Pentair plc — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless otherwise stated. Pentair provides water-treatment, pool, pump and fluid-management products through Consumer Solutions and Industrial & Flow Technologies. The company reorganized its reporting segments effective January 1, 2020 and retrospectively reclassified prior-period figures.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $710.0 million | $688.9 million | +3.1% |
| Gross profit / margin | $251.6 million / 35.4% | $235.6 million / 34.2% | Margin +1.2 points |
| Operating income / margin | $100.7 million / 14.2% | $67.6 million / 9.8% | Income +49.0% |
| Continuing-operations net income | $72.7 million | $52.4 million | +38.7% |
| Diluted continuing-operations EPS | $0.43 | $0.30 | +$0.13 |
| Cash used in operating activities | $162.4 million | $257.1 million | Lower cash use |
| Free cash flow | $(181.0) million | $(273.6) million | Lower cash use |
Sales growth reflected volume and pricing gains and acquisitions, partly offset by currency and lower Industrial & Flow Technologies sales. Higher gross margin benefited from Consumer Solutions mix, volume and pricing. Operating income also benefited from lower SG&A, including the absence of a $15.3 million Q1 2019 impairment charge and reduced travel costs; Q1 2020 included $2.7 million of restructuring costs and $0.9 million of COVID-related costs.
Operating cash flow remained negative, primarily because of seasonal working-capital needs: accounts receivable increased as distributors prepared for peak selling season. Management reported a $273.6 million negative working-capital impact in Q1 2020, versus $344.1 million in Q1 2019.
Segments
- Consumer Solutions: Sales of $388.8 million, up 8.5%; segment income of $84.8 million, up 12.8%. Segment margin increased to 21.8% from 21.0%. Pool sales benefited from more normal weather and lower channel inventories; acquisitions and pricing also contributed.
- Industrial & Flow Technologies: Sales of $320.9 million, down 2.8%; segment income of $44.7 million, up 9.0%. Segment margin increased to 13.9% from 12.4%, supported by pricing and productivity, despite lower volume and COVID-related shipment delays.
Balance sheet, debt and liquidity
At March 31, 2020, cash and cash equivalents were $169.3 million, versus $82.5 million at year-end 2019. Total debt was $1,450.5 million, up from $1,029.1 million; the increase primarily reflected revolving-credit borrowings used to repay commercial paper and fund operations amid COVID-related commercial-paper market volatility. The company had no commercial paper outstanding and $325.5 million of availability under its Senior Credit Facility. It reported compliance with debt covenants. The facility’s principal leverage and interest-coverage limits are 3.75:1 maximum and 3.00:1 minimum, respectively.
Current assets were $1,339.6 million and current liabilities were $682.8 million. Q1 financing included $420.9 million of net receipts from commercial paper and revolving long-term debt, offset partly by $115.2 million of share repurchases and $32.1 million of dividends. Pentair repurchased 3.0 million shares for $115.2 million before temporarily suspending the buyback in March to preserve liquidity.
Outlook, risks and notable items
- COVID-19: Pentair said the pandemic’s future effect on results, liquidity and cash flows could not be reasonably estimated. Most facilities were considered essential and remained operational, but some experienced temporary closures or interruptions. Management reported no significant supply-chain interruption to date, while warning of supplier, transport and cost risks.
- Demand: Management expected short-term weakness in new pool construction and remodeling, residential filtration, commercial food service, residential flow and industrial markets. It said demand softened in most businesses in April, after the reported quarter.
- Cost and cash actions: The company described supplier cost negotiations, labor adjustments, hiring freezes and reductions or delays in services and travel. It reduced its 2020 capital-spending plan by more than 10%. It expected seasonal cash generation in Q2 based on historical patterns, but emphasized pandemic uncertainty.
- Tax: The Q1 effective tax rate was 21.5%, versus 17.1%. CARES Act provisions provided a stated $16.2 million positive cash benefit, partly offset by a $6.8 million BEAT item related to 2019. New IRS regulations were expected to result in approximately $14.1 million of discrete tax expense in Q2 and raise the 2020 annual effective tax rate by about 1 percentage point.
- Other items: Restructuring initiatives included an approximately 75-employee headcount reduction in Q1. Outstanding bonds, letters of credit and bank guarantees totaled $89.3 million. Approximately 770 asbestos claims were outstanding; environmental reserves were reported as immaterial. The company cautioned that litigation outcomes and future environmental findings remain uncertain.
No quantitative full-year revenue or earnings guidance is provided in the supplied filing text. Management said existing liquidity, expected operating cash flows and credit-facility capacity were expected to meet ordinary-course cash needs for the next 12 months, while noting that the pandemic’s effects remained uncertain.
Key facts for investors to verify
- Subsequent quarterly disclosures on COVID-related demand, operating interruptions, customer collections and supplier or transportation constraints.
- Whether seasonal working capital reverses as expected, and the resulting operating cash flow and free cash flow.
- Debt, revolver availability, covenant headroom and refinancing plans for $74.0 million of notes due within 12 months.
- Implementation and financial effects of cost actions, the reduced capital plan and the suspended share-repurchase program.
- The Q2 tax charge and updated annual tax-rate impact from the IRS regulations.