nVent Electric plc — Form 10-Q Summary
Business context and reporting period
nVent Electric plc is a global provider of electrical connection and protection solutions, operating through Enclosures, Thermal Management, and Electrical & Fastening Solutions. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. nVent became an independent public company following its April 30, 2018 separation from Pentair.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $539.5 million, down 0.6% | $1,077.5 million, down 0.4% |
| Gross profit | $212.2 million; 39.3% margin | $422.1 million; 39.2% margin |
| Operating income | $87.0 million; 16.1% margin | $164.5 million; 15.3% margin |
| Net income | $60.9 million | $117.3 million |
| Diluted EPS | $0.35 | $0.67 |
| Operating cash flow | Not separately provided | $57.8 million |
| Free cash flow | Not separately provided | $46.3 million |
SG&A was $113.1 million in the quarter and $233.2 million year to date, benefiting from the absence of 2018 separation costs and restructuring and lean initiatives. Net interest expense increased to $11.9 million in the quarter and $22.4 million year to date. The six-month effective tax rate was 16.3%, compared with 16.7% in 2018.
Cash and cash equivalents were $25.3 million at June 30, 2019, compared with $159.0 million at December 31, 2018. Total debt was $1,056.1 million, including $119.0 million drawn on the revolving facility and $142.5 million under the term loan. Revolving-facility availability was $481.0 million, and the company was in compliance with its debt covenants. Current and long-term lease liabilities totaled $45.2 million.
Working capital reduced operating cash flow: receivables, inventories, other current assets, accounts payable, employee compensation, and other current liabilities produced a net negative impact of approximately $112.2 million in the first half. Financing cash outflows included $235.7 million of share repurchases and $61.5 million of dividends, partly offset by $119.0 million of revolving-debt borrowings.
Material changes versus the prior comparable period
- Sales declined modestly because organic growth and pricing were more than offset by unfavorable foreign-currency effects. Second-quarter organic growth was 1.4%, while currency reduced sales by 2.0%.
- Gross margin decreased 1.1 percentage points in the quarter and 0.4 percentage points year to date, primarily from raw-material, labor, and freight inflation and lower volume leverage.
- Operating margin improved 4.1 percentage points in the quarter and 3.2 percentage points year to date, mainly because 2018 included $24.8 million of second-quarter and $34.5 million of first-half separation costs.
- Net income increased 40.6% in the quarter and 22.8% year to date; diluted EPS increased to $0.35 from $0.24 in the quarter and to $0.67 from $0.53 year to date. Average diluted shares declined due to repurchases.
- Enclosures sales increased 1.7% in the quarter and 1.1% year to date. Thermal Management sales decreased 7.3% and 4.5%, respectively, while Electrical & Fastening Solutions sales increased 1.8% and 1.1%.
- Restructuring costs were $1.1 million in the quarter and $4.7 million year to date, including a reduction of approximately 50 hourly and salaried employees.
Guidance, outlook, risks and unusual items
Management’s 2019 objectives include differentiated revenue growth, lean and supply-management improvements, technological investment, and global talent development. Management estimated a 2019 annual effective tax rate of 19% to 20%, with an estimated rate at or near 18% for 2020. Proposed U.S. Treasury regulations concerning interest deductibility could increase the annual effective tax rate by approximately 300 basis points if finalized as written.
Management cited continued material and cost inflation, tariffs, pricing pressure, foreign-exchange volatility, slower capital spending, global economic conditions, and the need to execute restructuring and productivity initiatives. The company also faces acquisition-integration, competition, backlog-delivery, regulatory, litigation, and product-acceptance risks.
On July 26, 2019, nVent agreed to acquire Eldon Holding AB for approximately €117 million, or approximately $130 million, subject to customary conditions and regulatory approval. The transaction was expected to close in the third quarter of 2019 and was to be funded with cash and revolving-credit capacity.
At June 30, 2019, outstanding bonds, letters of credit, and bank guarantees totaled $68.5 million. Management reported no material changes to previously disclosed legal proceedings or risk factors, and no material warranty liability. Disclosure controls were considered effective.
Investor verification points
- Verify the sustainability of margin improvement after the nonrecurring 2018 separation-cost comparison benefit.
- Monitor Thermal Management demand, capital-spending trends, inflation, tariffs, and the company’s ability to recover costs through pricing.
- Assess liquidity after share repurchases, dividends, working-capital investment, and the planned Eldon acquisition.
- Review debt maturities, covenant headroom, interest-rate exposure, and the limited cash held in jurisdictions with repatriation restrictions.
- Evaluate the final U.S. tax regulations and their effect on the effective tax rate.
- Reconcile reported operating cash flow with earnings and investigate the negative working-capital impact during the first half.