Pentair’s Resilient Performance Amid Challenges

Pentair, a leading provider of innovative water solutions, has reported its financial results for the third quarter and first nine months of 2024. Despite facing headwinds from inflation, supply chain disruptions, and macroeconomic uncertainty, the company has demonstrated resilience and continued to deliver solid financial performance.

Financial Highlights

In the third quarter of 2024, Pentair’s net sales decreased by 1.5% to $993.4 million compared to the same period in 2023. However, the company’s gross profit margin improved by 2.7 percentage points to 39.6% due to increased selling prices and productivity gains. Selling, general, and administrative (SG&A) expenses increased by 2.7 percentage points as a percentage of net sales, primarily driven by higher transformation and restructuring costs.

For the first nine months of 2024, Pentair’s net sales declined by 0.3% to $3.11 billion, while gross profit margin improved by 2.3 percentage points to 39.3%. SG&A expenses increased by 1.2 percentage points as a percentage of net sales, again due to higher transformation and restructuring costs.

The company’s operating income remained relatively flat in the third quarter, declining by 0.1% to $179.9 million. However, for the first nine months of 2024, operating income increased by 6.4% to $608.7 million, reflecting the company’s efforts to drive operational excellence and margin expansion.

Pentair’s effective tax rate decreased by 0.7 percentage points in the third quarter and 0.4 percentage points in the first nine months of 2024 compared to the same periods in 2023, primarily due to the favorable impact of discrete tax items.

Segment Performance

Pentair’s business is organized into three reportable segments: Flow, Water Solutions, and Pool.

Flow Segment The Flow segment, which focuses on providing innovative, energy-efficient flow solutions, saw a 7.0% decrease in net sales in the third quarter and a 4.2% decline in the first nine months of 2024 compared to the same periods in 2023. This was primarily driven by decreased sales volume in the residential flow and industrial solutions businesses, partially offset by increased sales volume in the commercial flow business and higher selling prices.

Segment income as a percentage of net sales for Flow increased by 2.8 percentage points in the third quarter and 3.1 percentage points in the first nine months of 2024, driven by increased selling prices, productivity improvements, and favorable mix, which offset inflationary cost pressures.

Water Solutions Segment The Water Solutions segment, which offers a range of water treatment and flow control solutions, experienced a 3.3% decrease in net sales in the third quarter and a 3.8% decline in the first nine months of 2024 compared to the same periods in 2023. This was mainly due to decreased sales volume, particularly in the commercial business, and the completion of a large project in 2023 that did not recur in 2024.

Segment income as a percentage of net sales for Water Solutions decreased by 0.8 percentage points in the third quarter but increased by 0.5 percentage points in the first nine months of 2024. The third-quarter decline was primarily driven by inflationary cost increases, while the year-to-date improvement was driven by increased productivity and selling prices, which offset inflation.

Pool Segment The Pool segment, which provides innovative, energy-efficient pool solutions, saw a 7.3% increase in net sales in the third quarter and a 7.4% increase in the first nine months of 2024 compared to the same periods in 2023. This was mainly due to increased sales volume driven by higher demand and higher selling prices to mitigate inflationary cost pressures, partially offset by a product line exit.

Segment income as a percentage of net sales for Pool increased by 4.7 percentage points in the third quarter and 2.0 percentage points in the first nine months of 2024, primarily due to increased productivity and higher selling prices, which more than offset inflationary cost increases.

Backlog and Liquidity

Pentair’s total backlog decreased by 29.1% to $523.6 million as of September 30, 2024, compared to $738.3 million at the end of 2023. This decline was primarily driven by the company’s backlog trending down to more historical levels as a result of increased manufacturing capacity, improved lead times, and the delivery of orders associated with certain advance sale programs within the Pool segment.

The company’s liquidity position remains strong, with $900.0 million of availability under its revolving credit facility as of September 30, 2024. Pentair generated $680.4 million in net cash from operating activities in the first nine months of 2024, an increase of 35.4% compared to the same period in 2023. Free cash flow, a key metric for the company, also improved significantly, reaching $628.9 million in the first nine months of 2024, up from $451.3 million in the same period of 2023.

Transformation and Outlook

Pentair continues to execute on its Transformation Program, which is designed to accelerate growth and drive margin expansion through initiatives focused on pricing excellence, strategic sourcing, operations excellence, and organizational effectiveness. The company incurred $41.4 million in transformation costs during the first nine months of 2024, up from $28.0 million in the same period of 2023, as it remains committed to this strategic initiative.

Additionally, Pentair has begun using ⁸⁰⁄₂₀ guiding principles to enable its Transformation Program, which is expected to create value by focusing on the right customers and products through quadrant-based strategies. The company anticipates that this analysis will result in actions to improve operating performance by reducing lower-margin sales and removing complexity.

Looking ahead, Pentair’s operating objectives for 2024 focus on delivering its core business and building its future. The company expects to execute these objectives by:

1. Delivering profitable revenue growth and productivity for customers and shareholders.
2. Continuing to focus on capital allocation, including maintaining its investment-grade rating, reducing long-term debt, returning cash to shareholders through dividends and share repurchases, and pursuing strategically aligned mergers and acquisitions.
3. Focusing on growth initiatives that accelerate investments in digital, innovation, technology, and environmental, social, and governance (ESG) efforts.
4. Continuing to implement its Transformation Program initiatives to drive operational excellence, reduce complexity, and improve its organizational structure.
5. Building a high-performance growth culture and delivering on its commitments while living its “Win Right” values.

Challenges and Risks

Pentair faces several key trends and uncertainties that have affected its financial performance in the first nine months of 2024 and are reasonably likely to impact its results in the future:

1. Inflationary cost increases for raw materials, logistics, and transportation, which the company has partially offset through pricing actions and transformation initiatives.
2. The adoption of the Organization for Economic Co-operation and Development Pillar Two Model Rules for a global 15.0% minimum tax, which has negatively impacted Pentair’s effective tax rate in 2024.
3. Specific product and geographic market opportunities that the company continues to pursue, both within and outside the U.S., which may require additional investments in research and development and sales and marketing resources.
4. Ongoing business restructuring initiatives aimed at reducing the company’s fixed cost structure and realigning its business, which are expected to continue throughout the remainder of 2024 and drive margin growth.

Conclusion

Despite the challenging macroeconomic environment, Pentair has demonstrated its ability to navigate through the headwinds and deliver solid financial performance. The company’s focus on operational excellence, margin expansion, and strategic initiatives, such as the Transformation Program and ⁸⁰⁄₂₀ analysis, positions it well to capitalize on growth opportunities and create value for its shareholders.

As Pentair continues to execute on its core business and build its future, investors will be closely watching the company’s ability to manage inflationary pressures, successfully penetrate new markets, and drive sustainable growth and profitability. With its strong liquidity position, commitment to capital allocation, and focus on innovation and ESG, Pentair appears well-equipped to navigate the current challenges and deliver long-term value.