Pentair plc — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Pentair supplies water-related products and systems through Consumer Solutions and Industrial & Flow Technologies. Unless otherwise noted, financial amounts are in millions of U.S. dollars.
Business context and results
Second-quarter demand was strong, particularly for pool and residential water-treatment products. The company also reported growth in residential and irrigation flow products, commercial flow, and recovering industrial filtration demand. Consumer Solutions represented about 61% of first-half sales and Industrial & Flow Technologies about 39%.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $941.1 | $713.3 | $1,807.0 | $1,423.3 |
| Gross profit | $341.0 | $245.1 | $656.2 | $496.7 |
| Gross margin | 36.2% | 34.4% | 36.3% | 34.9% |
| Operating income | $161.8 | $111.1 | $318.9 | $211.8 |
| Operating margin | 17.2% | 15.6% | 17.6% | 14.9% |
| Net income | $132.1 | $72.1 | $260.7 | $144.8 |
| Diluted EPS | $0.79 | $0.43 | $1.55 | $0.86 |
Sales increased 31.9% in Q2 and 27.0% in the first half. Management attributed growth primarily to volume, with contributions from pricing, acquisitions, and favorable currency. First-half effective tax rate was 14.7%, compared with 25.3% in 2020; lower prior-year discrete tax effects were a key reason for the decline. Q2 net interest expense fell 50.6% year over year, mainly reflecting lower debt and variable borrowing rates.
Segments and material changes
- Consumer Solutions: Q2 sales rose 43.8% to $576.9; segment income increased 48.3% to $143.4, with segment margin up 0.8 percentage point to 24.9%. First-half sales increased 39.0% to $1,098.3 and segment margin rose 2.0 points to 25.0%.
- Industrial & Flow Technologies: Q2 sales rose 16.7% to $363.9; segment income increased 29.5% to $57.1, and margin improved 1.6 points to 15.7%. First-half sales grew 11.9% to $708.0, with margin up 1.1 points to 15.1%.
- Companywide gross margin improved 1.8 points in Q2 and 1.4 points in the first half, supported by volume, pricing, and productivity. Inflation in materials, logistics, and labor partly offset those gains. Q2 SG&A increased as a share of sales by 0.4 point, reflecting incentive compensation and higher transformation-related costs; first-half SG&A ratio declined 1.2 points.
- Backlog increased 109.3% from December 2020 to $1,564.8, driven by higher orders and supply-chain and labor constraints. The filing cautions that backlog is not necessarily an indicator of 2021 sales.
Cash flow, balance sheet, and capital allocation
- First-half operating cash flow from continuing operations was $361.0, versus $266.5 a year earlier. Free cash flow was $340.0, compared with $235.6. Capital expenditures were $24.3.
- Cash was $95.9 at June 30, 2021, compared with $82.1 at year-end 2020. Total assets were $4,354.7 and total liabilities $2,083.1.
- Debt was $716.6, down from $839.6 at December 31, 2020; the company repaid $103.8 of fixed notes that matured. It reported $883.9 of availability under its $900 million senior credit facility, no commercial paper outstanding, and compliance with financial covenants. No fixed-rate senior notes mature in the next twelve months.
- First-half financing included $50.0 of share repurchases and $66.7 of dividends paid. The quarterly dividend declared was $0.20 per share. The company had $750 million available under its share repurchase authorization.
- On May 19, 2021, Pentair acquired Ken’s Beverage, Inc. for $82.8 net of cash acquired. The preliminary allocation included $29.3 of goodwill and $38.0 of customer-relationship intangibles.
Outlook, risks, and unusual items
- No specific full-year revenue or earnings guidance is stated in the provided filing text. Pentair targeted at least 300 basis points of margin expansion by 2025 through its new Transformation Program, which focuses on reducing complexity, digitization and automation, modernizing overhead, and improving decision-making. Additional restructuring, IT, and program costs were expected during the remainder of 2021 and beyond.
- Management expected inflationary pressures and supply-chain challenges—including longer lead times and higher material, logistics, and labor costs—to continue through the remainder of 2021 and potentially beyond. Pricing actions and productivity improvements were intended to mitigate these pressures.
- COVID-19, virus variants, customer demand, supplier disruption, inflation, labor availability, logistics, housing and weather-sensitive markets, currency, acquisitions, and the ability to realize transformation benefits are identified risks. The company noted that uncertainty over the pandemic could adversely affect operations, liquidity, and cash flows.
- Q2 restructuring and transformation costs were $6.1; first-half costs were $7.2. First-half results also included a $2.4 legal accrual reduction. Discontinued operations recorded a first-half loss of $3.0.
- Legal proceedings, product-liability matters, environmental matters, and guarantees are discussed. Environmental reserves were not material; outstanding bonds, letters of credit, and bank guarantees totaled $98.9. The company stated that a material adverse effect from current claims was considered unlikely, while acknowledging litigation uncertainty.
Important facts for investors to verify
- Whether elevated pool and residential water-treatment demand and the unusually large backlog convert into shipments and sustainable sales growth.
- How effectively pricing and productivity offset persistent input, labor, logistics, and supply-chain cost inflation, and whether margin gains continue.
- Progress, timing, costs, and execution risks for the Transformation Program and its 2025 margin-expansion target.
- Cash conversion and working-capital trends, including the effects of receivables, inventory, rebates, and seasonal cash flows.
- Integration and returns from the Ken’s Beverage acquisition, as well as debt, liquidity, covenant compliance, and shareholder-return plans.
- Developments in COVID-19 conditions, litigation and contingencies, and the company’s ability to maintain supply and meet demand.