Pentair plc — Q2 2023 Form 10-Q
Business context and period. Pentair provides water treatment, flow, commercial ice and pool products and services through Industrial & Flow Technologies, Water Solutions and Pool. This unaudited report covers the three and six months ended June 30, 2023; amounts below are in U.S. dollars unless stated otherwise. The Manitowoc Ice acquisition, completed in July 2022, materially affects year-over-year comparisons in Water Solutions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $1,082.5 million | $1,064.2 million | $2,111.1 million | $2,063.8 million |
| Gross profit margin | 36.9% | 33.8% | 37.0% | 33.5% |
| Operating income | $208.5 million | $190.8 million | $392.1 million | $336.6 million |
| Income from continuing operations | $154.2 million | $153.0 million | $282.7 million | $271.5 million |
| Net income | $152.9 million | $152.9 million | $282.6 million | $270.5 million |
| Diluted EPS | $0.92 | $0.92 | $1.70 | $1.63 |
| Net interest expense | $31.8 million | $9.2 million | $64.2 million | $14.9 million |
- Q2 sales rose 1.7%, while operating income increased 9.3%; first-half sales rose 2.3% and operating income increased 16.5%. Pricing and acquisition-related sales contributed, while volume was a drag overall.
- First-half operating cash flow from continuing operations was $340.1 million, versus $176.3 million. Free cash flow was $308.1 million, versus $138.1 million. Capital expenditures were $35.4 million.
- At June 30, cash was $141.6 million, current assets $1.570 billion and current liabilities $1.061 billion. Debt was $2.115 billion, down from $2.317 billion at December 31, 2022. Revolving credit availability was $784.3 million.
- First-half dividends paid were $72.5 million. No shares were repurchased under the public authorization during the period; $600 million remained available.
Material changes and segment trends
- Industrial & Flow Technologies Q2 sales increased 9.1% to $411.6 million; segment income rose 26.6% to $74.8 million. Pricing and commercial/industrial volume gains helped, partly offset by inflation.
- Water Solutions Q2 sales increased 51.3% to $336.2 million and segment income rose to $74.8 million from $32.5 million. Growth primarily reflects Manitowoc Ice, alongside stronger commercial demand and production.
- Pool Q2 sales fell 28.0% to $334.3 million and segment income declined 23.1% to $105.1 million. Management cited weather, elevated channel inventory and weaker demand; margin as a share of sales nevertheless increased to 31.4% from 29.5%.
- Total backlog was $679.8 million at June 30, down 31.7% from year-end, chiefly as Pool backlog returned toward historical levels amid improved production and shorter lead times.
Outlook, risks and unusual items
- The filing provides no numerical full-year earnings or revenue guidance. Management expected residential distributor channel inventories to normalize by the end of Q3 2023 and anticipated continued restructuring and transformation activity, with costs continuing through the rest of 2023 and beyond.
- Management said supply-chain pressures and inflation in certain raw materials and labor could persist through the remainder of 2023 and potentially beyond. Pricing and productivity initiatives are intended to offset these pressures.
- Restructuring and transformation costs were $18.4 million in the first half, versus $13.6 million a year earlier. The company reduced headcount by approximately 220 employees during the first half. First-half asset impairment and write-offs totaled $4.4 million.
- Net interest expense rose substantially, mainly due to acquisition-related debt and higher variable rates. The company entered into interest-rate swaps and collars covering $500 million of exposure. Debt covenants include a maximum leverage ratio of 3.75:1, subject to specified acquisition-related provisions, and minimum interest coverage of 3.00:1.
- Other risks highlighted include housing and market conditions, seasonality and weather, currency and interest-rate volatility, acquisition integration, litigation, and possible effects of the global minimum tax framework beginning in 2024. The company reported $100.4 million of outstanding bonds, letters of credit and bank guarantees.
Important facts for investors to verify
- Whether Pool demand and channel inventory recover as management anticipated, and how that affects sales, backlog and segment margins.
- How much Water Solutions growth and profitability reflects Manitowoc Ice versus underlying organic performance, and whether acquisition integration delivers expected benefits.
- Whether pricing and productivity continue to offset labor, raw-material and supply-chain inflation while transformation costs persist.
- Debt reduction, variable-rate interest exposure, covenant headroom and the company’s ability to sustain cash generation, dividends and planned capital allocation.
- Completion of Manitowoc Ice purchase-accounting estimates, which remained preliminary, and any material changes resulting from finalization.