Pentair plc — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods. Pentair supplies water-treatment, pool, pump and fluid-handling products through Consumer Solutions and Industrial & Flow Technologies.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $713.3 million | $799.5 million | $1,423.3 million | $1,488.4 million |
| Gross margin | 34.4% | 35.9% | 34.9% | 35.1% |
| Operating income | $111.1 million | $133.8 million | $211.8 million | $201.4 million |
| Net income | $72.1 million | $114.3 million | $144.8 million | $165.6 million |
| Diluted EPS | $0.43 | $0.67 | $0.86 | $0.97 |
| Operating cash flow, continuing operations | Not separately presented | Not separately presented | $266.5 million | $99.2 million |
Q2 sales fell 10.8%, chiefly on lower volume associated with COVID-19, while operating income declined 17.0%. For the first half, sales fell 4.4%, but operating income rose 5.2%, reflecting lower SG&A and the absence of the prior-year impairment charge, among other items. First-half net income declined despite higher operating income, with the effective tax rate rising to 25.3% from 16.4%.
- Segments: Q2 Consumer Solutions sales declined 8.2% to $401.2 million; segment income was $96.7 million, down 11.3%. Industrial & Flow Technologies sales declined 13.9% to $311.8 million; segment income was $44.1 million, down 26.1%. Pool demand was strong, while filtration, commercial and industrial markets were pressured.
- Cash flow and investment: First-half free cash flow was $235.6 million ($236.1 million from continuing operations), versus $67.3 million a year earlier. Capital expenditures were $30.5 million; acquisition spending was $28.5 million, compared with $284.5 million in the first half of 2019.
- Liquidity and debt: June 30 cash was $90.6 million; current assets were $1,001.7 million and current liabilities $750.6 million. Debt was $1,013.0 million, down from $1,029.1 million at year-end 2019. Availability under the senior credit facility was $763.5 million. The company reported compliance with debt covenants.
- Capital returns: First-half dividends paid were $63.7 million. Pentair repurchased $115.2 million of shares during the half, then temporarily suspended repurchases in March to preserve liquidity. The quarterly dividend declared was $0.19 per share.
Material changes and unusual items
- COVID-19 reduced demand in several end markets and disrupted suppliers and production. Pentair reported intermittent facility closures and higher pool-business freight and labor costs, alongside strong pool demand and increased backlog. COVID-related employee health and safety costs were $4.8 million in Q2 and $5.7 million in the first half.
- Gross margin was pressured by sales mix, supply-chain costs and input inflation; price increases and productivity actions partly offset the impact. Restructuring costs were $3.8 million in the first half, and about 100 employees were reduced through restructuring actions.
- Second-quarter tax expense included approximately $14.1 million from final U.S. interest-deduction regulations. The CARES Act provided approximately $28.7 million of positive cash benefits, with related tax-rate and discrete-item effects also disclosed.
- Effective January 1, 2020, Pentair reorganized reporting into two segments; prior-period segment results were reclassified for comparability. The company adopted the expected-credit-loss accounting standard, with no material effect.
Outlook, risks and contingencies
Pentair did not provide numerical earnings or sales guidance in the supplied filing. Management said the pandemic’s future effects could not be reasonably estimated and expected industrial filtration to remain under pressure in the second half of 2020. It expected restructuring actions to support margin growth in that half and stated that long-term demand drivers for industrial filtration were not expected to change significantly. Management believed available liquidity and anticipated operating cash flows would meet ordinary-course needs for the next 12 months.
Key risks include further COVID-19-related demand weakness, supply-chain and operating disruptions, higher costs, capital-market volatility and potential limits on liquidity access. Other disclosed risks include inflation, currency movements, customer capital spending, litigation and environmental matters. Approximately 610 asbestos-related claims were outstanding at June 30; environmental reserves were not material. Bonds, letters of credit and bank guarantees totaled $97.9 million. Management cautioned that adverse litigation developments could result in material charges, although it considered a material effect from existing matters unlikely.
Important facts for investors to verify
- Whether pool demand and backlog convert to sales, and whether supplier constraints, freight and labor costs ease.
- How COVID-19 affects commercial filtration, industrial markets, customer orders, receivable collections and second-half results.
- Whether strong first-half operating cash flow is sustainable, given the contribution from working-capital collections.
- Refinancing plans for $177.8 million of fixed-rate notes maturing within 12 months and continued compliance with credit covenants.
- Future effective tax rate and the continuing effects of discrete tax items and U.S. tax regulations.