Pentair plc — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Pentair supplies water-treatment, pool and pumping products through Aquatic Systems, Filtration Solutions and Flow Technologies. Its Electrical business was spun off to nVent in April 2018 and is reported as discontinued operations, affecting year-over-year comparisons.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $799.5m | $780.6m | $1,488.4m | $1,513.2m |
| Gross profit / margin | $286.7m / 35.9% | $282.6m / 36.2% | $522.3m / 35.1% | $535.9m / 35.4% |
| Operating income / margin | $133.8m / 16.7% | $122.6m / 15.7% | $201.4m / 13.5% | $215.3m / 14.2% |
| Continuing-operations net income | $115.1m | $77.9m | $167.5m | $136.3m |
| Net income | $114.3m | $41.5m | $165.6m | $144.4m |
| Diluted EPS | $0.67 | $0.23 | $0.97 | $0.80 |
- Q2 sales rose 2.4%, led by pricing and the Aquion and Pelican acquisitions; volume fell 2.0% and currency reduced sales 1.6%. First-half sales declined 1.6% as lower volume and unfavorable currency outweighed pricing and acquisitions.
- Q2 operating income increased 9.1%. First-half operating income fell 6.5%. Gross margin was down 0.3 percentage points in both periods, reflecting mix and labor/raw-material inflation, partly offset by pricing and productivity.
- Q2 net income includes a $0.8m discontinued-operations loss versus a $36.4m loss in Q2 2018. The prior-year comparison also included a $17.1m debt-extinguishment loss; these items contribute to the marked increase in reported net income.
- Segment sales in Q2: Aquatic Systems $270.6m, down 2.0%; Filtration Solutions $285.6m, up 9.0%; Flow Technologies $243.0m, up 0.5%. Segment income declined in all three segments, with margin pressure from inflation and weaker mix/volume.
Cash flow, balance sheet and liquidity
- First-half cash from continuing operating activities was $99.2m, down from $177.8m. Free cash flow from continuing operations was $69.8m versus $157.0m. Management attributed the operating-cash decline principally to higher working capital, pension contributions and the pension settlement.
- Investing cash outflow was $314.7m, including $284.5m for the Aquion and Pelican acquisitions and $29.8m of capital expenditures. Financing provided $222.4m, including $400.0m of new notes; share repurchases were $150.0m and dividends paid were $62.0m.
- At June 30, cash was $80.5m; total debt was $1,215.1m, up from $787.6m at year-end 2018. Current assets were $1,041.5m and current liabilities $710.2m. Goodwill was $2,287.5m, including acquisition-related additions.
- Pentair issued $400.0m of 4.5% senior notes due 2029 and used net proceeds partly to repay commercial paper. Commercial paper outstanding was $130.9m. The $900m revolving facility had $765m available; the company reported compliance with its debt covenants. $405.3m of fixed-rate notes mature within 12 months but were classified as long-term based on refinancing intent and ability.
Outlook, commentary and risks
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management expects Aquatic Systems results in the second half of 2019 to be negatively affected by delayed pool construction, weather-related weak sell-through and elevated channel inventory.
- Management cited ongoing labor and raw-material inflation, pricing volatility, foreign-exchange exposure, seasonality, and the need to achieve growth and acquisition-integration goals. It also identified potential effects from tariffs and changes to tax rules.
- Unusual items included a $12.2m non-cash pension settlement gain following termination and annuitization of the Salaried Plan, $18.2m of first-half trade-name and other impairment, and $7.8m of first-half restructuring costs. The acquisitions’ purchase-price allocations remained preliminary.
- The filing reports approximately 670 outstanding asbestos claims; environmental reserves were not material. Management said litigation is not expected to materially affect results, while noting that adverse developments could do so. No material change to previously disclosed risk factors was reported. Disclosure controls were deemed effective.
Investor verification priorities
- Track Aquatic Systems sell-through, channel inventory and weather-related demand into the second half.
- Assess whether operating cash flow and free cash flow recover from the first-half decline and working-capital demands.
- Review acquisition integration, purchase-accounting adjustments, and the contribution of Aquion and Pelican to sales and margins.
- Monitor debt maturities, refinancing execution, leverage and covenant headroom, alongside the impact of share repurchases and dividends.
- Evaluate ongoing inflation, pricing, segment margins, impairment exposure, and developments in asbestos, environmental and other legal matters.