Pentair plc — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; amounts in millions except per-share data. Pentair provides water-related products through Aquatic Systems, Filtration Solutions and Flow Technologies. The Electrical business, separated in April 2018, is reported as discontinued operations.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $713.6 | $711.4 | $2,202.0 | $2,224.6 |
| Gross profit / margin | $255.0 / 35.7% | $243.8 / 34.3% | $777.3 / 35.3% | $779.7 / 35.0% |
| Operating income / margin | $108.8 / 15.2% | $108.4 / 15.2% | $310.2 / 14.1% | $323.7 / 14.6% |
| Continuing-operations net income | $91.3 | $91.2 | $258.8 | $227.5 |
| Net income, including discontinued operations | $92.3 | $110.1 | $257.9 | $254.5 |
| Diluted EPS, continuing operations | $0.54 | $0.52 | $1.52 | $1.28 |
| Diluted EPS, total | $0.55 | $0.63 | $1.51 | $1.43 |
| Operating cash flow, continuing operations | Not stated by quarter | Not stated by quarter | $266.1 | $299.2 |
| Free cash flow, continuing operations | Not stated by quarter | Not stated by quarter | $221.9 | $265.0 |
- Q3: Sales were nearly flat year over year (+0.3%). Gross margin improved 1.4 percentage points, while operating margin was unchanged. Net interest expense rose 60.5% to $6.9, mainly due to higher average debt.
- Nine months: Sales declined 1.0%, operating income fell 4.2%, but continuing-operations net income increased 13.8%. The lower effective tax rate (14.2% versus 17.0%) and lower interest expense contributed to the net-income increase.
- Balance sheet at September 30: Cash was $113.2; current assets $1,002.6 and current liabilities $694.2. Total debt was $1,118.7, versus $787.6 at year-end 2018; long-term debt was $1,118.7. Total assets were $4,080.4 and equity $1,868.8.
- Liquidity and capital allocation: The $900 million revolving facility had $706.7 available; commercial paper outstanding was $189.7. The company reported compliance with debt covenants. It repurchased $150.0 of shares and paid $92.4 in dividends during the first nine months.
Segments and material changes
| Segment | Q3 sales change | Q3 segment income change | Nine-month sales change | Nine-month segment income change |
|---|---|---|---|---|
| Aquatic Systems | -6.0% | -8.5% | -5.3% | -7.8% |
| Filtration Solutions | +13.8% | +17.4% | +5.9% | +3.5% |
| Flow Technologies | -7.1% | +3.6% | -3.8% | -8.2% |
Management attributed Aquatic Systems weakness to cold, wet weather earlier in the year and elevated channel inventory. Filtration Solutions benefited from the February 2019 Aquion and Pelican acquisitions and Q3 growth in industrial filtration and food and beverage. Flow Technologies was affected by lower agriculture-related volume, weather and divestitures. Pricing actions and productivity savings supported margins, partly offset by labor and raw-material inflation and unfavorable sales mix.
Outlook, risks and unusual items
- Management expected Aquatic Systems results for the remainder of 2019 to be negatively affected by slower first-half sell-through and higher-than-anticipated channel inventory. The filing provides no specific full-year earnings or revenue guidance.
- Key uncertainties include global economic conditions and housing demand, competition and pricing, currency movements, raw-material and labor inflation, weather and seasonality, tariffs and regulatory changes, and execution/integration of acquisitions and restructuring initiatives.
- Aquion and Pelican were acquired for a combined $284.5 cash outlay, net of cash acquired; preliminary purchase-price allocations included $215.5 of acquisition goodwill. Pentair also recorded $18.2 of trade-name and other impairment in the first nine months.
- A $11.8 non-cash pension settlement gain benefited nine-month results. The prior-year comparison included a $17.1 loss on early debt extinguishment and $27.0 income from discontinued operations for the first nine months; 2019 discontinued operations recorded a $0.9 loss.
- The company issued $400.0 of 4.5% notes due 2029 and used net proceeds to partially repay commercial paper. It had $324.0 of fixed-rate notes maturing within 12 months, classified as long-term based on intended refinancing capacity.
- Contingencies include approximately 700 outstanding asbestos claims, environmental matters with reserves described as not material, product-liability claims, and guarantees and indemnities. Management said a material impact from current claims was considered unlikely, while noting litigation outcomes remain uncertain.
Important facts for investors to verify
- Whether Aquatic Systems channel inventory normalizes and the expected remainder-of-2019 weakness materializes.
- How much reported Filtration Solutions growth and goodwill reflects the Aquion and Pelican acquisitions, and whether integration delivers expected benefits.
- Whether operating cash flow and free cash flow recover from the year-over-year nine-month declines as working capital and acquisition effects evolve.
- Debt refinancing plans and covenant headroom, particularly for the $324.0 of notes due within 12 months; the filing does not state current leverage or interest-coverage ratios.
- Whether inflation, foreign exchange, weather, impairment, litigation or environmental developments materially affect future results.