Pentair plc — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless stated otherwise. Pentair supplies water-related products through Consumer Solutions and Industrial & Flow Technologies.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $969.2 million | $798.5 million | $2,776.2 million | $2,221.8 million |
| Gross profit | $334.8 million | $277.4 million | $991.0 million | $774.1 million |
| Gross margin | 34.5% | 34.7% | 35.7% | 34.8% |
| Operating income | $167.3 million | $128.1 million | $486.2 million | $339.9 million |
| Operating margin | 17.3% | 16.0% | 17.5% | 15.3% |
| Net income | $143.6 million | $110.8 million | $404.3 million | $255.6 million |
| Diluted EPS | $0.86 | $0.66 | $2.41 | $1.53 |
Q3 sales grew 21.4%; nine-month sales grew 25.0%. Volume, pricing, acquisitions and favorable currency contributed to growth. Nine-month sales growth was led by Consumer Solutions, up 35.8%, while Industrial & Flow Technologies grew 10.7%.
Q3 Consumer Solutions sales were $613.6 million, up 30.3%, and segment margin was 23.5% versus 24.2%. Industrial & Flow Technologies sales were $355.1 million, up 8.5%, and segment margin improved to 14.8% from 13.0%.
For the nine months, operating cash flow from continuing operations was $540.4 million versus $500.8 million; free cash flow was $505.5 million versus $456.5 million. Capital expenditures were $38.6 million. Cash and equivalents were $173.2 million at quarter-end, versus $82.1 million at December 31, 2020. Debt was $700.9 million, down from $839.6 million; the $900 million revolving facility was undrawn and available. The company reported compliance with debt covenants.
Changes, outlook and risks
- Q3 gross margin declined 0.2 percentage points year over year as inflation in materials, logistics and labor offset pricing, productivity and volume leverage. Nine-month gross margin increased 0.9 points.
- Nine-month net interest expense fell 42.5%, primarily reflecting lower debt and interest rates. The effective tax rate was 14.2% for the nine months, compared with 19.9% in 2020; Q3’s rate rose to 13.3% from 11.5%.
- Management cited strong pool and residential water-treatment demand, improving commercial water-treatment activity, and growth in residential and irrigation flow products. Backlog rose 117.8% from December 2020 to $1.63 billion; the filing cautions backlog is not necessarily indicative of 2021 sales.
- Supply constraints, longer lead times, labor availability and inflation in raw materials, logistics and labor pressured operations. The company expected these challenges and inflationary trends to continue through the remainder of 2021 and potentially beyond; pricing and productivity actions were intended to mitigate them.
- Pentair launched a Transformation Program targeting at least 300 basis points of margin expansion by 2025. It reported $11.2 million of restructuring and transformation costs for the first nine months and expected further program costs. No specific near-term revenue or EPS guidance is provided in the filing.
- The company completed the $82.8 million Ken’s Beverage acquisition in May. Pleatco was acquired October 18, after quarter-end, for approximately $255 million in cash, funded with cash and revolving-facility borrowings.
- COVID-19 effects remained uncertain, including potential supply, demand and manufacturing impacts. The filing also discusses litigation, product-liability matters, environmental claims and guarantees; environmental reserves were not material, and management considered a material impact from disclosed matters unlikely, while noting litigation outcomes are uncertain.
Key facts for investors to verify
- Whether pricing and productivity can continue to offset persistent input, freight and labor inflation and supply-chain disruptions.
- How much of the unusually high backlog converts to shipments and revenue, given capacity and labor constraints.
- Whether the Transformation Program achieves its 2025 margin-expansion target and how much additional cost it requires.
- The impact of the Pleatco acquisition, including integration, financing and realized benefits.
- Debt refinancing needs, particularly $88.3 million of fixed-rate notes due in 2022, and liquidity after the Pleatco purchase.
- Whether strong demand in pool and residential markets persists as pandemic-related conditions and customer patterns change.