Pentair plc — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. The filing is an annual report, not a standalone fourth-quarter report. Pentair provides water-treatment, pool, flow and industrial water products and services. FY2022 reporting segments were Consumer Solutions and Industrial & Flow Technologies; effective January 1, 2023, Consumer Solutions was divided into Pool and Water Solutions.
Financial performance
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Net sales | $4,121.8 million | $3,764.8 million | Up 9.5%; price +13.3%, volume −7.1%, acquisitions +5.5%, currency −2.2% |
| Gross profit / margin | $1,364.6 million / 33.1% | $1,319.2 million / 35.0% | Margin down 1.9 percentage points |
| Operating income / margin | $595.3 million / 14.4% | $636.9 million / 16.9% | Income down 6.5%; margin down 2.5 points |
| Net income | $480.9 million | $553.0 million | Down 13.0%; continuing-operations net income was $483.2 million versus $556.0 million |
| Diluted earnings per share | $2.90 | $3.30 | Continuing-operations diluted EPS was $2.92 versus $3.32 |
| Operating cash flow, continuing operations | $364.3 million | $613.6 million | Down; working capital included a $218.7 million cash outflow |
| Free cash flow | $282.2 million | $556.9 million | Company-defined non-GAAP measure; down year over year |
| Cash and cash equivalents | $108.9 million | $94.5 million | At December 31 |
| Total debt outstanding | $2,339.3 million | $902.6 million | Principal amount; balance-sheet debt, net of issuance costs, was $2,317.3 million |
FY2022 segment sales were $2,619.5 million for Consumer Solutions, up 11.9%, and $1,500.8 million for Industrial & Flow Technologies, up 5.6%. Consumer Solutions segment income rose 10.2% to $611.1 million, while its margin declined 0.4 points to 23.3%. Industrial & Flow Technologies segment income rose 13.6% to $242.3 million, and margin increased 1.1 points to 16.1%. Segment income is a company-defined measure that excludes certain costs and items.
Material changes and notable items
- Acquired Manitowoc Ice on July 28, 2022, for approximately $1.6 billion in cash. It contributed $156.3 million of sales and $12.2 million of operating income from acquisition through year-end. The preliminary purchase-price allocation included $790.5 million of goodwill and $588.4 million of customer-relationship intangibles; final allocation was expected by the third quarter of 2023.
- Sales growth reflected pricing and acquisitions despite lower volumes, especially in pool and residential water treatment. The company attributed margin pressure to input, logistics and labor inflation, reduced productivity, and supply-chain and plant inefficiencies.
- Restructuring and transformation costs totaled $83.5 million in 2022, versus $19.1 million in 2021. The company also recorded $25.6 million of asset impairments and write-offs, including inventory and long-lived assets, and $4.7 million of costs related to exiting business activity and sales in Russia.
- Backlog fell 34.5% to $995.2 million. Consumer Solutions backlog declined 55.0% to $483.1 million, while Industrial & Flow Technologies backlog rose 14.7% to $512.1 million. Management cautioned that backlog is not necessarily an indicator of 2023 sales.
Liquidity, debt and capital allocation
The Manitowoc Ice purchase was financed with a $1.0 billion term loan facility, $400 million of 5.900% senior notes due 2032, revolving-credit borrowings and cash. At year-end, the company reported $580 million available under its $900 million revolving facility. Variable-rate debt was $1.52 billion, with a weighted-average rate of 5.64%; the filing states that a 100-basis-point rate increase would add approximately $15.2 million to annual interest incurred on that variable-rate debt. Debt covenants generally cap leverage at 3.75-to-1.00, with a conditional acquisition-related step-up, and require EBITDA-to-interest coverage of at least 3.00-to-1.00.
FY2022 dividends paid were $138.6 million; the quarterly dividend was raised 5% from $0.21 to $0.22 per share, payable in February 2023. The company repurchased $50.0 million of shares in 2022 and had $600 million remaining under its repurchase authorization. Management said it expected sufficient cash and borrowing capacity for foreseeable needs and identified debt reduction, dividends, repurchases and strategically aligned acquisitions as capital-allocation priorities.
Outlook, management commentary and risks
- The filing provides no specific numerical FY2023 revenue or earnings guidance. Management expects supply-chain challenges and inflationary cost increases to continue into 2023, and expects channel inventory normalization and lower backlog to moderate volumes in the near term.
- Management expects restructuring and transformation initiatives to continue into 2023 and beyond, with intended benefits including margin expansion, productivity and operational efficiency; realization of those benefits is uncertain.
- Key risks include weaker economic and residential demand, channel inventory corrections, inflation and supply disruption, foreign-exchange effects, seasonal and weather-driven demand, customer concentration, acquisition integration, increased leverage and variable-rate interest exposure.
- One customer in the pool business represented approximately 20% of consolidated sales in both 2022 and 2021. Goodwill and intangible assets totaled $4.35 billion, or 67% of total assets, creating potential exposure to future impairment if performance or valuations weaken.
- Approximately 689 asbestos-related claims were pending against subsidiaries at year-end, substantially related to discontinued operations. The company said most claims were historically insured, but coverage is eroding; environmental reserves were not material at year-end. Litigation outcomes and ultimate environmental costs remain uncertain.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management’s control assessment excluded Manitowoc Ice, which was still being integrated; it represented approximately 4% of FY2022 consolidated sales.
Important facts for investors to verify
- Whether pricing, mix and acquisitions can offset lower volumes, inflation and reduced channel orders, and how margins develop after the reported FY2022 decline.
- Manitowoc Ice integration progress, realized synergies, final purchase-price allocation and the acquired business’s contribution to earnings and cash generation.
- Debt reduction, covenant headroom, refinancing plans and the effect of variable interest rates on cash flow.
- Inventory normalization, backlog trends and customer concentration, particularly the pool customer responsible for about one-fifth of sales.
- Potential future costs from restructuring, Russia-related business exits, asbestos claims, environmental matters and goodwill or intangible-asset impairment.