Pentair plc — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Pentair is a water-solutions company with three reportable segments: Aquatic Systems, Filtration Solutions and Flow Technologies. Unless otherwise noted, financial results below are from continuing operations.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $2,965.1 million | $2,845.7 million | +4.2% |
| Gross profit / margin | $1,047.7 million / 35.3% | $987.5 million / 34.7% | Margin +0.6 points |
| Operating income / margin | $436.7 million / 14.7% | $378.3 million / 13.3% | Income +15.4% |
| Net income from continuing operations attributable to Pentair | $321.7 million | $114.1 million | More than doubled |
| Diluted EPS from continuing operations | $1.81 | $0.62 | Up from prior year |
| Effective tax rate | 15.3% | 34.0% | Down 18.7 points |
| Net interest expense | $32.6 million | $87.3 million | Down 62.7% |
| Operating cash flow, continuing operations | $458.1 million | $278.6 million | Increased |
| Free cash flow, continuing operations | $410.1 million | $243.2 million | Increased |
FY 2018 total net income was $347.4 million, including $25.7 million from discontinued operations. FY 2017 total net income of $666.5 million included $371.3 million of discontinued-operations income and a $181.1 million after-tax gain on the Valves & Controls sale; total net income therefore is not directly comparable.
Fourth quarter: Net sales were $740.5 million, gross profit $268.0 million, operating income $113.0 million, and net income from continuing operations $94.2 million. Diluted EPS from continuing operations was $0.54. For Q4 2017, the corresponding figures were $720.8 million, $253.7 million, $85.4 million, $55.8 million and $0.30.
Segments
- Aquatic Systems: Sales $1,026.1 million, up 9.2%; segment income $277.6 million, with a 27.1% margin versus 27.0%.
- Filtration Solutions: Sales $1,001.0 million, up 1.0%; segment income $168.5 million, with a 16.8% margin versus 15.6%.
- Flow Technologies: Sales $936.7 million, up 2.5%; segment income $145.6 million, with a 15.5% margin versus 15.4%.
Segment income is a company-defined measure that excludes certain amortization, restructuring, impairment and other items.
Balance sheet, debt and capital allocation
- At year-end, cash and cash equivalents were $74.3 million, current assets $1,039.4 million and current liabilities $818.7 million.
- Total debt was $787.6 million, down from $1,440.7 million. Total assets were $3,806.5 million and total equity $1,836.1 million. Balance-sheet comparisons are heavily affected by the Electrical-business spin-off.
- The $800 million senior unsecured revolving facility matures in April 2023; available capacity was $697.8 million. Pentair reported compliance with its debt covenants. Commercial paper outstanding was $76.0 million.
- Cash provided by the nVent distribution ($993.6 million) was used in part to repay debt. The company repurchased $500.0 million of shares in 2018 and paid $187.2 million in dividends. The board planned a 2019 annual dividend of $0.72 per share.
- Continuing-operations capital expenditures were $48.2 million. Free cash flow for the whole company, including discontinued operations, was $386.0 million, down from $550.7 million in 2017; that comparison includes changing discontinued-operation activity.
Material changes, outlook and risks
- On April 30, 2018, Pentair separated and distributed its Electrical business to shareholders as nVent; Pentair retained no equity interest. Electrical results are reported as discontinued operations. The separation and distribution generated $84.2 million of separation costs in 2018, reported in discontinued operations.
- The company reorganized its legacy Water segment into the three current reportable segments effective May 1, 2018; prior segment results were retrospectively reclassified.
- Revenue growth reflected volume growth of 3.6%, price increases of 1.2% and favorable currency of 0.6%, partly offset by divestitures. Margin improvement reflected pricing, favorable mix and productivity savings, partially offset by raw-material and labor inflation.
- Management said restructuring and cost initiatives are expected to contribute to margin growth in 2019. 2019 priorities include commercial excellence, acquisition integration, new products, market expansion, digital transformation and growth in pool and water treatment. The filing provides no specific numerical revenue or earnings guidance.
- In February 2019, Pentair completed the announced acquisitions of Aquion for $160 million and Pelican Water Systems for $120 million, both in cash, subject to customary adjustments. Management did not expect them to have a material financial impact.
- Key disclosed risks include economic and housing-market cycles, competitive pricing, raw-material and labor inflation, foreign exchange and trade/tariff uncertainty, seasonality and weather, customer concentration (Pool Corporation represented about 15% of 2018 consolidated sales), execution of restructuring and the spin-off, and tax, cybersecurity, environmental and litigation exposures.
- About $2.35 billion of goodwill and intangible assets represented 62% of total assets; management reported no goodwill impairment indication in its 2018 annual assessment. Approximately 600 asbestos-related claims were pending, substantially all related to discontinued operations. Recorded environmental reserves were not material, though future costs could exceed reserves.
Important facts for investors to verify
- Assess continuing-operations growth and margins separately from discontinued operations and spin-off-related accounting effects.
- Confirm the 2018 tax-rate reduction and determine whether the 15.3% effective rate is sustainable.
- Monitor cash conversion, working capital, debt maturities and remaining share-repurchase authorization against the company’s investment and dividend needs.
- Track whether restructuring savings offset continuing input-cost inflation and whether 2019 margin-growth expectations are achieved.
- Review the integration and performance of Aquion and Pelican, as well as customer concentration and any material tax, asbestos, environmental or spin-off-related developments.