data Central: Wikinvest
20. ↑ Google Finance: Flowserve Corporation (FLS)
21. ↑ Google Finance: Pentair
22. ↑ Google Finance: ITT
23. ↑ Google Finance: Flowserve
24. ↑ Google Finance: General Electric Co.
25. ↑ Google Finance: Emerson Electric Company