Pentair plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Pentair provides water-related products through Aquatic Systems, Filtration Solutions and Flow Technologies. The Electrical business was separated in April 2018 and is reported as discontinued operations.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $688.9 million | $732.6 million | Down 6.0% |
| Gross profit / margin | $235.6 million / 34.2% | $253.3 million / 34.6% | Margin down 0.4 points |
| Operating income / margin | $67.6 million / 9.8% | $92.7 million / 12.7% | Down 27.1% |
| Continuing-operations net income | $52.4 million | $58.4 million | Down 10.3% |
| Net income, including discontinued operations | $51.3 million | $102.9 million | Prior period included $44.5 million income from discontinued operations |
| Diluted EPS from continuing operations | $0.30 | $0.32 | Down $0.02 |
Cash flow: Continuing-operations operating cash flow was a use of $257.1 million, versus a use of $194.0 million; continuing free cash flow was negative $273.6 million, versus negative $205.5 million. Management attributed the 2019 cash use primarily to a $344.1 million working-capital increase, especially receivables ahead of distributors’ peak season. Capital expenditures were $16.8 million.
Balance sheet and funding: Cash was $78.9 million at March 31, 2019. Total debt was $1.371 billion, up from $787.6 million at year-end, primarily reflecting commercial paper borrowings used for acquisitions and working capital. Commercial paper outstanding was $681.2 million; availability under the $800 million revolving facility was $113.8 million. The company reported compliance with debt covenants. It had $403.6 million of fixed-rate notes maturing in the next 12 months, classified as long-term based on its stated intent and ability to refinance. Current assets were $1.252 billion and current liabilities were $705.3 million.
Material changes and operating performance
- Sales declined due to lower volume (down 6.2%), unfavorable currency (down 2.4%) and weaker demand in weather-sensitive markets; price increases and acquisitions partially offset the decline.
- Aquatic Systems sales fell 8.3%, with segment income down 12.7%; cold, wet weather and elevated channel inventory weighed on pool-related demand.
- Filtration Solutions sales fell 4.9%, while segment income was flat at $33.7 million. Price, productivity and acquisitions supported segment margin.
- Flow Technologies sales fell 4.8% and segment income fell 22.2%; weather-related weakness in higher-margin agriculture products, inflation and divestitures contributed.
- In February, Pentair acquired Aquion and Pelican for $287.2 million in total cash, net of cash acquired. Preliminary goodwill allocations were $94.6 million and $121.9 million, respectively, and remain subject to refinement.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected channel inventory to decline as stronger sell-through resumed in Q2 and Q3; results could be pressured if sell-through or end-market growth did not recover.
- Management cited wet and cold weather, moderating growth in some European filtration markets, raw-material and labor inflation, pricing volatility, foreign exchange, and acquisition integration as risks. It also highlighted growth investment in product development, sales and marketing, and geographic expansion.
- SG&A included a $15.3 million trade-name and other impairment. Segment-income reconciliation also identifies $4.2 million of deal-related costs and $1.7 million of inventory step-up costs. A $3.5 million gain on sale of a business was recorded.
- Asbestos-related claims outstanding were approximately 650. Environmental reserves were described as not material; the company cautioned that changing or unknown conditions could create additional liabilities. Outstanding bonds, letters of credit and bank guarantees totaled $121.6 million.
- Adoption of the new lease standard resulted in recognition of lease assets and liabilities; the company reported no impact on the income statement or cash flows. Management stated disclosure controls were effective and there were no material changes in internal control during the quarter.
Most important facts for investors to verify
- Whether pool and agricultural demand improves and distributor channel inventory falls in Q2 and Q3 as management anticipated.
- How the Aquion and Pelican acquisitions perform, including final purchase-price allocations, integration costs and debt reduction.
- Working-capital and free-cash-flow recovery after the first-quarter seasonal cash outflow.
- Refinancing of the $403.6 million of notes due within 12 months and continued access to revolving credit while commercial paper is elevated.
- Any further impairment, litigation, environmental or indemnification developments beyond the amounts and assessments disclosed in this filing.