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, 2022 | |||||
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☑ | 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, 2022, 165,399,674 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, 2022 | March 31, 2021 | ||||||
| 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, 2022 | December 31, 2021 | |||||||
| 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, 2022 | March 31, 2021 | ||||||
| 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 of unconsolidated subsidiaries | ( | ( | ||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Deferred income taxes | ( | ( | ||||||
| Share-based compensation | ||||||||
| Amortization of bridge financing fees | ||||||||
| 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 revolving long-term debt | ||||||||
| Debt issuance costs | ( | |||||||
| 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, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | |||||||||||||||||
Dividends declared, $ | — | — | — | ( | — | ( | |||||||||||||||||
| 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, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||
| 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 | $ | $ | $ | $ | ( | $ | |||||||||||||||||
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, 2021.
Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of those for a full year.
In 2020, the World Health Organization declared the novel coronavirus 2019 (“COVID-19”) a global pandemic. The COVID-19 pandemic has had and may continue to have an unfavorable impact on certain parts of our business. The broader implications of the COVID-19 pandemic on our business, financial condition and results of operations remain uncertain and will depend on certain developments, including the duration and severity of the COVID-19 pandemic, the impact of virus variants, the effectiveness of vaccinations, the COVID-19 pandemic’s impact on our customers and suppliers and the range of governmental and community reactions to the pandemic. We may continue to experience reduced customer demand in certain parts of our business, impacts to our operations, or constrained labor and/or supply that could materially and adversely impact our business, financial condition, results of operations, liquidity and cash flows in future periods.
Our fiscal year ends on December 31. We report our interim quarterly periods on a calendar quarter basis.
2.Revenue
We disaggregate our revenue from contracts with customers by segment, geographic location and vertical, as we believe these best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Refer to Note 15 for revenue disaggregated by segment.
Geographic net sales information, based on geographic destination of the sale, was as follows:
| Three months ended | ||||||||
| In millions | March 31, 2022 | March 31, 2021 | ||||||
| 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, 2022 | March 31, 2021 | ||||||
| Residential | $ | $ | ||||||
| Commercial | ||||||||
| Industrial | ||||||||
| Consolidated net sales | $ | $ | ||||||
7
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Performance obligations
On March 31, 2022, we had $73.9 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, 2022 | December 31, 2021 | $ Change | % Change | |||||||||||||
| Contract assets | $ | $ | $ | ( | ( | % | |||||||||||
| Contract liabilities | ( | ( | % | ||||||||||||||
| Net contract assets | $ | $ | $ | % | |||||||||||||
3.Acquisitions
On March 2, 2022, as part of our Consumer Solutions reporting segment, we entered into a definitive agreement with Welbilt, Inc. (“Welbilt”) to acquire the issued and outstanding equity securities of certain subsidiaries of Welbilt and certain other assets, rights, and properties, and assume certain liabilities, comprising Welbilt’s Manitowoc Ice business (“Manitowoc Ice”), for an aggregate purchase price of $1.6 billion, subject to customary adjustments contemplated by the definitive agreement. We expect to fund the purchase price for the acquisition with new debt that we anticipate to be investment grade, including the Term Loan Facility (as defined below). We expect to close our Manitowoc Ice acquisition in the second or third quarter of 2022, subject to customary closing conditions and necessary regulatory approvals.
In October 2021, as part of both of our Consumer Solutions and Industrial & Flow Technologies reporting segments, we completed the acquisition of Pleatco Holdings, LLC and related entities for $256.9 million in cash, net of cash acquired and working capital true-ups. The excess of purchase price over tangible net assets acquired has been preliminarily allocated to goodwill in the amount of $139.5 million, $137.5 million of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired consisted of $97.9 million of definite-lived customer relationships with an estimated useful life of 17 years.
In May 2021, as part of our Consumer Solutions reporting segment, we completed the acquisition of Ken’s Beverage, Inc. for $82.2 million in cash, net of cash acquired and working capital true-ups. The excess of purchase price over tangible net assets acquired has been preliminarily allocated to goodwill in the amount of $28.3 million, all of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired consisted of $38.0 million of definite-lived customer relationships with an estimated useful life of 22 years.
The pro forma impact of these acquisitions is not material.
4.Share Plans
Total share-based compensation expense for the three months ended March 31, 2022 and 2021 was as follows:
| Three months ended | ||||||||
| In millions | March 31, 2022 | March 31, 2021 | ||||||
| Restricted stock units | $ | $ | ||||||
| Stock options | ||||||||
| Performance share units | ||||||||
| Total share-based compensation expense | $ | $ | ||||||
8
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
In the first quarter of 2022, we issued our annual share-based compensation grants under the Pentair plc 2020 Share and Incentive Plan to eligible employees. The total number of awards issued was approximately 0.6 million, of which 0.3 million were restricted stock units (“RSUs”), 0.2 million were stock options and 0.1 million were performance share units (“PSUs”). The weighted-average grant date fair value of the RSUs, stock options and PSUs issued was $60.78 , $17.92 , and $68.28 , respectively.
We estimated the fair value of each stock option award issued in the annual share-based compensation grant using a Black-Scholes option pricing model, modified for dividends and using the following assumptions:
| 2022 Annual Grant | |||||
| Risk-free interest rate | % | ||||
| 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 and Transformation Program
In 2021, we launched and committed resources to a program designed to accelerate growth and drive margin expansion through transformation of our business model to drive operational excellence, reduce complexity and streamline our processes (the “Transformation Program”). The Transformation Program is structured in multiple phases and is expected to empower us to work more efficiently and optimize our business to better serve our customers while meeting our financial objectives.
During the three months ended March 31, 2022, we initiated and continued execution of actions aimed at reducing our fixed cost structure and realigning our business associated with restructuring and the Transformation Program.
Restructuring and transformation-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, 2022 | March 31, 2021 | ||||||
| Restructuring Initiatives | ||||||||
| Severance and related costs | $ | $ | ||||||
Other restructuring costs (1) | ||||||||
| Total restructuring costs | ||||||||
| Transformation Program | ||||||||
Transformation costs (2) | ||||||||
| Total restructuring and transformation costs | $ | $ | ||||||
(1) Other restructuring costs primarily consist of asset impairment and various contract termination costs. | ||||||||
(2) Transformation costs primarily consist of professional services and project management and related costs. | ||||||||
9
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Restructuring and transformation costs by reportable segment were as follows:
| Three months ended | ||||||||
| In millions | March 31, 2022 | March 31, 2021 | ||||||
| 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, 2022:
| In millions | March 31, 2022 | ||||
| Beginning balance | $ | ||||
| Costs incurred | |||||
| Cash payments and other | ( | ||||
| Ending balance | $ | ||||
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, 2022 | March 31, 2021 | ||||||
| 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 | ||||||||
10
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
7.Accounts Receivable
All trade receivables are reported on our Condensed Consolidated Balance Sheets at the outstanding principal amount adjusted for any allowance for credit losses and write-offs, net of recoveries. We record an allowance for credit losses, reducing our receivables balance to an amount we estimate is collectible from our customers. Estimates used in determining the allowance for credit losses are based on current trends, aging of accounts receivable, periodic credit evaluations of our customers’ financial condition, and historical collection experience as well as reasonable and supportable forecasts of future economic conditions. Write-offs are recorded at the time all collection efforts have been exhausted. We generally do not require collateral. We review our allowance for credit losses on a quarterly basis.
Activity related to our allowance for credit losses is summarized as follows for the three months ended March 31, 2022:
| In millions | March 31, 2022 | ||||
| Beginning balance | $ | ||||
| Bad debt expense | |||||
| Write-offs, net of recoveries | ( | ||||
Other (1) | |||||
| Ending balance | $ | ||||
(1) Other amounts are primarily the effects of changes in currency translation and the impact of allowance for credits. | |||||
11
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
8.Supplemental Balance Sheet Information
| In millions | March 31, 2022 | December 31, 2021 | ||||||
| Inventories | ||||||||
| Raw materials and supplies | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
| Other current assets | ||||||||
| Cost in excess of billings | $ | $ | ||||||
| Prepaid expenses | ||||||||
| 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 | ||||||||
| Foreign currency contract assets | ||||||||
| Other non-current assets | ||||||||
| Total other non-current assets | $ | $ | ||||||
| Other current liabilities | ||||||||
| Dividends payable | $ | $ | ||||||
| Accrued warranty | ||||||||
| Accrued rebates and incentives | ||||||||
| Accrued freight | ||||||||
| 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 | $ | $ | ||||||
12
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, 2021 | Purchase Accounting Adjustments | Foreign currency translation | March 31, 2022 | ||||||||||
| Consumer Solutions | $ | $ | $ | ( | $ | |||||||||
| Industrial & Flow Technologies | ( | |||||||||||||
| Total goodwill | $ | $ | $ | ( | $ | |||||||||
Identifiable intangible assets consisted of the following:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| 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 $6.6 million and $7.1 million for the three months ended March 31, 2022 and 2021, respectively.
Estimated future amortization expense for identifiable intangible assets during the remainder of 2022 and the next five years is as follows:
| Q2-Q4 | ||||||||||||||||||||
| 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | |||||||||||||||
| Estimated amortization expense | $ | $ | $ | $ | $ | $ | ||||||||||||||
10.Debt
Debt and the average interest rates on debt outstanding were as follows:
| In millions | Average interest rate as of March 31, 2022 | Maturity Year | March 31, 2022 | December 31, 2021 | ||||||||||
| Revolving credit facilities | 2026 | $ | $ | |||||||||||
| Term loans | 2024 | |||||||||||||
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. | ||||||||||||||
13
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
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, which was amended and restated in December 2021, providing for a $900.0 million senior unsecured revolving credit facility and a $200.0 million senior unsecured term loan facility. The revolving credit facility has a maturity date of December 16, 2026 and the term loan facility has a maturity date of December 16, 2024. Borrowings under the Senior Credit Facility bear interest at a rate equal to an adjusted base rate, the London interbank offered rate, the euro interbank offered rate or the central bank 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.
As of March 31, 2022, total availability under the Senior Credit Facility was $505.0 million. In addition, PFSA has the option to request to increase the revolving credit facility and/or enter into one or more additional tranches of term loans in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders.
In connection with entering into the definitive agreement to acquire Manitowoc Ice, Pentair and PFSA entered into a commitment letter, dated March 2, 2022 (the “Commitment Letter”), pursuant to which, among other things, the lenders have committed to provide debt financing for the acquisition of Manitowoc Ice, consisting of a senior unsecured bridge facility of $1.6 billion (the “Bridge Facility”), on the terms and subject to the conditions set forth in the Commitment Letter. The Bridge Facility will be subject to mandatory reduction and prepayment for 100% of the net cash proceeds from the issuance of any debt and other of our securities, other specified events and the Term Loan Facility (as defined below), subject to certain exceptions.
On March 24, 2022, in contemplation of the acquisition of Manitowoc Ice, Pentair and PFSA entered into a Loan Agreement among PFSA, as borrower, Pentair, as guarantor, and the lenders and agents party thereto, providing for a five-year $600.0 million senior unsecured term loan facility (the “Term Loan Facility”). PFSA and Pentair intend to borrow the full $600.0 million aggregate principal amount available under the Term Loan Facility to finance a portion of the purchase price in the Manitowoc Ice acquisition and to pay related fees and expenses.
The aggregate principal amount of the commitments under the Term Loan Facility have replaced a corresponding amount of the commitments in respect of the Bridge Facility in accordance with the terms of the Commitment Letter. As a result, the remaining commitment under the Bridge Facility was $1.0 billion as of March 31, 2022. No borrowings or loans were outstanding under the Bridge Facility or the Term Loan Facility as of March 31, 2022.
Our debt agreements contain various financial covenants, but the most restrictive covenants are contained in the Senior Credit Facility and the Term Loan Facility. The Senior Credit Facility and the Term Loan Facility contain 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 (each, a “testing period”) to exceed 3.75 to 1.00 (or, at PFSA’s election and subject to certain conditions, 4.25 to 1.00 for four testing periods in connection with certain material acquisitions) (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 and the Term Loan Facility provide 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 and the Term Loan Facility, we have various other credit facilities with an aggregate availability of $21.5 million, of which there were no outstanding borrowings at March 31, 2022. Borrowings under these credit facilities bear interest at variable rates.
We have $88.3 million of fixed rate senior notes maturing in the next twelve months. We classified this debt as long-term as of March 31, 2022 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, 2022 matures on a calendar year basis as follows:
| Q2-Q4 | ||||||||||||||||||||||||||
| In millions | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | ||||||||||||||||||
Contractual debt obligation maturities | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
14
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
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, 2022 and December 31, 2021, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $10.3 million and $14.7 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, 2022 and December 31, 2021, we had outstanding cross currency swap agreements with a combined notional amount of $776.0 million and $794.4 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 gains of $13.9 million and $7.3 million at March 31, 2022 and December 31, 2021, 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.
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;
15
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
•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, 2022 | December 31, 2021 | ||||||||||||||||
| 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, 2022 | |||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | NAV | Total | ||||||||||||
| Recurring fair value measurements | |||||||||||||||||
| Foreign currency contract assets | $ | $ | $ | $ | $ | ||||||||||||
| Foreign currency contract liabilities | ( | ( | |||||||||||||||
| Deferred compensation plan assets | |||||||||||||||||
| Total recurring fair value measurements | $ | $ | $ | $ | $ | ||||||||||||
| December 31, 2021 | |||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | NAV | Total | ||||||||||||
| Recurring fair value measurements | |||||||||||||||||
| Foreign currency contract assets | $ | $ | $ | $ | $ | ||||||||||||
| Foreign currency contract liabilities | ( | ( | |||||||||||||||
| Deferred compensation plan assets | |||||||||||||||||
| Total recurring fair value measurements | $ | $ | ( | $ | $ | $ | |||||||||||
12.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, 2022 was 15.4 %, compared to 13.5 % for the three months ended March 31, 2021. 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 the mix of global earnings or adjustments that are required to be reported in the specific quarter of resolution.
16
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
13.Benefit Plans
Components of net periodic benefit expense for our pension plans for the three months ended March 31, 2022 and 2021 were as follows:
| Three months ended | ||||||||
| In millions | March 31, 2022 | March 31, 2021 | ||||||
| Service cost | $ | $ | ||||||
| Interest cost | ||||||||
| Expected return on plan assets | ( | ( | ||||||
| Net periodic benefit expense | $ | $ | ||||||
14.Shareholders’ Equity
Share repurchases
In December 2020, 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 December 31, 2025 . During the three months ended March 31, 2022, no ordinary shares were repurchased. As of March 31, 2022, we had $650.0 million available for share repurchases under this authorization.
Dividends payable
15.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 and transformation activities, impairments and other unusual non-operating items.
| Three months ended | ||||||||
| In millions | March 31, 2022 | March 31, 2021 | ||||||
| Net sales | ||||||||
| Consumer Solutions | $ | $ | ||||||
| Industrial & Flow Technologies | ||||||||
| Other | ||||||||
| Consolidated | $ | $ | ||||||
| Segment income (loss) | ||||||||
| Consumer Solutions | $ | $ | ||||||
| Industrial & Flow Technologies | ||||||||
| Other | ( | ( | ||||||
| Consolidated | $ | $ | ||||||
17
Pentair plc and Subsidiaries
Notes to condensed consolidated financial statements (unaudited)
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, 2022 | March 31, 2021 | ||||||
| Segment income | $ | $ | ||||||
| Deal-related costs and expenses | ( | ( | ||||||
| Restructuring and other | ( | ( | ||||||
| Transformation costs | ( | |||||||
| Intangible amortization | ( | ( | ||||||
| Russia business exit costs | ( | |||||||
| Legal accrual adjustments | ||||||||
| Net interest expense | ( | ( | ||||||
| Other expense | ( | ( | ||||||