QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number:001-11625
Pentair plc
(Exact name of Registrant as specified in its charter)
Ireland
98-1141328
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
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:
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 (§223.405 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.
Large accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting
company
☐
Emerging growth 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 ☑
On September 30, 2019, 168,092,998 shares of Registrant’s common stock were outstanding.
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, 2018.
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.
Our fiscal year ends on December 31. We report our interim quarterly periods on a calendar quarter basis.
Adoption of new accounting standards
On January 1, 2019, we adopted ASU No. 2016-02, “Leases” (“the new lease standard” or “ASC 842”) using the transition method of adoption. Under the transition method of adoption, comparative information has not been restated and continues to be reported under the standards in effect for those periods. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient to not separate non-lease components from the lease components to which they relate, and instead account for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as one lease cost.
The impact of adopting the new standard primarily relates to the recognition of a lease right-of-use (“ROU”) asset and current and non-current lease liability on the consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As we cannot readily determine the rate implicit in the lease, we use our incremental borrowing rate determined by country of lease origin based on the anticipated lease term as determined at commencement date in determining the present value of lease payments. The ROU asset also excludes any accrued lease payments and unamortized lease incentives.
As of September 30, 2019, $80.0 million was included inOther non-current assets, $19.8 million inOther current liabilities and $63.0 million in Other non-current liabilities, on the Condensed Consolidated Balance Sheets as a result of the new lease standard. There was no impact on our Condensed Consolidated Statements of Operations and Comprehensive Income or Condensed Consolidated Statements of Cash Flows.
Notes to condensed consolidated financial statements (unaudited)
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 14 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, 2019
September 30, 2018
September 30, 2019
September 30, 2018
U.S.
$
445.0
$
438.5
$
1,382.1
$
1,395.1
Western Europe
97.8
97.1
309.0
311.2
Developing (1)
119.9
117.6
357.8
346.0
Other Developed (2)
50.9
58.2
153.1
172.3
Consolidated net sales
$
713.6
$
711.4
$
2,202.0
$
2,224.6
(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, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Residential
$
395.5
$
397.6
$
1,230.1
$
1,247.3
Commercial
154.3
155.8
475.7
475.4
Industrial
163.8
158.0
496.2
501.9
Consolidated net sales
$
713.6
$
711.4
$
2,202.0
$
2,224.6
Performance obligations
On September 30, 2019, we had $62.8 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, 2019
December 31, 2018
$ Change
% Change
Contract assets
$
37.3
$
36.5
$
0.8
2.2
%
Contract liabilities
34.4
32.8
1.6
4.9
%
Net contract assets
$
2.9
$
3.7
$
(0.8
)
(21.6
)%
The $0.8 milliondecrease in net contract assets from December 31, 2018 to September 30, 2019 was primarily the result of timing of milestone payments. Approximately 80% of our contract liabilities at December 31, 2018 were recognized in revenue in the first nine months of 2019. There were no impairment losses recognized on our contract assets for the three months or nine months ended September 30, 2019.
Notes to condensed consolidated financial statements (unaudited)
3.Acquisitions and Discontinued Operations
Acquisitions
In February 2019, as part of Filtration Solutions, we completed the acquisitions of Aquion, Inc. (“Aquion”) and Pelican Water Systems (“Pelican”) for $163.4 million and $121.1 million, respectively, in cash, net of cash acquired.
For Aquion, the excess of purchase price over tangible net assets and identified intangible assets acquired has been preliminarily allocated to goodwill in the amount of $94.5 million, $4.6 million of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired as part of the Aquion acquisition include $15.7 million of indefinite-lived trade name intangible assets and $78.8 million of definite-lived customer relationships with an estimated useful life of 15 years.
For Pelican, the excess purchase price over tangible net assets acquired has been preliminarily allocated to goodwill in the amount of $121.0 million, $7.6 million of which is expected to be deductible for income tax purposes.
The preliminary purchase price allocation for these acquisitions is subject to further refinement and may require significant adjustments to arrive at the final purchase price allocation. These changes will primarily relate to impacts associated with income taxes and other accruals.
The proforma impact of these acquisitions is not material.
Discontinued Operation — Electrical Separation
On April 30, 2018, we completed the separation of our Electrical business from the rest of Pentair (the “Separation”) by means of a dividend in specie of the Electrical business, which was effected by the transfer of the Electrical business from Pentair to nVent Electric plc (“nVent”) and the issuance by nVent of ordinary shares directly to Pentair shareholders (the “Distribution”). The results of the Electrical business have been presented as discontinued operations. The Electrical business had been previously disclosed as a stand-alone reporting segment. Separation costs related to the Separation and Distribution were $2.5 million and $82.4 million for the three and nine months ended September 30, 2018, respectively. These costs are reported in discontinued operations as they represent a cost directly related to the Separation and Distribution and are included within Income (loss) from discontinued operations, net of tax presented below.
Operating results of the discontinued operation is summarized below:
Three months ended
Nine months ended
In millions
September 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Net sales
$
—
$
—
$
—
$
693.9
Cost of goods sold
—
—
—
424.0
Gross profit
—
—
—
269.9
Selling, general and administrative expenses
1.2
2.5
2.0
233.5
Research and development expenses
—
—
—
14.6
Operating (loss) income
$
(1.2
)
$
(2.5
)
$
(2.0
)
$
21.8
(Loss) income from discontinued operations before income taxes
$
(1.3
)
$
14.8
$
(2.5
)
$
34.6
Income tax (benefit) provision
(2.3
)
(4.1
)
(1.6
)
7.6
Income (loss) from discontinued operations, net of tax
Notes to condensed consolidated financial statements (unaudited)
4.
Share Plans
Total share-based compensation expense for the three and nine months endedSeptember 30, 2019 and 2018 was as follows:
Three months ended
Nine months ended
In millions
September 30, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Restricted stock units
$
2.5
$
2.4
$
8.2
$
6.7
Stock options
0.9
1.3
3.4
3.5
Performance share units
1.2
1.4
3.7
6.2
Total share-based compensation expense
$
4.6
$
5.1
$
15.3
$
16.4
Of the total share-based compensation expense noted above, $3.4 million was reported as part of Income (loss) from discontinued operations, net of tax for the nine months endedSeptember 30, 2018.
In the first quarter of 2019, we issued our annual share-based compensation grants under the Pentair plc 2012 Stock and Incentive Plan to eligible employees. The total number of awards issued was approximately 0.8 million, of which 0.3 million were restricted stock units (“RSUs”), 0.4 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 $40.84, $8.84, and $38.47, 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:
2019
Annual Grant
Risk-free interest rate
2.89
%
Expected dividend yield
1.78
%
Expected share price volatility
23.3
%
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.
5.
Restructuring
During the nine months endedSeptember 30, 2019 and the year ended December 31, 2018, we initiated and continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. Initiatives during the nine months ended September 30, 2019 and the year ended December 31, 2018 included the reduction in hourly and salaried headcount of approximately 325 employees and 300 employees, respectively.
Restructuring-related costs included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income included costs for severance and other restructuring costs as follows:
Notes to condensed consolidated financial statements (unaudited)
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, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Aquatic Systems
$
0.2
$
0.6
$
3.1
$
3.6
Filtration Solutions
1.5
0.9
3.1
14.4
Flow Technologies
0.3
0.7
2.4
8.7
Other
0.9
1.3
2.1
7.4
Consolidated
$
2.9
$
3.5
$
10.7
$
34.1
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 endedSeptember 30, 2019:
In millions
September 30, 2019
Beginning balance
$
27.1
Costs incurred
9.6
Cash payments and other
(19.7
)
Ending balance
$
17.0
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, 2019
September 30, 2018
September 30, 2019
September 30, 2018
Net income
$
92.3
$
110.1
$
257.9
$
254.5
Net income from continuing operations
$
91.3
$
91.2
$
258.8
$
227.5
Weighted average ordinary shares outstanding
Basic
168.1
174.3
169.7
176.8
Dilutive impact of stock options, restricted stock units and performance share units
0.5
1.4
0.6
1.7
Diluted
168.6
175.7
170.3
178.5
Earnings (loss) per ordinary share
Basic
Continuing operations
$
0.54
$
0.52
$
1.53
$
1.29
Discontinued operations
0.01
0.11
(0.01
)
0.15
Basic earnings per ordinary share
$
0.55
$
0.63
$
1.52
$
1.44
Diluted
Continuing operations
$
0.54
$
0.52
$
1.52
$
1.28
Discontinued operations
0.01
0.11
(0.01
)
0.15
Diluted earnings per ordinary share
$
0.55
$
0.63
$
1.51
$
1.43
Anti-dilutive stock options excluded from the calculation of diluted earnings per share