Pentair plc — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Pentair supplies water-related products and services through Industrial & Flow Technologies, Water Solutions, and Pool. The Water Solutions segment includes Manitowoc Ice, acquired in July 2022. Financial statements are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $1,028.6 million | $999.6 million |
| Gross profit / margin | $381.8 million / 37.1% | $332.2 million / 33.2% |
| Operating income / margin | $183.6 million / 17.8% | $145.8 million / 14.6% |
| Net income from continuing operations | $128.5 million | $118.5 million |
| Net income | $129.7 million | $117.6 million |
| Diluted EPS | $0.79 | $0.70 |
| Net interest expense | $32.4 million | $5.7 million |
| Operating cash flow | $(106.6) million | $(131.5) million |
| Free cash flow | $(123.0) million | $(149.2) million |
Revenue increased 2.9%; price contributed 9.3 percentage points, volume reduced sales 11.9 points, acquisitions added 6.6 points, and currency reduced growth 1.1 points. Gross and operating margins improved despite inflation and higher operating expenses. The effective tax rate fell to 14.6% from 15.4%.
Segment results
- Industrial & Flow Technologies: Sales rose 9.4% to $391.8 million; segment income increased 24.5% to $65.0 million. Segment margin rose to 16.6% from 14.6%.
- Water Solutions: Sales rose 32.2% to $272.0 million, primarily reflecting Manitowoc Ice; segment income increased to $52.4 million from $22.2 million. Segment margin rose to 19.3% from 10.8%.
- Pool: Sales fell 16.3% to $364.3 million, while segment income was nearly flat at $116.2 million. Segment margin increased to 31.9% from 26.7%, supported by pricing.
Balance sheet, cash flow and debt
At March 31, 2023, cash was $119.2 million, total debt was $2,491.8 million, and total current assets and liabilities were $1,766.7 million and $1,001.6 million, respectively. Debt increased from $2,317.3 million at year-end 2022, principally reflecting $173.6 million of net revolving-credit borrowings. The company reported $406.4 million of availability under its $900 million revolving facility and $21.1 million of availability under other facilities.
Quarterly operating cash use reflected seasonal working-capital needs, including a $184.8 million increase in accounts receivable; management attributed the receivables build largely to advance-sale programs ahead of peak distributor sales. Cash from operations remained negative, though less so than in Q1 2022. Cash and borrowing capacity are expected to support ordinary needs for the next 12 months. Management expects seasonal cash use to typically reverse in Q2 and expects significant Q2 cash generation.
Variable-rate borrowings expose the company to higher interest costs. Average rates at March 31 were approximately 6.1% on the listed revolving and term facilities. The company entered into $300 million of interest-rate swaps on March 31 and, on April 3, entered into $200 million of interest-rate collars. Debt covenants include a maximum leverage ratio of 3.75 to 1.00, subject to specified acquisition-related provisions, and a minimum interest coverage ratio of 3.00 to 1.00.
Material changes, outlook and risks
- Demand mix: Pool sales were pressured by unusual weather in the U.S. West, higher channel inventory and lower demand. Residential Water Solutions also faced weaker demand and business exits. Commercial Water Solutions benefited from the Manitowoc Ice acquisition.
- Pricing, costs and transformation: Pricing and productivity initiatives supported margin expansion, while labor and raw-material inflation and supply-chain pressures continued. Pentair recorded $11.6 million of restructuring and transformation costs and reported approximately 200 employee reductions during the quarter. It expects initiatives and related costs to continue through the rest of 2023 and beyond.
- Outlook: The filing provides no specific numerical full-year revenue or earnings guidance. Management’s stated priorities include profitable growth, productivity, debt reduction, dividends and share repurchases, and strategically aligned acquisitions. It expects supply-chain and inflationary pressures to continue during 2023, potentially longer.
- Backlog: Backlog declined 24.4% from December 2022 to $752.1 million, mainly as Pool backlog normalized with improved lead times and channel inventory balancing. The company cautions backlog is not necessarily indicative of 2023 sales.
- Acquisition and unusual items: Manitowoc Ice’s preliminary purchase-price allocation remained subject to refinement, particularly tax-related adjustments, with completion expected by Q3 2023. Q1 included $3.9 million of asset impairments and write-offs; intangible amortization increased to $13.8 million from $6.6 million following the acquisition.
- Other risks and contingencies: Risks include global economic conditions, housing and related markets, inflation, rates and currency movements, Russia-Ukraine-related conditions, supply and demand, seasonality, acquisition integration, and litigation or regulatory matters. Outstanding bonds, letters of credit and bank guarantees totaled $101.6 million. The filing reports no material changes to previously disclosed risk factors and no material market-risk changes for the quarter.
Important facts for investors to verify
- Whether Pool demand and channel inventory normalize, given the segment’s 16.3% sales decline and sharp backlog reduction.
- How much reported Water Solutions growth and margin improvement is attributable to Manitowoc Ice, and the final acquisition accounting adjustments.
- Whether pricing and productivity continue to offset inflation and supply-chain costs, and how much further transformation spending is required.
- Whether seasonal Q2 cash generation materializes and working-capital balances, particularly receivables, unwind as expected.
- Debt, variable-rate exposure, covenant headroom, and management’s stated objective to reduce long-term debt.
- The distinction between employee share surrenders and open-market repurchases: no shares were repurchased under the public program in Q1, and $600 million remained authorized.