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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the Quarterly Period Ended September 30, 2022 |
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-11625
(Exact name of Registrant as specified in its charter)
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| Ireland | 98-1141328 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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| Regal House, 70 London Road, | Twickenham, | London, | TW13QS | United Kingdom | |
| (Address of principal executive offices) | |
Registrant’s telephone number, including area code: 44-74-9421-6154
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Ordinary Shares, nominal value $0.01 per share | PNR | New York Stock Exchange |
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ 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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting
company | ☐ | Emerging growth
company | ☐ |
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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 ☑
On September 30, 2022, 164,498,354 shares of Registrant’s common stock were outstanding.
Pentair plc and Subsidiaries
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| PART I FINANCIAL INFORMATION | |
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| ITEM 1. | | |
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| ITEM 2. | | |
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| ITEM 3. | | |
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| ITEM 4. | | |
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| PART II OTHER INFORMATION | |
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| ITEM 1. | | |
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| ITEM 1A. | | |
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| ITEM 2. | | |
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| ITEM 6. | | |
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pentair plc and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
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| Three months ended | | Nine months ended |
| In millions, except per-share data | September 30,
2022 | September 30,
2021 | | September 30,
2022 | September 30,
2021 |
| Net sales | $ | 1,055.1 | | $ | 969.2 | | | $ | 3,118.9 | | $ | 2,776.2 | |
| Cost of goods sold | 707.0 | | 634.4 | | | 2,079.1 | | 1,785.2 | |
| Gross profit | 348.1 | | 334.8 | | | 1,039.8 | | 991.0 | |
| Selling, general and administrative expenses | 177.3 | | 145.6 | | | 487.0 | | 440.4 | |
| Research and development expenses | 23.7 | | 21.9 | | | 69.1 | | 64.4 | |
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| Operating income | 147.1 | | 167.3 | | | 483.7 | | 486.2 | |
| Other (income) expense: | | | | | |
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| Gain on sale of businesses | (0.2) | | (1.4) | | | (0.2) | | (1.4) | |
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| Net interest expense | 19.3 | | 2.6 | | | 34.2 | | 11.5 | |
| Other expense | 0.3 | | 0.3 | | | 0.5 | | 1.0 | |
| Income from continuing operations before income taxes | 127.7 | | 165.8 | | | 449.2 | | 475.1 | |
| Provision for income taxes | 12.3 | | 22.1 | | | 62.3 | | 67.7 | |
| Net income from continuing operations | 115.4 | | 143.7 | | | 386.9 | | 407.4 | |
| Loss from discontinued operations, net of tax | — | | (0.1) | | | (1.0) | | (3.1) | |
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| Net income | $ | 115.4 | | $ | 143.6 | | | $ | 385.9 | | $ | 404.3 | |
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| Comprehensive income, net of tax | | | | | |
| Net income | $ | 115.4 | | $ | 143.6 | | | $ | 385.9 | | $ | 404.3 | |
| Changes in cumulative translation adjustment | (59.0) | | (19.0) | | | (113.2) | | (31.3) | |
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| Changes in market value of derivative financial instruments, net of tax | 45.5 | | 12.1 | | | 83.5 | | 25.0 | |
| Comprehensive income | $ | 101.9 | | $ | 136.7 | | | $ | 356.2 | | $ | 398.0 | |
| Earnings (loss) per ordinary share | | | | | |
| Basic | | | | | |
| Continuing operations | $ | 0.70 | | $ | 0.87 | | | $ | 2.35 | | $ | 2.46 | |
| Discontinued operations | — | | — | | | (0.01) | | (0.02) | |
| Basic earnings per ordinary share | $ | 0.70 | | $ | 0.87 | | | $ | 2.34 | | $ | 2.44 | |
| Diluted | | | | | |
| Continuing operations | $ | 0.70 | | $ | 0.86 | | | $ | 2.33 | | $ | 2.43 | |
| Discontinued operations | — | | — | | | (0.01) | | (0.02) | |
| Diluted earnings per ordinary share | $ | 0.70 | | $ | 0.86 | | | $ | 2.32 | | $ | 2.41 | |
| Weighted average ordinary shares outstanding | | | | | |
| Basic | 164.5 | | 165.7 | | | 164.8 | | 166.0 | |
| Diluted | 165.2 | | 167.6 | | | 165.8 | | 167.7 | |
| | | | | |
See accompanying notes to condensed consolidated financial statements.
Pentair plc and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
| | | | | | | | |
| | September 30,
2022 | December 31,
2021 |
| In millions, except per-share data |
| Assets |
| Current assets | | |
| Cash and cash equivalents | $ | 118.8 | | $ | 94.5 | |
Accounts receivable, net of allowances of $10.3 and $9.1, respectively | 529.7 | | 534.3 | |
| Inventories | 778.7 | | 562.9 | |
| Other current assets | 135.3 | | 112.3 | |
| | |
| Total current assets | 1,562.5 | | 1,304.0 | |
| Property, plant and equipment, net | 339.1 | | 310.0 | |
| Other assets | | |
| Goodwill | 3,202.5 | | 2,504.5 | |
| Intangibles, net | 1,110.7 | | 428.0 | |
| Other non-current assets | 293.8 | | 207.1 | |
| | |
| Total other assets | 4,607.0 | | 3,139.6 | |
| Total assets | $ | 6,508.6 | | $ | 4,753.6 | |
| Liabilities and Equity |
| Current liabilities | | |
| | |
| Accounts payable | $ | 372.0 | | $ | 385.7 | |
| Employee compensation and benefits | 102.9 | | 140.1 | |
| Other current liabilities | 625.6 | | 525.9 | |
| | |
| Total current liabilities | 1,100.5 | | 1,051.7 | |
| Other liabilities | | |
| Long-term debt | 2,448.1 | | 894.1 | |
| Pension and other post-retirement compensation and benefits | 88.4 | | 93.2 | |
| Deferred tax liabilities | 46.5 | | 89.8 | |
| Other non-current liabilities | 185.9 | | 202.9 | |
| | |
| Total liabilities | 3,869.4 | | 2,331.7 | |
| Commitments and contingencies (Note 16) | | |
| Equity | | |
Ordinary shares $0.01 par value, 426.0 authorized, 164.5 and 165.1 issued at September 30, 2022 and December 31, 2021, respectively | 1.7 | | 1.7 | |
| | |
| Additional paid-in capital | 1,549.3 | | 1,582.7 | |
| Retained earnings | 1,331.8 | | 1,051.4 | |
| Accumulated other comprehensive loss | (243.6) | | (213.9) | |
| Total equity | 2,639.2 | | 2,421.9 | |
| Total liabilities and equity | $ | 6,508.6 | | $ | 4,753.6 | |
See accompanying notes to condensed consolidated financial statements.
Pentair plc and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | | | | | | | |
| | Nine months ended |
| In millions | September 30,
2022 | September 30,
2021 |
| Operating activities | | |
| Net income | $ | 385.9 | | $ | 404.3 | |
| Loss from discontinued operations, net of tax | 1.0 | | 3.1 | |
| | |
| Adjustments to reconcile net income from continuing operations to net cash provided by (used for) operating activities of continuing operations | | |
| Equity income of unconsolidated subsidiaries | (1.2) | | (0.2) | |
| Depreciation | 39.9 | | 38.3 | |
| Amortization | 31.4 | | 19.4 | |
| Deferred income taxes | (37.5) | | (4.8) | |
| Gain on sale of businesses | (0.2) | | (1.4) | |
| Share-based compensation | 20.6 | | 20.8 | |
| | |
| | |
| | |
| | |
| Amortization of bridge financing fees | 9.0 | | — | |
| (Gain) loss on sale of assets | (2.3) | | 0.7 | |
| Changes in assets and liabilities, net of effects of business acquisitions | | |
| Accounts receivable | 24.3 | | (78.2) | |
| Inventories | (170.6) | | (76.1) | |
| Other current assets | (27.1) | | (9.6) | |
| Accounts payable | (36.7) | | 79.3 | |
| Employee compensation and benefits | (34.9) | | 30.7 | |
| Other current liabilities | 79.8 | | 118.2 | |
| Other non-current assets and liabilities | (9.9) | | (4.1) | |
| Net cash provided by operating activities of continuing operations | 271.5 | | 540.4 | |
| Net cash used for operating activities of discontinued operations | (1.0) | | (0.3) | |
| Net cash provided by operating activities | 270.5 | | 540.1 | |
| Investing activities | | |
| Capital expenditures | (63.2) | | (38.6) | |
| Proceeds from sale of property and equipment | 3.0 | | 3.7 | |
| Proceeds from the sale of businesses, net | — | | 1.4 | |
| Acquisitions, net of cash acquired | (1,592.8) | | (83.6) | |
| Settlement of net investment hedges | 8.8 | | — | |
| Other | 0.3 | | 2.7 | |
| | |
| | |
| Net cash used for investing activities | (1,643.9) | | (114.4) | |
| Financing activities | | |
| | |
| Net borrowings (repayments) of revolving long-term debt | 256.1 | | (36.1) | |
| Proceeds from long-term debt | 1,391.3 | | — | |
| Repayments of long-term debt | (88.3) | | (103.8) | |
| Debt issuance costs | (15.7) | | — | |
| | |
| Shares issued to employees, net of shares withheld | (4.0) | | 12.7 | |
| Repurchases of ordinary shares | (50.0) | | (100.0) | |
| Dividends paid | (104.1) | | (99.9) | |
| Receipts (payments) upon the maturity of cross currency swaps | 0.2 | | (14.7) | |
| | |
| | |
| Net cash provided by (used for) financing activities | 1,385.5 | | (341.8) | |
| | |
| Effect of exchange rate changes on cash and cash equivalents | 12.2 | | 7.2 | |
| Change in cash and cash equivalents | 24.3 | | 91.1 | |
| Cash and cash equivalents, beginning of period | 94.5 | | 82.1 | |
| Cash and cash equivalents, end of period | $ | 118.8 | | $ | 173.2 | |
See accompanying notes to condensed consolidated financial statements.
Pentair plc and Subsidiaries
Condensed Consolidated Statements of Changes in Equity (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Ordinary shares | | | Additional paid-in capital | Retained earnings | Accumulated
other
comprehensive loss | | | Total |
| Number | Amount | | |
| Balance - December 31, 2021 | 165.1 | | $ | 1.7 | | | | | $ | 1,582.7 | | $ | 1,051.4 | | $ | (213.9) | | | | $ | 2,421.9 | |
| Net income | — | | — | | | | | — | | 117.6 | | — | | | | 117.6 | |
| Other comprehensive loss, net of tax | — | | — | | | | | — | | — | | (0.8) | | | | (0.8) | |
Dividends declared, $0.21 per share | — | | — | | | | | — | | (36.4) | | — | | | | (36.4) | |
| | | | | | | | | | | |
| Exercise of options, net of shares tendered for payment | — | | — | | | | | 0.5 | | — | | — | | | | 0.5 | |
| Issuance of restricted shares, net of cancellations | 0.4 | | — | | | | | (2.2) | | — | | — | | | | (2.2) | |
| Shares surrendered by employees to pay taxes | (0.1) | | — | | | | | (3.6) | | — | | — | | | | (3.6) | |
| Share-based compensation | — | | — | | | | | 6.9 | | — | | — | | | | 6.9 | |
| Balance - March 31, 2022 | 165.4 | | $ | 1.7 | | | | | $ | 1,584.3 | | $ | 1,132.6 | | $ | (214.7) | | | | $ | 2,503.9 | |
| Net income | — | | — | | | | | — | | 152.9 | | — | | | | 152.9 | |
| Other comprehensive loss, net of tax | — | | — | | | | | — | | — | | (15.4) | | | | (15.4) | |
Dividends declared, $0.21 per share | — | | — | | | | | — | | (34.6) | | — | | | | (34.6) | |
| Share repurchases | (0.9) | | — | | | | | (50.0) | | — | | — | | | | (50.0) | |
| Exercise of options, net of shares tendered for payment | — | | — | | | | | 0.2 | | — | | — | | | | 0.2 | |
| | | | | | | | | | | |
| Shares surrendered by employees to pay taxes | — | | — | | | | | (0.3) | | — | | — | | | | (0.3) | |
| Share-based compensation | — | | — | | | | | 6.3 | | — | | — | | | | 6.3 | |
| Balance - June 30, 2022 | 164.5 | | $ | 1.7 | | | | | $ | 1,540.5 | | $ | 1,250.9 | | $ | (230.1) | | | | $ | 2,563.0 | |
| Net income | — | | — | | | | | — | | 115.4 | | — | | | | 115.4 | |
| Other comprehensive loss, net of tax | — | | — | | | | | — | | — | | (13.5) | | | | (13.5) | |
Dividends declared, $0.21 per share | — | | — | | | | | — | | (34.5) | | — | | | | (34.5) | |
| | | | | | | | | | | |
| Exercise of options, net of shares tendered for payment | — | | — | | | | | 1.4 | | — | | — | | | | 1.4 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Share-based compensation | — | | — | | | | | 7.4 | | — | | — | | | | 7.4 | |
| Balance - September 30, 2022 | 164.5 | | $ | 1.7 | | | | | $ | 1,549.3 | | $ | 1,331.8 | | $ | (243.6) | | | | $ | 2,639.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Ordinary shares | | Additional paid-in capital | Retained earnings | Accumulated
other
comprehensive loss | Total |
| Number | Amount |
| Balance - December 31, 2020 | 166.1 | | $ | 1.7 | | | $ | 1,680.7 | | $ | 631.2 | | $ | (207.3) | | $ | 2,106.3 | |
| Net income | — | | — | | | — | | 128.6 | | — | | 128.6 | |
| | | | | | | |
| Other comprehensive loss, net of tax | — | | — | | | — | | — | | (3.7) | | (3.7) | |
Dividends declared, $0.20 per share | — | | — | | | — | | (33.3) | | — | | (33.3) | |
| Share repurchases | (0.2) | | — | | | (9.6) | | — | | — | | (9.6) | |
| Exercise of options, net of shares tendered for payment | 0.1 | | — | | | 5.2 | | — | | — | | 5.2 | |
| Issuance of restricted shares, net of cancellations | 0.2 | | — | | | — | | — | | — | | — | |
| Shares surrendered by employees to pay taxes | — | | — | | | (5.3) | | — | | — | | (5.3) | |
| Share-based compensation | — | | — | | | 5.6 | | — | | — | | 5.6 | |
| Balance - March 31, 2021 | 166.2 | | $ | 1.7 | | | $ | 1,676.6 | | $ | 726.5 | | $ | (211.0) | | $ | 2,193.8 | |
| Net income | — | | — | | | — | | 132.1 | | — | | 132.1 | |
| Other comprehensive income, net of tax | — | | — | | | — | | — | | 4.3 | | 4.3 | |
Dividends declared, $0.20 per share | — | | — | | | — | | (33.3) | | — | | (33.3) | |
| Share repurchases | (0.6) | | — | | | (40.4) | | — | | — | | (40.4) | |
| Exercise of options, net of shares tendered for payment | 0.3 | | — | | | 5.6 | | — | | — | | 5.6 | |
| Issuance of restricted shares, net of cancellations | 0.1 | | — | | | — | | — | | — | | — | |
| Shares surrendered by employees to pay taxes | (0.1) | | — | | | (1.5) | | — | | — | | (1.5) | |
| Share-based compensation | — | | — | | | 11.0 | | — | | — | | 11.0 | |
| Balance - June 30, 2021 | 165.9 | | $ | 1.7 | | | $ | 1,651.3 | | $ | 825.3 | | $ | (206.7) | | $ | 2,271.6 | |
| Net income | — | | — | | | — | | 143.6 | | — | | 143.6 | |
| Other comprehensive income, net of tax | — | | — | | | — | | — | | (6.9) | | (6.9) | |
| | | | | | | |
Dividends declared, $0.20 per share | — | | — | | | — | | (33.1) | | — | | (33.1) | |
| Share repurchase | (0.6) | | — | | | (50.0) | | — | | — | | (50.0) | |
| Exercise of options, net of shares tendered for payment | 0.2 | | — | | | 8.9 | | — | | — | | 8.9 | |
| | | | | | | |
| Shares surrendered by employees to pay taxes | — | | — | | | (0.2) | | — | | — | | (0.2) | |
| Share-based compensation | — | | — | | | 4.2 | | — | | — | | 4.2 | |
| Balance - September 30, 2021 | 165.5 | | $ | 1.7 | | | $ | 1,614.2 | | $ | 935.8 | | $ | (213.6) | | $ | 2,338.1 | |
See accompanying notes to condensed consolidated financial statements.
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
1.Basis of Presentation and Responsibility for Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of Pentair plc and its subsidiaries (“we,” “us,” “our,” “Pentair,” or the “Company”) have been prepared following the requirements of the U.S. Securities and Exchange Commission (“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.
We are responsible for the unaudited condensed consolidated 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 and operating results. As these are condensed financial statements, one should also read our consolidated financial statements and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2021.
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.
In 2020, the World Health Organization declared the novel coronavirus 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has had and may continue to have an unfavorable impact on certain parts of our business. The broader implications of the COVID-19 pandemic on our business, financial condition and results of operations remain uncertain and will depend on certain developments, including the duration and severity of the COVID-19 pandemic, the impact of virus variants, the effectiveness of vaccinations, the COVID-19 pandemic’s impact on our customers and suppliers and the range of governmental and community reactions to the pandemic. We may continue to experience reduced customer demand in certain parts of our business, impacts to our operations, or constrained labor and/or supply that could materially and adversely impact our business, financial condition, results of operations, liquidity and cash flows in future periods.
Our fiscal year ends on December 31. We report our interim quarterly periods on a calendar quarter basis.
2.Revenue
We disaggregate our revenue from contracts with customers by segment, geographic location and vertical, as we believe these best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Refer to Note 15 for revenue disaggregated by segment.
Geographic net sales information, based on geographic destination of the sale, was as follows:
| | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| In millions | September 30,
2022 | September 30,
2021 | | September 30,
2022 | September 30,
2021 |
| U.S. | $ | 752.1 | | $ | 669.3 | | | $ | 2,215.1 | | $ | 1,895.0 | |
| Western Europe | 97.9 | | 115.1 | | | 331.7 | | 351.1 | |
Developing (1) | 140.3 | | 123.7 | | | 378.3 | | 349.6 | |
Other Developed (2) | 64.8 | | 61.1 | | | 193.8 | | 180.5 | |
| Consolidated net sales | $ | 1,055.1 | | $ | 969.2 | | | $ | 3,118.9 | | $ | 2,776.2 | |
| | | | | |
| | | | | |
(1) Developing includes China, Eastern Europe, Latin America, the Middle East and Southeast Asia. |
(2) Other Developed includes Australia, Canada and Japan. |
Vertical net sales information was as follows:
| | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| In millions | September 30,
2022 | September 30,
2021 | | September 30,
2022 | September 30,
2021 |
| Residential | $ | 637.0 | | $ | 628.8 | | | $ | 2,050.1 | | $ | 1,800.0 | |
| Commercial | 241.7 | | 178.1 | | | 553.3 | | 488.9 | |
| Industrial | 176.4 | | 162.3 | | | 515.5 | | 487.3 | |
| Consolidated net sales | $ | 1,055.1 | | $ | 969.2 | | | $ | 3,118.9 | | $ | 2,776.2 | |
| | | | | |
| | | | | |
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Performance obligations
On September 30, 2022, we had $111.1 million of remaining performance obligations on contracts with an 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 12 to 18 months.
Contract assets and liabilities
Contract assets and liabilities consisted of the following:
| | | | | | | | | | | | | | | | | |
| In millions | September 30,
2022 | December 31,
2021 | | $ Change | % Change |
| Contract assets | $ | 45.2 | | $ | 48.8 | | | $ | (3.6) | | (7.4) | % |
| Contract liabilities | 50.3 | | 39.4 | | | 10.9 | | 27.7 | % |
| Net contract (liabilities) assets | $ | (5.1) | | $ | 9.4 | | | $ | (14.5) | | (154.3) | % |
The $14.5 million change in net contract liabilities from December 31, 2021 to September 30, 2022 was primarily the result of timing of milestone payments and the recognition of $1.1 million of impairment losses on our contract assets in the first quarter of 2022 related to our exit of business activity in Russia. Approximately 85% of our contract liabilities at December 31, 2021 were recognized in revenue in the first nine months of 2022.
3.Acquisitions
On July 28, 2022, as part of our Consumer Solutions reporting segment, we acquired the issued and outstanding equity securities of certain subsidiaries of Welbilt, Inc. (“Welbilt”) and certain other assets, rights, and properties, and assumed certain liabilities, comprising Welbilt’s Manitowoc Ice business (“Manitowoc Ice”), for approximately $1.6 billion in cash.
Manitowoc Ice is a designer, manufacturer, and distributor of commercial ice machines. The acquisition of Manitowoc Ice allows us to enhance and deliver our total water management offerings to an expanded network of channel partners and customers.
The purchase price has been preliminarily allocated based on the estimated fair value of assets acquired and liabilities assumed at the date of the Manitowoc Ice acquisition. The preliminary purchase price allocation is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These changes will primarily relate to the fair value of tangible assets and the related income tax impacts. We expect the final purchase price allocation to be completed by the third quarter of 2023. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation.
The following table summarizes our preliminary estimates of the fair values of the assets acquired and liabilities assumed in the Manitowoc Ice acquisition:
| | | | | |
| In millions | |
| Cash | $ | 33.8 | |
| Accounts receivable | 39.7 | |
| Inventories | 70.8 | |
| Other current assets | 3.9 | |
| Property, plant and equipment | 21.6 | |
| Identifiable intangible assets | 728.3 | |
| Goodwill | 796.7 | |
| Other assets | 1.8 | |
| Current liabilities | (68.1) | |
| Other liabilities | (3.2) | |
| Purchase price | $ | 1,625.3 | |
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
The excess of purchase price over tangible net assets and identified intangible assets acquired has been preliminarily allocated to goodwill in the amount of $796.7 million, all of which is expected to be deductible for income tax purposes. Goodwill recognized from the Manitowoc Ice acquisition primarily reflects the future economic benefit resulting from synergies of our combined operations.
Identifiable intangible assets acquired as part of the Manitowoc Ice acquisition include $78.4 million of indefinite-lived trade name intangible assets, $588.4 million of definite-lived customer relationships with an estimated useful life of 20 years, $47.1 million of definite-lived proprietary technology intangible assets with an estimated useful life of 10 years and $14.4 million of other definite-lived intangible assets with an estimated useful life of four months. The fair values of trade names and proprietary technology acquired in the acquisition were determined using a relief-from-royalty method, and customer relationships and other definite-lived intangible assets acquired were determined using a multi-period excess earnings method. These methods utilize unobservable inputs that are significant to these fair value measurements and thus classified as Level 3 of the fair value hierarchy.
Manitowoc Ice’s net sales and operating income for the period from the acquisition date to September 30, 2022 were $66.5 million and $1.3 million, respectively. Manitowoc’s operating income includes $12.9 million of identifiable intangible asset amortization expense and $5.8 million of amortization of inventory fair market value step-up.
The following table presents unaudited pro forma financial information as if the Manitowoc Ice acquisition had occurred on January 1, 2021:
| | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| In millions, except per-share data | September 30,
2022 | September 30,
2021 | | September 30,
2022 | September 30,
2021 |
| Pro forma net sales | $ | 1,084.6 | | $ | 1,058.7 | | | $ | 3,325.7 | | $ | 3,009.2 | |
| Pro forma net income from continuing operations | 131.9 | | 146.5 | | | 417.8 | | 377.9 | |
| Pro forma earnings per ordinary share - continuing operations | | | | | |
| Basic | $ | 0.80 | | $ | 0.88 | | | $ | 2.53 | | $ | 2.28 | |
| Diluted | 0.80 | | 0.87 | | | 2.52 | | 2.25 | |
The unaudited pro forma net income from continuing operations includes Manitowoc Ice’s identifiable intangible asset amortization expense of $8.5 million for the three months ended September 30, 2022 and 2021, respectively, and $25.6 million and $40.0 million for the nine months ended September 30, 2022 and 2021, respectively. The unaudited pro forma net income from continuing operations for the three and nine months ended September 30, 2022 excludes the impact of $18.8 million and $34.2 million, respectively, of transaction-related charges, acquisition-related bridge financing costs and non-recurring expense related to the fair value adjustment to acquisition-date inventory. The nine months ended September 30, 2021 was adjusted to include transaction-related charges and non-recurring expense related to the fair value adjustment to acquisition-date inventory.
The pro forma condensed consolidated financial information has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may differ materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of the Manitowoc Ice acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the Manitowoc Ice acquisition occurred on January 1, 2021.
In October 2021, as part of both of our Consumer Solutions and Industrial & Flow Technologies reporting segments, we completed the acquisition of Pleatco Holdings, LLC and related entities for $256.9 million in cash, net of cash acquired and working capital true-ups. The excess of purchase price over tangible net assets acquired has been preliminarily allocated to goodwill in the amount of $140.1 million, $136.4 million of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired consisted of $97.9 million of definite-lived customer relationships with an estimated useful life of 17 years. We expect the final purchase price allocation to be completed in the fourth quarter of 2022. The pro forma impact of this acquisition is not material.
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
In May 2021, as part of our Consumer Solutions reporting segment, we completed the acquisition of Ken’s Beverage, Inc. for $82.2 million in cash, net of cash acquired and working capital true-ups. The excess of purchase price over tangible net assets acquired has been allocated to goodwill in the amount of $28.3 million, all of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired consisted of $38.0 million of definite-lived customer relationships with an estimated useful life of 22 years. The pro forma impact of this acquisition is not material.
4.Share Plans
Total share-based compensation expense for the three and nine months ended September 30, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| In millions | September 30,
2022 | September 30,
2021 | | September 30,
2022 | September 30,
2021 |
| Restricted stock units | $ | 4.1 | | $ | 2.4 | | | $ | 11.0 | | $ | 9.4 | |
| Stock options | 1.1 | | 0.7 | | | 3.0 | | 2.5 | |
| Performance share units | 2.2 | | 1.1 | | | 6.6 | | 8.9 | |
| Total share-based compensation expense | $ | 7.4 | | $ | 4.2 | | | $ | 20.6 | | $ | 20.8 | |
In the first quarter of 2022, we issued our annual share-based compensation grants under the Pentair plc 2020 Share and Incentive Plan to eligible employees. The total number of awards issued was approximately 0.6 million, of which 0.3 million were restricted stock units (“RSUs”), 0.2 million were stock options and 0.1 million were performance share units (“PSUs”). The weighted-average grant date fair value of the RSUs, stock options and PSUs issued was $60.78, $17.92, and $68.28, 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:
| | | | | |
| | 2022
Annual Grant |
| Risk-free interest rate | 1.18 | % |
| Expected dividend yield | 1.14 | % |
| Expected share price volatility | 29.60 | % |
| Expected term (years) | 6.4 |
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 United States (“U.S.”) Treasury Department yield curve in effect at the time of grant.
5.Restructuring and Transformation Program
In 2021, we launched and committed resources to a program designed to accelerate growth and drive margin expansion through transformation of our business model to drive operational excellence, reduce complexity and streamline our processes (the “Transformation Program”). The Transformation Program is structured in multiple phases and is expected to empower us to work more efficiently and optimize our business to better serve our customers while meeting our financial objectives.
During the nine months ended September 30, 2022, we initiated and continued execution of restructuring actions aimed at reducing our fixed cost structure and realigning our business as well as certain initiatives associated with the Transformation Program. These actions included a reduction in hourly and salaried headcount of approximately 400 employees.
Restructuring and transformation-related costs within Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income included the following:
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
| | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| In millions | September 30,
2022 | September 30,
2021 | | September 30,
2022 | September 30,
2021 |
| Restructuring Initiatives |
| Severance and related costs | $ | 8.5 | | $ | — | | | $ | 11.2 | | $ | 5.1 | |
Other restructuring costs (1) | 2.4 | | — | | | 2.6 | | 0.2 | |
| Total restructuring costs | 10.9 | | — | | | 13.8 | | 5.3 | |
| Transformation Program |
| Severance and related costs | 3.1 | | — | | | 3.1 | | — | |
Other transformation costs (2) | 7.0 | | 4.0 | | | 17.7 | | 5.9 | |
| Total transformation costs | 10.1 | | 4.0 | | | 20.8 | | 5.9 | |
| Total restructuring and transformation costs | $ | 21.0 | | $ | 4.0 | | | $ | 34.6 | | $ | 11.2 | |
(1) Other restructuring costs primarily consist of asset impairment and various contract termination costs. |
(2) Other transformation costs primarily consist of professional services and project management and related costs. |
Restructuring and transformation costs by reportable segment were as follows:
| | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| In millions | September 30,
2022 | September 30,
2021 | | September 30,
2022 | September 30,
2021 |
| Consumer Solutions | $ | 12.0 | | $ | 0.1 | | | $ | 13.8 | | $ | 0.8 | |
| Industrial & Flow Technologies | 0.3 | | (0.2) | | | 1.5 | | 0.3 | |
| Other | 8.7 | | 4.1 | | | 19.3 | | 10.1 | |
| Consolidated | $ | 21.0 | | $ | 4.0 | | | $ | 34.6 | | $ | 11.2 | |
Activity related to accrued severance and related costs recorded in Other current liabilities in the Condensed Consolidated Balance Sheets is summarized as follows for the nine months ended September 30, 2022:
| | | | | |
| In millions | September 30,
2022 |
| Beginning balance | $ | 10.7 | |
| |
| Costs incurred | 14.3 | |
| Cash payments and other | (6.1) | |
| Ending balance | $ | 18.9 | |
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
6.Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
| | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| In millions, except per-share data | September 30,
2022 | September 30,
2021 | | September 30,
2022 | September 30,
2021 |
| Net income | $ | 115.4 | | $ | 143.6 | | | $ | 385.9 | | $ | 404.3 | |
Net income from continuing operations | $ | 115.4 | | $ | 143.7 | | | $ | 386.9 | | $ | 407.4 | |
| Weighted average ordinary shares outstanding | | | | | |
| Basic | 164.5 | | 165.7 | | | 164.8 | | 166.0 | |
Dilutive impact of stock options, restricted stock units and performance share units | 0.7 | | 1.9 | | | 1.0 | | 1.7 | |
| Diluted | 165.2 | | 167.6 | | | 165.8 | | 167.7 | |
Earnings (loss) per ordinary share | | | | | |
| Basic | | | | | |
| Continuing operations | $ | 0.70 | | $ | 0.87 | | | $ | 2.35 | | $ | 2.46 | |
| Discontinued operations | — | | — | | | (0.01) | | (0.02) | |
| Basic earnings per ordinary share | $ | 0.70 | | $ | 0.87 | | | $ | 2.34 | | $ | 2.44 | |
| Diluted | | | | | |
| Continuing operations | $ | 0.70 | | $ | 0.86 | | | $ | 2.33 | | $ | 2.43 | |
| Discontinued operations | — | | — | | | (0.01) | | (0.02) | |
| Diluted earnings per ordinary share | $ | 0.70 | | $ | 0.86 | | | $ | 2.32 | | $ | 2.41 | |
Anti-dilutive stock options excluded from the calculation of diluted earnings per share | 1.0 | | — | | | 0.7 | | 0.1 | |
7.Accounts Receivable
All trade receivables are reported on our Condensed Consolidated Balance Sheets at the outstanding principal amount adjusted for any allowance for credit losses and write-offs, net of recoveries. We record an allowance for credit losses, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for credit losses are based on current trends, aging of accounts receivable, periodic credit evaluations of our customers’ financial condition, and historical collection experience as well as reasonable and supportable forecasts of future economic conditions. Write-offs are recorded at the time all collection efforts have been exhausted. We generally do not require collateral. We review our allowance for credit losses on a quarterly basis.
Activity related to our allowance for credit losses is summarized as follows for the nine months ended September 30, 2022:
| | | | | | |
| In millions | September 30,
2022 | |
| Beginning balance | $ | 9.1 | | |
| Bad debt expense | 2.6 | | |
| Acquisitions | 0.3 | | |
| Write-offs, net of recoveries | (1.3) | | |
Other (1) | (0.4) | | |
| Ending balance | $ | 10.3 | | |
(1) Other amounts are primarily the effects of changes in currency translation and the impact of allowance for credits. |
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
8.Supplemental Balance Sheet Information
| | | | | | | | |
| In millions | September 30,
2022 | December 31,
2021 |
| Inventories | | |
| Raw materials and supplies | $ | 406.0 | | $ | 290.3 | |
| Work-in-process | 93.7 | | 77.4 | |
| Finished goods | 279.0 | | 195.2 | |
| Total inventories | $ | 778.7 | | $ | 562.9 | |
| Other current assets | | |
| Cost in excess of billings | $ | 45.2 | | $ | 48.8 | |
| Prepaid expenses | 84.0 | | 57.1 | |
| | |
| Other current assets | 6.1 | | 6.4 | |
| Total other current assets | $ | 135.3 | | $ | 112.3 | |
| Property, plant and equipment, net | | |
| Land and land improvements | $ | 32.9 | | $ | 34.8 | |
| Buildings and leasehold improvements | 193.7 | | 194.5 | |
| Machinery and equipment | 620.3 | | 607.3 | |
| Capitalized software | 67.8 | | 66.5 | |
| Construction in progress | |
