10-Q 1 nvent-2018093010q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Quarterly Period Ended September 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-38265
nVent Electric plc
 
(Exact name of Registrant as specified in its charter)
Ireland
  
98-1391970
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification number)
 
 
The Mille, 1000 Great West Road, 8th Floor (East), London, TW8 9DW, United Kingdom
(Address of principal executive offices)
Registrant's telephone number, including area code: 44-20-3966-0279
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
  
Accelerated filer o
  
Non-accelerated filer o
  
Smaller reporting 
company 
o
 
Emerging growth
company 
o
 
  
 
  
(Do not check if a smaller reporting company)
  
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
On September 30, 2018, 179,425,993 shares of Registrant's common stock were outstanding.




nVent Electric plc
 
 
Page
 
 
PART I FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II OTHER INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 
 



2


PART I FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
nVent Electric plc
Condensed Consolidated and Combined Statements of Income and Comprehensive Income (Unaudited)
 
Three months ended
 
Nine months ended
In millions, except per-share data
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Net sales
$
563.9

$
540.6

 
$
1,645.5

$
1,556.0

Cost of goods sold
334.8

320.5

 
988.1

927.5

Gross profit
229.1

220.1

 
657.4

628.5

Selling, general and administrative
124.1

110.0

 
399.1

339.4

Research and development
11.3

10.5

 
33.7

32.4

Operating income
93.7

99.6

 
224.6

256.7

Net interest expense
11.7

0.2

 
21.6

0.4

Other expense
0.9

1.4

 
7.2

4.2

Income before income taxes
81.1

98.0

 
195.8

252.1

Provision for income taxes
12.9

18.3

 
32.0

46.4

Net income
$
68.2

$
79.7

 
$
163.8

$
205.7

Comprehensive income, net of tax
 
 
 
 
 
Net income
$
68.2

$
79.7

 
$
163.8

$
205.7

Changes in cumulative translation adjustment
4.3

(31.8
)
 
(33.2
)
(3.9
)
Changes in market value of derivative financial instruments, net of tax
0.5


 
(1.2
)
0.5

Comprehensive income
$
73.0

$
47.9

 
$
129.4

$
202.3

Earnings per ordinary share
 
 
 
 
 
Basic
$
0.38

$
0.45

 
$
0.92

$
1.15

Diluted
$
0.38

$
0.44

 
$
0.90

$
1.14

Weighted average ordinary shares outstanding
 
 
 
 
 
Basic
179.3

179.0

 
178.8

179.0

Diluted
181.5

181.2

 
181.1

181.2

See accompanying notes to condensed consolidated and combined financial statements.

3


nVent Electric plc
Condensed Consolidated and Combined Balance Sheets (Unaudited)
 
September 30,
2018
December 31,
2017
In millions, except per-share data
Assets
Current assets
 
 
Cash and cash equivalents
$
106.0

$
26.9

Accounts and notes receivable, net of allowances of $6.2 and $8.4, respectively
365.5

349.3

Inventories
237.1

224.1

Other current assets
126.7

132.3

Total current assets
835.3

732.6

Property, plant and equipment, net
264.0

265.8

Other assets
 
 
Goodwill
2,237.6

2,238.2

Intangibles, net
1,190.0

1,236.6

Other non-current assets
56.2

251.8

Total other assets
3,483.8

3,726.6

Total assets
$
4,583.1

$
4,725.0

Liabilities and Equity
Current liabilities
 
 
Current maturities of long-term debt and short-term borrowings
$
11.3

$

Accounts payable
141.9

174.1

Employee compensation and benefits
74.0

75.5

Other current liabilities
198.1

141.3

Total current liabilities
425.3

390.9

Other liabilities
 
 
Long-term debt
932.7


Pension and other post-retirement compensation and benefits
179.0

176.7

Deferred tax liabilities
255.7

279.4

Other non-current liabilities
74.8

86.7

Total liabilities
1,867.5

933.7

Equity
 
 
Net Parent investment

3,848.4

Ordinary shares $0.01 par value, 400.0 authorized, 179.4 issued at September 30, 2018
1.8


Additional paid-in capital
2,757.8


Retained earnings
47.5


Accumulated other comprehensive loss
(91.5
)
(57.1
)
Total equity
2,715.6

3,791.3

Total liabilities and equity
$
4,583.1

$
4,725.0

See accompanying notes to condensed consolidated and combined financial statements.

4


nVent Electric plc
Condensed Consolidated and Combined Statements of Cash Flows (Unaudited)
 
Nine months ended
In millions
September 30,
2018
September 30,
2017
Operating activities
 
 
Net income
$
163.8

$
205.7

Adjustments to reconcile net income to net cash provided by (used for) operating activities
 
 
Depreciation
27.6

27.3

Amortization
45.8

46.0

Deferred income taxes
(4.3
)
(3.9
)
Share-based compensation
9.3

11.4

Changes in assets and liabilities, net of effects of business acquisitions
 
 
Accounts and notes receivable
(21.7
)
(33.6
)
Inventories
(18.5
)
(13.4
)
Other current assets
(8.2
)
(17.6
)
Accounts payable
(28.1
)
(16.8
)
Employee compensation and benefits
4.0

1.3

Other current liabilities
30.0

57.8

Other non-current assets and liabilities
(17.1
)
34.2

Net cash provided by (used for) operating activities
182.6

298.4

Investing activities
 
 
Capital expenditures
(28.5
)
(25.1
)
Proceeds from sale of property and equipment
2.3

3.9

Acquisitions, net of cash acquired
(2.0
)
(13.6
)
Net cash provided by (used for) investing activities
(28.2
)
(34.8
)
Financing activities
 
 
Net repayments of short-term borrowings
(0.3
)

Proceeds from long-term debt
1,000.0


Repayments of long-term debt
(50.0
)

Debt issuance costs
(9.9
)

Cash provided at separation to Parent
(993.6
)

Dividends paid
(31.4
)

Net transfers to Parent prior to separation

(241.7
)
Shares issued to employees, net of shares withheld
10.1


Net cash provided by (used for) financing activities
(75.1
)
(241.7
)
Effect of exchange rate changes on cash and cash equivalents
(0.2
)
(16.2
)
Change in cash and cash equivalents
79.1

5.7

Cash and cash equivalents, beginning of period
26.9

21.5

Cash and cash equivalents, end of period
$
106.0

$
27.2

See accompanying notes to condensed consolidated and combined financial statements.

5


nVent Electric plc
Condensed Consolidated and Combined Statements of Changes in Equity (Unaudited)

In millions
Ordinary shares
Additional paid-in capital
Retained Earnings
Net Parent investment
Accumulated
other
comprehensive loss
 Total
Number
Amount
Balance - December 31, 2017

$

$

$

$
3,848.4

$
(57.1
)
$
3,791.3

Net income



110.3

53.5


163.8

Cumulative effect of accounting changes




(172.7
)

(172.7
)
Other comprehensive income, net of tax





(34.4
)
(34.4
)
Net transfers from Parent




5.7


5.7

Cash provided at separation to Parent




(993.6
)

(993.6
)
Reclassification of Net Parent investment to additional paid-in capital


2,741.3


(2,741.3
)


Issuance of common stock upon separation
178.4

1.8





1.8

Dividends declared



(62.8
)


(62.8
)
Exercise of options, net of shares tendered for payment
0.9


11.2




11.2

Issuance of restricted shares, net of cancellations
0.1







Shares surrendered by employees to pay taxes


(1.1
)



(1.1
)
Share-based compensation


6.4




6.4

Balance - September 30, 2018
179.4

$
1.8

$
2,757.8

$
47.5

$

$
(91.5
)
$
2,715.6

 
In millions
Ordinary shares
Additional paid-in capital
Retained Earnings
Net Parent investment
Accumulated
other
comprehensive loss
 Total
Number
Amount
Balance - December 31, 2016

$

$

$

$
3,546.3

$
(60.6
)
$
3,485.7

Net income




205.7


205.7

Other comprehensive income, net of tax





(3.4
)
(3.4
)
Net transfers from Parent




74.7


74.7

Balance - September 30, 2017

$

$

$

$
3,826.7

$
(64.0
)
$
3,762.7

See accompanying notes to condensed consolidated and combined financial statements.


6

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)


1.Basis of Presentation and Responsibility for Interim Financial Statements
Business
nVent Electric plc ("nVent," "we," "us," "our" or the "Company") is a leading global provider of electrical connection and protection solutions. The Company is comprised of three reporting segments: Enclosures, Thermal Management and Electrical & Fastening Solutions.
The Company was incorporated in Ireland on May 30, 2017. Although our jurisdiction of organization is Ireland, we manage our affairs so that we are centrally managed and controlled in the United Kingdom (the "U.K.") and therefore have tax residency in the U.K.
Separation from Pentair
On April 30, 2018, Pentair plc ("Pentair" or "Parent") completed the separation of its Water business and its Electrical business into two independent, publicly-traded companies (the "separation"). To effect the separation, Pentair distributed to its shareholders one ordinary share of nVent for every ordinary share of Pentair held as of the record date of April 17, 2018. As a result of the distribution, nVent is now an independent publicly-traded company and began "regular way" trading under the symbol "NVT" on the New York Stock Exchange on May 1, 2018.
In connection with the separation, we filed a Registration Statement on Form 10 (as amended, the “Form 10”) with the Securities and Exchange Commission (the “SEC”), which was declared effective on April 9, 2018. The Form 10 included an Information Statement describing the details of the separation and providing information as to our business and management. The final version of the Information Statement was filed with the SEC as Exhibit 99.1 to our Current Report on Form 8-K/A filed with the SEC on April 11, 2018 (the "Information Statement").

Except where indicated, references below to transactions completed by nVent prior to April 30, 2018 refer to transactions completed by or on behalf of the Electrical reporting segment of Pentair that are reflected on the condensed consolidated and combined financial statements of nVent.
Basis of presentation
The accompanying unaudited condensed consolidated and combined financial statements of nVent have been prepared following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America ("GAAP") can be condensed or omitted. As these are condensed financial statements, one should also read our combined financial statements and notes thereto for the year ended December 31, 2017, which were included in the Information Statement.
We are responsible for the unaudited condensed consolidated and combined financial statements included in this document. The financial statements include all normal recurring adjustments that are considered necessary for the fair presentation of our financial position, results of operations and cash flows for the interim periods presented.
Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for a full year.
The financial statements for periods prior to April 30, 2018 were prepared on a stand-alone basis derived from the consolidated financial statements and records of Pentair as if nVent were operated on a stand-alone basis. These condensed consolidated and combined financial statements have been prepared in U.S. dollars (“USD”) and in accordance with GAAP.
Cost allocations
For periods prior to the separation, the condensed consolidated and combined financial statements of nVent include general corporate expenses of Pentair for certain support functions that were provided on a centralized basis, such as expenses related to executive management, finance, audit, legal, information technology, human resources, communications, facilities and employee benefits and compensation. These general corporate expenses are included in the Condensed Consolidated and Combined Statements of Income and Comprehensive Income within Selling, general and administrative expense and Other expense.
The amount allocated was $17.1 million for the three months ended September 30, 2017, of which $7.7 million was historically recorded to the Electrical segment in Pentair’s consolidated financial statements. The amounts allocated were $42.5 million and $49.6 million for the nine months ended September 30, 2018 and 2017, respectively, of which $10.3 million and $23.2 million, respectively, were historically recorded to the Electrical segment in Pentair's consolidated financial statements. These

7

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

expenses were allocated to nVent on the basis of direct usage when identifiable, with the remainder allocated based on a proportional basis of net sales, headcount or other measures.
nVent considers the allocation methodology regarding Pentair’s general corporate expenses to be reasonable for all periods presented. Nevertheless, the condensed consolidated and combined financial statements of nVent for periods prior to the separation may not reflect the actual expenses that would have been incurred and may not reflect nVent’s condensed consolidated and combined results of operations, financial position and cash flows had it been a stand-alone company during the periods presented. Actual costs for periods prior to the separation that would have been incurred if nVent had been a stand-alone company would depend on multiple factors including organization structure, capital structure and strategic decisions made in various areas, including information technology and infrastructure. Transactions between nVent and Pentair have been included in related party transactions in these unaudited condensed consolidated and combined financial statements and were considered to be effectively settled at the time the transaction was recorded. The total net effect of the settlement of these transactions is reflected in the Condensed Consolidated and Combined Statements of Cash Flows as a financing activity and in the Condensed Consolidated and Combined Balance Sheets as Net Parent investment. The Net Parent investment represents Pentair’s historical investment in nVent, the net effect of cost allocations from transactions with Pentair, net transfers of cash and assets to Pentair and nVent’s accumulated earnings. See Note 10 for a further description of related party transactions and Net Parent investment.
Prior to the separation, transfers of cash, both to and from Pentair’s centralized cash management system were reflected as a component of Net Parent investment in the Condensed Consolidated and Combined Balance Sheets and as a financing activity on the Condensed Consolidated and Combined Statements of Cash Flows. For periods prior to the separation, the cash and cash equivalents held by Pentair at the corporate level were not attributed to nVent, as legal ownership remained with the former Parent.

For periods prior to the separation, certain nVent operations were included in Pentair’s U.S. federal and state income tax returns, and substantially all income taxes on those operations have been paid by Pentair. Income tax expense and other income tax related information contained in these condensed consolidated and combined financial statements for periods prior to the separation are presented on a separate return approach as if nVent filed its own tax returns. Under this approach, the provision for income taxes represents income tax paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year calculated as if nVent was a stand-alone taxpayer filing hypothetical income tax returns where applicable. Current income tax liabilities are assumed to be immediately settled with Pentair and are relieved through the Net Parent investment account and the Net transfers to Parent in the Condensed Consolidated and Combined Statements of Cash Flows.

Adoption of new accounting standards
On January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2017-07, "Retirement Benefits-Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." As a result of the adoption, the interest cost, expected return on plan assets and net actuarial gain/loss components of net periodic pension and post-retirement benefit cost have been reclassified from Selling, general and administrative expense to Other expense. Only the service cost component remains in Operating income and will be eligible for capitalization in assets on a prospective basis.
The effect of the retrospective presentation change related to the net periodic cost of our defined benefit pension and other post-retirement plans on our Condensed Consolidated and Combined Statements of Income and Comprehensive Income was a reclassification of $1.4 million and $4.2 million for the three and nine months ended September 30, 2017, respectively, from Selling, general and administrative expense to Other expense.
On January 1, 2018, we adopted ASU No. 2016-16, "Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory" using the modified retrospective method. The ASU requires the tax effects of all intra-entity sales of assets other than inventory to be recognized in the period in which the transaction occurs. The adoption resulted in a $174.5 million cumulative-effect adjustment recorded in equity as of the beginning of 2018 that reflects a $201.5 million reduction of non-current prepaid income tax assets, partially offset by the establishment of $27.0 million of deferred tax assets.
On January 1, 2018, we adopted ASU No. 2014-09, "Revenue from Contracts with Customers" and the related amendments ("ASC 606" or "the new revenue standard") using the modified retrospective method. As a result of adoption, the cumulative impact to our beginning equity at January 1, 2018 was $1.8 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.

8

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

A majority of our net sales continue to be recognized when products are shipped from our manufacturing facilities or delivery has occurred, depending on terms of the sale. Under the new standard, timing for recognition of certain revenue may be accelerated such that a portion of revenue will be recognized prior to shipment or delivery dependent upon contract-specific terms.
The impact of adopting the new standard primarily relates to the accounting for certain custom products manufactured by our Enclosures segment. Previously revenue was recognized for these custom products upon shipment. However, as these products have no alternative use to the Company and we have an enforceable right to payment for our performance completed to date, revenue related to these custom products will now be recognized over time. Additionally, the new revenue standard resulted in reclassifications on the Condensed Consolidated and Combined Balance Sheets related to accounting for sales returns.
The impact of adoption of the new revenue standard on our Condensed Consolidated and Combined Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2018 and Condensed Consolidated and Combined Balance Sheets as of September 30, 2018 was not material.
The cumulative effect of the changes made to our January 1, 2018 Condensed Consolidated and Combined Balance Sheets from the modified retrospective adoption of ASU 2016-16 and ASU 2014-09 was as follows:
Condensed Consolidated and Combined Balance Sheets
 
 
 
In millions
Balance at December 31, 2017
Adjustments due to ASU 2016-16
Adjustments due to ASU 2014-09
Balance at January 1, 2018
Assets
 
 
 
 
Accounts and notes receivable, net
$
349.3

$

$
3.8

$
353.1

Inventories
224.1


(1.8
)
222.3

Other current assets
132.3


1.8

134.1

Other non-current assets
251.8

(174.5
)

77.3

Liabilities
 
 
 
 
Other current liabilities
141.3


3.8

145.1

Deferred tax liabilities
279.4


0.4

279.8

Equity
 
 
 

Net Parent investment
3,848.4

(174.5
)
1.8

3,675.7

New accounting standards issued but not yet adopted

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases" ("the new lease standard" or "ASC 842"), which requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. In July 2018, the FASB issued ASU No. 2018-11, which provides entities with an additional transition method to adopt ASC 842. Under the new transition method, an entity initially applies the new lease standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company intends to adopt the new lease guidance as of January 1, 2019 and expects to elect the transition method at the adoption date. In preparation for adoption of the new guidance, the Company has reviewed lease contracts and evaluated the impact of applying the package of practical expedients. Based on procedures performed to date, we expect the primary impact to our consolidated financial position upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancelable operating leases on our consolidated and combined balance sheets resulting in the recording of right of use assets and lease obligations. We do not expect the new guidance to have a material impact on our Consolidated and Combined Statements of Income or our Consolidated and Combined Statement of Cash Flows. Adoption of this standard will require changes to our business processes, systems and controls. We are in the process of implementing such changes.

9

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

2.Revenue
Revenue recognition
Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those goods or providing services. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
When determining whether the customer has obtained control of the goods or services, we consider any future performance obligations. Generally, there is no post-shipment obligation on product sold other than warranty obligations in the normal and ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until nVent has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.
Performance obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, stand-alone selling price is generally readily observable.
Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products and services transferred to customers at a point in time accounted for 73% and 87% of our revenue for the three-month periods ended September 30, 2018 and 2017, respectively, and 72% and 86% of our revenue for the nine-month periods ended September 30, 2018 and 2017, respectively. Revenue on these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally this occurs with the transfer of control upon shipment.
Revenue from products and services transferred to customers over time accounted for 27% and 13% of our revenue for the three-month periods ended September 30, 2018 and 2017, respectively, and 28% and 14% of our revenue for the nine-month periods ended September 30, 2018 and 2017, respectively. The increase in our revenue recognized on an over time basis in the first nine months of 2018 compared to the first nine months of 2017 is primarily the result of the impact of the new revenue standard for certain custom products manufactured by our Enclosures segment. Previously, revenue was recognized for these custom products upon shipment. However, as these products have no alternative use to the Company and we have an enforceable right to payment for our performance completed to date, revenue related to these custom products will now be recognized over time.
For the majority of our revenue recognized over time, we use an input measure to determine progress towards completion. Under this method, sales and gross profit are recognized as work is performed generally based on the relationship between the actual costs incurred and the total estimated costs at completion ("the cost-to-cost method") or based on efforts for measuring progress towards completion in situations in which this approach is more representative of the progress on the contract than the cost-to-cost method. Contract costs include labor, material, overhead and, when appropriate, general and administrative expenses. Changes to the original estimates may be required during the life of the contract and such estimates are reviewed on a regular basis. Sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs. These reviews have not resulted in adjustments that were significant to our results of operations. For performance obligations related to long-term contracts, when estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.
We use an output method to measure progress towards completion for certain of our Enclosures businesses, as this method appropriately depicts performance towards satisfaction of the performance obligation. Under the output method, revenue is recognized based on number of units produced.
On September 30, 2018, we had $54.6 million of remaining performance obligations on contracts with original expected duration of one year or more. We expect to recognize the majority of our remaining performance obligations on these contracts within the next twelve to eighteen months.
Sales returns
The right of return may exist explicitly or implicitly with our customers. Our return policy allows for customer returns only upon our authorization. Goods returned must be product we continue to market and must be in salable condition. When the

10

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

right of return exists, we adjust the transaction price for the estimated effect of returns. We estimate the expected returns based on historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer and a projection of this experience into the future.
Pricing and sales incentives
Our sales contracts may give customers the option to purchase additional goods or services priced at a discount. Options to acquire additional goods or services at a discount can come in many forms, such as customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives.
We reduce the transaction price for certain customer programs and incentive offerings including pricing arrangements, promotions and other volume-based incentives that represent variable consideration. Sales incentives given to our customers are recorded using either the expected value method or most likely amount approach for estimating the amount of consideration to which nVent shall be entitled. The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value is an appropriate estimate of the amount of variable consideration when there are a large number of contracts with similar characteristics. The most likely amount is the single most likely amount in a range of possible consideration amounts (that is, the single most likely outcome of the contract). The most likely amount is an appropriate estimate of the amount of variable consideration if the contract has limited possible outcomes (for example, an entity either achieves a performance bonus or does not).
Pricing is established at or prior to the time of sale with our customers and we record sales at the agreed-upon net selling price. However, certain of our businesses allow customers to apply for a refund of a percentage of the original purchase price if they can demonstrate sales to a qualifying end customer. We use the expected value method to estimate the anticipated refund to be paid based on historical experience and reduce sales for the probable cost of the discount. The cost of these refunds is recorded as a reduction of transaction price.
Volume-based incentives involve rebates that are negotiated at or prior to the time of sale with the customer and are redeemable only if the customer achieves a specified cumulative level of sales or sales increase. Under these incentive programs, at the time of sale, we estimate the anticipated rebate to be paid based on forecasted sales levels. These forecasts are updated at least quarterly for each customer and the transaction price is reduced for the anticipated cost of the rebate. If the forecasted sales for a customer changes, the accrual for rebates is adjusted to reflect the new amount of rebates expected to be earned by the customer.
Shipping and handling costs
Amounts billed to customers for shipping and handling activities after the customer obtains control are treated as a promised service performance obligation and recorded in Net sales in the accompanying Condensed Consolidated and Combined Statements of Income and Comprehensive Income. Shipping and handling costs incurred by nVent for the delivery of goods to customers are considered a cost to fulfill the contract and are included in Cost of goods sold in the accompanying Condensed Consolidated and Combined Statements of Income and Comprehensive Income.
Contract assets and liabilities
Contract assets consist of unbilled amounts resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer, such as when the customer retains a small portion of the contract price until completion of the contract. We typically receive interim payments on sales under long-term contracts as work progresses, although for some contracts, we may be entitled to receive an advance payment. Contract liabilities consist of advanced payments and billings in excess of costs incurred and deferred revenue.
Contract assets are recorded within Other current assets and contract liabilities are recorded within Other current liabilities in the Condensed Consolidated and Combined Balance Sheets.

11

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

Contract assets and liabilities consisted of the following:
In millions
September 30, 2018
December 31, 2017
$ Change
% Change
Contract assets
$
68.2

$
69.9

$
(1.7
)
(2.4
)%
Contract liabilities
13.5

14.3

(0.8
)
(5.6
)%
Net contract assets (liabilities)
$
54.7

$
55.6

$
(0.9
)
(1.6
)%
The $0.9 million decrease in net contract assets from December 31, 2017 to September 30, 2018 was primarily the result of timing of milestone payments. The majority of our contract liabilities at December 31, 2017 were recognized in revenue as of September 30, 2018. There were no impairment losses recognized on our contract assets for the nine months ended September 30, 2018.
Practical expedients and exemptions
We generally expense incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are recorded in Selling, general and administrative expense in the Condensed Consolidated and Combined Statements of Income and Comprehensive Income.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Further, we do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Revenue by category
We disaggregate our revenue from contracts with customers by geographic location and vertical for each of our segments, as we believe these best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Geographic net sales information by segment, based on geographic destination of the sale, was as follows:
 
Three months ended September 30, 2018
In millions
Enclosures
Thermal Management
Electrical & Fastening Solutions
Total
U.S. and Canada
$
179.7

$
90.7

$
104.1

$
374.5

Developed Europe (1)
50.6

42.9

28.5

122.0

Developing (2)
26.0

20.7

11.0

57.7

Other Developed (3)
3.2

3.1

3.4

9.7

Total
$
259.5

$
157.4

$
147.0

$
563.9

 
Nine months ended September 30, 2018
In millions
Enclosures
Thermal Management
Electrical & Fastening Solutions
Total
U.S. and Canada
$
530.8

$
248.3

$
300.7

$
1,079.8

Developed Europe (1)
152.6

122.6

84.2

359.4

Developing (2)
77.0

60.7

35.7

173.4

Other Developed (3)
8.8

12.7

11.4

32.9

Total
$
769.2

$
444.3

$
432.0

$
1,645.5


12

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

 
Three months ended September 30, 2017
In millions
Enclosures
Thermal Management
Electrical & Fastening Solutions
Total
U.S. and Canada
$
166.2

$
82.5

$
98.5

$
347.2

Developed Europe (1)
45.1

47.1

25.8

118.0

Developing (2)
27.2

25.5

11.7

64.4

Other Developed (3)
3.2

4.0

3.8

11.0

Total
$
241.7

$
159.1

$
139.8

$
540.6

 
Nine months ended September 30, 2017
In millions
Enclosures
Thermal Management
Electrical & Fastening Solutions
Total
U.S. and Canada
$
495.3

$
235.8

$
286.2

$
1,017.3

Developed Europe (1)
125.9

135.0

73.2

334.1

Developing (2)
71.2

63.6

39.5

174.3

Other Developed (3)
9.9

10.0

10.4

30.3

Total
$
702.3

$
444.4

$
409.3

$
1,556.0

(1) Developed Europe - Represents Western Europe and Eastern Europe included in European Union.
(2) Developing - Represents China, Eastern Europe not included in European Union, Latin America, Middle East and Southeast Asia.
(3) Other Developed - Represents Australia and Japan.

Vertical net sales information by segment was as follows:
 
Three months ended September 30, 2018
In millions
Enclosures
Thermal Management
Electrical & Fastening Solutions
Total
Industrial
$
161.1

$
66.9

$
29.3

$
257.3

Commercial & Residential
22.8

45.5

85.5

153.8

Energy
24.5

43.7

13.8

82.0

Infrastructure
51.1

1.3

18.4

70.8

Total
$
259.5

$
157.4

$
147.0

$
563.9

 
Nine months ended September 30, 2018
In millions
Enclosures
Thermal Management
Electrical & Fastening Solutions
Total
Industrial
$
475.2

$
185.1

$
84.5

$
744.8

Commercial & Residential
65.0

135.4

248.9

449.3

Energy
79.8

119.8

39.9

239.5

Infrastructure
149.2

4.0

58.7

211.9

Total
$
769.2

$
444.3

$
432.0

$
1,645.5


13

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

 
Three months ended September 30, 2017
In millions
Enclosures
Thermal Management
Electrical & Fastening Solutions
Total
Industrial
$
147.9

$
74.2

$
26.9

$
249.0

Commercial & Residential
22.3

39.1

78.9

140.3

Energy
25.9

44.7

13.0

83.6

Infrastructure
45.6

1.1

21.0

67.7

Total
$
241.7

$
159.1

$
139.8

$
540.6

 
Nine months ended September 30, 2017
In millions
Enclosures
Thermal Management
Electrical & Fastening Solutions
Total
Industrial
$
432.3

$
190.6

$
75.4

$
698.3

Commercial & Residential
66.0

113.8

234.0

413.8

Energy
73.6

137.5

40.8

251.9

Infrastructure
130.4

2.5

59.1

192.0

Total
$
702.3

$
444.4

$
409.3

$
1,556.0


14

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

3.
Restructuring
During the nine months ended September 30, 2018, we continued execution of certain business restructuring initiatives, which we initiated in the year ended December 31, 2017, aimed at reducing our fixed cost structure and realigning our business. Initiatives during the nine months ended September 30, 2018 included the reduction in hourly and salaried headcount of approximately 50 employees.
Restructuring related costs included in Selling, general and administrative expense in the Condensed Consolidated and Combined Statements of Income and Comprehensive Income included costs for severance and other restructuring costs as follows: 
 
Three months ended
 
Nine months ended
In millions
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Severance and related costs
$
1.3

$
1.7

 
$
6.4

$
14.5

Other


 

0.2

Total restructuring costs
$
1.3

$
1.7

 
$
6.4

$
14.7

Other restructuring costs primarily consist of asset impairment and various contract termination costs.
Restructuring costs by reportable segment were as follows:
 
Three months ended
 
Nine months ended
In millions
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Enclosures
$

$
0.5

 
$
1.2

$
5.6

Thermal Management
0.3

0.2

 
3.0

7.0

Electrical & Fastening Solutions

1.0

 
1.0

2.1

Other
1.0


 
1.2


Total
$
1.3

$
1.7

 
$
6.4

$
14.7

Activity related to accrued severance and related costs recorded in Other current liabilities in the Condensed Consolidated and Combined Balance Sheets is summarized as follows for the nine months ended September 30, 2018:
In millions
September 30,
2018
Beginning balance
$
5.1

Costs incurred
6.4

Cash payments and other
(7.6
)
Ending balance
$
3.9


15

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

4.
Earnings Per Share
On April 30, 2018, Pentair completed the separation of its Electrical business, distributing to its shareholders one ordinary share of nVent for every ordinary share of Pentair held as of the record date of April 17, 2018. The computations of basic and diluted earnings per share for periods prior to the separation were calculated using the shares that were distributed to Pentair shareholders upon the separation.
Basic and diluted earnings per share were calculated as follows:
 
Three months ended
 
Nine months ended
In millions, except per-share data
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Net income
$
68.2

$
79.7

 
$
163.8

$
205.7

Weighted average ordinary shares outstanding
 
 
 
 
 
Basic
179.3

179.0

 
178.8

179.0

Dilutive impact of stock options, restricted stock units and performance share units
2.2

2.2

 
2.3

2.2

Diluted
181.5

181.2

 
181.1

181.2

Earnings per ordinary share
 
 
 
 
 
Basic earnings per ordinary share
$
0.38

$
0.45

 
$
0.92

$
1.15

Diluted earnings per ordinary share
$
0.38

$
0.44

 
$
0.90

$
1.14

Anti-dilutive stock options excluded from the calculation of diluted earnings per share
0.9

0.4

 
0.6

0.4

5.
Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill by reportable segment were as follows:
In millions
December 31,
2017
Acquisitions/
divestitures
Foreign currency 
translation/other 
September 30,
2018
Enclosures
$
274.8

$

$
(1.3
)
$
273.5

Thermal Management
927.1


(1.2
)
925.9

Electrical & Fastening Solutions
1,036.3

1.9


1,038.2

Total goodwill
$
2,238.2

$
1.9

$
(2.5
)
$
2,237.6

In January 2018, we completed an acquisition as part of our Electrical & Fastening Solutions segment with a purchase price of $2.0 million in cash, net of cash acquired.
Identifiable intangible assets consisted of the following:
 
September 30,
2018
 
December 31,
2017
In millions
Cost
Accumulated
amortization
Net
 
Cost
Accumulated
amortization
Net
Definite-life intangibles
 
 
 
 
 
 
 
Customer relationships
$
1,151.7

$
(252.0
)
$
899.7

 
$
1,153.0

$
(207.5
)
$
945.5

Proprietary technology and patents
14.8

(5.8
)
9.0

 
14.6

(4.8
)
9.8

Total definite-life intangibles
1,166.5

(257.8
)
908.7

 
1,167.6

(212.3
)
955.3

Indefinite-life intangibles
 
 
 
 
 
 
 
Trade names
281.3


281.3

 
281.3


281.3

Total intangibles
$
1,447.8

$
(257.8
)
$
1,190.0

 
$
1,448.9

$
(212.3
)
$
1,236.6


16

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

Identifiable intangible asset amortization expense was $15.2 million and $15.4 million for the three months ended September 30, 2018 and 2017, respectively, and $45.8 million and $46.0 million for the nine months ended September 30, 2018 and 2017, respectively.
Estimated future amortization expense for identifiable intangible assets during the remainder of 2018 and the next five years is as follows:
 
Q4
 
 
 
 
 
In millions
2018
2019
2020
2021
2022
2023
Estimated amortization expense
$
15.2

$
60.5

$
60.4

$
59.2

$
59.2

$
59.0


17

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

6.
Supplemental Balance Sheet Information
In millions
September 30,
2018
December 31,
2017
Inventories
 
 
Raw materials and supplies
$
70.0

$
64.3

Work-in-process
25.9

25.2

Finished goods
141.2

134.6

Total inventories
$
237.1

$
224.1

Other current assets
 
 
Cost in excess of billings
$
68.2

$
69.9

Prepaid expenses
36.1

29.3

Prepaid income taxes
12.3

31.3

Other current assets
10.1

1.8

Total other current assets
$
126.7

$
132.3

Property, plant and equipment, net
 
 
Land and land improvements
$
38.8

$
39.1

Buildings and leasehold improvements
175.2

170.2

Machinery and equipment
413.7

402.0

Construction in progress
9.7

11.5

Total property, plant and equipment
637.4

622.8

Accumulated depreciation and amortization
373.4

357.0

Total property, plant and equipment, net
$
264.0

$
265.8

Other non-current assets
 
 
Prepaid income taxes
$

$
201.5

Deferred compensation plan assets
25.0

25.1

Other non-current assets
31.2

25.2

Total other non-current assets
$
56.2

$
251.8

Other current liabilities
 
 
Dividends payable
$
31.4

$

Accrued rebates
40.4

42.9

Billings in excess of cost
8.7

9.8

Accrued taxes payable
36.4

41.8

Accrued interest
19.9


Other current liabilities
61.3

46.8

Total other current liabilities
$
198.1

$
141.3

Other non-current liabilities
 
 
Income taxes payable
$
44.7

$
57.6

Deferred compensation plan liabilities
25.0

25.1

Other non-current liabilities
5.1

4.0

Total other non-current liabilities
$
74.8

$
86.7


18

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

7.
Derivatives and Financial Instruments
Derivative financial instruments
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. dollar. We manage our economic and transaction exposure to certain market-based risks through the use of foreign currency derivative financial instruments. Our objective in holding these derivatives is to reduce the volatility of net earnings and cash flows associated with changes in foreign currency exchange rates. The majority of our foreign currency contracts have an original maturity date of less than one year. The derivative contracts contain credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. The amount of such credit risk is generally limited to the unrealized gains, if any, in such contracts. Such risk is minimized by limiting those counterparties to major financial institutions of high credit quality.
Foreign currency contracts
At September 30, 2018 and December 31, 2017, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $19.9 million and $10.7 million, respectively. The impact of these contracts on the Condensed Consolidated and Combined Statements of Income and Comprehensive Income was not material for any period presented. In October 2018, we entered into a foreign currency derivative contract with a gross notional U.S. dollar equivalent amount of $100.6 million.
Gains or losses on foreign currency contracts designated as hedges are reclassified out of Accumulated Other Comprehensive Loss ("AOCI") and into Selling, general and administrative expense in the Condensed Consolidated and Combined Statements of Income and Comprehensive Income when the hedged transactions affect earnings. Such reclassifications during the three and nine months ended September 30, 2018 and 2017 were not material.
Net investment hedge
We have net investments in foreign subsidiaries that are subject to changes in the foreign currency exchange rate. In October 2018, we designated a cross-currency swap with a gross notional U.S. dollar equivalent amount of $69.1 million as a net investment hedge for a portion of our net investment in our Euro denominated subsidiaries. Gains or losses resulting from the change in fair value of the net investment hedge will be included as a component of the cumulative translation adjustment account within AOCI and offset gains and losses on the underlying foreign currency exposures.

Fair value of financial instruments
The following methods were used to estimate the fair values of each class of financial instruments: 
short-term financial instruments (cash and cash equivalents, accounts and notes receivable, accounts and notes payable and variable-rate debt) — recorded amount approximates fair value because of the short maturity period;
long-term fixed-rate debt, including current maturities — fair value is based on market quotes available for issuance of debt with similar terms, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance;
foreign currency contract agreements — fair values are determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance; and
deferred compensation plan assets (mutual funds, common/collective trusts and cash equivalents for payment of certain non-qualified benefits for retired, terminated and active employees) — fair value of mutual funds and cash equivalents are based on quoted market prices in active markets that are classified as Level 1 in the valuation hierarchy defined by the accounting guidance; fair value of common/collective trusts are based on observable inputs that are classified as Level 2 in the valuation hierarchy defined by the accounting guidance.

19

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

The recorded amounts and estimated fair values of total debt, excluding unamortized issuance costs and discounts, were as follows:
 
September 30,
2018
 
December 31,
2017
In millions
Recorded
Amount
Fair
Value
 
Recorded
Amount
Fair
Value
Variable rate debt
$
150.0

$
150.0

 
$

$

Fixed rate debt
800.0

793.1

 


Total debt
$
950.0

$
943.1

 
$

$

Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:
 
September 30, 2018
In millions
Level 1
Level 2
Level 3
Total
Recurring fair value measurements
 
 
 
 
Foreign currency contract liabilities
$

$
(0.5
)
$

$
(0.5
)
Deferred compensation plan assets
20.8

4.2


25.0

Total recurring fair value measurements
$
20.8

$
3.7

$

$
24.5

 
December 31, 2017
In millions
Level 1
Level 2
Level 3
Total
Recurring fair value measurements
 
 
 
 
Foreign currency contract assets
$

$
0.7

$

$
0.7

Deferred compensation plan assets
22.9

2.2


25.1

Total recurring fair value measurements
$
22.9

$
2.9

$

$
25.8

Nonrecurring fair value measurements (1)
 
 
 
 
(1)
During the fourth quarter of 2017, we completed our annual intangible assets impairment review. As a result, we recorded a pre-tax non-cash impairment charge of $16.4 million. The impairment charge reduced the carrying value of the impacted trade name intangibles to $16.2 million. The fair value of trade names is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital.

20

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

8.
Debt
Debt and the average interest rates on debt outstanding were as follows:
In millions
Average interest rate as of September 30, 2018
Maturity
Year
September 30,
2018
December 31,
2017
Senior notes - fixed rate(1)
3.950%
2023
$
300.0

$

Senior notes - fixed rate(1)
4.550%
2028
500.0


Term loan facility
3.617%
2023
150.0


Unamortized debt issuance costs and discounts
N/A
N/A
(6.0
)

Total debt
 
 
944.0


Less: Current maturities and short-term borrowings
 
 
(11.3
)

Long-term debt
 
 
$
932.7

$

(1) Senior notes are fully and unconditionally guaranteed as to payment by nVent Electric plc ("Parent Company Guarantor")
Senior notes
In March 2018, nVent Finance S.à r.l. (“nVent Finance” or "Subsidiary Issuer"), a 100-percent owned subsidiary of nVent, issued $300.0 million aggregate principal amount of 3.950% senior notes due 2023 (the "2023 Notes") and $500.0 million aggregate principal amount of 4.550% senior notes due 2028 (the "2028 Notes" and, collectively with the 2023 Notes, the "Notes"). Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning October 15, 2018. In August 2018, nVent and nVent Finance filed a Registration Statement on Form S-4 with the SEC to exchange the Notes for new, registered Notes. The exchange offer was completed on October 22, 2018, pursuant to which substantially all of the Notes were exchanged for the new, registered Notes. The exchange offer did not impact the aggregate principle amount of the Notes outstanding.
The Notes are fully and unconditionally guaranteed as to payment by the Parent Company Guarantor. There are no subsidiaries that guarantee the Notes. The Parent Company Guarantor has no independent assets or operations unrelated to its investments in its consolidated subsidiaries. The Parent Company Guarantor’s only direct subsidiary is the Subsidiary Issuer. The Subsidiary Issuer has no independent assets or operations unrelated to its investments in its consolidated subsidiaries and the issuance of the Notes and other external debt.

The Notes constitute general unsecured senior obligations of the Subsidiary Issuer and rank equally in right of payment with all existing and future unsubordinated and unsecured indebtedness and liabilities of the Subsidiary Issuer. The guarantees of the Notes by the Parent Company Guarantor constitute general unsecured obligations of the Parent Company Guarantor and rank equally in right of payment with all existing and future unsubordinated and unsecured indebtedness and liabilities of the Subsidiary Issuer. Subject to certain qualifications and exceptions, the indenture pursuant to which the Notes were issued contains covenants that, among other things, restrict nVent’s, nVent Finance’s and certain subsidiaries’ ability to merge or consolidate with another person, create liens or engage in sale and lease-back transactions.

There are no significant restrictions on the ability of nVent to obtain funds from its subsidiaries by dividend or loan. None of the assets of nVent or its subsidiaries represents restricted net assets pursuant to the guidelines established by the SEC.

Senior credit facilities
In March 2018, nVent Finance entered into a credit agreement with a syndicate of banks providing for a five-year $200.0 million senior unsecured term loan facility (the "Term Loan Facility") and a five-year $600.0 million senior unsecured revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Senior Credit Facilities"). We have the option to request to increase the Revolving Credit Facility in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders. There were no outstanding borrowings under the Revolving Credit Facility as of September 30, 2018. We repaid $50.0 million of outstanding principal on the Term Loan Facility during the third quarter of 2018.
Our debt agreements contain certain financial covenants, the most restrictive of which are in the Senior Credit Facilities, including that we may not permit (i) the ratio of our consolidated debt (net of our consolidated unrestricted cash in excess of $5.0 million but not to exceed $250.0 million) to our consolidated net income (excluding, among other things, non-cash gains and losses) before interest, taxes, depreciation, amortization and non-cash share-based compensation expense ("EBITDA") on

21

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

the last day of any period of four consecutive fiscal quarters to exceed 3.75 to 1.00 and (ii) the ratio of our EBITDA to our consolidated interest expense for the same period to be less than 3.00 to 1.00. In addition, subject to certain qualifications and exceptions, the Senior Credit Facilities also contain covenants that, among other things, restrict our ability to create liens, merge or consolidate with another person, make acquisitions and incur subsidiary debt. As of September 30, 2018, we were in compliance with all financial covenants in our debt agreements.
Debt outstanding, excluding unamortized issuance costs and discounts, at September 30, 2018 matures on a calendar year basis as follows:
 
Q4
 
 
 
 
 
 
 
In millions
2018
2019
2020
2021
2022
2023
Thereafter
Total
Contractual debt obligation maturities
$
2.5

$
12.5

$
17.5

$
20.0

$
20.0

$
377.5

$
500.0

$
950.0

9.
Income Taxes
The effective income tax rate for the nine months ended September 30, 2018 was 16.3%, compared to 18.4% for nine months ended September 30, 2017. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The liability for uncertain tax positions was $18.6 million and $24.6 million at September 30, 2018 and December 31, 2017, respectively. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Interest expense, respectively, on the Condensed Consolidated and Combined Statements of Income and Comprehensive Income, which is consistent with our past practices.
U.S. tax reform
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
Given the significance of the Act, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 allows registrants to record provisional amounts during a one year “measurement period.” The measurement period is deemed to have ended when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
The Company calculated its best estimate of the impact of the Act in its December 31, 2017 income tax provision in accordance with its understanding of the Act and guidance available as of the date of the filing of the Form 10 and as a result recorded a provisional income tax benefit of $84.8 million in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was a decrease to income tax expense of $122.0 million. The remeasurement of deferred taxes requires further analysis regarding the state tax impacts of the remeasurement, the impact of the Act on the taxation of executive compensation arrangements, changes to tax capitalization provisions and other aspects of the Act that may impact our tax balances. We are continuing to gather additional information to complete our accounting for these items and we will complete the analysis in the fourth quarter of 2018.
The amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was an increase to income tax expense of $32.9 million, which represents a decrease of $4.3 million compared to the provisional amount recorded at December 31, 2017.

22

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

10.
Related Party Transactions and Net Parent Investment
The Parent’s business model prior to the separation included a combination of stand-alone and combined business functions between Pentair and nVent, varying by region and country. Sales to Pentair were not material for all periods prior to the separation. During the periods prior to the separation, nVent engaged in cash pooling arrangements with related parties managed centrally by the Parent.
The condensed consolidated and combined financial statements of nVent include allocations of these costs between Pentair and nVent for periods prior to the separation. Such allocations are estimates, and also may not represent the cost of such services if performed on a stand-alone basis. See further description of cost allocations in Note 1.
The Condensed Consolidated and Combined Balance Sheets of nVent for periods prior to the separation include certain of the Parent assets and liabilities that are specifically identifiable or otherwise attributable to nVent and were transferred to nVent upon completion of the separation. Transactions between nVent and Pentair prior to the separation are considered to be effectively settled at the time the transaction was recorded. The net effect of these transactions is included in the Condensed Consolidated and Combined Statements of Cash Flows as Net transfers to Parent.
Net Parent investment in the Condensed Consolidated and Combined Balance Sheets represents the Parent’s historical investment in the Company, the net effect of cost allocations from transactions with the Parent, net transfers of cash and assets to the Parent and nVent’s accumulated earnings.
11.
Benefit Plans
We sponsor defined-benefit pension plans and a post-retirement health plan. The defined benefit pension plans cover certain non-U.S. employees and retirees, and the pension benefits are based principally on an employee’s years of service and/or compensation levels near retirement. These plans are accounted for as defined benefit pension plans for purposes of the condensed consolidated and combined financial statements. Accordingly, the funded position of these plans and the related expense are recorded in the condensed consolidated and combined financial statements. The unfunded post-retirement health plan covers certain U.S. employees and retirees and provides a fixed monthly dollar credit for retiree health care expenses. The benefit obligation and related expense for this plan are included in the condensed consolidated and combined financial statements.
Components of net periodic benefit cost for our pension plans for the three and nine months ended September 30, 2018 and 2017 were as follows:
 
Three months ended
 
Nine months ended
In millions
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Service cost
$
1.5

$
1.4

 
$
4.4

$
4.2

Interest cost
1.1

0.9

 
3.3

2.7

Expected return on plan assets
(0.4
)
(0.4
)
 
(1.1
)
(1.0
)
Net actuarial loss


 
4.1


Net periodic benefit cost
$
2.2

$
1.9

 
$
10.7

$
5.9

As described in Note 1, during the first quarter of 2018, the Company adopted ASU 2017-07. As a result, service costs are classified as employee compensation costs within Cost of goods sold and Selling, general and administrative expense within the Condensed Consolidated and Combined Statements of Income and Comprehensive Income. All other components of net periodic benefit cost are classified within Other expense for the periods presented.
Components of net periodic benefit cost for our other post-retirement health plan for the three and nine months ended September 30, 2018 and 2017 were not material.
Prior to the separation, certain Company employees participated in defined benefit pension plans and post-retirement health plans sponsored by Pentair ("Shared Plans"), which also included other Pentair participants. For purposes of these condensed consolidated and combined financial statements, the Company accounts for the Shared Plans as multi-employer benefit plans. Accordingly, the Company did not record an asset or liability to recognize the funded status of the Shared Plans. However, the Company did record expense attributable to its employees who participated in the Shared Plans, as well as expense allocated for Pentair’s corporate and shared functional employees. The total expense was $1.8 million for the three months ended

23

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

September 30, 2017, and $0.9 million and $5.4 million for the nine months ended September 30, 2018 and 2017, respectively. nVent did not assume any benefit obligation of the Shared Plans as a result of the separation.
12.
Share Plans
Prior to the separation on April 30, 2018, the Company's employees participated in stock-based compensation plans sponsored by Pentair. The share-based compensation expense recorded by the Company includes the expenses associated with employees historically attributable to the Company’s operations. Additionally, a portion of share-based compensation expense for Pentair’s corporate and shared functional employees has been allocated to the Company’s financial statements.
Total share-based compensation expense for the three and nine months ended September 30, 2018 and 2017 were as follows:
 
Three months ended
 
Nine months ended
In millions
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Restricted stock units
$
2.1

$
1.3

 
$
4.8

$
4.7

Stock options
1.1

0.8

 
2.4

3.3

Performance share units
0.7

0.5

 
2.1

3.4

Total share-based compensation expense
$
3.9

$
2.6

 
$
9.3

$
11.4

In May 2018, we issued our annual share-based compensation grants under the nVent Electric plc 2018 Omnibus Incentive Plan to eligible employees. The total number of awards issued was 1.4 million, of which 0.3 million were restricted stock units, 0.9 million were stock options and 0.2 million were performance share units. The weighted-average grant date fair value of the restricted stock units, stock options and performance share units issued was $25.34, $5.04 and $25.34, respectively.
We estimated the fair value of each stock option award issued in the annual share-based compensation grant using a Black-Scholes option pricing model, modified for dividends and using the following assumptions:
 
2018 Annual Grant
Risk-free interest rate
2.53
%
Expected dividend yield
2.94
%
Expected share price volatility
25.5
%
Expected term (years)
6.1

These estimates require us to make assumptions based on historical results, observance of trends in our share price, changes in option exercise behavior, future expectations and other relevant factors. If other assumptions had been used, share-based compensation expense, as calculated and recorded under the accounting guidance, could have been affected.
We based the expected life assumption on historical experience as well as the terms and vesting periods of the options granted. For purposes of determining expected share price volatility, we considered a rolling average of historical volatility measured over a period approximately equal to the expected option term. The risk-free interest rate for periods that coincide with the expected life of the options is based on the U.S. Treasury Department yield curve in effect at the time of grant.

24

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

13.
Shareholders' Equity
Share repurchases
On July 23, 2018, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $500.0 million. The authorization expires on July 23, 2021. We made no purchases of our ordinary shares during the third quarter of 2018.
Dividends Paid
On July 23, 2018, the Board of Directors declared a quarterly cash dividend of $0.175 that was paid on August 17, 2018 to shareholders of record at the close of business on August 3, 2018.
Dividends Payable
On September 18, 2018, the Board of Directors declared a quarterly cash dividend of $0.175 payable on November 2, 2018 to shareholders of record at the close of business on October 19, 2018. As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $31.4 million at September 30, 2018.
14.
Segment Information
We evaluate performance based on net sales and segment income (loss) and use a variety of ratios to measure performance of our reporting segments. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Segment income (loss) represents operating income exclusive of intangible amortization, separation costs, net interest expense, costs of restructuring and other activities and other unusual non-operating items.
Financial information by reportable segment is as follows:
 
Three months ended
 
Nine months ended
In millions
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Net sales
 
 
 
 
 
Enclosures
$
259.5

$
241.7

 
$
769.2

$
702.3

Thermal Management
157.4

159.1

 
444.3

444.4

Electrical & Fastening Solutions
147.0

139.8

 
432.0

409.3

Total
$
563.9

$
540.6

 
$
1,645.5

$
1,556.0

Segment income (loss)
 
 
 
 
 
Enclosures
$
47.4

$
44.1

 
$
135.9

$
130.1

Thermal Management
41.9

43.3

 
105.8

96.9

Electrical & Fastening Solutions
38.9

35.2

 
111.5

108.2

Other
(13.2
)
(2.9
)
 
(37.1
)
(12.6
)
Total
$
115.0

$
119.7

 
$
316.1

$
322.6

The following table presents a reconciliation of segment income to income before income taxes:
 
Three months ended
 
Nine months ended
In millions
September 30,
2018
September 30,
2017
 
September 30,
2018
September 30,
2017
Segment income
$
115.0

$
119.7

 
$
316.1

$
322.6

Intangible amortization
(15.2
)
(15.4
)
 
(45.8
)
(46.0
)
Separation costs
(4.8
)
(4.7
)
 
(39.3
)
(6.9
)
Net interest expense
(11.7
)
(0.2
)
 
(21.6
)
(0.4
)
Restructuring and other
(1.3
)

 
(6.4
)
(13.0
)
Other expense
(0.9
)
(1.4
)
 
(7.2
)
(4.2
)
Income before income taxes
$
81.1

$
98.0

 
$
195.8

$
252.1


25

nVent Electric plc
Notes to condensed consolidated and combined financial statements (unaudited)

15.
Commitments and Contingencies
Warranties and guarantees
In connection with the disposition of our businesses or product lines, we may agree to indemnify purchasers for various potential liabilities relating to the sold business, such as pre-closing tax, product liability, warranty, environmental, or other obligations. The subject matter, amounts and duration of any such indemnification obligations vary for each type of liability indemnified and may vary widely from transaction to transaction.
Generally, the maximum obligation under such indemnifications is not explicitly stated and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial position, results of operations or cash flows.
We recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.
We provide service and warranty policies on our products. Liability under service and warranty policies is based upon a review of historical warranty and service claim experience. Adjustments are made to accruals as claim data and historical experience warrant. Our liability for service and product warranties as of September 30, 2018 and December 31, 2017 was not material.
Stand-by letters of credit, bank guarantees and bonds
In disposing of assets or businesses, we often provide representations, warranties and indemnities to cover various risks including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities and unidentified tax liabilities and legal fees related to periods prior to disposition. We do not have the ability to reasonably estimate the potential liability due to the inchoate and unknown nature of these potential liabilities. However, we have no reason to believe that these uncertainties would have a material adverse effect on our financial position, results of operations or cash flows.
In the ordinary course of business, we are required to commit to bonds, letters of credit and bank guarantees that require payments to our customers for any non-performance. The outstanding face value of these instruments fluctuates with the value of our projects in process and in our backlog. In addition, we issue financial stand-by letters of credit primarily to secure our performance to third parties under self-insurance programs.
As of September 30, 2018 and December 31, 2017, the outstanding value of bonds, letters of credit and bank guarantees totaled $79.2 million and $72.3 million, respectively.

26


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This report contains statements that we believe to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact are forward-looking statements. Without limitation, any statements preceded or followed by or that include the words "targets," "plans," "believes," "expects," "intends," "will," "likely," "may," "anticipates," "estimates," "projects," "should," "would," "positioned," "strategy," "future," "forecast" or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the ability to realize the anticipated benefits from the separation (as defined below); adverse effects on our business operations or financial results; the ability of our business to operate independently following the separation; changes in tax laws; the impact of the separation on our employees, customers and suppliers; overall global economic and business conditions impacting our business; the ability to achieve the benefits of our restructuring plans; the ability to successfully identify, finance, complete and integrate acquisitions; competition and pricing pressures in the markets we serve, including the impacts of tariffs; the strength of housing and related markets; volatility in currency exchange rates and commodity prices; inability to generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future project work; failure of markets to accept new product introductions and enhancements; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including this Quarterly Report on Form 10-Q and the Information Statement filed as exhibit 99.1 to our Current Report on Form 8-K/A, filed with the SEC on April 11, 2018 (the "Information Statement"). All forward-looking statements speak only as of the date of this report. nVent Electric plc assumes no obligation, and disclaims any obligation, to update the information contained in this report.
Overview
The terms "us," "we" "our" "the Company" or "nVent" refer to nVent Electric plc. nVent is a leading global provider of electrical connection and protection solutions. We believe our inventive electrical solutions enable safer systems and ensure a more secure world. We design, manufacture, market, install, and service high performance products and solutions that connect and protect some of the world's most sensitive equipment, buildings, and critical processes. We offer a comprehensive range of enclosures, electrical connections and fastening, and thermal management solutions across industry-leading brands that are recognized globally for quality, reliability, and innovation.
We operate across three segments: Enclosures, Thermal Management, and Electrical & Fastening Solutions, which represented approximately 47%, 27% and 26% of total revenues during the first nine months of 2018, respectively. We classify our operations into business segments based primarily on types of products offered and markets served:
Enclosures—The Enclosures segment provides inventive solutions that protect, connect and manage
heat in critical electronics, communication, control, and power equipment. From metallic and non-metallic enclosures to cabinets, subracks and backplanes, it offers the physical infrastructure to host, connect and protect server and network equipment, as well as indoor and outdoor protection for broadband voice, data and video surveillance applications in industrial, infrastructure, commercial, and energy verticals.
Thermal Management—The Thermal Management segment provides electric thermal solutions that connect and protect critical buildings, infrastructure, industrial processes and people. Its thermal management systems include heat tracing, floor heating, fire-rated and specialty wiring, sensing and snow melting and de-icing solutions for use in industrial, energy, commercial & residential and infrastructure verticals. Its highly reliable and easy to install solutions lower total cost of ownership to building owners, facility managers, operators and end users.
Electrical & Fastening Solutions—The Electrical & Fastening Solutions segment provides fastening solutions that connect and protect electrical and mechanical systems and civil structures. Its engineered electrical and fastening products are used across a wide range of verticals, including commercial, industrial, infrastructure and energy.

27


On April 30, 2018, Pentair plc ("Pentair") completed the separation of its Water business and its Electrical business into two independent, publicly-traded companies (the "separation"). To effect the separation, Pentair distributed to its shareholders one ordinary share of nVent for every ordinary share of Pentair held as of the record date of April 17, 2018. As a result of the distribution, nVent is now an independent publicly-traded company and began regular way trading under the symbol "NVT" on the New York Stock Exchange on May 1, 2018.
The Company was incorporated in Ireland on May 30, 2017. Although our jurisdiction of organization is Ireland, we manage our affairs so that we are centrally managed and controlled in the United Kingdom (the "U.K.") and therefore have tax residency in the U.K.
Key Trends and Uncertainties Regarding our Existing Business
The following trends and uncertainties affected our financial performance in 2017 and the first nine months of 2018 and will likely impact our results in the future:
We have identified specific product and geographic market opportunities that we find attractive and continue to pursue, both within and outside the U.S. We are reinforcing our businesses to more effectively address these opportunities through research and development and additional sales and marketing resources. Unless we successfully penetrate these markets, our organic sales growth will likely be limited or may decline.
We have experienced material and other cost inflation. We strive for productivity improvements and we implement increases in selling prices to help mitigate this inflation. We expect the current economic environment, including the impacts of tariffs, will result in continuing price volatility for many of our raw materials and purchased components and we are uncertain as to the timing and impact of these market changes.
During 2017 and the first nine months of 2018, we continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. We expect that these actions will contribute to margin growth through the remainder of 2018.
In 2018, our operating objectives include the following:
Achieving differentiated revenue growth through new products and solutions and market expansion in key developing regions;
Driving operating excellence through lean enterprise initiatives, with specific focus on sourcing and supply management, cash flow management and lean operations;
Optimizing our technological capabilities to increasingly generate innovative new and connected products; and
Focusing on developing global talent in light of our global presence.
The financial statements for periods prior to April 30, 2018 were prepared on a stand-alone basis derived from the consolidated financial statements and records of Pentair as if nVent were operated on a stand-alone basis.
For periods prior to the separation, the condensed consolidated and combined financial statements of nVent include general corporate expenses of Pentair for certain support functions that were provided on a centralized basis, such as expenses related to executive management, finance, audit, legal, information technology, human resources, communications, facilities and employee benefits and compensation. These general corporate expenses are included in the Condensed Consolidated and Combined Statements of Income and Comprehensive Income within Selling, general and administrative expense and Other expense. These expenses were allocated to nVent on the basis of direct usage when identifiable, with the remainder allocated based on a proportional basis of net sales, headcount or other measures. nVent considers the allocation methodology regarding Pentair’s general corporate expenses to be reasonable for periods presented prior to the separation. Nevertheless, the condensed consolidated and combined financial statements of nVent for periods prior to the separation may not reflect the actual expenses that would have been incurred and may not reflect nVent’s condensed consolidated and combined results of operations, financial position and cash flows had it been a stand-alone company during the periods presented.

28


CONSOLIDATED AND COMBINED RESULTS OF OPERATIONS
The consolidated and combined results of operations for the three months ended September 30, 2018 and 2017 were as follows:
 
Three months ended
In millions
September 30,
2018
September 30,
2017
change
% / point 
change
Net sales
$
563.9

$
540.6

$
23.3

4.3
%
Cost of goods sold
334.8

320.5

14.3

4.5
%
Gross profit
229.1

220.1

9.0

4.1
%
      % of net sales
40.6
%
40.7
%
 
(0.1
) pts
 
 
 
 
 

Selling, general and administrative
124.1

110.0

14.1

12.8
%
      % of net sales
22.0
%
20.3
%
 
1.7
  pts
Research and development
11.3

10.5

0.8

7.6
%
      % of net sales
2.0
%
1.9
%
 
0.1
 pts
 
 
 
 
 
Operating income
93.7

99.6

(5.9
)
(5.9
)%
      % of net sales
16.6
%
18.4
%
 
(1.8
) pts
 
 
 
 
 
Net interest expense
11.7

0.2

11.5

N.M.

Other expense
0.9

1.4

(0.5
)
N.M.

 
 
 
 
 
Income before income taxes
81.1

98.0

(16.9
)
(17.2
)%
Provision for income taxes
12.9

18.3

(5.4
)
(29.5
)%
      Effective tax rate
15.9
%
18.7
%
 
(2.8
) pts
N.M. Not Meaningful



29


The consolidated and combined results of operations for the nine months ended September 30, 2018 and September 30, 2017 were as follows:
 
Nine months ended
In millions
September 30,
2018
September 30,
2017

change
% / point 
change
Net sales
$
1,645.5

$
1,556.0

$
89.5

5.8
%
Cost of goods sold
988.1

927.5

60.6

6.5
%
Gross profit
657.4

628.5

28.9

4.6
%
      % of net sales
40.0
%
40.4
%
 
(0.4
) pts
 
 
 
 
 
Selling, general and administrative
399.1

339.4

59.7

17.6
%
      % of net sales
24.3
%
21.8
%
 
2.5
   pts
Research and development
33.7

32.4

1.3

4.0
%
      % of net sales
2.0
%
2.1
%
 
(0.1
) pts
 
 
 
 
 
Operating income
224.6

256.7

(32.1
)
(12.5
)%
      % of net sales
13.6
%
16.5
%
 
(2.9
) pts
 
 
 
 
 
Net interest expense
21.6

0.4

21.2

N.M.

Other expense
7.2

4.2

3.0

N.M.

 
 
 
 
 
Income before income taxes
195.8

252.1

(56.3
)
(22.3
)%
Provision for income taxes
32.0

46.4

(14.4
)
(31.0
)%
      Effective tax rate
16.3
%
18.4
%
 
(2.1
) pts
N.M. Not Meaningful

Net sales
The components of the consolidated and combined net sales change from the prior period were as follows:
 
Three months ended September 30, 2018
Nine months ended September 30, 2018
 
over the prior year period
over the prior year period
Volume
3.4
 %
2.8
%
Price
2.1

1.5

Organic growth
5.5

4.3

Currency
(1.2
)
1.5

Total
4.3
 %
5.8
%
The 4.3 percentage point increase in net sales in the third quarter of 2018 from 2017 was primarily the result of:
organic sales growth of approximately 3.0% from our commercial & residential business and 2.0% from our industrial business.
This increase was partially offset by:
unfavorable foreign currency effects for the three months ended September 30, 2018.





30


The 5.8 percentage point increase in net sales in the first nine months of 2018 from 2017 was primarily the result of:
organic sales growth of approximately 2.5% from our industrial business and 2.0% from our commercial & residential business; and
favorable foreign currency effects for the nine months ended September 30, 2018.
This increase was partially offset by:
slowdown in capital spending impacting the energy business, driving lower organic sales of approximately 1.0%.
Gross profit
The 0.1 and 0.4 percentage point decreases in gross profit as a percentage of sales in the third quarter and first nine months of 2018, respectively, from 2017 were primarily the result of:
inflationary increases related to certain raw materials, labor and freight costs.
These decreases were partially offset by:
organic sales growth in our commercial & residential and industrial businesses, which resulted increased leverage on fixed expenses included in cost of goods sold; and
higher contribution margin as a result of savings generated from our lean and supply management practices.
Selling, general and administrative ("SG&A")
The 1.7 percentage point increase in SG&A expense as a percentage of sales in the third quarter of 2018 from 2017 was primarily the result of:
increased investment in sales and marketing to drive growth;
inflationary increases impacting our labor costs; and
increased corporate expenses incurred to operate as an independent public company.
This increase was partially offset by:
organic sales growth in our commercial & residential and industrial businesses, which resulted in increased leverage on operating expenses.

The 2.5 percentage point increase in SG&A expense as a percentage of sales in the first nine months of 2018 from 2017 was primarily the result of:
$39.3 million of non-recurring separation related costs incurred in the first nine months of 2018 to prepare nVent to operate as an independent stand-alone public company, primarily related to information technology, legal, advisory and other professional fees, compared to $6.9 million in the first nine months of 2017;
increased investment in sales and marketing to drive growth; and
increased corporate expenses incurred to operate as an independent public company.
This increase was partially offset by:
organic sales growth in our commercial & residential and industrial businesses, which resulted in increased leverage on operating expenses; and
restructuring costs of $6.4 million in the first nine months of 2018, compared to $13.0 million in the first nine months of 2017.
Provision for income taxes
The 2.8 and 2.1 percentage point decreases in the effective tax rate in the third quarter and first nine months of 2018, respectively, were primarily the result of:
the favorable impact of discrete items that occurred during the third quarter and first nine months of 2018 that did not occur in the corresponding periods during 2017; and

31


the mix of global earnings toward lower tax jurisdictions, including the favorable impact of U.S. tax reform legislation.
SEGMENT RESULTS OF OPERATIONS
The summary that follows provides a discussion of the results of operations of each of our three reportable segments (Enclosures, Thermal Management and Electrical & Fastening Solutions). Each of these segments comprises various product offerings that serve various verticals and end users.
We evaluate performance based on sales and segment income and use a variety of ratios to measure performance of our reporting segments. Segment income represents operating income exclusive of intangible amortization, certain acquisition related expenses, costs of restructuring activities, impairments and other unusual non-operating items.
Enclosures
The net sales and segment income for the Enclosures segment were as follows:
 
Three months ended
 
 
 
Nine months ended
 
 
In millions
September 30,
2018
September 30,
2017

% / point change
 
September 30,
2018
September 30,
2017
 
% / point change
Net sales
$
259.5

$
241.7

 
7.4
%
 
$
769.2

$
702.3

 
9.5
%
Segment income
47.4

44.1

 
7.5
%
 
135.9

130.1

 
4.5
%
      % of net sales
18.3
%
18.2
%
 
0.1
 pts
 
17.7
%
18.5
%
 
(0.8
) pts
Net sales
The components of the change in the Enclosures segment net sales were as follows:
 
Three months ended September 30, 2018
Nine months ended September 30, 2018
 
over the prior year period
over the prior year period
Volume
6.6
%
7.5
%
Price
1.3

0.6

Organic growth
7.9

8.1

Currency
(0.5
)
1.4

Total
7.4
%
9.5
%
The 7.4 and 9.5 percent increases in Enclosures net sales in the third quarter and first nine months of 2018, respectively, from 2017 were primarily the result of:
organic sales growth of approximately 6.0% and 5.0% from our industrial business in the third quarter and first nine months of 2018 from 2017, respectively, and approximately 2.5% from our infrastructure business in the third quarter and first nine months of 2018 from 2017, respectively; and
favorable foreign currency effects for the nine months ended September 30, 2018.
Segment income
The components of the change in the Enclosures segment income as a percentage of net sales from the prior period were as follows:
 
Three months ended September 30, 2018
Nine months ended September 30, 2018
 
over the prior year period
over the prior year period
Growth/Price
2.7
  pts
2.3
  pts
Inflation
(3.8
)
(3.4
)
Productivity
1.2

0.3

Total
0.1
  pts
(0.8
) pts
The 0.1 percentage point increase in segment income for Enclosures as a percentage of net sales in the third quarter of 2018 from 2017 was primarily the result of:
organic sales growth in our industrial and infrastructure businesses, including selective increases in selling prices, which resulted in increased leverage on operating expenses; and

32


higher contribution margin as a result of savings generated from our lean and supply management practices.
This increase was partially offset by:
inflationary increases related to certain raw materials, labor and freight costs.

The 0.8 percentage point decrease in segment income for Enclosures as a percentage of net sales in the first nine months of 2018 from 2017 was primarily the result of:
inflationary increases related to certain raw materials, labor and freight costs; and
higher cost of sales due to manufacturing footprint rationalization and a new U.S. distribution center. We expect these investments will result in increased productivity and operating leverage in future periods.
This decrease was partially offset by:
organic sales growth in our industrial and infrastructure businesses, including selective increases in selling prices, which resulted in increased leverage on production and operating expenses; and
higher contribution margin as a result of savings generated from our lean and supply management practices.
Thermal Management
The net sales and segment income for the Thermal Management segment were as follows:
 
Three months ended
 
 
 
Nine months ended
 
 
In millions
September 30,
2018
September 30,
2017
 
% / point change
 
September 30,
2018
September 30,
2017
 
% / point change
Net sales
$
157.4

$
159.1

 
(1.1
)%
 
$
444.3

$
444.4

 
%
Segment income
41.9

43.3

 
(3.2
%)
 
105.8

96.9

 
9.2
 %
      % of net sales
26.6
%
27.2
%
 
(0.6
) pts
 
23.8
%
21.8
%
 
2.0
 pts
Net sales
The components of the change in the Thermal Management segment net sales were as follows:
 
Three months ended September 30, 2018
Nine months ended September 30, 2018
 
over the prior year period
over the prior year period
Volume
1.1
 %
(2.1
)%
Price
0.5

0.3

Organic growth
1.6

(1.8
)
Currency
(2.7
)
1.8

Total
(1.1
)%
%
The 1.1 percent decrease in Thermal Management net sales in the third quarter of 2018 from 2017 was primarily the result of:
unfavorable foreign currency effects for the three months ended September 30, 2018; and
slowdown in capital spending impacting the industrial business, driving lower organic sales of approximately 3.5%.
This decrease was partially offset by:
organic sales growth of approximately 5.0% from our commercial & residential business.
Thermal Management net sales remained consistent in the first nine months of 2018 from 2017 and were favorably impacted by:
favorable foreign currency effects for the nine months ended September 30, 2018; and
organic sales growth of approximately 4.5% from our commercial & residential business.

33


These favorable fluctuations were partially offset by:
slowdown in capital spending impacting the industrial business and lower project sales volume in the energy business, driving lower organic sales of approximately 5.0% and 2.0%, respectively.
Segment income
The components of the change in the Thermal Management segment income as a percentage of net sales from the prior period were as follows:
 
Three months ended September 30, 2018
Nine months ended September 30, 2018