Pentair Earnings 2021-03-31
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the Quarterly Period Ended March 31, 2021 | |||||
OR
| 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)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||||||||
| (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 | ||||||
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.
| ☑ | 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 March 31, 2021, 166,201,692 shares of Registrant’s common stock were outstanding.
Pentair plc and Subsidiaries
| Page | ||||||||
| PART I FINANCIAL INFORMATION | ||||||||
| ITEM 1. | ||||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| PART II OTHER INFORMATION | ||||||||
| ITEM 1. | ||||||||
| ITEM 1A. | ||||||||
| ITEM 2. | ||||||||
| ITEM 6. | ||||||||
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Pentair plc and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
| Three months ended | ||||||||
| In millions, except per-share data | March 31, 2021 | March 31, 2020 | ||||||
| Net sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Operating income | ||||||||
| Other expense: | ||||||||
| Net interest expense | ||||||||
| Other expense | ||||||||
| Income from continuing operations before income taxes | ||||||||
| Provision for income taxes | ||||||||
| Net income from continuing operations | ||||||||
| Loss from discontinued operations, net of tax | ( | |||||||
| Net income | $ | $ | ||||||
| Comprehensive income, net of tax | ||||||||
| Net income | $ | $ | ||||||
| Changes in cumulative translation adjustment | ( | ( | ||||||
| Changes in market value of derivative financial instruments, net of tax | ||||||||
| Comprehensive income | $ | $ | ||||||
| Earnings (loss) per ordinary share | ||||||||
| Basic | ||||||||
| Continuing operations | $ | $ | ||||||
| Discontinued operations | ( | |||||||
| Basic earnings per ordinary share | $ | $ | ||||||
| Diluted | ||||||||
| Continuing operations | $ | $ | ||||||
| Discontinued operations | ( | |||||||
| Diluted earnings per ordinary share | $ | $ | ||||||
| Weighted average ordinary shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to condensed consolidated financial statements.
3
Pentair plc and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
| March 31, 2021 | December 31, 2020 | |||||||
| In millions, except per-share data | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net of allowances of $ | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other assets | ||||||||
| Goodwill | ||||||||
| Intangibles, net | ||||||||
| Other non-current assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Employee compensation and benefits | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| Long-term debt | ||||||||
| Pension and other post-retirement compensation and benefits | ||||||||
| Deferred tax liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 16) | ||||||||
| Equity | ||||||||
Ordinary shares $ | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
4
Pentair plc and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three months ended | ||||||||
| In millions | March 31, 2021 | March 31, 2020 | ||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Loss from discontinued operations, net of tax | ||||||||
| Adjustments to reconcile net income from continuing operations to net cash provided by (used for) operating activities of continuing operations | ||||||||
| Equity (income) loss of unconsolidated subsidiaries | ( | |||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Deferred income taxes | ( | |||||||
| Share-based compensation | ||||||||
| Changes in assets and liabilities, net of effects of business acquisitions | ||||||||
| Accounts receivable | ( | ( | ||||||
| Inventories | ( | ( | ||||||
| Other current assets | ( | ( | ||||||
| Accounts payable | ( | |||||||
| Employee compensation and benefits | ( | ( | ||||||
| Other current liabilities | ( | |||||||
| Other non-current assets and liabilities | ( | |||||||
| Net cash used for operating activities of continuing operations | ( | ( | ||||||
| Net cash used for operating activities of discontinued operations | ( | |||||||
| Net cash used for operating activities | ( | ( | ||||||
| Investing activities | ||||||||
| Capital expenditures | ( | ( | ||||||
| Proceeds from sale of property and equipment | ||||||||
| Acquisitions, net of cash acquired | ( | |||||||
| Net cash used for investing activities | ( | ( | ||||||
| Financing activities | ||||||||
| Net borrowings of commercial paper and revolving long-term debt | ||||||||
| Shares issued to employees, net of shares withheld | ( | |||||||
| Repurchases of ordinary shares | ( | ( | ||||||
| Dividends paid | ( | ( | ||||||
| Payments upon the maturity of cross currency swaps | ( | |||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | |||||||
| Change in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
5
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, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||
Dividends declared, $ | — | — | — | ( | — | ( | |||||||||||||||||
| Share repurchases | ( | — | ( | — | — | ( | |||||||||||||||||
| Exercise of options, net of shares tendered for payment | — | — | — | ||||||||||||||||||||
| Issuance of restricted shares, net of cancellations | — | — | — | — | |||||||||||||||||||
| Shares surrendered by employees to pay taxes | — | ( | — | — | ( | ||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||
| Balance - March 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||
| In millions | Ordinary shares | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total | ||||||||||||||||||
| Number | Amount | ||||||||||||||||||||||
| Balance - December 31, 2019 | $ | $ | $ | $ | ( | $ | |||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | |||||||||||||||||||
Dividends declared, $ | — | — | — | ( | — | ( | |||||||||||||||||
| Share repurchases | ( | — | ( | — | — | ( | |||||||||||||||||
| Exercise of options, net of shares tendered for payment | — | — | — | ||||||||||||||||||||
| Issuance of restricted shares, net of cancellations | — | — | — | — | |||||||||||||||||||
| Shares surrendered by employees to pay taxes | ( | — | ( | — | — | ( | |||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||
| Balance - March 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
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, 2020.
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 March 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 rate 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 or constrained supply that could materially adversely impact our business, financial condition, results of operations, liquidity and cash flows in future periods.
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 | ||||||||
| In millions | March 31, 2021 | March 31, 2020 | ||||||
| U.S. | $ | $ | ||||||
| Western Europe | ||||||||
Developing (1) | ||||||||
Other Developed (2) | ||||||||
| Consolidated net sales | $ | $ | ||||||
(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, 2021 | March 31, 2020 | ||||||
| Residential | $ | $ | ||||||
| Commercial | ||||||||
| Industrial | ||||||||
| Consolidated net sales | $ | $ | ||||||
7
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Performance obligations
On March 31, 2021, we had $78.4 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, 2021 | December 31, 2020 | $ Change | % Change | |||||||||||||
| Contract assets | $ | $ | $ | % | |||||||||||||
| Contract liabilities | % | ||||||||||||||||
| Net contract assets | $ | $ | $ | % | |||||||||||||
The $1.2 million increase in net contract assets from December 31, 2020 to March 31, 2021 was primarily the result of timing of milestone payments and impact of foreign currency fluctuations. Approximately 45 % of our contract liabilities at December 31, 2020 were recognized in revenue in the first quarter of 2021. There were no impairment losses recognized on our contract assets for the three months ended March 31, 2021.
3.Acquisitions
On April 19, 2021, as part of our Consumer Solutions reporting segment, we entered into a definitive agreement to acquire the assets of Ken’s Beverage, Inc. for total consideration of approximately $80.0 million in cash, subject to customary adjustments. The transaction is anticipated to be completed in the second quarter of 2021, subject to customary closing conditions.
In 2020, our Consumer Solutions reporting segment completed acquisitions with purchase prices totaling $58.0 million in cash, net of cash acquired.
The pro forma impact of these acquisitions is not material.
4.Share Plans
Total share-based compensation expense for the three months ended March 31, 2021 and 2020 was as follows:
| Three months ended | ||||||||
| In millions | March 31, 2021 | March 31, 2020 | ||||||
| Restricted stock units | $ | $ | ||||||
| Stock options | ||||||||
| Performance share units | ||||||||
| Total share-based compensation expense | $ | $ | ||||||
In the first quarter of 2021, 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 0.7 million, of which 0.3 million were restricted stock units (“RSUs”), 0.3 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 $55.42 , $12.88 , and $52.57 , respectively.
8
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
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:
| 2021 Annual Grant | |||||
| Risk-free interest rate | % | ||||
| Expected dividend yield | % | ||||
| Expected share price volatility | % | ||||
| Expected term (years) | |||||
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
During the three months ended March 31, 2021 and the year ended December 31, 2020, we initiated and continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business, including the reduction in headcount of approximately 25 and 175 employees, respectively.
Restructuring-related costs within Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income included the following:
| Three months ended | ||||||||
| In millions | March 31, 2021 | March 31, 2020 | ||||||
| Severance and related costs | $ | $ | ||||||
| Other | ||||||||
| Total restructuring costs | $ | $ | ||||||
Other restructuring costs primarily consist of asset impairment and various contract termination costs.
Restructuring costs by reportable segment were as follows:
| Three months ended | ||||||||
| In millions | March 31, 2021 | March 31, 2020 | ||||||
| Consumer Solutions | $ | $ | ||||||
| Industrial & Flow Technologies | ||||||||
| Other | ||||||||
| Consolidated | $ | $ | ||||||
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, 2021:
| In millions | March 31, 2021 | ||||
| Beginning balance | $ | ||||
| Costs incurred | |||||
| Cash payments and other | ( | ||||
| Ending balance | $ | ||||
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 | ||||||||
| In millions, except per-share data | March 31, 2021 | March 31, 2020 | ||||||
| Net income | $ | $ | ||||||
Net income from continuing operations | $ | $ | ||||||
| Weighted average ordinary shares outstanding | ||||||||
| Basic | ||||||||
Dilutive impact of stock options, restricted stock units and performance share units | ||||||||
| Diluted | ||||||||
Earnings (loss) per ordinary share | ||||||||
| Basic | ||||||||
| Continuing operations | $ | $ | ||||||
| Discontinued operations | ( | |||||||
| Basic earnings per ordinary share | $ | $ | ||||||
| Diluted | ||||||||
| Continuing operations | $ | $ | ||||||
| Discontinued operations | ( | |||||||
| Diluted earnings per ordinary share | $ | $ | ||||||
Anti-dilutive stock options excluded from the calculation of diluted earnings per share | ||||||||
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.
| In millions | March 31, 2021 | December 31, 2020 | ||||||
| Beginning balance | $ | $ | ||||||
Bad debt expense (benefit) (1) | ( | |||||||
| Write-offs, net of recoveries | ( | ( | ||||||
Other (2) | ( | |||||||
| Ending balance | $ | $ | ||||||
(1) The bad debt benefit for the year-ended December 31, 2020 includes the positive impact related to the adoption of ASU No. 2016-13 “Financial Instruments-Credit Losses.” | ||||||||
(2) Other amounts are primarily the effects of changes in currency translation and the impact of allowance for credits. | ||||||||
10
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
8. Supplemental Balance Sheet Information
| In millions | March 31, 2021 | December 31, 2020 | ||||||
| Inventories | ||||||||
| Raw materials and supplies | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
| Other current assets | ||||||||
| Cost in excess of billings | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Prepaid income taxes | ||||||||
| Other current assets | ||||||||
| Total other current assets | $ | $ | ||||||
| Property, plant and equipment, net | ||||||||
| Land and land improvements | $ | $ | ||||||
| Buildings and leasehold improvements | ||||||||
| Machinery and equipment | ||||||||
| Capitalized software | ||||||||
| Construction in progress | ||||||||
| Total property, plant and equipment | ||||||||
| Accumulated depreciation and amortization | ||||||||
| Total property, plant and equipment, net | $ | $ | ||||||
| Other non-current assets | ||||||||
| Right-of-use lease assets | $ | $ | ||||||
| Deferred income taxes | ||||||||
| Deferred compensation plan assets | ||||||||
| Other non-current assets | ||||||||
| Total other non-current assets | $ | $ | ||||||
| Other current liabilities | ||||||||
| Dividends payable | $ | $ | ||||||
| Accrued warranty | ||||||||
| Accrued rebates and incentives | ||||||||
| Billings in excess of cost | ||||||||
| Current lease liability | ||||||||
| Income taxes payable | ||||||||
| Accrued restructuring | ||||||||
| Other current liabilities | ||||||||
| Total other current liabilities | $ | $ | ||||||
| Other non-current liabilities | ||||||||
| Long-term lease liability | $ | $ | ||||||
| Income taxes payable | ||||||||
| Self-insurance liabilities | ||||||||
| Deferred compensation plan liabilities | ||||||||
| Foreign currency contract liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total other non-current liabilities | $ | $ | ||||||
11
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
9.Goodwill and Other Identifiable Intangible Assets
The changes in the carrying amount of goodwill by reportable segment were as follows:
| In millions | December 31, 2020 | Purchase Accounting Adjustments | Foreign currency translation/other | March 31, 2021 | ||||||||||
| Consumer Solutions | $ | $ | $ | ( | $ | |||||||||
| Industrial & Flow Technologies | ( | |||||||||||||
| Total goodwill | $ | $ | $ | ( | $ | |||||||||
Identifiable intangible assets consisted of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| In millions | Cost | Accumulated amortization | Net | Cost | Accumulated amortization | Net | |||||||||||||||||
| Definite-life intangibles | |||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||
| Proprietary technology and patents | ( | ( | |||||||||||||||||||||
| Total definite-life intangibles | ( | ( | |||||||||||||||||||||
| Indefinite-life intangibles | |||||||||||||||||||||||
| Trade names | — | — | |||||||||||||||||||||
| Total intangibles | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||
Identifiable intangible asset amortization expense was $7.1 million and $7.6 million for the three months ended March 31, 2021 and 2020, respectively.
Estimated future amortization expense for identifiable intangible assets during the remainder of 2021 and the next five years is as follows:
| Q2 - Q4 | ||||||||||||||||||||
| In millions | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | ||||||||||||||
| Estimated amortization expense | $ | $ | $ | $ | $ | $ | ||||||||||||||
12
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
10.Debt
Debt and the average interest rates on debt outstanding were as follows:
| In millions | Average interest rate as of March 31, 2021 | Maturity Year | March 31, 2021 | December 31, 2020 | ||||||||||
| Revolving credit facilities | 2023 | $ | $ | |||||||||||
| Term loans | 2023 | |||||||||||||
Senior notes - fixed rate (1) | 2021 | |||||||||||||
Senior notes - fixed rate (1) | 2022 | |||||||||||||
Senior notes - fixed rate (1) | 2025 | |||||||||||||
Senior notes - fixed rate (1) | 2029 | |||||||||||||
| Unamortized debt issuance costs and discounts | N/A | N/A | ( | ( | ||||||||||
| Total debt | $ | $ | ||||||||||||
(1) Senior notes are guaranteed as to payment by Pentair plc. | ||||||||||||||
Pentair, Pentair Finance S.à r.l (“PFSA“) and Pentair, Inc. are parties to a credit agreement (the “Senior Credit Facility”), with Pentair as guarantor and PFSA and Pentair, Inc. as borrowers, providing for a $900.0 million senior unsecured revolving credit facility. 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.
The Senior Credit Facility provides for the extension of term loans in an aggregate amount of $200.0 million (the “Term Loans”). The Term Loans are in addition to the revolving credit facility commitment. In addition, PFSA has the option to further increase the Senior Credit Facility in an aggregate amount of up to $300.0 million, through a combination of increases to the total commitment amount of the revolving credit facility and/or one or more tranches of term loans in addition to the Term Loans, subject to customary conditions, including the commitment of the participating lenders.
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 no
In 2020, the commercial paper market began to experience high levels of volatility due to uncertainty related to the COVID-19 pandemic. The volatility impacted both market access to and pricing of commercial paper. As a cost mitigation action, we withdrew our credit ratings to access the commercial paper market and continued to use the revolving credit facility, along with cash generated from operations, to fund our general operations. As of March 31, 2021, total availability under the Senior Credit Facility was $771.5 million.
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.
In addition to the Senior Credit Facility, we have various other credit facilities with an aggregate availability of $21.4 million, of which there were no outstanding borrowings at March 31, 2021. Borrowings under these credit facilities bear interest at variable rates.
We have $103.8 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, 2021 as we have the intent and ability to refinance such obligation on a long-term basis under the Senior Credit Facility.
13
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Debt outstanding, excluding unamortized issuance costs and discounts, at March 31, 2021 matures on a calendar year basis as follows:
| Q2 - Q4 | ||||||||||||||||||||||||||
| In millions | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | ||||||||||||||||||
Contractual debt obligation maturities | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
11.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, 2021 and December 31, 2020, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $11.7 million and $12.4 million, respectively. The impact of these contracts on the Condensed Consolidated Statements of Operations and Comprehensive Income was not material for any period presented.
Cross Currency Swaps
At March 31, 2021 and December 31, 2020, we had outstanding cross currency swap agreements with a combined notional amount of $823.6 million and $855.1 million, respectively. The agreements are accounted for as either cash flow hedges, to hedge foreign currency fluctuations on certain intercompany debt, or as net investment hedges to manage our exposure to fluctuations in the Euro-U.S. Dollar exchange rate. We had deferred foreign currency losses of $16.0 million and $32.8 million at March 31, 2021 and December 31, 2020, respectively, in Accumulated other comprehensive loss associated with our cross currency swap activity. The periodic interest settlements related to our cross currency swap agreements are classified as operating activities. The cash flows that relate to principal balances are classified as financing activities for the cash flow hedges on intercompany debt and investing activities for the net investment hedges.
In January 2021, one of our cross currency swap agreements which was accounted for as a cash flow hedge matured, resulting in a net cash payment of $14.7 million. The net cash payment is included within financing activities on the Condensed Consolidated Statements of Cash Flows.
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:
| 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.
14
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
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, 2021 | December 31, 2020 | ||||||||||||||||
| In millions | Recorded Amount | Fair Value | Recorded Amount | Fair Value | |||||||||||||
| Variable rate debt | $ | $ | $ | $ | |||||||||||||
| Fixed rate debt | |||||||||||||||||
| Total debt | $ | $ | $ | $ | |||||||||||||
Financial assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows:
| March 31, 2021 | |||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | NAV | Total | ||||||||||||
| Recurring fair value measurements | |||||||||||||||||
| Foreign currency contract liabilities | $ | $ | ( | $ | $ | $ | ( | ||||||||||
| Deferred compensation plan assets | |||||||||||||||||
| Total recurring fair value measurements | $ | $ | ( | $ | $ | $ | ( | ||||||||||
| December 31, 2020 | |||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | NAV | Total | ||||||||||||
| Recurring fair value measurements | |||||||||||||||||
| Foreign currency contract liabilities | $ | $ | ( | $ | $ | $ | ( | ||||||||||
| Deferred compensation plan assets | |||||||||||||||||
| Total recurring fair value measurements | $ | $ | ( | $ | $ | $ | ( | ||||||||||
12.Income Taxes
15
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
The effective income tax rate for the three months ended March 31, 2021 was 13.5 %, compared to 21.5 % for the three months ended March 31, 2020. 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 $46.7 million and $46.3 million at March 31, 2021 and December 31, 2020, 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.
13.Benefit Plans
Components of net periodic benefit expense for our pension plans for the three months ended March 31, 2021 and 2020 were as follows:
| Three months ended | ||||||||
| In millions | March 31, 2021 | March 31, 2020 | ||||||
| Service cost | $ | $ | ||||||
| Interest cost | ||||||||
| Expected return on plan assets | ( | ( | ||||||