nVent Electric plc — Q1 2018 Form 10-Q Summary
Business context and reporting period
Unaudited condensed combined results for the three months ended March 31, 2018, compared with March 31, 2017. nVent provides electrical connection and protection solutions through three segments: Enclosures, Thermal Management, and Electrical & Fastening Solutions.
The results reflect the Electrical business as historically operated within Pentair and include allocated Pentair corporate costs. Pentair completed the separation on April 30, 2018; nVent began regular-way trading on the NYSE under “NVT” on May 1, 2018.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $538.9 million | $502.2 million | 7.3% |
| Gross profit | $208.9 million | $198.7 million | 5.1% |
| Gross margin | 38.8% | 39.6% | Down 0.8 points |
| Operating income | $65.6 million | $67.6 million | Down 3.0% |
| Operating margin | 12.2% | 13.5% | Down 1.3 points |
| Net income | $52.3 million | $55.3 million | Down 5.4% |
| Pro forma diluted EPS | $0.29 | $0.31 | Down $0.02 |
| Operating cash flow | $36.1 million | $87.1 million | Down $51.0 million |
| Free cash flow | $33.0 million | $75.8 million | Down $42.8 million |
Revenue growth consisted of approximately 2.5% volume growth, 0.6% pricing, and 4.2% favorable currency effects. The effective tax rate increased to 18.0% from 16.3%.
Segment performance
| Segment | Q1 2018 sales | Sales change | Q1 2018 segment income | Margin |
|---|---|---|---|---|
| Enclosures | $254.1 million | 12.2% | $40.6 million | 16.0% |
| Thermal Management | $147.9 million | 1.7% | $33.5 million | 22.7% |
| Electrical & Fastening Solutions | $136.9 million | 5.1% | $31.7 million | 23.2% |
Enclosures benefited from industrial and infrastructure growth but experienced inflation and costs associated with manufacturing-footprint rationalization and a new U.S. distribution center. Thermal Management margins improved materially from favorable mix, commercial and residential growth, and lean and supply-management savings, despite lower energy-related demand. Electrical & Fastening Solutions faced energy weakness and inflation, partially offset by pricing and productivity actions.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $836.7 million at March 31, 2018, compared with $26.9 million at December 31, 2017, primarily reflecting $800.0 million of senior-note proceeds.
- Gross debt was $800.0 million, consisting of $300.0 million of 3.950% notes due 2023 and $500.0 million of 4.550% notes due 2028; carrying value was $793.0 million after issuance costs and discounts.
- nVent entered into a five-year $200.0 million term loan and a $600.0 million revolving credit facility, with an option to increase the revolver by up to $300.0 million subject to conditions. nVent drew the $200.0 million term loan in April 2018.
- Management stated that approximately $1.0 billion of indebtedness existed as of April 30, 2018. Cash above $50.0 million was transferred to Pentair in connection with the separation.
- Debt covenants include a maximum consolidated debt-to-EBITDA ratio of 3.75 to 1.00 and a minimum EBITDA-to-interest ratio of 3.00 to 1.00.
- Capital expenditures were $5.4 million in Q1 2018. Fiscal 2018 capital expenditures are expected to be approximately $40 million.
- Outstanding bonds, letters of credit, and bank guarantees totaled $68.9 million at March 31, 2018.
Material changes and unusual items
- Operating income and net income declined despite higher sales because of inflation, investments in manufacturing and distribution capacity, higher SG&A, and $9.7 million of non-recurring separation costs.
- Restructuring costs declined to $2.8 million from $9.3 million. The company reduced approximately 25 employees during the quarter, following approximately 250 reductions in 2017.
- Operating cash flow declined primarily because of an increase in net working capital, including lower cash impacts from accounts payable and employee compensation balances.
- The company adopted ASC 606 revenue guidance using the modified retrospective method. The first-quarter income statement and balance-sheet impact was not material, but revenue recognized over time increased to 27.5% from 14.5%, primarily for certain custom Enclosures products.
- The company adopted ASU 2016-16, resulting in a $174.5 million cumulative reduction to beginning equity, principally from reducing non-current prepaid income tax assets.
- nVent completed a $2.0 million acquisition in Electrical & Fastening Solutions during January 2018.
Outlook, commentary, and risks
Management expects restructuring actions and operational investments to contribute to margin growth in 2018. Priorities include differentiated revenue growth through new products and developing-region expansion, lean and supply-management initiatives, cash-flow improvement, technology development, and talent development. The company expects to fund working capital, capital expenditures, interest, debt service, and dividends through cash, internally generated funds, and credit facilities.
Key risks include raw-material and labor inflation, commodity and currency volatility, energy-market weakness, competition and pricing pressure, execution of restructuring and separation activities, the ability to operate independently from Pentair, acquisition integration, global economic conditions, tax-law changes, litigation, product liability, environmental matters, and compliance with debt covenants. The filing states that there were no material changes to previously disclosed risk factors.
Potentially significant comparability issue: historical corporate cost allocations, centralized cash management, tax arrangements, and benefit-plan treatment may not represent the expenses, capital structure, or cash flows nVent would have incurred as a standalone company.
Facts investors should verify
- Post-separation cash balances, debt balances, term-loan draw, and the effect of transferring excess cash to Pentair.
- Standalone corporate costs and recurring separation-related expenses after transition services and other Pentair arrangements end.
- Progress toward recovering gross-margin pressure from inflation, manufacturing rationalization, and the new distribution center.
- Operating cash-flow conversion and working-capital performance relative to reported earnings.
- Compliance with the 3.75-to-1.00 leverage and 3.00-to-1.00 interest-coverage covenants.
- Final accounting for U.S. tax reform items recorded provisionally in 2017 and the effects of the ASU 2016-16 adoption.
- Execution of the approximately $40 million 2018 capital-expenditure plan and expected productivity benefits.