Pentair plc — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results; amounts in U.S. dollars. Pentair supplies residential, commercial and industrial water-treatment, pool, pump and flow products through Consumer Solutions and Industrial & Flow Technologies.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $798.5 million | $713.6 million | $2,221.8 million | $2,202.0 million |
| Gross profit | $277.4 million | $255.0 million | $774.1 million | $777.3 million |
| Gross margin | 34.7% | 35.7% | 34.8% | 35.3% |
| Operating income | $128.1 million | $108.8 million | $339.9 million | $310.2 million |
| Net income | $110.8 million | $92.3 million | $255.6 million | $257.9 million |
| Diluted EPS | $0.66 | $0.55 | $1.53 | $1.51 |
- Q3 operating margin rose to 16.0% from 15.2%; nine-month operating margin rose to 15.3% from 14.1%.
- Q3 continuing-operations income was $110.8 million, versus $91.3 million. Nine-month continuing-operations income was $257.3 million, versus $258.8 million.
- Q3 effective tax rate was 11.5%, compared with 9.8%; the nine-month rate was 19.9%, compared with 14.2%.
- Nine-month operating cash flow was $500.3 million, including $500.8 million from continuing operations, versus $264.7 million and $266.1 million, respectively, in 2019. Free cash flow was $456.0 million, versus $220.5 million.
- Capital expenditures were $44.4 million. Cash and cash equivalents were $82.6 million at September 30, 2020, compared with $82.5 million at year-end 2019.
- Total debt was $805.2 million on the balance sheet, down from $1,029.1 million at year-end 2019. The filing reports $813.6 million of contractual debt before unamortized issuance costs and discounts. Pentair had $897.8 million available under its senior credit facility and was in compliance with debt covenants.
- Current assets were $963.5 million and current liabilities $818.9 million, compared with $1,061.9 million and $749.0 million at year-end 2019.
Material changes and segment results
- Q3 sales increased 11.9%, mainly on higher Consumer Solutions pool demand and improved residential and irrigation flow sales. Nine-month sales increased 0.9%; volume was slightly lower, offset by price, acquisitions and other factors.
- Consumer Solutions Q3 sales grew 24.9% to $470.8 million and segment income rose 38.9% to $113.8 million. Nine-month sales rose 7.5% to $1,260.8 million and segment income rose 11.0% to $295.3 million.
- Industrial & Flow Technologies Q3 sales fell 2.6% to $327.4 million and segment income fell 23.6% to $42.7 million. Nine-month sales declined 6.7% to $960.1 million and segment income declined 16.0% to $131.5 million.
- Despite higher Q3 gross profit dollars, gross margin contracted 1.0 percentage point, reflecting product mix, higher pool-related transportation and labor costs, COVID-19 safety costs and material inflation. Lower operating expenses helped operating margin improve.
- Nine-month cash generation benefited from a $165.6 million working-capital cash inflow, primarily collections from pool early-buy programs. Investing cash outflow was $70.6 million versus $329.5 million in 2019, when the Aquion and Pelican acquisitions were completed. Financing used $414.8 million, including debt repayments, $115.2 million of share repurchases and $95.4 million of dividends.
Outlook, risks and unusual items
- Management said available liquidity and expected operating cash flows should cover ordinary-course cash needs for the next 12 months, while emphasizing that COVID-19’s future financial impact could not be reasonably estimated. No numerical earnings or sales guidance is provided in the filing.
- Management expected industrial filtration to remain under pressure in Q4 2020; commercial and infrastructure flow demand remained soft. Pool demand was strong and backlog elevated, but the company cautioned that the surge may not continue and that capacity constraints could limit fulfillment. Restructuring actions are expected to support margin growth in 2021.
- COVID-19 caused intermittent facility closures earlier in 2020, supplier and capacity disruption, higher freight and labor costs, and weaker demand in several end markets. All manufacturing facilities were operating at the filing date. COVID-19 health and safety costs were $2.6 million in Q3 and $8.3 million year to date.
- Nine-month results included $5.6 million of restructuring costs. Higher taxes included discrete items associated with the CARES Act and U.S. interest-deduction regulations; the latter produced approximately $14.1 million of tax expense in Q2. The CARES Act provided approximately $28.7 million of cash benefits.
- Other risks include economic recession, continued supply-chain constraints, inflation and pricing volatility, foreign exchange, customer capital-spending weakness, and access or cost of funding. The company had $103.8 million of senior notes maturing within 12 months, classified as long-term based on its stated intent and ability to refinance. It held $56.0 million of cash in countries with repatriation limits or potential tax costs.
- Contingencies include approximately 610 outstanding asbestos claims, environmental matters for which recorded reserves were not material, and $97.3 million of outstanding bonds, letters of credit and bank guarantees. Management said a material impact from current litigation claims was considered unlikely, while acknowledging uncertainty.
Important facts for investors to verify
- Whether pool demand and elevated backlog persist, and whether Pentair can resolve related supply, production, freight and labor constraints.
- How continued COVID-19 effects and weak commercial, industrial and infrastructure markets affect sales, margins, receivable collections and cash flow.
- Whether working-capital cash benefits are repeatable; the nine-month operating cash flow increase included a substantial collections-driven inflow.
- Debt refinancing plans for the $103.8 million maturity, facility availability and covenant headroom as market conditions evolve.
- Potential effects of tax items, restructuring execution, asbestos and other legal matters, guarantees, and restricted cash on future earnings and liquidity.