nVent Electric plc - Quarter Report: 2020 September (Form 10-Q)
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 September 30, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission file number 001-38265
nVent Electric plc
(Exact name of Registrant as specified in its charter)
| Ireland | 98-1391970 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification number) | |||||||||||||
The Mille, 1000 Great West Road, 8th Floor (East), London, TW8 9DW, United Kingdom
| (Address of principal executive offices) | ||||||||||||||
Registrant's telephone number, including area code: 44-20-3966-0279
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
| Ordinary Shares, nominal value $0.01 per share | NVT | New York Stock Exchange | ||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§223.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
On September 30, 2020, 170,118,318 shares of Registrant's common stock were outstanding.
nVent Electric plc
| 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
nVent Electric plc
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (Unaudited)
| Three months ended | Nine months ended | ||||||||||||||||
| In millions, except per-share data | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Net sales | $ | 509.3 | $ | 559.8 | $ | 1,477.4 | $ | 1,637.3 | |||||||||
| Cost of goods sold | 312.5 | 335.7 | 925.0 | 991.1 | |||||||||||||
| Gross profit | 196.8 | 224.1 | 552.4 | 646.2 | |||||||||||||
| Selling, general and administrative | 107.4 | 126.2 | 334.8 | 359.4 | |||||||||||||
| Research and development | 10.5 | 11.8 | 33.1 | 36.2 | |||||||||||||
| Impairment of goodwill and trade names | 220.5 | — | 220.5 | — | |||||||||||||
| Operating income (loss) | (141.6) | 86.1 | (36.0) | 250.6 | |||||||||||||
| Net interest expense | 8.5 | 11.6 | 27.8 | 34.0 | |||||||||||||
Other expense | 0.7 | 0.9 | 2.2 | 2.8 | |||||||||||||
| Income (loss) before income taxes | (150.8) | 73.6 | (66.0) | 213.8 | |||||||||||||
| Provision (benefit) for income taxes | (12.1) | 13.7 | 28.3 | 36.6 | |||||||||||||
| Net income (loss) | $ | (138.7) | $ | 59.9 | $ | (94.3) | $ | 177.2 | |||||||||
| Comprehensive income (loss), net of tax | |||||||||||||||||
| Net income (loss) | $ | (138.7) | $ | 59.9 | $ | (94.3) | $ | 177.2 | |||||||||
| Changes in cumulative translation adjustment | 1.2 | (8.0) | (15.7) | (1.8) | |||||||||||||
Changes in market value of derivative financial instruments, net of tax | (5.4) | 2.3 | 6.8 | 8.8 | |||||||||||||
Comprehensive income (loss) | $ | (142.9) | $ | 54.2 | $ | (103.2) | $ | 184.2 | |||||||||
Earnings (loss) per ordinary share | |||||||||||||||||
Basic | $ | (0.82) | $ | 0.35 | $ | (0.56) | $ | 1.03 | |||||||||
Diluted | $ | (0.82) | $ | 0.35 | $ | (0.56) | $ | 1.02 | |||||||||
| Weighted average ordinary shares outstanding | |||||||||||||||||
| Basic | 170.0 | 169.1 | 169.9 | 172.3 | |||||||||||||
| Diluted | 170.0 | 170.3 | 169.9 | 173.8 | |||||||||||||
| Cash dividends paid per ordinary share | $ | 0.175 | $ | 0.175 | $ | 0.525 | $ | 0.525 | |||||||||
See accompanying notes to condensed consolidated financial statements.
3
nVent Electric plc
Condensed Consolidated Balance Sheets (Unaudited)
| September 30, 2020 | December 31, 2019 | |||||||
| In millions, except per-share data | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 159.8 | $ | 106.4 | ||||
Accounts and notes receivable, net of allowances of $7.5 and $5.4, respectively | 327.4 | 334.3 | ||||||
| Inventories | 238.9 | 244.7 | ||||||
| Other current assets | 89.9 | 113.3 | ||||||
| Total current assets | 816.0 | 798.7 | ||||||
| Property, plant and equipment, net | 278.1 | 284.5 | ||||||
| Other assets | ||||||||
| Goodwill | 2,090.7 | 2,279.1 | ||||||
| Intangibles, net | 1,117.6 | 1,160.5 | ||||||
| Other non-current assets | 108.2 | 117.5 | ||||||
| Total other assets | 3,316.5 | 3,557.1 | ||||||
| Total assets | $ | 4,410.6 | $ | 4,640.3 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities | ||||||||
| Current maturities of long-term debt and short-term borrowings | $ | 20.0 | $ | 17.5 | ||||
| Accounts payable | 139.1 | 187.1 | ||||||
| Employee compensation and benefits | 68.8 | 71.9 | ||||||
| Other current liabilities | 182.0 | 185.7 | ||||||
| Total current liabilities | 409.9 | 462.2 | ||||||
| Other liabilities | ||||||||
| Long-term debt | 1,032.8 | 1,047.1 | ||||||
| Pension and other post-retirement compensation and benefits | 220.0 | 207.2 | ||||||
| Deferred tax liabilities | 234.7 | 237.8 | ||||||
| Other non-current liabilities | 99.8 | 93.5 | ||||||
| Total liabilities | 1,997.2 | 2,047.8 | ||||||
| Equity | ||||||||
Ordinary shares $0.01 par value, 400.0 authorized, 170.1 and 169.5 issued at September 30, 2020 and December 31, 2019, respectively | 1.7 | 1.7 | ||||||
| Additional paid-in capital | 2,516.2 | 2,502.7 | ||||||
| Retained earnings | 3.0 | 186.7 | ||||||
| Accumulated other comprehensive loss | (107.5) | (98.6) | ||||||
| Total equity | 2,413.4 | 2,592.5 | ||||||
| Total liabilities and equity | $ | 4,410.6 | $ | 4,640.3 | ||||
See accompanying notes to condensed consolidated financial statements.
4
nVent Electric plc
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Nine months ended | ||||||||
| In millions | September 30, 2020 | September 30, 2019 | ||||||
| Operating activities | ||||||||
| Net income (loss) | $ | (94.3) | $ | 177.2 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities | ||||||||
| Depreciation | 28.8 | 26.1 | ||||||
| Amortization | 48.1 | 45.6 | ||||||
| Deferred income taxes | 6.2 | (1.9) | ||||||
| Share-based compensation | 10.0 | 12.4 | ||||||
| Impairment of goodwill and trade names | 220.5 | — | ||||||
| Changes in assets and liabilities, net of effects of business acquisitions | ||||||||
| Accounts and notes receivable | 7.8 | (17.2) | ||||||
| Inventories | 9.3 | (18.4) | ||||||
| Other current assets | 22.2 | — | ||||||
| Accounts payable | (46.1) | (53.6) | ||||||
| Employee compensation and benefits | (3.5) | (7.7) | ||||||
| Other current liabilities | (3.4) | (1.9) | ||||||
| Other non-current assets and liabilities | (1.9) | (3.1) | ||||||
| Net cash provided by (used for) operating activities | 203.7 | 157.5 | ||||||
| Investing activities | ||||||||
| Capital expenditures | (25.4) | (29.0) | ||||||
| Proceeds from sale of property and equipment | 1.5 | 6.1 | ||||||
| Acquisitions, net of cash acquired | (27.0) | (127.8) | ||||||
| Net cash provided by (used for) investing activities | (50.9) | (150.7) | ||||||
| Financing activities | ||||||||
| Net receipts of revolving long-term debt | — | 216.5 | ||||||
| Repayments of long-term debt | (12.5) | (9.7) | ||||||
| Dividends paid | (89.2) | (91.1) | ||||||
| Shares issued to employees, net of shares withheld | 4.7 | 5.3 | ||||||
| Repurchases of ordinary shares | (3.2) | (235.7) | ||||||
| Net cash provided by (used for) financing activities | (100.2) | (114.7) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 0.8 | (1.6) | ||||||
| Change in cash and cash equivalents | 53.4 | (109.5) | ||||||
| Cash and cash equivalents, beginning of period | 106.4 | 159.0 | ||||||
| Cash and cash equivalents, end of period | $ | 159.8 | $ | 49.5 | ||||
See accompanying notes to condensed consolidated financial statements.
5
nVent Electric plc
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, 2019 | 169.5 | $ | 1.7 | $ | 2,502.7 | $ | 186.7 | $ | (98.6) | $ | 2,592.5 | |||||||||
| Net income | — | — | — | 18.6 | — | 18.6 | ||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | (6.5) | (6.5) | ||||||||||||||
| Dividends declared | — | — | — | (29.8) | — | (29.8) | ||||||||||||||
Share repurchases | (0.2) | — | (3.2) | — | — | (3.2) | ||||||||||||||
Exercise of options, net of shares tendered for payment | 0.3 | — | 6.4 | — | — | 6.4 | ||||||||||||||
Issuance of restricted shares, net of cancellations | 0.3 | — | — | — | — | — | ||||||||||||||
| Shares surrendered by employees to pay taxes | (0.1) | — | (3.3) | — | — | (3.3) | ||||||||||||||
| Share-based compensation | — | — | 1.9 | — | — | 1.9 | ||||||||||||||
| Balance - March 31, 2020 | 169.8 | $ | 1.7 | $ | 2,504.5 | $ | 175.5 | $ | (105.1) | $ | 2,576.6 | |||||||||
| Net income | — | — | — | 25.8 | — | 25.8 | ||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | 1.8 | 1.8 | ||||||||||||||
| Dividends declared | — | — | — | (29.8) | — | (29.8) | ||||||||||||||
Exercise of options, net of shares tendered for payment | — | — | 0.2 | — | — | 0.2 | ||||||||||||||
Issuance of restricted shares, net of cancellations | 0.1 | — | — | — | — | — | ||||||||||||||
| Shares surrendered by employees to pay taxes | — | — | (0.6) | — | — | (0.6) | ||||||||||||||
| Share-based compensation | — | — | 4.2 | — | — | 4.2 | ||||||||||||||
| Balance - June 30, 2020 | 169.9 | $ | 1.7 | $ | 2,508.3 | $ | 171.5 | $ | (103.3) | $ | 2,578.2 | |||||||||
| Net income (loss) | — | — | — | (138.7) | — | (138.7) | ||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (4.2) | (4.2) | ||||||||||||||
| Dividends declared | — | — | — | (29.8) | — | (29.8) | ||||||||||||||
Exercise of options, net of shares tendered for payment | 0.2 | — | 2.2 | — | — | 2.2 | ||||||||||||||
| Shares surrendered by employees to pay taxes | — | — | (0.2) | — | — | (0.2) | ||||||||||||||
| Share-based compensation | — | — | 5.9 | — | — | 5.9 | ||||||||||||||
| Balance - September 30, 2020 | 170.1 | $ | 1.7 | $ | 2,516.2 | $ | 3.0 | $ | (107.5) | $ | 2,413.4 | |||||||||
6
| In millions | Ordinary shares | Additional paid-in capital | Retained earnings | Accumulated other comprehensive loss | Total | |||||||||||||||
| Number | Amount | |||||||||||||||||||
| Balance - December 31, 2018 | 177.2 | $ | 1.8 | $ | 2,709.7 | $ | 83.4 | $ | (107.8) | $ | 2,687.1 | |||||||||
| Net income | — | — | — | 56.4 | — | 56.4 | ||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (3.2) | (3.2) | ||||||||||||||
| Dividends declared | — | — | — | (30.6) | — | (30.6) | ||||||||||||||
| Share repurchases | (3.0) | (0.1) | (79.8) | — | — | (79.9) | ||||||||||||||
Exercise of options, net of shares tendered for payment | 0.3 | — | 3.6 | — | — | 3.6 | ||||||||||||||
Issuance of restricted shares, net of cancellations | 0.3 | — | — | — | — | — | ||||||||||||||
| Shares surrendered by employees to pay taxes | (0.1) | — | (2.6) | — | — | (2.6) | ||||||||||||||
| Share-based compensation | — | — | 4.3 | — | — | 4.3 | ||||||||||||||
| Balance - March 31, 2019 | 174.7 | $ | 1.7 | $ | 2,635.2 | $ | 109.2 | $ | (111.0) | $ | 2,635.1 | |||||||||
| Net income | — | — | — | 60.9 | — | 60.9 | ||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | 15.9 | 15.9 | ||||||||||||||
| Dividends declared | — | — | — | (29.6) | — | (29.6) | ||||||||||||||
| Share repurchases | (5.9) | — | (152.8) | — | — | (152.8) | ||||||||||||||
Exercise of options, net of shares tendered for payment | 0.3 | — | 4.8 | — | — | 4.8 | ||||||||||||||
| Shares surrendered by employees to pay taxes | — | — | (0.6) | — | — | (0.6) | ||||||||||||||
| Share-based compensation | — | — | 4.1 | — | — | 4.1 | ||||||||||||||
| Balance - June 30, 2019 | 169.1 | $ | 1.7 | $ | 2,490.7 | $ | 140.5 | $ | (95.1) | $ | 2,537.8 | |||||||||
| Net income | — | — | — | 59.9 | — | 59.9 | ||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | (5.7) | (5.7) | ||||||||||||||
| Dividends declared | — | — | — | (29.6) | — | (29.6) | ||||||||||||||
Exercise of options, net of shares tendered for payment | — | — | 0.3 | — | — | 0.3 | ||||||||||||||
| Issuance of restricted shares, net of cancellations | 0.1 | — | — | — | — | — | ||||||||||||||
| Shares surrendered by employees to pay taxes | — | — | (0.3) | — | — | (0.3) | ||||||||||||||
| Share-based compensation | — | — | 4.1 | — | — | 4.1 | ||||||||||||||
| Balance - September 30, 2019 | 169.2 | $ | 1.7 | $ | 2,494.8 | $ | 170.8 | $ | (100.8) | $ | 2,566.5 | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
1.Basis of Presentation and Responsibility for Interim Financial Statements
Business
nVent Electric plc ("nVent," "we," "us," "our" or the "Company") is a leading global provider of electrical connection and protection solutions. The Company is comprised of three reporting segments: Enclosures, Electrical & Fastening Solutions and Thermal Management.
The Company was incorporated in Ireland on May 30, 2017. Although our jurisdiction of organization is Ireland, we manage our affairs so that we are centrally managed and controlled in the United Kingdom (the "U.K.") and have tax residency in the U.K.
Separation from Pentair
On April 30, 2018, Pentair plc ("Pentair" or "former Parent") completed the separation of its Water business and its Electrical business into two independent, publicly-traded companies (the "separation"). To effect the separation, Pentair distributed to its shareholders one ordinary share of nVent for every ordinary share of Pentair held as of the record date of April 17, 2018. As a result of the distribution, nVent is an independent publicly-traded company and began "regular way" trading under the symbol "NVT" on the New York Stock Exchange on May 1, 2018.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of nVent have been prepared following the requirements of the 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 and combined financial statements and notes thereto, which are included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Revenues, expenses, cash flows, assets and liabilities can and do vary during each quarter of the year. Additionally, in March 2020, the World Health Organization declared novel coronavirus 2019 (“COVID-19”) a pandemic. The effects of the COVID-19 pandemic have had and may continue to have an unfavorable impact on our business. The broader implication of COVID-19 on our results of operations and overall financial performance remains uncertain. We may experience reduced customer demand or constrained supply that could materially adversely impact our business, financial condition, results of operations and overall financial performance in future periods. Therefore, the results and trends in these interim financial statements may not be indicative of those for a full year.
Adoption of new accounting standards
Effective January 1, 2020, the Company adopted Accounting Standards Update 2017-04, "Intangibles-Goodwill and Other (Topic 350)". The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment expense for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
In March 2020, the SEC amended Rule 3-10 of Regulation S-X regarding financial disclosure requirements for registered debt offerings involving subsidiaries as either issuers or guarantors. This amended rule narrows the circumstances that require separate financial statements or summarized financial disclosures of subsidiary issuers and guarantors and simplifies the summarized disclosures required in lieu of those statements. As a result of this amended rule, we have included narrative disclosures in lieu of separate financial statements and summarized financial disclosures as amounts presented would not be material because the guarantor and subsidiary issuer do not have material independent assets and operations unrelated to investments in consolidated subsidiaries.
8
2.Revenue
Disaggregation of revenue
We disaggregate our revenue from contracts with customers by geographic location and vertical for each of our segments, as we believe these best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Geographic net sales information, based on geographic destination of the sale, was as follows:
| Three months ended September 30, 2020 | ||||||||||||||
| In millions | Enclosures | Electrical & Fastening Solutions | Thermal Management | Total | ||||||||||
| U.S. and Canada | $ | 159.7 | $ | 109.2 | $ | 69.6 | $ | 338.5 | ||||||
Developed Europe (1) | 60.4 | 26.3 | 32.0 | 118.7 | ||||||||||
Developing (2) | 20.9 | 8.2 | 12.2 | 41.3 | ||||||||||
Other Developed (3) | 3.7 | 4.0 | 3.1 | 10.8 | ||||||||||
| Total | $ | 244.7 | $ | 147.7 | $ | 116.9 | $ | 509.3 | ||||||
| Nine months ended September 30, 2020 | ||||||||||||||
| In millions | Enclosures | Electrical & Fastening Solutions | Thermal Management | Total | ||||||||||
| U.S. and Canada | $ | 474.6 | $ | 312.3 | $ | 191.4 | $ | 978.3 | ||||||
Developed Europe (1) | 177.8 | 74.9 | 85.6 | 338.3 | ||||||||||
Developing (2) | 59.9 | 23.2 | 45.5 | 128.6 | ||||||||||
Other Developed (3) | 10.2 | 11.3 | 10.7 | 32.2 | ||||||||||
| Total | $ | 722.5 | $ | 421.7 | $ | 333.2 | $ | 1,477.4 | ||||||
| Three months ended September 30, 2019 | ||||||||||||||
| In millions | Enclosures | Electrical & Fastening Solutions | Thermal Management | Total | ||||||||||
| U.S. and Canada | $ | 183.3 | $ | 107.6 | $ | 90.7 | $ | 381.6 | ||||||
Developed Europe (1) | 52.0 | 28.1 | 32.1 | 112.2 | ||||||||||
Developing (2) | 23.6 | 10.5 | 20.3 | 54.4 | ||||||||||
Other Developed (3) | 3.7 | 3.4 | 4.5 | 11.6 | ||||||||||
| Total | $ | 262.6 | $ | 149.6 | $ | 147.6 | $ | 559.8 | ||||||
| Nine months ended September 30, 2019 | ||||||||||||||
| In millions | Enclosures | Electrical & Fastening Solutions | Thermal Management | Total | ||||||||||
| U.S. and Canada | $ | 549.8 | $ | 314.6 | $ | 248.0 | $ | 1,112.4 | ||||||
Developed Europe (1) | 150.4 | 82.9 | 97.4 | 330.7 | ||||||||||
Developing (2) | 68.9 | 30.1 | 63.2 | 162.2 | ||||||||||
Other Developed (3) | 9.0 | 10.1 | 12.9 | 32.0 | ||||||||||
| Total | $ | 778.1 | $ | 437.7 | $ | 421.5 | $ | 1,637.3 | ||||||
(1) Developed Europe includes Western Europe and Eastern Europe included in European Union. | ||||||||||||||
(2) Developing includes China, Eastern Europe not included in European Union, Latin America, Middle East and Southeast Asia. | ||||||||||||||
(3) Other Developed includes Australia and Japan. | ||||||||||||||
9
Vertical net sales information was as follows:
| Three months ended September 30, 2020 | ||||||||||||||
| In millions | Enclosures | Electrical & Fastening Solutions | Thermal Management | Total | ||||||||||
| Industrial | $ | 148.4 | $ | 29.4 | $ | 47.4 | $ | 225.2 | ||||||
| Commercial & Residential | 28.5 | 83.3 | 45.2 | 157.0 | ||||||||||
| Energy | 21.3 | 15.5 | 22.7 | 59.5 | ||||||||||
| Infrastructure | 46.5 | 19.5 | 1.6 | 67.6 | ||||||||||
| Total | $ | 244.7 | $ | 147.7 | $ | 116.9 | $ | 509.3 | ||||||
| Nine months ended September 30, 2020 | ||||||||||||||
| In millions | Enclosures | Electrical & Fastening Solutions | Thermal Management | Total | ||||||||||
| Industrial | $ | 438.5 | $ | 81.3 | $ | 129.6 | $ | 649.4 | ||||||
| Commercial & Residential | 83.9 | 237.5 | 117.8 | 439.2 | ||||||||||
| Energy | 66.6 | 45.9 | 81.4 | 193.9 | ||||||||||
| Infrastructure | 133.5 | 57.0 | 4.4 | 194.9 | ||||||||||
| Total | $ | 722.5 | $ | 421.7 | $ | 333.2 | $ | 1,477.4 | ||||||
| Three months ended September 30, 2019 | ||||||||||||||
| In millions | Enclosures | Electrical & Fastening Solutions | Thermal Management | Total | ||||||||||
| Industrial | $ | 157.8 | $ | 30.1 | $ | 60.5 | $ | 248.4 | ||||||
| Commercial & Residential | 29.4 | 87.2 | 47.3 | 163.9 | ||||||||||
| Energy | 26.5 | 13.6 | 37.1 | 77.2 | ||||||||||
| Infrastructure | 48.9 | 18.7 | 2.7 | 70.3 | ||||||||||
| Total | $ | 262.6 | $ | 149.6 | $ | 147.6 | $ | 559.8 | ||||||
| Nine months ended September 30, 2019 | ||||||||||||||
| In millions | Enclosures | Electrical & Fastening Solutions | Thermal Management | Total | ||||||||||
| Industrial | $ | 467.7 | $ | 86.7 | $ | 173.9 | $ | 728.3 | ||||||
| Commercial & Residential | 78.7 | 255.0 | 131.7 | 465.4 | ||||||||||
| Energy | 78.6 | 41.8 | 109.1 | 229.5 | ||||||||||
| Infrastructure | 153.1 | 54.2 | 6.8 | 214.1 | ||||||||||
| Total | $ | 778.1 | $ | 437.7 | $ | 421.5 | $ | 1,637.3 | ||||||
Contract balances
Contract assets and liabilities consisted of the following:
| In millions | September 30, 2020 | December 31, 2019 | $ Change | % Change | ||||||||||
| Contract assets | $ | 42.8 | $ | 69.4 | $ | (26.6) | (38.3) | % | ||||||
| Contract liabilities | 11.7 | 13.7 | (2.0) | (14.6) | % | |||||||||
| Net contract assets | $ | 31.1 | $ | 55.7 | $ | (24.6) | (44.2) | % | ||||||
10
The $24.6 million decrease in net contract assets from December 31, 2019 to September 30, 2020 was primarily the result of timing of milestone payments. The majority of our contract liabilities at December 31, 2019 were recognized in revenue during the nine months ended September 30, 2020. There were no material impairment losses recognized on our contract assets for the three or nine months ended September 30, 2020.
Remaining performance obligations
We have elected the practical expedient to disclose only the value of remaining performance obligations for contracts with an original expected length of one year or more. On September 30, 2020, we had $82.7 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.
3.Restructuring
During the nine months ended September 30, 2020 and the year ended December 31, 2019, we initiated and continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. Specifically in the first nine months of 2020, certain initiatives were executed in response to the decrease in expected demand attributed to the effect of the COVID-19 pandemic and recent significant volatility in oil and gas prices leading to a potential sustained downturn in the energy industry. Restructuring initiatives during the nine months ended September 30, 2020 included the reduction in hourly and salaried headcount of approximately 300 employees.
Restructuring related costs included in Selling, general and administrative expense in the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) included costs for severance and other restructuring costs as follows:
| Three months ended | Nine months ended | ||||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Severance and related costs | $ | 3.5 | $ | 10.9 | $ | 9.7 | $ | 14.4 | |||||||||
| Other | 0.8 | 0.3 | 1.9 | 1.5 | |||||||||||||
| Total restructuring costs | $ | 4.3 | $ | 11.2 | $ | 11.6 | $ | 15.9 | |||||||||
Other restructuring costs primarily consist of asset impairment and various contract termination costs.
Restructuring costs by reportable segment were as follows:
| Three months ended | Nine months ended | ||||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Enclosures | $ | 0.9 | $ | 1.5 | $ | 5.1 | $ | 1.6 | |||||||||
| Electrical & Fastening Solutions | 0.3 | 0.2 | 0.4 | 1.2 | |||||||||||||
| Thermal Management | 1.7 | 2.8 | 4.3 | 5.6 | |||||||||||||
| Other | 1.4 | 6.7 | 1.8 | 7.5 | |||||||||||||
| Total | $ | 4.3 | $ | 11.2 | $ | 11.6 | $ | 15.9 | |||||||||
Activity related to accrued severance and related costs recorded in Other current liabilities in the Condensed Consolidated Balance Sheets is summarized as follows for the nine months ended September 30, 2020:
| In millions | |||||
| Beginning balance | $ | 9.5 | |||
| Costs incurred | 9.7 | ||||
| Cash payments and other | (11.6) | ||||
| Ending balance | $ | 7.6 | |||
11
4.Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share were calculated as follows:
| Three months ended | Nine months ended | ||||||||||||||||
| In millions, except per-share data | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Net income (loss) | $ | (138.7) | $ | 59.9 | $ | (94.3) | $ | 177.2 | |||||||||
| Weighted average ordinary shares outstanding | |||||||||||||||||
| Basic | 170.0 | 169.1 | 169.9 | 172.3 | |||||||||||||
| Dilutive impact of stock options, restricted stock units and performance share units | — | 1.2 | — | 1.5 | |||||||||||||
| Diluted | 170.0 | 170.3 | 169.9 | 173.8 | |||||||||||||
| Earnings (loss) per ordinary share | |||||||||||||||||
| Basic earnings (loss) per ordinary share | $ | (0.82) | $ | 0.35 | $ | (0.56) | $ | 1.03 | |||||||||
| Diluted earnings (loss) per ordinary share | $ | (0.82) | $ | 0.35 | $ | (0.56) | $ | 1.02 | |||||||||
| Anti-dilutive stock options excluded from the calculation of diluted earnings (loss) per share | 4.6 | 2.6 | 4.4 | 2.1 | |||||||||||||
As a result of the Company’s net loss during the three and nine month periods ended September 30, 2020, 0.5 million and 0.7 million of outstanding stock options, restricted stock units and performance share units were not included in the computation of diluted earnings (loss) per share because the effect would have been anti-dilutive.
5.Acquisitions
On August 30, 2019, we completed the acquisition of Eldon Holding AB ("Eldon") for $127.8 million, net of cash acquired. Eldon, now part of our Enclosures segment, is an innovative European based manufacturer of enclosures that protect sensitive electrical, electronic and data and telecommunications components.
The excess purchase price over tangible net assets and identified intangible assets acquired has been allocated to goodwill in the amount of $51.2 million, none of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired included $46.7 million of definite-lived customer relationships with an estimated useful life of 17 years.
On February 10, 2020, we acquired substantially all of the assets of WBT LLC ("WBT") for $29.9 million in cash. The U.S. based WBT business manufactures high-quality cable tray systems that will be marketed as part of the nVent CADDY product line within our Electrical & Fastening Solutions segment and nVent HOFFMAN product line within our Enclosures segment.
The excess purchase price over tangible net assets and identified intangible assets acquired has been preliminarily allocated to goodwill in the amount of $13.7 million, substantially all of which is expected to be deductible for income tax purposes. Identifiable intangible assets acquired included $11.3 million of definite-lived customer relationships with an estimated useful life of 12 years.
The pro forma impact of these acquisitions is not material.
12
6.Goodwill and Other Identifiable Intangible Assets
As a result of the adverse market and economic conditions attributed to the COVID-19 pandemic, combined with significant volatility in oil and gas prices leading to a potential sustained downturn in the energy industry, we concluded a triggering event occurred during the third quarter of 2020 for our Thermal Management reporting unit requiring an impairment test as of September 30, 2020. In order to perform the goodwill impairment test for the Thermal Management reporting unit, including consideration of market-based inputs such as a market capitalization reconciliation, we determined it was appropriate to measure the fair value of all of our reporting units as of September 30, 2020.
The fair value of the reporting units was determined using a discounted cash flow and market approach. Determining the fair value of the reporting units required the use of significant judgment, including assumptions about future revenues and expenses, capital expenditures and changes in working capital and discount rates, which are based on our annual operating plan and long-term business plan. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, including the impacts from the COVID-19 pandemic and growth expectations for the industries and end markets in which the reporting unit participates. Inputs used to estimate these fair values included significant unobservable inputs that reflect the Company’s assumptions about the inputs that market participants would use and, therefore, the fair value assessments are classified within Level 3 of the fair value hierarchy defined by the accounting guidance.
As a result of this analysis, during the three months ended September 30, 2020, we recognized a pre-tax, non-cash goodwill impairment expense of $212.3 million related to the Thermal Management reporting unit. Subsequent to the impairment charge recorded in the quarter, the remaining goodwill for the Thermal Management reporting unit was $712.5 million. The impairment resulted in a $21.6 million income tax benefit associated with the proportionate share of tax deductible goodwill. The impairment expense is included in Impairment of goodwill and trade names on the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).
The changes in the carrying amount of goodwill by reportable segment were as follows:
| In millions | December 31, 2019 | Acquisitions/ divestitures | Impairment | Foreign currency translation/other | September 30, 2020 | ||||||||||||
| Enclosures | $ | 315.4 | $ | 6.4 | $ | — | $ | 4.4 | $ | 326.2 | |||||||
| Electrical & Fastening Solutions | 1,038.2 | 13.8 | — | — | $ | 1,052.0 | |||||||||||
| Thermal Management | 925.5 | — | (212.3) | (0.7) | $ | 712.5 | |||||||||||
| Total goodwill | $ | 2,279.1 | $ | 20.2 | $ | (212.3) | $ | 3.7 | $ | 2,090.7 | |||||||
Identifiable intangible assets consisted of the following:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| In millions | Cost | Accumulated amortization | Net | Cost | Accumulated amortization | Net | |||||||||||||||||
| Definite-life intangibles | |||||||||||||||||||||||
| Customer relationships | $ | 1,209.8 | $ | (373.1) | $ | 836.7 | $ | 1,197.9 | $ | (326.1) | $ | 871.8 | |||||||||||
| Proprietary technology and patents | 16.3 | (8.5) | 7.8 | 14.8 | (7.4) | 7.4 | |||||||||||||||||
| Total definite-life intangibles | 1,226.1 | (381.6) | 844.5 | 1,212.7 | (333.5) | 879.2 | |||||||||||||||||
| Indefinite-life intangibles | |||||||||||||||||||||||
| Trade names | 273.1 | — | 273.1 | 281.3 | — | 281.3 | |||||||||||||||||
| Total intangibles | $ | 1,499.2 | $ | (381.6) | $ | 1,117.6 | $ | 1,494.0 | $ | (333.5) | $ | 1,160.5 | |||||||||||
Identifiable intangible asset amortization expense was $16.1 million and $15.4 million for the three months ended September 30, 2020 and 2019, respectively, and $48.1 million and $45.6 million for the nine months ended September 30, 2020 and 2019, respectively. For the three and nine months ended September 30, 2020, we recognized pre-tax, non-cash impairment expense of $8.2 million related to trade names.
Estimated future amortization expense for identifiable intangible assets during the remainder of 2020 and the next five years is as follows:
| Q4 | ||||||||||||||||||||
| In millions | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | ||||||||||||||
| Estimated amortization expense | $ | 16.0 | $ | 63.1 | $ | 63.1 | $ | 62.9 | $ | 62.3 | $ | 62.3 | ||||||||
13
7.Supplemental Balance Sheet Information
| In millions | September 30, 2020 | December 31, 2019 | ||||||
| Inventories | ||||||||
| Raw materials and supplies | $ | 69.3 | $ | 67.1 | ||||
| Work-in-process | 25.5 | 25.6 | ||||||
| Finished goods | 144.1 | 152.0 | ||||||
| Total inventories | $ | 238.9 | $ | 244.7 | ||||
| Other current assets | ||||||||
| Contract assets | $ | 42.8 | $ | 69.4 | ||||
| Prepaid expenses | 33.8 | 32.5 | ||||||
| Prepaid income taxes | 10.7 | 9.0 | ||||||
| Other current assets | 2.6 | 2.4 | ||||||
| Total other current assets | $ | 89.9 | $ | 113.3 | ||||
| Property, plant and equipment, net | ||||||||
| Land and land improvements | $ | 40.4 | $ | 40.6 | ||||
| Buildings and leasehold improvements | 180.6 | 181.6 | ||||||
| Machinery and equipment | 454.3 | 440.4 | ||||||
| Construction in progress | 21.7 | 16.5 | ||||||
| Total property, plant and equipment | 697.0 | 679.1 | ||||||
| Accumulated depreciation and amortization | 418.9 | 394.6 | ||||||
| Total property, plant and equipment, net | $ | 278.1 | $ | 284.5 | ||||
| Other non-current assets | ||||||||
| Deferred compensation plan assets | $ | 17.9 | $ | 17.3 | ||||
| Lease right-of-use assets | 46.8 | 44.2 | ||||||
| Deferred tax assets | 25.7 | 40.9 | ||||||
| Other non-current assets | 17.8 | 15.1 | ||||||
| Total other non-current assets | $ | 108.2 | $ | 117.5 | ||||
| Other current liabilities | ||||||||
| Dividends payable | $ | 29.8 | $ | 29.7 | ||||
| Accrued rebates | 36.5 | 44.1 | ||||||
| Contract liabilities | 11.7 | 13.7 | ||||||
| Accrued taxes payable | 21.6 | 24.8 | ||||||
| Current lease liabilities | 14.3 | 14.7 | ||||||
| Other current liabilities | 68.1 | 58.7 | ||||||
| Total other current liabilities | $ | 182.0 | $ | 185.7 | ||||
| Other non-current liabilities | ||||||||
| Income taxes payable | $ | 31.8 | $ | 31.9 | ||||
| Deferred compensation plan liabilities | 17.9 | 17.3 | ||||||
| Non-current lease liabilities | 36.7 | 33.7 | ||||||
| Other non-current liabilities | 13.4 | 10.6 | ||||||
| Total other non-current liabilities | $ | 99.8 | $ | 93.5 | ||||
14
8.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 in net earnings and cash flows associated with changes in foreign currency rates. The majority of our foreign currency contracts have an original maturity date of less than one year.
At September 30, 2020 and December 31, 2019, we had outstanding foreign currency derivative contracts with gross notional U.S. dollar equivalent amounts of $40.8 million and $34.5 million, respectively. The impact of these contracts on the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) was not material for any period presented.
Cross currency swaps
At both September 30, 2020 and December 31, 2019, we had outstanding cross currency swap agreements with a combined notional amount of $303.5 million. 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. At September 30, 2020 and December 31, 2019, we had deferred foreign currency gains of $8.7 million and $1.9 million, respectively, in Accumulated other comprehensive loss associated with our cross currency swap activity.
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 underlying securities owned by the fund divided by the number of shares outstanding.
15
The recorded amounts and estimated fair values of total debt, excluding unamortized issuance costs and discounts, were as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||
| In millions | Recorded Amount | Fair Value | Recorded Amount | Fair Value | |||||||||||||
| Variable rate debt | $ | 257.1 | $ | 257.1 | $ | 269.6 | $ | 269.6 | |||||||||
| Fixed rate debt | 800.0 | 909.0 | 800.0 | 863.5 | |||||||||||||
| Total debt | $ | 1,057.1 | $ | 1,166.1 | $ | 1,069.6 | $ | 1,133.1 | |||||||||
Financial assets and liabilities measured at fair value on a recurring basis were as follows:
| Recurring fair value measurements | September 30, 2020 | ||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | NAV | Total | ||||||||||||
| Foreign currency contract liabilities | $ | — | $ | (5.2) | $ | — | $ | — | $ | (5.2) | |||||||
| Foreign currency contract assets | — | 5.3 | — | — | 5.3 | ||||||||||||
| Deferred compensation plan assets | 13.9 | — | — | 4.0 | 17.9 | ||||||||||||
| Total recurring fair value measurements | $ | 13.9 | $ | 0.1 | $ | — | $ | 4.0 | $ | 18.0 | |||||||
| Recurring fair value measurements | December 31, 2019 | ||||||||||||||||
| In millions | Level 1 | Level 2 | Level 3 | NAV | Total | ||||||||||||
| Foreign currency contract liabilities | $ | — | $ | (3.4) | $ | — | $ | — | $ | (3.4) | |||||||
| Foreign currency contract assets | — | 7.6 | — | — | 7.6 | ||||||||||||
| Deferred compensation plan assets | 12.8 | — | — | 4.5 | 17.3 | ||||||||||||
| Total recurring fair value measurements | $ | 12.8 | $ | 4.2 | $ | — | $ | 4.5 | $ | 21.5 | |||||||
9.Debt
Debt and the average interest rates on debt outstanding were as follows:
| In millions | Average interest rate at September 30, 2020 | Maturity Year | September 30, 2020 | December 31, 2019 | ||||||||||
| Revolving credit facility | 1.520% | 2023 | $ | 134.6 | $ | 134.6 | ||||||||
| Senior notes - fixed rate | 3.950% | 2023 | 300.0 | 300.0 | ||||||||||
| Senior notes - fixed rate | 4.550% | 2028 | 500.0 | 500.0 | ||||||||||
| Term loan facility | 1.520% | 2023 | 122.5 | 135.0 | ||||||||||
| Unamortized debt issuance costs and discounts | N/A | N/A | (4.3) | (5.0) | ||||||||||
| Total debt | 1,052.8 | 1,064.6 | ||||||||||||
Less: Current maturities and short-term borrowings | (20.0) | (17.5) | ||||||||||||
| Long-term debt | $ | 1,032.8 | $ | 1,047.1 | ||||||||||
Senior notes
In March 2018, nVent Finance S.à r.l. (“nVent Finance” or "Subsidiary Issuer"), a 100-percent owned subsidiary of nVent, issued $300.0 million aggregate principal amount of 3.950% senior notes due 2023 (the "2023 Notes") and $500.0 million aggregate principal amount of 4.550% senior notes due 2028 (the "2028 Notes" and, collectively with the 2023 Notes, the "Notes"). Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
16
The Notes constitute general unsecured senior obligations of the Subsidiary Issuer and rank equally in right of payment with all existing and future unsubordinated and unsecured indebtedness and liabilities of the Subsidiary Issuer. The Notes are fully and unconditionally guaranteed as to payment by nVent (the "Parent Company Guarantor"). The guarantees of the Notes by the Parent Company Guarantor constitute general unsecured obligations of the Parent Company Guarantor and rank equally in right of payment with all existing and future unsubordinated and unsecured indebtedness and liabilities of the Subsidiary Issuer. Subject to certain qualifications and exceptions, the indenture pursuant to which the Notes were issued contains covenants that, among other things, restrict nVent’s, nVent Finance’s and certain subsidiaries’ ability to merge or consolidate with another person, create liens or engage in sale and lease-back transactions.
There are no significant restrictions on the ability of nVent to obtain funds from its subsidiaries by dividend or loan. None of the assets of nVent or its subsidiaries represents restricted net assets pursuant to the guidelines established by the SEC.
Senior credit facilities
In March 2018, nVent Finance entered into a credit agreement with a syndicate of banks providing for a five-year $200.0 million senior unsecured term loan facility (the "Term Loan Facility") and a five-year $600.0 million senior unsecured revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Senior Credit Facilities"). We have the option to request to increase the Revolving Credit Facility in an aggregate amount of up to $300.0 million, subject to customary conditions, including the commitment of the participating lenders.
In March 2020, as a proactive measure to maximize our liquidity in response to the effect of the COVID-19 pandemic, we drew down $150.0 million on our Revolving Credit Facility. We repaid this amount on our Revolving Credit Facility in September 2020. Total availability under the Revolving Credit Facility was $465.4 million as of September 30, 2020.
Our debt agreements contain certain financial covenants, the most restrictive of which are in the Senior Credit Facilities, including that we may not 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 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. In addition, subject to certain qualifications and exceptions, the Senior Credit Facilities also contain covenants that, among other things, restrict our ability to create liens, merge or consolidate with another person, make acquisitions and incur subsidiary debt. As of September 30, 2020, we were in compliance with all financial covenants in our debt agreements, and there is no material uncertainty about our ongoing ability to meet those covenants.
Debt outstanding, excluding unamortized issuance costs and discounts, at September 30, 2020 matures on a calendar year basis as follows:
| Q4 | ||||||||||||||||||||||||||
| In millions | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||
Contractual debt obligation maturities | $ | 5.0 | $ | 20.0 | $ | 20.0 | $ | 512.1 | $ | — | $ | — | $ | 500.0 | $ | 1,057.1 | ||||||||||
10.Income Taxes
The effective income tax rate for the nine months ended September 30, 2020 was negative 42.9%, compared to 17.1% for the nine months ended September 30, 2019. The liability for uncertain tax positions was $17.0 million at both September 30, 2020 and December 31, 2019. We record penalties and interest related to unrecognized tax benefits in Provision (benefit) for income taxes and Net interest expense, respectively, on the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss), which is consistent with our past practices.
In the third quarter of 2020, along with the goodwill impairment expense of $212.3 million, we recorded $21.6 million of income tax benefit associated with the proportionate share of tax deductible goodwill.
Valuation allowances are recorded to reduce the amount of deferred tax assets in jurisdictions where, based on the weight of information available to us, we determine that it is more likely than not the related tax benefits will not be realized. In the nine-month period ended September 30, 2020, as a result of the assessment of the available information, we established a valuation allowance of $19.4 million on certain foreign deferred tax assets.
17
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest and the ability to carryback net operating losses arising in taxable years from 2018 through 2020. The CARES Act provisions provided a permanent cash benefit of $7.5 million, offset by base erosion and anti-abuse tax of $1.1 million related to 2019 that was recorded as a discrete tax item in the first quarter of 2020.
11.Shareholders' Equity
Share repurchases
On July 23, 2018, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $500.0 million (the "2018 Authorization"). On February 19, 2019, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $380.0 million (the "2019 Authorization"). The 2018 and 2019 Authorizations expire on July 23, 2021.
During the nine months ended September 30, 2020, we repurchased 0.2 million of our ordinary shares for $3.2 million under the 2018 Authorization. During the nine months ended September 30, 2019, we repurchased 9.0 million of our ordinary shares for $232.7 million under the 2018 Authorization. As of September 30, 2020, we have $585.1 million available for share repurchases under the combined 2018 and 2019 Authorizations, which total $880.0 million.
In March 2020, to enhance our liquidity position in response to the COVID-19 pandemic, we elected to temporarily suspend any share repurchases under our existing share repurchase program. In July 2020, we lifted the temporary suspension of share repurchases, and in October 2020, we resumed the execution of share repurchases to help offset dilution.
On September 28, 2020, the Board of Directors declared a quarterly cash dividend of $0.175 per ordinary share payable on November 6, 2020, to shareholders of record at the close of business on October 23, 2020. The balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $29.8 million and $29.7 million at September 30, 2020 and December 31, 2019, respectively.
18
12.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 operating income exclusive of intangible amortization, acquisition related expenses, costs of restructuring activities, impairments and other unusual non-operating items.
Financial information by reportable segment is as follows:
| Three months ended | Nine months ended | ||||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Net sales | |||||||||||||||||
| Enclosures | $ | 244.7 | $ | 262.6 | $ | 722.5 | $ | 778.1 | |||||||||
| Electrical & Fastening Solutions | 147.7 | 149.6 | 421.7 | 437.7 | |||||||||||||
| Thermal Management | 116.9 | 147.6 | 333.2 | 421.5 | |||||||||||||
| Total | $ | 509.3 | $ | 559.8 | $ | 1,477.4 | $ | 1,637.3 | |||||||||
| Segment income (loss) | |||||||||||||||||
| Enclosures | $ | 44.0 | $ | 47.6 | $ | 113.1 | $ | 141.4 | |||||||||
| Electrical & Fastening Solutions | 40.7 | 41.3 | 108.9 | 114.1 | |||||||||||||
| Thermal Management | 25.5 | 38.5 | 60.2 | 98.1 | |||||||||||||
| Other | (9.3) | (12.8) | (31.5) | (38.0) | |||||||||||||
| Total | $ | 100.9 | $ | 114.6 | $ | 250.7 | $ | 315.6 | |||||||||
The following table presents a reconciliation of segment income to income before income taxes:
| Three months ended | Nine months ended | ||||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Segment income | $ | 100.9 | $ | 114.6 | $ | 250.7 | $ | 315.6 | |||||||||
| Impairment of goodwill | (212.3) | — | (212.3) | — | |||||||||||||
| Impairment of trade names | (8.2) | — | (8.2) | — | |||||||||||||
| Intangible amortization | (16.1) | (15.4) | (48.1) | (45.6) | |||||||||||||
| Restructuring and other | (5.4) | (11.2) | (15.9) | (17.5) | |||||||||||||
| Acquisition transaction and integration costs | (0.5) | (1.9) | (2.2) | (1.9) | |||||||||||||
| Net interest expense | (8.5) | (11.6) | (27.8) | (34.0) | |||||||||||||
| Other expense | (0.7) | (0.9) | (2.2) | (2.8) | |||||||||||||
| Income (loss) before income taxes | $ | (150.8) | $ | 73.6 | $ | (66.0) | $ | 213.8 | |||||||||
19
13.Leases
We have operating leases for office space, production facilities, distribution centers, warehouses, sales offices, fleet vehicles and equipment. In accordance with our accounting policy, leases with an initial term of 12 months or less are not recognized on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We elected the practical expedient for all leases to include both lease and non-lease components within our lease assets and lease liabilities.
Our lease agreements do not contain any material residual value guarantees, any material bargain purchase options or material restrictive covenants. We have no material sublease arrangements with third parties or lease transactions with related parties.
During the three months ended September 30, 2020 and September 30, 2019, rent expense was $4.9 million and $5.0 million, respectively. During the nine months ended September 30, 2020 and September 30, 2019, rent expense was $15.0 million and $14.1 million, respectively. Rent expense figures are primarily related to operating lease costs. Costs associated with short-term leases, variable rent and subleases were immaterial.
Our leases have remaining lease terms of one to ten years, some of which include options to extend the leases for up to five years. Renewal options that are reasonably certain to be exercised are included in the lease term. The incremental borrowing rate is used in determining the present value of lease payments, unless an implicit rate is specified. Incremental borrowing rates on a collateralized basis are determined based on the economic environment in which leases are denominated and the lease term. The weighted average remaining lease term and weighted average discount rate were as follows:
| September 30, 2020 | September 30, 2019 | |||||||
| Weighted average remaining lease term | ||||||||
| Operating leases | 5 years | 5 years | ||||||
| Weighted average discount rate | ||||||||
| Operating leases | 3.7 | % | 4.1 | % | ||||
Future lease payments under non-cancelable operating leases as of September 30, 2020 were as follows:
| In millions | |||||
| Remainder of 2020 | $ | 4.6 | |||
| 2021 | 15.5 | ||||
| 2022 | 11.3 | ||||
| 2023 | 7.5 | ||||
| 2024 | 5.6 | ||||
| 2025 | 4.5 | ||||
| Thereafter | 9.9 | ||||
| Total lease payments | $ | 58.9 | |||
| Less imputed interest | (7.9) | ||||
Total reported lease liability | $ | 51.0 | |||
As of September 30, 2020, we have approximately $23 million in future undiscounted cash flows related to a lease of a manufacturing facility and warehouse that has not yet commenced for which we are involved in the design and construction of the assets. The lease has a term of 10 years and is expected to commence in the first half of 2021.
Supplemental cash flow information related to operating leases were as follows:
| Nine months ended | ||||||||
| In millions | September 30, 2020 | September 30, 2019 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 13.8 | $ | 12.9 | ||||
| Lease right-of-use assets obtained in exchange for new lease liabilities | 13.8 | 12.8 | ||||||
20
Supplemental balance sheet information related to operating leases was as follows:
| In millions | Classification | September 30, 2020 | December 31, 2019 | ||||||||
| Assets | |||||||||||
| Lease right-of-use assets | Other non-current assets | $ | 46.8 | $ | 44.2 | ||||||
| Liabilities | |||||||||||
| Current lease liabilities | Other current liabilities | $ | 14.3 | $ | 14.7 | ||||||
| Non-current lease liabilities | Other non-current liabilities | 36.7 | 33.7 | ||||||||
| Total lease liabilities | $ | 51.0 | $ | 48.4 | |||||||
14.Commitments and Contingencies
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 effect on our financial position, results of operations or cash flows. We recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.
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. Our liability for service and product warranties as of September 30, 2020 and December 31, 2019 was not material.
Stand-by letters of credit, bank guarantees and bonds
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 September 30, 2020 and December 31, 2019, the outstanding value of bonds, letters of credit and bank guarantees totaled $41.3 million and $70.0 million, respectively.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
This report contains statements that we believe to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact are forward-looking statements. Without limitation, any statements preceded or followed by or that include the words "targets," "plans," "believes," "expects," "intends," "will," "likely," "may," "anticipates," "estimates," "projects," "should," "would," "positioned," "strategy," "future," "forecast" or words, phrases or terms of similar substance or the negative thereof, are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include adverse effects on our business operations or financial results, including due to the impact of the novel coronavirus 2019 ("COVID-19") pandemic and potential impairment of goodwill and trade names; overall global economic and business conditions impacting our business; the ability to achieve the benefits of our restructuring plans; the ability to successfully identify, finance, complete and integrate acquisitions; competition and pricing pressures in the markets we serve, including the impacts of tariffs; volatility in currency exchange rates and commodity prices; inability to generate savings from excellence in operations initiatives consisting of lean enterprise, supply management and cash flow practices; increased risks associated with operating foreign businesses; the ability to deliver backlog and win future project work; failure of markets to accept new product introductions and enhancements; the impact of changes in laws and regulations, including those that limit U.S. tax benefits; the outcome of litigation and governmental proceedings; and the ability to achieve our long-term strategic operating goals. Additional information concerning these and other factors is contained in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including this Quarterly Report on Form 10-Q and ITEM 1A. of our Annual Report on Form 10-K for the year ended December 31, 2019. All forward-looking statements speak only as of the date of this report. nVent Electric plc assumes no obligation, and disclaims any obligation, to update the information contained in this report.
Overview
The terms "us," "we," "our," "the Company" or "nVent" refer to nVent Electric plc. nVent is a leading global provider of electrical connection and protection solutions. We believe our inventive electrical solutions enable safer systems and ensure a more secure world. We design, manufacture, market, install and service high performance products and solutions that connect and protect some of the world's most sensitive equipment, buildings and critical processes. We offer a comprehensive range of enclosures, electrical connections and fastening and thermal management solutions across industry-leading brands that are recognized globally for quality, reliability and innovation.
We classify our operations into business segments based primarily on types of products offered and markets served. We operate across three segments: Enclosures, Electrical & Fastening Solutions and Thermal Management, which represented approximately 49%, 28% and 23% of total revenues during the first nine months of 2020, respectively.
•Enclosures—The Enclosures segment provides innovative solutions to connect and protect critical controls systems, electronics, data and electrical equipment. From metallic and non-metallic enclosures to cabinets, subracks and backplanes, it offers the physical infrastructure to host, connect and protect server and network equipment, as well as indoor and outdoor protection for test and measurement, aerospace and defense applications in industrial, infrastructure, energy and commercial verticals.
•Electrical & Fastening Solutions—The Electrical & Fastening Solutions segment provides solutions that connect and protect electrical and mechanical systems and civil structures. Its engineered electrical and fastening products are innovative cost efficient and labor saving connections that are used across a wide range of verticals, including commercial, industrial, infrastructure and energy.
•Thermal Management—The Thermal Management segment provides electric thermal solutions that connect and protect critical buildings, infrastructure, industrial processes and people. Its thermal management systems include heat tracing, floor heating, fire-rated and specialty wiring, sensing and snow melting and de-icing solutions for use in industrial, commercial & residential, energy and infrastructure verticals. It's highly reliable and easy to install solutions lower total cost of ownership to building owners, facility managers, operators and end users.
22
On April 30, 2018, Pentair plc ("Pentair" or "former Parent") completed the separation of its Water business and its Electrical business into two independent, publicly-traded companies (the "separation"). To effect the separation, Pentair distributed to its shareholders one ordinary share of nVent for every ordinary share of Pentair held as of the record date of April 17, 2018. As a result of the distribution, nVent is an independent publicly-traded company and began regular way trading under the symbol "NVT" on the New York Stock Exchange on May 1, 2018.
On August 30, 2019, as part of our Enclosures segment, we completed the acquisition of Eldon Holding AB ("Eldon") for $127.8 million, net of cash acquired. Eldon is an innovative European based manufacturer of enclosures that protect sensitive electrical, electronic and data and telecommunications components.
On February 10, 2020, we acquired substantially all of the assets of WBT LLC ("WBT") for approximately $29.9 million in cash. The U.S. based WBT business manufactures high-quality cable tray systems that will be marketed as part of the nVent CADDY product line within our Electrical & Fastening Solutions segment and nVent HOFFMAN product line within our Enclosures segment.
COVID-19
In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has adversely affected, and is likely to continue to adversely affect, our business. Governments around the world have implemented measures to help control the spread of the virus, including business curtailments and shutdowns, isolating residents to their places of residence and restricting travel. Significant uncertainty exists concerning the duration and magnitude of the impact of the COVID-19 pandemic on our business, but the effects of the COVID-19 pandemic have had an unfavorable impact on our business, and we anticipate that the global health crisis and related actions will negatively impact business activity globally.
Our top priority remains the safety and well-being of our employees. We have implemented safety and hygiene processes at our manufacturing and distribution locations to help keep our employees safe, including separation of shifts and workstations, temperature monitoring in most locations, and other recommended practices. We have also taken actions to help keep our non-manufacturing employees safe, including: directing employees to work from home, wherever possible, limiting and screening visitors to our facilities, travel restrictions, canceling events that involve large groups of people, encouraging social distancing best practices and enhanced cleaning in our facilities. All of our facilities have a COVID-19 readiness plan, and we have also launched updated wellness programs for employees. We expect to continue to implement these measures until we determine that the COVID-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend, or as we determine to be in the best interests of our employees.
We also remain focused on continuing to serve our customers and support critical industries and essential infrastructure such as medical, data centers and networking solutions, energy and defense, among others. Government mandated measures providing for business curtailments or shutdowns have generally excluded certain essential businesses and services, including businesses that manufacture and sell products or services that are considered essential to daily lives, or otherwise operate in essential or critical sectors. While our facilities are considered essential and have remained operational, during the third quarter we have experienced intermittent partial closures at certain facilities as a result of these measures or the need to sanitize the facilities and address employee well-being. As of the date of this filing, all of our manufacturing sites are operational and we have not experienced any significant disruptions to our supply chain. We have experienced and expect to continue to experience reductions in customer demand in several end-markets across our business segments. During the second and third quarters of 2020, organic sales declined by approximately 22% and 14% compared to the same period of the prior year, respectively, which was primarily attributable to the adverse impacts of the pandemic.
In response to the adverse effects of the pandemic, we have taken, and expect to continue to take as appropriate, actions to lower costs, manage our liquidity and focus on cash flow. These actions have included, but are not limited to:
•Limiting discretionary spending across the organization;
•Reducing payroll costs, which included employee furloughs and temporarily reducing Board of Director fees and salaries for executive officers and other senior leaders in the second and third quarters of 2020;
•Temporarily reducing certain discretionary employee benefits;
•Aligning our cost structure to meet demand;
•Reducing capital expenditures;
23
•Optimizing working capital through inventory reduction initiatives across business segments and focused actions to optimize customer and vendor payment terms; and
•Deferring payment of income and payroll taxes and utilizing job retention subsidies in certain jurisdictions where such opportunities are available.
In addition to actions taken to lower costs, manage our liquidity and focus on cash flow, we remain focused on enhancing our digital and technological capabilities. Our shift to working virtually where possible is allowing us to accelerate our digital initiatives as we collaborate with customers and distribution partners to enhance our websites and improve our digital product content. We are also continuing to invest in our technological capabilities, with new product launches in the first nine months of 2020, and more expected to be launched during the balance of this year.
We will continue to actively monitor the impacts of the pandemic and may take further actions that alter our business operations as may be required by governments in the jurisdictions where we operate, or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
Key Trends and Uncertainties Regarding our Existing Business
The following trends and uncertainties affected our financial performance in 2019 and the first nine months of 2020 and will likely impact our results in the future:
•There are many uncertainties regarding the COVID-19 pandemic, including the anticipated duration and severity of the pandemic and the extent of worldwide social, political and economic disruption it may cause. The magnitude of the impact of the pandemic on our financial condition, liquidity and results of operations cannot be determined at this time, and ultimately will be affected by a number of evolving factors including the length of time that the pandemic continues, its effect on the demand for the Company’s products and services and the supply chain, as well as the impact of governmental regulations imposed in response to the pandemic including potential business curtailments and shutdowns impacting our factories. In addition, the recent significant volatility in oil and gas prices have lead to a potential sustained downturn in the energy industry.
•We have identified specific product, vertical and geographic opportunities that we find attractive and continue to pursue, both within and outside the U.S. We are positioning our businesses to more effectively address these opportunities through research and development and additional sales and marketing resources. Unless we successfully penetrate these markets, our organic sales growth will likely be limited or may decline.
•We have experienced material and other cost inflation. We strive for productivity improvements, and we implement increases in selling prices to help mitigate this inflation. We expect the current economic environment, including the impacts of tariffs, will result in continuing price volatility for many of our raw materials and purchased components, and we are uncertain as to the timing and impact of these market changes.
•During 2019 and the first nine months of 2020, we continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business. Specifically in the first nine months of 2020, certain initiatives were executed in response to the decrease in demand attributed to the effect of the COVID-19 pandemic.
In addition to the actions and objectives discussed in the Overview and COVID-19 sections above, our operating objectives in 2020 also include the following:
•Achieving differentiated revenue growth through new products and solutions and vertical expansion in key developing regions;
•Driving operating excellence through lean enterprise initiatives, with specific focus on sourcing and supply management, cash flow management and lean operations;
•Optimizing our technological capabilities to increasingly generate innovative new and connected products and advance digital transformation; and
•Focusing on developing global talent in light of our global presence.
24
CONSOLIDATED RESULTS OF OPERATIONS
The consolidated results of operations for the three months ended September 30, 2020 and 2019 were as follows:
| Three months ended | ||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | $ change | % / point change | ||||||||||
| Net sales | $ | 509.3 | $ | 559.8 | $ | (50.5) | (9.0) | % | ||||||
| Cost of goods sold | 312.5 | 335.7 | (23.2) | (6.9) | % | |||||||||
| Gross profit | 196.8 | 224.1 | (27.3) | (12.2) | % | |||||||||
% of net sales | 38.6 | % | 40.0 | % | (1.4) | % | ||||||||
Selling, general and administrative | 107.4 | 126.2 | (18.8) | (14.9) | % | |||||||||
% of net sales | 21.1 | % | 22.5 | % | (1.4) | % | ||||||||
Research and development | 10.5 | 11.8 | (1.3) | (11.0) | % | |||||||||
| % of net sales | 2.1 | % | 2.1 | % | — | % | ||||||||
| Impairment of goodwill and trade names | 220.5 | — | 220.5 | N.M. | ||||||||||
| Operating income (loss) | (141.6) | 86.1 | (227.7) | (264.5) | % | |||||||||
| % of net sales | (27.8) | % | 15.4 | % | (43.2) | % | ||||||||
| Net interest expense | 8.5 | 11.6 | (3.1) | N.M. | ||||||||||
| Other expense | 0.7 | 0.9 | (0.2) | N.M. | ||||||||||
| Income (loss) before income taxes | (150.8) | 73.6 | (224.4) | (304.9) | % | |||||||||
| Provision (benefit) for income taxes | (12.1) | 13.7 | (25.8) | (188.3) | % | |||||||||
| Effective tax rate | 8.0 | % | 18.6 | % | (10.6) | % | ||||||||
N.M. Not Meaningful
25
The consolidated results of operations for the nine months ended September 30, 2020 and September 30, 2019 were as follows:
| Nine months ended | ||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | $ change | % / point change | ||||||||||
| Net sales | $ | 1,477.4 | $ | 1,637.3 | $ | (159.9) | (9.8) | % | ||||||
| Cost of goods sold | 925.0 | 991.1 | (66.1) | (6.7) | % | |||||||||
| Gross profit | 552.4 | 646.2 | (93.8) | (14.5) | % | |||||||||
% of net sales | 37.4 | % | 39.5 | % | (2.1) | % | ||||||||
Selling, general and administrative | 334.8 | 359.4 | (24.6) | (6.8) | % | |||||||||
% of net sales | 22.7 | % | 22.0 | % | 0.7 | % | ||||||||
Research and development | 33.1 | 36.2 | (3.1) | (8.6) | % | |||||||||
| % of net sales | 2.2 | % | 2.2 | % | — | % | ||||||||
| Impairment of goodwill and trade names | 220.5 | — | 220.5 | N.M. | ||||||||||
| Operating income (loss) | (36.0) | 250.6 | (286.6) | (114.4) | % | |||||||||
| % of net sales | (2.4) | % | 15.3 | % | (17.7) | % | ||||||||
| Net interest expense | 27.8 | 34.0 | (6.2) | N.M. | ||||||||||
| Other expense | 2.2 | 2.8 | (0.6) | N.M. | ||||||||||
| Income (loss) before income taxes | (66.0) | 213.8 | (279.8) | (130.9) | % | |||||||||
Provision for income taxes | 28.3 | 36.6 | (8.3) | (22.7) | % | |||||||||
| Effective tax rate | (42.9) | % | 17.1 | % | (60.0) | % | ||||||||
N.M. Not Meaningful
26
Net sales
The components of the change in consolidated net sales from the prior period were as follows:
| Three months ended September 30, 2020 | Nine months ended September 30, 2020 | |||||||
| over the prior year period | over the prior year period | |||||||
| Volume | (13.8) | % | (14.4) | % | ||||
| Price | 0.3 | 0.2 | ||||||
| Organic growth | (13.5) | (14.2) | ||||||
| Acquisition | 3.6 | 4.8 | ||||||
| Currency | 0.9 | (0.4) | ||||||
| Total | (9.0) | % | (9.8) | % | ||||
The 9.0 and 9.8 percentage point decreases in net sales in the third quarter and first nine months of 2020 from 2019, respectively were primarily the result of:
•slowdown in capital spending, including from the effects of the COVID-19 pandemic, resulting in organic sales decline of approximately 7.0% and 8.0% from our industrial business in the third quarter and first nine months of 2020 from 2019, respectively, and approximately 2.0% and 2.5% from our commercial & residential business in the third quarter and first nine months of 2020 from 2019, respectively.
These decreases were partially offset by:
•sales of $20.3 and $79.1 million in the third quarter and first nine months of 2020, respectively, as a result of the Eldon and WBT acquisitions.
Gross profit
The 1.4 and 2.1 percentage point decreases in gross profit as a percentage of net sales in the third quarter and first nine months of 2020 from 2019, respectively were primarily the result of:
•lower sales volume resulting in decreased leverage on fixed expenses in cost of goods sold; and
•inflationary increases related to certain raw materials, labor and freight costs.
These decreases were partially offset by:
•actions taken to lower costs in response to the adverse effects of the COVID-19 pandemic, including temporarily reducing labor costs and limiting discretionary spending; and
•savings generated from our lean and supply management practices.
Selling, general and administrative ("SG&A")
The 1.4 percentage point decrease in SG&A expense as a percentage of net sales in the third quarter of 2020 from 2019 was primarily the result of:
•actions taken to lower costs in response to the adverse effects of the COVID-19 pandemic, including temporarily reducing labor costs and limiting discretionary spending;
•restructuring and other costs of $5.4 million in the third quarter of 2020, compared to $11.2 million in the third quarter of 2019; and
•savings generated from restructuring and other lean initiatives.
These decreases were partially offset by:
•lower sales volume resulting in decreased leverage on fixed operating expenses; and
•inflationary increases impacting our labor costs.
The 0.7 percentage point increase in SG&A expense as a percentage of net sales in the first nine months of 2020 from 2019 was primarily the result of:
•lower sales volume resulting in decreased leverage on fixed operating expenses; and
27
•inflationary increases impacting our labor costs.
These increases were partially offset by:
•actions taken to lower costs in response to the adverse effects of the COVID-19 pandemic, including temporarily reducing labor costs and limiting discretionary spending; and
•savings generated from restructuring and other lean initiatives.
Impairment of goodwill and trade names
During the third quarter of 2020, as a result of the adverse market and economic conditions attributed to the COVID-19 pandemic, combined with significant volatility in oil and gas prices leading to a potential sustained downturn in the energy industry, we recognized pre-tax, non-cash impairment expense of $220.5 million, which primarily relates to a $212.3 million impairment of goodwill in the Thermal Management reporting unit. During the third quarter of 2020, we also recognized pre-tax, non-cash impairment expense of $8.2 million related to trade names.
Provision (benefit) for income taxes
The differences in the effective tax rates in the third quarter and first nine months of 2020 from 2019 were primarily the result of:
•impairment of goodwill during the third quarter of 2020 of $212.3 million and the related $21.6 million tax benefit from favorable deferred tax adjustments; and
•a $19.4 million non-cash charge related to the establishment of a valuation allowance on certain foreign deferred tax assets recorded in the first quarter of 2020.
SEGMENT RESULTS OF OPERATIONS
The summary that follows provides a discussion of the results of operations of each of our three reportable segments (Enclosures, Electrical & Fastening Solutions and Thermal Management). Each of these segments comprises various product offerings that serve multiple end users.
We evaluate performance based on sales and segment income and use a variety of ratios to measure performance of our reporting segments. Segment income represents operating income (loss) exclusive of intangible amortization, acquisition related expenses, costs of restructuring activities, impairments and other unusual non-operating items.
Enclosures
The net sales, segment income and segment income as a percentage of net sales for Enclosures were as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | % / point change | September 30, 2020 | September 30, 2019 | % / point change | |||||||||||||||||||||||
| Net sales | $ | 244.7 | $ | 262.6 | (6.8) | % | $ | 722.5 | $ | 778.1 | (7.1) | % | |||||||||||||||||
| Segment income | 44.0 | 47.6 | (7.6) | % | 113.1 | 141.4 | (20.0) | % | |||||||||||||||||||||
| % of net sales | 18.0 | % | 18.1 | % | (0.1) | pts | 15.7 | % | 18.2 | % | (2.5) | pts | |||||||||||||||||
28
Net sales
The components of the change in Enclosures net sales from the prior period were as follows:
| Three months ended September 30, 2020 | Nine months ended September 30, 2020 | |||||||
| over the prior year period | over the prior year period | |||||||
| Volume | (13.9) | % | (15.2) | % | ||||
| Price | (0.1) | (0.5) | ||||||
| Organic growth | (14.0) | (15.7) | ||||||
| Acquisition | 6.1 | 8.8 | ||||||
| Currency | 1.1 | (0.2) | ||||||
| Total | (6.8) | % | (7.1) | % | ||||
The 6.8 and 7.1 percent decreases in Enclosures net sales in the third quarter and first nine months of 2020 from 2019, respectively were primarily the result of:
•slowdown in capital spending, including the effects of the COVID-19 pandemic, resulting in organic sales decline of approximately 8.0% and 9.0% from our industrial business in the third quarter and first nine months of 2020 from 2019, respectively, and approximately 1.5% and 3.0% from our infrastructure business in the third quarter and first nine months of 2020 from 2019, respectively.
These decreases were partially offset by:
•sales of $16.0 million and $68.4 million in the third quarter and first nine months of 2020, respectively, as a result of the Eldon acquisition.
Segment income
The components of the change in Enclosures segment income as a percentage of net sales from the prior period were as follows:
| Three months ended September 30, 2020 | Nine months ended September 30, 2020 | |||||||
| over the prior year period | over the prior year period | |||||||
| Growth/acquisition | (1.6) | pts | (2.6) | pts | ||||
| Price | (0.1) | (0.4) | ||||||
| Currency | 0.5 | 0.5 | ||||||
| Net productivity | 1.1 | — | ||||||
| Total | (0.1) | pts | (2.5) | pts | ||||
The 0.1 and 2.5 percentage point decreases in segment income for Enclosures as a percentage of net sales in the third quarter and first nine months of 2020 from 2019, respectively were primarily the result of:
•lower sales volume resulting in decreased leverage on fixed expenses; and
•inflationary increases related to certain raw materials, labor and freight costs.
These decreases were partially offset by:
•actions taken to lower costs in response to the adverse effects of the COVID-19 pandemic, including temporarily reducing labor costs and limiting discretionary spending; and
•savings generated from restructuring and lean initiatives.
Electrical & Fastening Solutions
The net sales, segment income and segment income as a percentage of net sales for Electrical & Fastening Solutions were as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | % / point change | September 30, 2020 | September 30, 2019 | % / point change | |||||||||||||||||||||||
| Net sales | $ | 147.7 | $ | 149.6 | (1.3) | % | $ | 421.7 | $ | 437.7 | (3.7) | % | |||||||||||||||||
| Segment income | 40.7 | 41.3 | (1.4) | % | 108.9 | 114.1 | (4.6) | % | |||||||||||||||||||||
| % of net sales | 27.6 | % | 27.6 | % | — | pts | 25.8 | % | 26.1 | % | (0.3) | pts | |||||||||||||||||
29
Net sales
The components of the change in Electrical & Fastening Solutions net sales from the prior period were as follows:
| Three months ended September 30, 2020 | Nine months ended September 30, 2020 | |||||||
| over the prior year period | over the prior year period | |||||||
| Volume | (7.1) | % | (7.5) | % | ||||
| Price | 2.3 | 1.7 | ||||||
| Organic growth | (4.8) | (5.8) | ||||||
| Acquisition | 2.9 | 2.4 | ||||||
| Currency | 0.6 | (0.3) | ||||||
| Total | (1.3) | % | (3.7) | % | ||||
The 1.3 and 3.7 percent decreases in Electrical & Fastening Solutions net sales in the third quarter and first nine months of 2020 from 2019, respectively were primarily the result of:
•slowdown in capital spending, including the effects of the COVID-19 pandemic, resulting in organic sales decline of approximately 3.0% and 4.0% from our commercial & residential business in the third quarter and first nine months of 2020 from 2019, respectively, and approximately 3.5% from our industrial business in both the third quarter and first nine months of 2020 from 2019, respectively.
These decreases were partially offset by:
•sales of $4.3 million and $10.7 million in the third quarter and first nine months of 2020, respectively, as a result of the WBT acquisition;
•organic sales growth contribution of approximately 1.0% from our energy business in the third quarter and first nine months of 2020 from 2019, respectively; and
•selective increases in selling prices to mitigate inflationary cost increases.
Segment income
The components of the change in Electrical & Fastening Solutions segment income as a percentage of net sales from the prior period were as follows:
| Three months ended September 30, 2020 | Nine months ended September 30, 2020 | |||||||
| over the prior year period | over the prior year period | |||||||
| Growth/acquisition | (3.2) | pts | (2.7) | pts | ||||
| Price | 1.6 | 1.2 | ||||||
| Currency | — | — | ||||||
| Net productivity | 1.6 | 1.2 | ||||||
| Total | — | pts | (0.3) | pts | ||||
The flat segment income for Electrical & Fastening Solutions as a percentage of net sales in the third quarter, and the 0.3 percentage point decrease in the first nine months, of 2020 from 2019, were primarily the result of:
•lower sales volume resulting in decreased leverage on fixed expenses; and
•inflationary increases related to certain raw materials, labor and freight costs.
These decreases were fully offset in the third quarter, and partially offset in the first nine months, of 2020 from 2019, by:
•actions taken to lower costs in response to the adverse effects of the COVID-19 pandemic, including temporarily reducing labor costs and limiting discretionary spending; and
•selective increases in selling prices to mitigate inflationary cost increases.
30
Thermal Management
The net sales, segment income and segment income as a percentage of net sales for Thermal Management were as follows:
| Three months ended | Nine months ended | ||||||||||||||||||||||||||||
| In millions | September 30, 2020 | September 30, 2019 | % / point change | September 30, 2020 | September 30, 2019 | % / point change | |||||||||||||||||||||||
| Net sales | $ | 116.9 | $ | 147.6 | (20.8) | % | $ | 333.2 | $ | 421.5 | (20.9) | % | |||||||||||||||||
| Segment income | 25.5 | 38.5 | (33.8) | % | 60.2 | 98.1 | (38.6) | % | |||||||||||||||||||||
| % of net sales | 21.8 | % | 26.1 | % | (4.3) | pts | 18.1 | % | 23.3 | % | (5.2) | pts | |||||||||||||||||
Net sales
The components of the change in Thermal Management net sales from the prior period were as follows:
| Three months ended September 30, 2020 | Nine months ended September 30, 2020 | |||||||
| over the prior year period | over the prior year period | |||||||
| Volume | (20.6) | % | (20.2) | % | ||||
| Price | (1.0) | (0.1) | ||||||
| Organic growth | (21.6) | (20.3) | ||||||
| Currency | 0.8 | (0.6) | ||||||
| Total | (20.8) | % | (20.9) | % | ||||
The 20.8 and 20.9 percent decreases in Thermal Management net sales in the third quarter and first nine months of 2020 from 2019, respectively were primarily the result of:
•slowdown in capital spending, including the effects of the COVID-19 pandemic and significant volatility in oil and gas prices, resulting in organic sales decline of approximately 9.0% and 10.0% from our industrial business in the third quarter and first nine months of 2020 from 2019, respectively, and approximately 10.0% and 6.0% from our energy business in the third quarter and first nine months of 2020 from 2019, respectively.
Segment income
The components of the change in Thermal Management segment income as a percentage of net sales from the prior period were as follows:
| Three months ended September 30, 2020 | Nine months ended September 30, 2020 | |||||||
| over the prior year period | over the prior year period | |||||||
| Growth | (6.1) | pts | (6.2) | pts | ||||
| Price | (0.7) | (0.1) | ||||||
| Currency | (0.2) | — | ||||||
| Net productivity | 2.7 | 1.1 | ||||||
| Total | (4.3) | pts | (5.2) | pts | ||||
The 4.3 and 5.2 percentage point decreases in segment income for Thermal Management as a percentage of net sales in the third quarter and first nine months of 2020 from 2019, respectively were primarily the result of:
•lower sales volume resulting in decreased leverage on fixed expenses; and
•inflationary increases related to certain raw materials, labor and freight costs.
These decreases were partially offset by:
•actions taken to lower costs in response to the adverse effects of the COVID-19 pandemic, including temporarily reducing labor costs and limiting discretionary spending; and
•savings generated from restructuring and lean initiatives.
31
LIQUIDITY AND CAPITAL RESOURCES
The primary source of liquidity for our business is cash flows provided by operations. We expect to continue to have cash requirements to support working capital needs and capital expenditures, to pay interest and service debt and to pay dividends to shareholders quarterly. We believe we have the ability and sufficient capacity to meet these cash requirements by using available cash, internally generated funds and borrowing under committed credit facilities. We are focused on increasing our cash flow, while continuing to fund our research and development, sales and marketing and capital investment initiatives. Our intent is to maintain investment grade metrics and a solid liquidity position.
In March 2020, as a proactive measure to maximize our liquidity in response to the effect of the COVID-19 pandemic, we drew down $150.0 million on our Revolving Credit Facility. We repaid this amount on the Revolving Credit Facility in September 2020. As of September 30, 2020, we had $159.8 million of cash on hand, of which only $11.2 million is held in certain countries in which the ability to repatriate is limited due to local regulations or significant potential tax consequences.
We experience seasonal cash flows primarily due to increased demand for Electrical & Fastening Solutions products during the spring and summer months in the Northern Hemisphere and increased demand for Thermal Management products and services during the fall and winter months in the Northern Hemisphere.
Operating activities
Net cash provided by operating activities was $203.7 million in the first nine months of 2020, compared to net cash provided by operating activities of $157.5 million in the first nine months of 2019. Net cash provided by operating activities in the first nine months of 2020 primarily reflects net income of $209.3 million, net of non-cash depreciation, amortization, changes in deferred taxes and impairment expenses.
Investing activities
Net cash used for investing activities of $50.9 million in the first nine months of 2020 relates primarily to capital expenditures of $25.4 million and cash paid for the WBT acquisition of $27.0 million.
Net cash used for investing activities of $150.7 million in the first nine months of 2019 relates primarily to capital expenditures of $29.0 million and cash paid for the Eldon acquisition of $127.8 million.
Financing activities
Net cash used for financing activities of $100.2 million in the first nine months of 2020 primarily relates to dividends paid of $89.2 million.
Net cash used for financing activities of $114.7 million in the first nine months of 2019 primarily relates to share repurchases of $235.7 million and dividends paid of $91.1 million, offset by net receipts of revolving credit facility of $216.5 million.
Senior notes
In March 2018, nVent Finance S.à r.l. (“nVent Finance” or "Subsidiary Issuer"), a 100-percent owned subsidiary of nVent, issued $300.0 million aggregate principal amount of 3.950% senior notes due 2023 (the "2023 Notes") and $500.0 million aggregate principal amount of 4.550% senior notes due 2028 (the "2028 Notes" and, collectively with the 2023 Notes, the "Notes"). Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
The Notes are fully and unconditionally guaranteed as to payment by nVent (the "Parent Company Guarantor"). There are no subsidiaries that guarantee the Notes. The Parent Company Guarantor is a holding company that has no independent assets or operations unrelated to its investments in consolidated subsidiaries. The Subsidiary Issuer is a holding company that has no independent assets or operations unrelated to its investments in consolidated subsidiaries and the issuance of the Notes and other external debt. The Parent Company Guarantor’s principal source of cash flow, including cash flow to make payments on the Notes pursuant to the guarantees, is dividends from its subsidiaries. The Subsidiary Issuer’s principal source of cash flow is interest income from its subsidiaries. None of the subsidiaries of the Parent Company Guarantor or the Subsidiary Issuer is under any direct obligation to pay or otherwise fund amounts due on the Notes or the guarantees, whether in the form of dividends, distributions, loans or other payments. In addition, there may be statutory and regulatory limitations on the payment of dividends from certain subsidiaries of the Parent Company Guarantor or the Subsidiary Issuer. If such subsidiaries are unable to transfer funds to the Parent Company Guarantor or the Subsidiary Issuer and sufficient cash or liquidity is not otherwise available, the Parent Company Guarantor or the Subsidiary Issuer may not be able to make principal and interest payments on their outstanding debt, including the Notes or the guarantees.
32
The Notes constitute general unsecured senior obligations of the Subsidiary Issuer and rank equally in right of payment with all existing and future unsubordinated and unsecured indebtedness and liabilities of the Subsidiary Issuer. The guarantees of the Notes by the Parent Company Guarantor constitute general unsecured obligations of the Parent Company Guarantor and rank equally in right of payment with all existing and future unsubordinated and unsecured indebtedness and liabilities of the Subsidiary Issuer. Subject to certain qualifications and exceptions, the indenture pursuant to which the Notes were issued contains covenants that, among other things, restrict nVent’s, nVent Finance’s and certain subsidiaries’ ability to merge or consolidate with another person, create liens or engage in sale and lease-back transactions.
There are no significant restrictions on the ability of nVent to obtain funds from its subsidiaries by dividend or loan. None of the assets of nVent or its subsidiaries represents restricted net assets pursuant to the guidelines established by the SEC.
Senior credit facilities
In March 2018, nVent Finance entered into a credit agreement with a syndicate of banks providing for a five-year $200.0 million senior unsecured term loan facility (the "Term Loan Facility") and a five-year $600.0 million senior unsecured revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Senior Credit Facilities"). We have the option to request to increase the Revolving Credit Facility in an aggregate amount of up to $300.0 million. Total availability under the Revolving Credit Facility was $465.4 as of September 30, 2020.
Our debt agreements contain certain financial covenants, the most restrictive of which are in the Senior Credit Facilities, including that we may not 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 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. In addition, subject to certain qualifications and exceptions, the Senior Credit Facilities also contain covenants that, among other things, restrict our ability to create liens, merge or consolidate with another person, make acquisitions and incur subsidiary debt. As of September 30, 2020, we were in compliance with all financial covenants in our debt agreements, and there is no material uncertainty about our ongoing ability to meet those covenants.
Share repurchases
On July 23, 2018, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $500.0 million (the "2018 Authorization"). On February 19, 2019, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $380.0 million (the "2019 Authorization"). The 2018 and 2019 Authorizations expire on July 23, 2021.
During the nine months ended September 30, 2020, we repurchased 0.2 million of our ordinary shares for $3.2 million under the 2018 Authorization. During the nine months ended September 30, 2019, we repurchased 9.0 million of our ordinary shares for $232.7 million under the 2018 Authorization. As of September 30, 2020, we have $585.1 million available for share repurchases under the combined 2018 and 2019 Authorizations, which total $880.0 million.
In March 2020, to enhance our liquidity position in response to the COVID-19 pandemic, we elected to temporarily suspend any share repurchases under our existing share repurchase program. In July 2020, we lifted the temporary suspension of share repurchases, and in October 2020, we resumed the execution of share repurchases to help offset dilution.
Dividends
During the nine months ended September 30, 2020, we paid dividends of $89.2 million, or $0.525 per ordinary share. During the nine months ended September 30, 2019, we paid dividends of $91.1 million, or $0.525 per ordinary share.
On September 28, 2020, the Board of Directors declared a quarterly cash dividend of $0.175 per ordinary share payable on November 6, 2020, to shareholders of record at the close of business on October 23, 2020. The balance of dividends payable included in Other current liabilities on our Condensed Consolidated Balance Sheets was $29.8 million at both September 30, 2020 and December 31, 2019.
33
Other financial measures
In addition to measuring our cash flow generation or usage based upon operating, investing and financing classifications included in the Condensed Consolidated Statements of Cash Flows, we also measure our free cash flow. Free cash flow is a non-GAAP financial measure that we use to assess our cash flow performance. We believe free cash flow is an important measure of liquidity because it provides us and our investors a measurement of cash generated from operations that is available to pay dividends, make acquisitions, repay debt and repurchase shares. In addition, free cash flow is used as a criterion to measure and pay compensation-based incentives. Our measure of free cash flow may not be comparable to similarly titled measures reported by other companies. The following table is a reconciliation of free cash flow:
| Nine months ended | ||||||||
| In millions | September 30, 2020 | September 30, 2019 | ||||||
| Net cash provided by (used for) operating activities | $ | 203.7 | $ | 157.5 | ||||
| Capital expenditures | (25.4) | (29.0) | ||||||
| Proceeds from sale of property and equipment | 1.5 | 6.1 | ||||||
| Free cash flow | $ | 179.8 | $ | 134.6 | ||||
NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to Condensed Consolidated Financial Statements for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.
CRITICAL ACCOUNTING POLICIES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. In our 2019 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated and combined financial statements.
Goodwill is tested annually for impairment as of the first day of the fourth quarter, and is tested for impairment more frequently if events or changes in circumstances indicate that the asset might be impaired.
As a result of the changes in the current economic environment related to the COVID-19 pandemic, we evaluated whether current circumstances and market conditions indicate that it is more likely than not that any of our reporting units may be impaired and require an impairment test as of September 30, 2020. Our evaluation included consideration of changes in business performance assumptions compared to those used in our 2019 annual impairment test, such as estimates regarding future revenues and expenses, projected capital expenditures and income tax rates. We also considered changes in market-based inputs such as estimated market multiples, costs of invested capital and the most recent price of our ordinary shares.
Due to the adverse market and economic conditions attributed to the COVID-19 pandemic, combined with significant volatility in oil and gas prices leading to a potential sustained downturn in the energy industry, we concluded a triggering event occurred during the third quarter of 2020 for our Thermal Management reporting unit, requiring an impairment test as of September 30, 2020. In order to perform the goodwill impairment test for the Thermal Management reporting unit, including consideration of market-based inputs such as a market capitalization reconciliation, we determined it was appropriate to measure the fair value of all of our reporting units as of September 30, 2020.
The fair value of the reporting units was determined using a discounted cash flow analysis and market approach. Determining the fair value of the reporting unit required the use of significant judgment, including assumptions about future revenues and expenses, capital expenditures and changes in working capital and discount rates, which are based on our annual operating plan and long-term business plan. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, including the impacts from the COVID-19 pandemic, and growth expectations for the industries and end markets in which the reporting unit participates. Use of the market approach consists of comparisons to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations.
The level of judgment and estimation is inherently higher in the current environment considering the uncertainty created by the COVID-19 pandemic. We have evaluated numerous factors and made significant assumptions, which include the severity and
34
duration of the business disruption, the potential impact on customer demand, the timing and degree of economic recovery and ultimately, the combined effect of these assumptions on our future operating results and cash flows.
As a result of this analysis, during the three months ended September 30, 2020, we recognized a pre-tax, non-cash goodwill impairment expense of $212.3 million related to the Thermal Management reporting unit. Subsequent to the impairment charge recorded in the quarter, the remaining goodwill for the Thermal Management reporting unit was $712.5 million. The impairment resulted in a $21.6 million income tax benefit associated with the proportionate share of tax deductible goodwill.
In connection with the interim impairment test as of September 30, 2020, the percentage of excess fair value over carrying value of our Electrical & Fastening Solutions reporting unit was approximately 5%.
There is a risk that changes in economic and operating conditions affecting the assumptions used in our impairment tests, including changes due to the evolving nature of the COVID-19 pandemic, could adversely affect future estimates or fair value and result in additional goodwill or other intangible asset impairment expense in the future.
There have been no additional material changes to our critical accounting policies and estimates from those previously disclosed in our 2019 Annual Report on Form 10-K for the year ended December 31, 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except for the broad effects of the COVID-19 pandemic as a result of its negative impact on the global economy and major financial markets, there have been no material changes in our market risk during the quarter ended September 30, 2020. For additional information, refer to our 2019 Annual Report on Form 10-K for the year ended December 31, 2019.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended September 30, 2020 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the quarter ended September 30, 2020 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
(b) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the legal proceedings previously disclosed in Item 3 of our 2019 Annual Report on Form 10-K for the year ended December 31, 2019.
ITEM 1A. RISK FACTORS
There have been no additional material changes from the risk factors previously disclosed in our 2019 Annual Report on Form 10-K for the year ended December 31, 2019, except for the addition of the risk factor set forth below.
Our business, results of operations and financial condition may be materially adversely affected by global public health epidemics, including the strain of coronavirus known as COVID-19
Our business, consolidated results of operations and financial condition may be adversely affected if a global public health pandemic, including the current global COVID-19 pandemic, interferes with the ability of our employees, vendors and customers to perform our and their respective responsibilities and obligations relative to the conduct of our business. The COVID-19 pandemic has significantly impacted economic activity and markets around the world, and it has had, and could continue to have, a material negative impact on our business in numerous ways, including but not limited to those outlined below:
•The risk that we or our employees, vendors or customers may be prevented from conducting business activities for an indefinite period of time, including shutdowns that may be requested or mandated by governmental authorities or that we determine are appropriate to sanitize our facilities.
•Restrictions on travel to or from locations where we provide services, or restrictions on shipping products from certain jurisdictions where they are produced or into certain jurisdictions where customers are located.
•Inability to meet our customers’ needs and achieve costs targets due to disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability.
•Failure of third parties on which we rely, including our suppliers, distributors, contractors and commercial banks, to meet their obligations to the Company, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties and may adversely impact our operations.
•Significant reductions in demand or significant volatility in demand for one or more of our products and a global economic recession that could further reduce demand and/or pricing for our products, resulting from actions taken by governments, businesses and/or the general public in an effort to limit exposure to and spreading of such infectious diseases, such as travel restrictions, quarantines and business shutdowns or slowdowns. Deteriorating economic and political conditions caused by the COVID-19 pandemic, such as increased unemployment, decreases in capital spending, business shutdowns or economic recessions, could cause a further decrease in demand for our products.
•Delays or modifications to our strategic plans, initiatives and goals due to disruptions or uncertainties related to the COVID-19 pandemic for a sustained period of time.
•An impairment in the carrying value of goodwill or intangible assets or a change in the useful life of definite-lived intangible assets could occur if there are sustained changes in consumer purchasing behaviors, government restrictions, financial results, or a deterioration of macroeconomic conditions. As a result of the adverse market and economic conditions attributed to the COVID-19 pandemic, combined with significant volatility in oil and gas prices leading to a potential sustained downturn in the energy industry, during the third quarter of 2020, we recognized pre-tax, non-cash goodwill impairment expense of $212.3 million related to the Thermal Management reporting unit. During the third quarter of 2020, we also recognized pre-tax, non-cash impairment expense of $8.2 million related to trade names.
•Actions we have taken or may take, or decisions we have made or may make as a consequence of the COVID-19 pandemic may result in legal claims or litigation against us.
The global spread of the COVID-19 pandemic has created significant volatility, uncertainty and economic disruption, which is likely to continue and could cause a global recession. While we have taken certain actions in response to the COVID-19 pandemic to lower costs, preserve our liquidity and manage cash flow, the extent to which the COVID-19 pandemic will continue to impact our business, results of operations, liquidity and financial condition is uncertain and will depend on numerous evolving factors that we may not be able to accurately predict, including:
•the duration and scope of the pandemic;
36
•governmental, business and individual actions taken in response to the pandemic and the impact of those actions on global economic activity;
•the actions taken in response to economic disruption;
•the impact of business disruptions on our customers and the resulting impact on their demand for our products and services; and
•our customers' ability to pay for our products and services.
Any of these factors could cause or contribute to the risks and uncertainties identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and could materially adversely affect our business, financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to purchases we made of our ordinary shares during the third quarter of 2020:
| (a) | (b) | (c) | (d) | |||||||||||
| Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Dollar value of shares that may yet be purchased under the plans or programs | |||||||||||
| July 1 - July 25, 2020 | 4,487 | $ | 18.61 | — | $ | 585,149,838 | ||||||||
| July 26 - August 22, 2020 | 534 | 18.42 | — | 585,149,838 | ||||||||||
| August 23 - September 30, 2020 | 3,862 | 19.20 | — | 585,149,838 | ||||||||||
| Total | 8,883 | — | ||||||||||||
(a)The purchases in this column include shares repurchased as part of our publicly announced plans and shares deemed surrendered to us by participants in the nVent Electric plc 2018 Omnibus Incentive Plan (the "2018 Plan") and earlier Pentair stock incentive plans that are now outstanding under the 2018 Plan (collectively the "Plans") to satisfy the exercise price or withholding of tax obligations related to the exercise of stock options, vesting of restricted shares and vesting of performance shares.
(b)The average price paid in this column includes shares repurchased as part of our publicly announced plans and shares deemed surrendered to us by participants in the Plans to satisfy the exercise price of stock options and withholding tax obligations due upon stock option exercises and vesting of restricted and performance shares.
(c)The number of shares in this column represents the number of shares repurchased as part of our publicly announced plans to repurchase our ordinary shares up to a maximum dollar limit authorized by the Board of Directors, discussed below.
(d)On July 23, 2018, our Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $500.0 million (the "2018 Authorization"). On February 19, 2019, the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of $380.0 million (the "2019 Authorization"). The 2018 and 2019 Authorizations expire on July 23, 2021. As of September 30, 2020, we have $585.1 million available for share repurchases under the combined 2018 and 2019 Authorizations.
37
ITEM 6. EXHIBITS
The exhibits listed in the following Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.
Exhibit Index to Form 10-Q for the Period Ended September 30, 2020
| Guarantors and Subsidiary Issuers of Guaranteed Securities. (Incorporated by reference to Exhibit 22 in the Quarterly Report on Form 10-Q of nVent Electric plc filed with the Commission on April 29, 2020 (File No. 001-38265)). | ||||||||
| Certification of Chief Executive Officer. | ||||||||
| Certification of Chief Financial Officer. | ||||||||
| Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||
| Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||||
| 101 | The following materials from nVent Electric plc's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 are filed herewith, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2020 and 2019, (ii) the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, (iv) the Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2020 and 2019, and (v) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on October 30, 2020.
| nVent Electric plc | ||||||||
| Registrant | ||||||||
| By | /s/ Sara E. Zawoyski | |||||||
| Sara E. Zawoyski | ||||||||
| Executive Vice President and Chief Financial Officer | ||||||||
| By | /s/ Randolph A. Wacker | |||||||
| Randolph A. Wacker | ||||||||
| Senior Vice President, Chief Accounting Officer and Treasurer | ||||||||
39