QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 number)
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
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, 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 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 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
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 March 31, 2019, 171,891,940 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 March 31, 2019, $74.7 million was included in Other non-current assets, $19.9 million in Other current liabilities and $57.7 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
In millions
March 31, 2019
March 31, 2018
U.S.
$
426.0
$
452.4
Western Europe
104.3
110.3
Developing (1)
108.9
113.0
Other Developed (2)
49.7
56.9
Consolidated net sales
$
688.9
$
732.6
(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
In millions
March 31, 2019
March 31, 2018
Residential
$
383.6
$
412.2
Commercial
150.7
151.8
Industrial
154.6
168.6
Consolidated net sales
$
688.9
$
732.6
Performance obligations
On March 31, 2019, we had $66.4 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
March 31, 2019
December 31, 2018
$ Change
% Change
Contract assets
$
38.4
$
36.5
$
1.9
5.2
%
Contract liabilities
32.9
32.8
0.1
0.3
%
Net contract assets
$
5.5
$
3.7
$
1.8
48.6
%
The $1.8 million increase in net contract assets from December 31, 2018 to March 31, 2019 was primarily the result of timing of milestone payments. Approximately 50% of our contract liabilities at December 31, 2018 were recognized in revenue in the first quarter of 2019. There were no impairment losses recognized on our contract assets for the three months ended March 31, 2019.
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 $164.7 million and $122.5 million in cash, net of cash acquired, respectively.
Notes to condensed consolidated financial statements (unaudited)
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 $94.6 million, none 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 $121.9 million, none 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 $24.6 million for the three months ended March 31, 2018. These costs are reported in discontinued operations as they represent a cost directly related to the Separation and Distribution and are included within (Loss) income from discontinued operations, net of tax presented below.
Operating results of the discontinued operation is summarized below:
Three months ended
In millions
March 31, 2019
March 31, 2018
Net sales
$
—
$
538.9
Cost of goods sold
—
330.2
Gross profit
—
208.7
Selling, general and administrative expenses
0.3
137.8
Research and development expenses
—
11.3
Operating income (loss)
$
(0.3
)
$
59.6
(Loss) income from discontinued operations before income taxes
$
(0.8
)
$
58.2
Income tax provision
0.3
13.7
(Loss) income from discontinued operations, net of tax
Notes to condensed consolidated financial statements (unaudited)
4.
Share Plans
Total share-based compensation expense for the three months ended March 31, 2019 and 2018 was as follows:
Three months ended
In millions
March 31, 2019
March 31, 2018
Restricted stock units
$
2.8
$
2.4
Stock options
1.4
1.2
Performance share units
1.2
2.4
Total share-based compensation expense
$
5.4
$
6.0
Of the total share-based compensation expense noted above, $2.0 million was reported as part of (Loss) income from discontinued operations, net of tax for the three months ended March 31, 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 three months ended March 31, 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. These initiatives included the reduction in hourly and salaried headcount of approximately 10 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:
Three months ended
In millions
March 31, 2019
March 31, 2018
Severance and related costs
$
1.1
$
5.4
Other
—
0.2
Total restructuring costs
$
1.1
$
5.6
Other restructuring costs primarily consist of asset impairment and various contract termination costs.
Notes to condensed consolidated financial statements (unaudited)
Restructuring costs by reportable segment were as follows:
Three months ended
In millions
March 31, 2019
March 31, 2018
Aquatic Systems
$
0.9
$
1.8
Filtration Solutions
0.4
2.0
Flow Technologies
(0.3
)
1.7
Other
0.1
0.1
Consolidated
$
1.1
$
5.6
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 three months ended March 31, 2019:
In millions
March 31, 2019
Beginning balance
$
27.1
Costs incurred
1.1
Cash payments and other
(8.0
)
Ending balance
$
20.2
6.
Earnings Per Share
Basic and diluted earnings per share were calculated as follows:
Three months ended
In millions, except per-share data
March 31, 2019
March 31, 2018
Net income
$
51.3
$
102.9
Net income from continuing operations
$
52.4
$
58.4
Weighted average ordinary shares outstanding
Basic
171.6
179.2
Dilutive impact of stock options, restricted stock units and performance share units
0.9
2.3
Diluted
172.5
181.5
Earnings (loss) per ordinary share
Basic
Continuing operations
$
0.31
$
0.33
Discontinued operations
(0.01
)
0.24
Basic earnings per ordinary share
$
0.30
$
0.57
Diluted
Continuing operations
$
0.30
$
0.32
Discontinued operations
—
0.25
Diluted earnings per ordinary share
$
0.30
$
0.57
Anti-dilutive stock options excluded from the calculation of diluted earnings per share
Notes to condensed consolidated financial statements (unaudited)
9.
Debt
Debt and the average interest rates on debt outstanding were as follows:
In millions
Average interest rate as of March 31, 2019
Maturity
Year
March 31, 2019
December 31, 2018
Commercial paper
3.171%
2023
$
681.2
$
76.0
Revolving credit facilities
3.595%
2023
5.0
26.2
Senior notes - fixed rate (1)
2.650%
2019
250.0
250.0
Senior notes - fixed rate - Euro (1)
2.450%
2019
153.6
155.1
Senior notes - fixed rate (1)
3.625%
2020
74.0
74.0
Senior notes - fixed rate (1)
5.000%
2021
103.8
103.8
Senior notes - fixed rate (1)
3.150%
2022
88.3
88.3
Senior notes - fixed rate (1)
4.650%
2025
19.3
19.3
Unamortized debt issuance costs and discounts
N/A
N/A
(4.5
)
(5.1
)
Total debt
$
1,370.7
$
787.6
(1) Senior notes are guaranteed as to payment by Pentair and PISG.
In April 2018, Pentair, Pentair Investments Switzerland GmbH (“PISG”), Pentair Finance S.à r.l. (“PFSA”) and Pentair, Inc. entered into a credit agreement, providing for an $800.0 million senior unsecured revolving credit facility with a term of five years (the “Senior Credit Facility”), with Pentair and PISG as guarantors and PFSA and Pentair, Inc. as borrowers. The Senior Credit Facility replaced PFSA’s existing credit facility under that certain Amended and Restated Credit Agreement, dated as of October 3, 2014. The Senior Credit Facility has a maturity date of April 25, 2023. Borrowings under the Senior Credit Facility bear interest at a rate equal to an adjusted base rate or the London Interbank Offered Rate, plus, in each case, an applicable margin. The applicable margin is based on, at PFSA’s election, Pentair’s leverage level or PFSA’s public credit rating.
PFSA is authorized to sell short-term commercial paper notes to the extent availability exists under the Senior Credit Facility. PFSA uses the Senior Credit Facility as back-up liquidity to support 100% of commercial paper outstanding. PFSA had $681.2 million of commercial paper outstanding as of March 31, 2019 and $76.0 million as of December 31, 2018, all of which was classified as long-term debt as we have the intent and the ability to refinance such obligations on a long-term basis under the Senior Credit Facility.
Total availability under the Senior Credit Facility was $113.8 million as of March 31, 2019. Additionally, PFSA has the option to request to increase the Senior Credit Facility in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders. We anticipate that, during the second quarter of 2019, PFSA will request an increase in the Senior Credit Facility of $100.0 million pursuant to such option.
Our debt agreements contain various financial covenants, but the most restrictive covenants are contained in the Senior Credit Facility. The Senior Credit Facility contains covenants requiring us not to 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 the last day of any period of four consecutive fiscal quarters to exceed 3.75 to 1.00 (the “Leverage Ratio”) 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 as of the end of each fiscal quarter. For purposes of the Leverage Ratio, the Senior Credit Facility provides for the calculation of EBITDA giving pro forma effect to certain acquisitions, divestitures and liquidations during the period to which such calculation relates. As of March 31, 2019, we were in compliance with all financial covenants in our debt agreements.
In addition to the Senior Credit Facility, we have various other credit facilities with an aggregate availability of $21.2 million, of which there were no outstanding borrowings at March 31, 2019. Borrowings under these credit facilities bear interest at variable rates.
Notes to condensed consolidated financial statements (unaudited)
We have $403.6 million aggregate principal amount of fixed rate senior notes maturing in the next twelve months. We classified this debt as long-term as of March 31, 2019 as we have the intent and ability to refinance such obligation on a long-term basis under the Senior Credit Facility.
Debt outstanding, excluding unamortized issuance costs and discounts, at March 31, 2019 matures on a calendar year basis as follows:
Q2-Q4
In millions
2019
2020
2021
2022
2023
2024
Thereafter
Total
Contractual debt obligation maturities
$
403.6
$
74.0
$
103.8
$
88.3
$
686.2
$
—
$
19.3
$
1,375.2
10.
Derivatives and Financial Instruments
Derivative financial instruments
We are exposed to market risk related to changes in foreign currency exchange rates. To manage the volatility related to this exposure, we periodically enter into a variety of derivative financial instruments. Our objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. 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
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.
At March 31, 2019 and December 31, 2018, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $313.6 million and $331.4 million, respectively. The impact of these contracts on the Condensed Consolidated Statements of Operations and Comprehensive Income was not material for any period presented.
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 expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income upon settlement. Such reclassifications during the three months ended March 31, 2019 and 2018 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 September 2015, we designated the €500 million 2.45% Senior Notes due 2019 (the “2019 Euro Notes”) as a net investment hedge for a portion of our net investment in our Euro-denominated subsidiaries. In June 2018, the Company completed a tender offer for €363.4 million of the 2019 Euro Notes. The remaining €136.6 million of the 2019 Euro Notes have been re-designated as a net investment hedge in our Euro-denominated subsidiaries. The gains/losses on the 2019 Euro Notes have been included as a component of the cumulative translation adjustment account within AOCI. We had a deferred foreign currency gain of $0.7 million at March 31, 2019 and a deferred foreign currency loss of $0.8 million at December 31, 2018 in AOCI associated with the net investment hedge activity.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Notes to condensed consolidated financial statements (unaudited)
Level 1:
Valuation is based on observable inputs such as quoted market prices (unadjusted) for identical assets or liabilities in active markets.
Level 2:
Valuation is based on inputs such as quoted market prices for similar assets or liabilities in active markets or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3:
Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
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 valued at net asset value (“NAV”), which is based on the fair value of the underlying securities owned by the fund and divided by the number of shares outstanding.
The recorded amounts and estimated fair values of total debt, excluding unamortized issuance costs and discounts, were as follows:
March 31, 2019
December 31, 2018
In millions
Recorded
Amount
Fair
Value
Recorded
Amount
Fair
Value
Variable rate debt
$
686.2
$
686.2
$
102.2
$
102.2
Fixed rate debt
689.0
694.6
690.5
691.8
Total debt
$
1,375.2
$
1,380.8
$
792.7
$
794.0
Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:
Notes to condensed consolidated financial statements (unaudited)
December 31, 2018
In millions
Level 1
Level 2
Level 3
NAV
Total
Recurring fair value measurements
Foreign currency contract liabilities
$
—
$
(30.6
)
$
—
$
—
$
(30.6
)
Deferred compensation plan assets
17.6
—
—
3.3
20.9
Total recurring fair value measurements
$
17.6
$
(30.6
)
$
—
$
3.3
$
(9.7
)
11.
Income Taxes
We manage our affairs so that we are centrally managed and controlled in the United Kingdom (“U.K.”) and therefore have our tax residency in the U.K. The provision for income taxes consists of provisions for the U.K. and international income taxes. We operate in an international environment with operations in various locations outside the U.K. Accordingly, the consolidated income tax rate is a composite rate reflecting the earnings in the various locations and the applicable rates.
The effective income tax rate for the three months ended March 31, 2019 was 17.1%, compared to 20.5% for the three months ended March 31, 2018. We continue to actively pursue initiatives to reduce our effective tax rate. 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 $49.6 million and $51.4 million at March 31, 2019 and December 31, 2018, respectively. We record penalties and interest related to unrecognized tax benefits in Provision for income taxes and Net interest expense, respectively, on the Condensed Consolidated Statements of Operations and Comprehensive Income, which is consistent with our past practices.
12.
Benefit Plans
Components of net periodic benefit cost for our pension plans for the three months ended March 31, 2019 and 2018 were as follows:
Three months ended
In millions
March 31, 2019
March 31, 2018
Service cost
$
0.7
$
1.0
Interest cost
2.7
3.0
Expected return on plan assets
(1.7
)
(2.2
)
Net periodic benefit cost
$
1.7
$
1.8
Components of net periodic benefit cost for our other post-retirement plans for the three months ended March 31, 2019 and 2018 were not material.
13.
Shareholders’ Equity
Share repurchases
In May 2018, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $750.0 million. The authorization expires on May 31, 2021. There were no share repurchases during the three months ended March 31, 2019. As of March 31, 2019, we had $400.0 million available for share repurchases.
Dividends payable
On December 10, 2018, the Board of Directors declared a quarterly cash dividend of $0.18, that was paid on February 8, 2019, to shareholders of record at the close of business on January 25, 2019. Additionally, the Board of Directors approved a plan to pay an annual cash dividend of $0.72 in 2019. Further, on February 19, 2019, the Board of Directors declared a quarterly cash dividend of $0.18 payable on May 3, 2019, to shareholders of record at the close of business on April 19, 2019. As a result, the balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $30.9 million at March 31, 2019, compared to $30.8 million at December 31, 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 equity income of unconsolidated subsidiaries and operating income exclusive of intangible amortization, certain acquisition related expenses, costs of restructuring activities, impairments and other unusual non-operating items.
Notes to condensed consolidated financial statements (unaudited)
Financial information by reportable segment is as follows:
Three months ended
In millions
March 31, 2019
March 31, 2018
Net sales
Aquatic Systems
$
220.5
$
240.4
Filtration Solutions
239.3
251.6
Flow Technologies
228.7
240.3
Other
0.4
0.3
Consolidated
$
688.9
$
732.6
Segment income (loss)
Aquatic Systems
$
52.4
$
60.0
Filtration Solutions
33.7
33.7
Flow Technologies
30.1
38.7
Other
(17.5
)
(15.4
)
Consolidated
$
98.7
$
117.0
The following table presents a reconciliation of consolidated segment income to consolidated income from continuing operations before income taxes:
Three months ended
In millions
March 31, 2019
March 31, 2018
Segment income
$
98.7
$
117.0
Deal-related costs and expenses
(4.2
)
—
Inventory step-up
(1.7
)
—
Restructuring and other
(1.1
)
(5.6
)
Intangible amortization
(8.2
)
(9.3
)
Asset impairment
(15.3
)
—
Gain (loss) on sale of business
3.5
(5.3
)
Corporate allocations
—
(8.8
)
Net interest expense
(7.3
)
(13.5
)
Other expense
(1.2
)
(1.0
)
Income from continuing operations before income taxes
$
63.2
$
73.5
15.
Commitments and Contingencies
Leases
We determine if an arrangement is a lease at inception. Our lease portfolio principally consists of operating leases related to facilities, machinery, equipment and vehicles. Our lease terms do not include options to extend or terminate the lease until we are reasonably certain that we will exercise that option. Operating lease cost for lease payments is recognized on a straight-line basis over the lease term and principally consists of fixed payments for base rent.
The components of lease cost for the three months ended March 31, 2019 were as follows:
Notes to condensed consolidated financial statements (unaudited)
Supplemental cash flow information related to leases for the three months ended March 31, 2019 was as follows:
In millions
March 31, 2019
Operating cash flows from operating leases
$
6.6
Right-of-use assets obtained in exchange for lease obligations
79.5
Other information related to leases was as follows:
March 31, 2019
Weighted-average remaining lease term of operating leases
5 years
Weighted-average discount rate of operating leases
6.2
%
Future minimum lease commitments under non-cancelable operating leases, as of March 31, 2019 were as follows:
In millions
Operating Leases
Q2 through Q4 2019
$
18.5
2020
19.6
2021
14.9
2022
12.3
2023
10.3
Thereafter
15.6
Total lease payments
91.2
Less: imputed interest
(13.6
)
Total
$
77.6
Future minimum lease commitments under non-cancelable operating leases based on accounting standards applicable as of December 31, 2018 were as follows:
In millions
Operating Leases
2019
$
23.2
2020
17.6
2021
13.3
2022
11.1
2023
9.5
Thereafter
13.8
Total
$
88.5
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 adverse effect on our financial position, results of operations or cash flows.
Notes to condensed consolidated financial statements (unaudited)
We recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In connection with the disposition of the Valves & Controls business in 2017, we agreed to indemnify Emerson Electric Co. for certain pre-closing tax liabilities. We have recorded a liability representing the fair value of our expected future obligation for this matter.
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.
The changes in the carrying amount of service and product warranties of continuing operations for the three months ended March 31, 2019 were as follows:
In millions
March 31, 2019
Beginning balance
$
33.9
Service and product warranty provision
11.2
Payments
(10.5
)
Ending balance
$
34.6
Stand-by letters of credit, bank guarantees and bonds
In certain situations, Tyco International Ltd., Pentair Ltd.’s former parent company (“Tyco”), guaranteed performance by the flow control business of Pentair Ltd. (“Flow Control”) to third parties or provided financial guarantees for financial commitments of Flow Control. In situations where Flow Control and Tyco were unable to obtain a release from these guarantees in connection with the spin-off of Flow Control from Tyco, we will indemnify Tyco for any losses it suffers as a result of such guarantees.
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 March 31, 2019 and December 31, 2018, the outstanding value of bonds, letters of credit and bank guarantees totaled $121.6 million and $123.6 million, respectively.
16.
Supplemental Guarantor Information
Pentair plc (the “Parent Company Guarantor”) and PISG (the “Subsidiary Guarantor”), fully and unconditionally, guarantee the Notes of PFSA (the “Subsidiary Issuer”). The Subsidiary Guarantor is a Switzerland limited liability company and 100 percent-owned subsidiary of the Parent Company Guarantor. The Subsidiary Issuer is a Luxembourg private limited liability company and 100 percent-owned subsidiary of the Subsidiary Guarantor. The guarantees provided by the Parent Company Guarantor and Subsidiary Guarantor are joint and several.
The following supplemental financial information sets forth the Company’s Condensed Consolidating Statements of Operations and Comprehensive Income (Loss), Condensed Consolidating Balance Sheets and Condensed Consolidating Statements of Cash Flows by relevant group within the Company: Pentair plc and PISG as the guarantors, PFSA as issuer of the debt and all other non-guarantor subsidiaries. Condensed consolidating financial information for Pentair plc, PISG and PFSA on a stand-alone basis is presented using the equity method of accounting for subsidiaries.