NVENT ELECTRIC PLC
This Management's Discussion and Analysis of Financial Condition and Results of
Operations refers to and should be read in conjunction with the audited
consolidated financial statements and the corresponding notes included in ITEM
8.
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,"
"forecasts," "should," "would," "positioned," "strategy," "future," "are
confident," 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; inability to mitigate material and other cost inflation; risks
related to the availability of, and cost inflation in, supply chain inputs,
including labor, raw materials, commodities, packaging and transportation;
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 Annual Report on Form 10-K. 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.
The following is the discussion and analysis of changes in the financial
condition and results of operations for fiscal year 2021 compared to fiscal year
2020. The discussion and analysis of fiscal year 2019 and changes in the
financial condition and results of operations for fiscal year 2020 compared to
fiscal year 2019 that are not included in this Form 10-K may be found in Part
II, ITEM 7 of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2020 , filed with the SEC on February 23, 2021 .
Overview
The terms "us," "we," "our," "the Company" or "nVent" refer tonVent 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 51%, 26% and 23% of total revenues during 2021, respectively.
•Enclosures-The Enclosures segment provides innovative solutions to connect, protect, power and cool 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 and aerospace and defense applications in industrial, infrastructure, commercial and energy 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 time saving connections that are used across a wide range of verticals, including commercial, infrastructure, industrial 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
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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. Its highly reliable and easy to install
solutions lower total cost of ownership to building owners, facility managers,
operators and end users.
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 and operates within our Electrical & Fastening
Solutions segment.
On April 1, 2021 , we acquired substantially all of the assets of Vynckier
Enclosure Systems, Inc. ("Vynckier") for approximately $27.0 million in cash.
The U.S. based Vynckier business manufactures high-quality non-metallic
enclosures that we market as part of the nVent HOFFMAN product line within our
Enclosures segment.
On June 30, 2021 , we acquired CIS Global LLC ("CIS Global") for approximately
$202.4 million in cash. The CIS Global business is a leading provider of
intelligent rack power distribution and server slides products, and operates
within our Enclosures segment.
COVID-19
InMarch 2020 , theWorld 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 may 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. The effects of the COVID-19 pandemic have had and may continue to have an unfavorable impact on our business. Beginning inMarch 2020 , we experienced significant reductions in customer demand in several end-markets across our business segments. However, economic activity in many of the end-markets in which we operate began to stabilize and recover in the second half of 2020, and continued to increase in 2021. Our organic sales increased 18% in 2021 as compared to 2020. In response to the adverse effects of the pandemic, we executed a number of temporary cash and cost-savings measures, which were largely implemented in 2020. As our business has seen significant improvement in our financial results and improved outlook for many end-markets, we eliminated in 2021 many of the temporary cash and cost savings measures put in place. While our facilities remained operational during 2021, we continue to experience various degrees of higher manufacturing cost pressures and inflation as a result of supply chain challenges and high demand. Although we regularly monitor the financial health and operations of companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials or components required to manufacture our products and adversely affect our operations. As the COVID-19 conditions have improved and economic activity has increased, we have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. We expect the inflationary trends and supply chain pressures to continue in 2022.
We continue to actively monitor the impacts of the pandemic and global efforts to respond to it, 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 2021 and 2020, and are reasonably likely to 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, the ability of vaccines to protect against variant strains of COVID-19, the pandemic's effect on the demand for our 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. •We have identified specific product, vertical and geographic market opportunities that we find attractive and continue to pursue, both within and outside theU.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. 26 -------------------------------------------------------------------------------- •During 2021, we experienced supply chain challenges, including increased lead times, and inflationary increases of raw materials, logistics and labor costs due to availability constraints and high demand. While we have taken pricing actions and we plan for productivity improvements that could help offset these cost increases, we expect supply chain pressures and inflationary cost increases to continue into 2022, and could negatively impact our results of operations.
•During 2021 and 2020, we continued execution of certain business restructuring initiatives aimed at reducing our fixed cost structure and realigning our business.
In 2022, our operating objectives include the following:
•Executing our ESG strategy focused on People, Products and Planet;
•Enhancing and supporting employee engagement, development and retention;
•Achieving differentiated revenue growth through new products and innovation and expansion in higher growth verticals across all regions globally;
•Optimizing our technological capabilities to increasingly generate innovative new and connected products and advance digital transformation;
•Driving operational excellence through lean and agile, with specific focus on our digital transformation and supply chain resiliency;
•Optimizing working capital through inventory reduction initiatives across business segments and focused actions to optimize customer and vendor payment terms; and
•Deploying capital strategically to drive growth and value creation.
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--------------------------------------------------------------------------------CONSOLIDATED RESULTS OF OPERATIONS
The consolidated results of operations were as follows:
Years ended December 31 % / point change
In millions 2021 2020 2021 vs 2020
Net sales $ 2,462.0 $ 1,998.6 23.2 %
Cost of goods sold 1,520.1 1,249.2 21.7 %
Gross profit 941.9 749.4 25.7 %
% of net sales 38.3 % 37.5 % 0.8 pts
Selling, general and administrative 537.9 447.0 20.3 %
% of net sales 21.8 % 22.4 % (0.6 pts)
Research and development 48.6 43.5 11.7 %
% of net sales 2.0 % 2.2 % (0.2 pts)
Impairment of goodwill and trade names - 220.5 N.M.
Operating income 355.4 38.4 825.5 %
% of net sales 14.4 % 1.9 % 12.5 pts
Net interest expense 32.3 36.4 N.M.
Loss on early extinguishment of debt 15.2 - N.M.
Other expense (income) (12.8) 11.5 N.M.
Income (loss) before income taxes 320.7 (9.5) N.M.
Provision for income taxes 47.8 37.7 26.8 %
Effective tax rate 14.9 % (396.8 %) N.M.
Net income (loss) 272.9 (47.2) 678.2 %
N.M. Not Meaningful
Net sales
The components of the consolidated net sales change were as follows:
2021 vs 2020
Volume 11.3 %
Price 7.1
Organic growth 18.4
Acquisition 2.8
Currency 2.0
Total 23.2 %
The 23.2 percent increase in net sales in 2021 from 2020 was primarily the result of:
•organic sales growth contribution of approximately 9.0%, 4.5% and 3.0% from our industrial, commercial & residential and infrastructure businesses, respectively, in 2021 from 2020, which includes increases in selling prices;
•sales of
•favorable foreign currency effects.
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Gross profit
The 0.8 percentage point increase in gross profit as a percentage of sales in
2021 from 2020 was primarily the result of:
•increased sales volume resulting in increased leverage on fixed expenses in cost of goods sold;
•increases in selling prices to mitigate inflationary cost increases; and
•savings generated from our lean and supply management practices.
This increase was partially offset by:
•supply chain challenges, including increased lead times, and inflationary increases of raw materials, logistics and labor costs due to availability constraints and high demand compared to 2020.
Selling, general and administrative ("SG&A")
The 0.6 percentage point decrease in SG&A expense as a percentage of sales in
2021 from 2020 was driven by:
•increased sales volume resulting in increased leverage on fixed operating expenses;
•restructuring and other costs of
•savings generated from restructuring and other lean initiatives.
This decrease was partially offset by:
•inflationary increases impacting our labor costs compared to 2020;
•temporary actions taken in 2020 to lower costs in response to the adverse effects of the COVID-19 pandemic, including reducing labor costs and limiting discretionary spending for purchased services and travel; and
•higher employee incentive compensation expense compared to 2020.
Impairment of goodwill and trade names In 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. In 2020, we also recognized pre-tax, non-cash impairment expense of$8.2 million related to trade names. Loss on early extinguishment of debt In 2021, we issued$300.0 million of 2.750% fixed rate senior notes due 2031 and utilized the proceeds to redeem$300.0 million of 3.950% fixed rate senior notes due 2023. The$15.2 million premium paid on the early extinguishment was recorded as Loss on the early extinguishment of debt. Provision for income taxes The difference in the effective tax rate in 2021 from 2020 was primarily the result of:
•the unfavorable tax rate impact of the 2020 non-cash impairment expense of
•a
•a
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SEGMENT RESULTS OF OPERATIONS
The summary that follows provides a discussion of the results of operations 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 exclusive of intangible amortization, separation costs, costs of restructuring activities, impairments and other unusual non-operating items.
Enclosures
The net sales and segment income for Enclosures were as follows:
Years ended December 31 % / point change
In millions 2021 2020 2021 vs 2020
Net sales $ 1,244.8 $ 952.9 30.6 %
Segment income 202.1 148.5 36.1 %
% of net sales 16.2% 15.6% 0.6 pts
Net sales
The components of the change in Enclosures net sales were as follows:
2021 vs 2020
Volume 16.2 %
Price 7.0
Organic growth 23.2
Acquisition 5.7
Currency 1.7
Total 30.6 %
The 30.6 percent increase in Enclosures net sales in 2021 from 2020 was primarily the result of:
•organic sales growth contribution of approximately 14.5%, 3.5% and 3.0% from our industrial, infrastructure and commercial & residential businesses, respectively, in 2021 from 2020, which includes increases in selling prices;
•sales of
•favorable foreign currency effects.
Segment income
The components of the change in Enclosures segment income as a percentage of net
sales from the prior period were as follows:
2021 vs 2020
Growth/acquisition 3.3 pts
Price 5.5
Currency (0.3)
Net productivity (7.9)
Total 0.6 pts
The 0.6 percentage point increase in segment income for Enclosures as a percentage of net sales in 2021 from 2020 was primarily the result of:
•increases in selling prices to mitigate inflationary cost increases; and
•higher sales volume resulting in increased leverage on fixed expenses.
This increase was partially offset by:
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--------------------------------------------------------------------------------•supply chain challenges, including increased lead times, and inflationary increases of raw materials, logistics and labor costs due to availability constraints and high demand compared to 2020;
•temporary actions taken in 2020 to lower costs in response to the adverse effects of the COVID-19 pandemic, including reducing labor costs and limiting discretionary spending for purchased services and travel; and
•higher sales volume resulting in increased employee incentive compensation expense compared to 2020.
Electrical & Fastening Solutions
The net sales and segment income for Electrical & Fastening Solutions were as
follows:
Years ended December 31 % / point change
In millions 2021 2020 2021 vs 2020
Net sales $ 657.5 $ 569.1 15.5 %
Segment income 181.5 150.2 20.8 %
% of net sales 27.6% 26.4% 1.2 pts
Net sales
The components of the change in Electrical & Fastening Solutions net sales were
as follows:
2021 vs 2020
Volume 3.1 %
Price 10.6
Organic growth 13.7
Acquisition 0.3
Currency 1.5
Total 15.5 %
The 15.5 percent increase in Electrical & Fastening Solutions net sales in 2021 from 2020 was primarily the result of:.
•organic sales growth contribution of approximately 6.5% and 5.0% from our commercial & residential and infrastructure businesses, respectively, in 2021 from 2020, which includes increases in selling prices; and
•favorable foreign currency effects.
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:
2021 vs 2020
Growth/acquisition 0.6 pts
Price 7.1
Currency 0.1
Net productivity (6.6)
Total 1.2 pts
The 1.2 percentage point increase in segment income for Electrical & Fastening Solutions as a percentage of net sales in 2021 from 2020 was primarily the result of:
•increases in selling prices to mitigate inflationary cost increases;
•higher sales volume resulting in increased leverage on fixed expenses; and
•savings generated from restructuring and lean initiatives.
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--------------------------------------------------------------------------------This increase was partially offset by:
•supply chain challenges, including increased lead times, and inflationary increases of raw materials, logistics and labor costs due to availability constraints and high demand compared to 2020;
•temporary actions taken in 2020 to lower costs in response to the adverse effects of the COVID-19 pandemic, including reducing labor costs and limiting discretionary spending for purchased services and travel; and
•higher sales volume resulting in increased employee incentive compensation expense compared to 2020.
Thermal Management
The net sales and segment income for Thermal Management were as follows:
Years ended December 31 % / point change
In millions 2021 2020 2021 vs 2020
Net sales $ 559.7 $ 476.6 17.4 %
Segment income 121.2 93.9 29.1 %
% of net sales 21.7% 19.7% 2.0 pts
Net sales
The components of the change in Thermal Management net sales were as follows:
2021 vs 2020
Volume 11.3 %
Price 3.2
Organic growth 14.5
Currency 2.9
Total 17.4 %
The 17.4 percent increase in Thermal Management net sales in 2021 from 2020 was primarily the result of:
•organic sales growth contribution of approximately 7.5% and 6.0% from our industrial and commercial & residential businesses, respectively, in 2021 from 2020, which includes increases in selling prices; and
•favorable foreign currency effects.
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:
2021 vs 2020
Growth/acquisition 3.5 pts
Price 2.5
Currency 0.1
Net productivity (4.1)
Total 2.0 pts
The 2.0 percentage point increase in segment income for Thermal Management as a percentage of net sales in 2021 from 2020 was primarily the result of:
•higher sales volume resulting in increased leverage on fixed expenses;
•increases in selling prices to mitigate inflationary cost increases; and
•savings generated from restructuring and lean initiatives.
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--------------------------------------------------------------------------------This increase was partially offset by:
•supply chain challenges, including increased lead times, and inflationary increases of raw materials, logistics and labor costs due to availability constraints and high demand compared to 2020;
•temporary actions taken in 2020 to lower costs in response to the adverse effects of the COVID-19 pandemic, including reducing labor costs and limiting discretionary spending for purchased services and travel; and
•higher sales volume resulting in increased employee incentive compensation expense compared to 2020.
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, to pay dividends to shareholders quarterly and otherwise as described below under "Material cash requirements." We believe we have the ability and sufficient capacity to meet these cash requirements in the short term and long term 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. As ofDecember 31, 2021 , we had$49.5 million of cash on hand, of which$20.8 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$373.3 million in 2021, compared to$344.0 million in 2020. Net cash provided by operating activities in 2021 primarily reflects net income of$381.3 million , net of non-cash depreciation and amortization, and the negative impact of$9.2 million as a result of changes in net working capital. Net cash provided by operating activities in 2020 primarily reflects net income of$275.9 million , net of non-cash depreciation, amortization, and impairment expenses, and the positive impact of$46.8 million as a result of changes in net working capital. Investing activities Net cash used for investing activities was$274.0 million in 2021, which related primarily to capital expenditures of$39.5 million and cash paid for the CIS Global and Vynckier acquisitions of$228.0 million , net of cash acquired. Net cash used for investing activities was$65.0 million in 2020, which primarily related to capital expenditures of$40.0 million and cash paid for the acquisition of WBT of$27.0 million . Capital expenditures are primarily used for expansion of manufacturing facilities, developing new products and general maintenance. Financing activities Net cash used for financing activities was$166.8 million in 2021, which primarily related to share repurchases of$111.5 million , dividends paid of$117.7 million and net receipts of revolving long-term debt of$72.1 million . As noted below, in 2021, we issued$300.0 million of 2.750% fixed rate senior notes due 2031, and utilized the proceeds to redeem$300.0 million of 3.950% fixed rate senior notes due 2023. We also settled an outstanding interest rate swap related for$9.6 million related to the debt that was redeemed and incurred$15.2 million of costs related to the early extinguishment of the debt.
Net cash used for financing activities was
Senior notes InMarch 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"). InNovember 2021 , nVent Finance issued$300.0 million aggregate principal amount of 2.750% fixed rate senior notes due 2031 (the "2031 Notes" and, collectively with the 2028 Notes, the "Notes"). InDecember 2021 , we redeemed the$300 million aggregate principal amount of our 3.950% fixed rate senior notes due 2023. We incurred costs of$15.2 million related to the early extinguishment of the 2023 Notes. 33 -------------------------------------------------------------------------------- Interest on the 2028 Notes is payable semi-annually in arrears onApril 15 andOctober 15 of each year, and interest on the 2031 Notes is payable semi-annually in arrears onMay 15 andNovember 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. 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 theSEC . Senior credit facilities InMarch 2018 , the Company and its subsidiaries nVentFinance and Hoffman Schroff Holdings, Inc. entered into a credit agreement with a syndicate of banks providing for a five-year$200.0 million senior unsecured term loan facility and a five-year$600.0 million senior unsecured revolving credit facility. InSeptember 2021 , the Company and its subsidiaries nVentFinance and Hoffman Schroff Holdings, Inc. entered into an amended and restated credit agreement (the "Credit Agreement") with a syndicate of banks providing for a five-year$300.0 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"), which amended and restated theMarch 2018 credit agreement. Borrowings under the Term Loan Facility are permitted on a delayed draw basis during the first year of the five-year term of the Term Loan Facility, and borrowings under the Revolving Credit Facility are permitted from time to time during the full five-year term of the Revolving Credit Facility. nVent Finance has 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. Borrowings under the Senior Credit Facilities bear interest at a rate equal to an adjusted base rate, London Interbank Offered Rate ("LIBOR"), Euro InterbankOffer Rate ("EURIBOR") or Sterling Overnight Index Average ("SONIA"), plus, in each case, an applicable margin. The applicable margin will be based on, at nVent Finance's election, the Company's leverage level or public credit rating. As ofDecember 31, 2021 , the borrowing capacity under the Term Loan Facility on a delayed draw basis was$200.0 million , and the borrowing capacity under the Revolving Credit Facility was$493.3 million . 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 (each, a "testing period") to exceed 3.75 to 1.00 (or, at nVent Finance's election and subject to certain conditions, 4.25 to 1.00 for four testing periods in connection with certain material acquisitions) 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 ofDecember 31, 2021 , 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. 34 -------------------------------------------------------------------------------- Share repurchases OnJuly 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"). OnFebruary 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 the 2019 Authorizations expired onJuly 23, 2021 . OnMay 14, 2021 , the Board of Directors authorized the repurchase of our ordinary shares up to a maximum dollar limit of$300.0 million (the "2021 Authorization"). The 2021 Authorization began onJuly 23, 2021 upon expiration of the 2018 Authorization and the 2019 Authorization, and expires onJuly 22, 2024 .
During the year ended
Dividends
Dividends paid per ordinary share were
OnDecember 13, 2021 , the Board of Directors declared a quarterly cash dividend of$0.175 that was paid onFebruary 4, 2022 to shareholders of record at the close of business onJanuary 21, 2022 . The balance of dividends payable included in Other current liabilities on our Consolidated Balance Sheets was$30.5 million and$29.4 million atDecember 31, 2021 and 2020, respectively. OnFebruary 21, 2022 , the Board of Directors declared a quarterly cash dividend of$0.175 per ordinary share payable onMay 6, 2022 to shareholders of record at the close of business onApril 22, 2022 . Under Irish law, the payment of future cash dividends and repurchases of shares may be paid only out ofnVent Electric plc's "distributable reserves" on its statutory balance sheet.nVent Electric plc is not permitted to pay dividends out of share capital, which includes share premiums. Distributable reserves may be created through the earnings of the Irish parent company and through a reduction in share capital approved by theIrish High Court . Distributable reserves ofnVent Electric plc are not linked to a generally accepted accounting principles inthe United States of America ("GAAP") reported amount (e.g., retained earnings). Our distributable reserve balance was$2.9 billion and$3.1 billion as ofDecember 31, 2021 and 2020, respectively. Authorized shares Our authorized share capital consists of 400.0 million ordinary shares with a par value of$0.01 per share. Material cash requirements In general, we require cash to fund working capital investments, acquisitions, capital expenditures, debt and interest payments, taxes, dividends and share repurchases. Our material contractual cash requirements as ofDecember 31, 2021 include principal and interest on long-term debt as well as payments for operating lease liabilities. Servicing these obligations includes the following estimated cash outflows fromDecember 31, 2021 : Greater than 1 In millions Within 1 year year Total Debt obligations $ 5.0$ 1,000.5 $ 1,005.5 Interest obligations on fixed-rate debt 31.0 199.4 230.4 Operating lease obligations, net of sublease rentals 20.8 76.3 97.1 Total $ 56.8$ 1,276.2 $ 1,333.0 35
-------------------------------------------------------------------------------- We also incur purchase obligations in the ordinary course of business that are enforceable and legally binding. We have contractual purchase obligations of$84.0 million for 2022, which represent commitments for raw materials to be utilized in the normal course of business for which all significant terms have been confirmed. Contractual purchase obligations beyond 2022 are not material.
The total gross liability for uncertain tax positions at
Other financial measures In addition to measuring our cash flow generation or usage based upon operating, investing and financing classifications included in the 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 annual incentive compensation. 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:
Years ended December 31
In millions 2021 2020
Net cash provided by (used for) operating activities $ 373.3 $ 344.0
Capital expenditures (39.5) (40.0)
Proceeds from sale of property and equipment 0.6 2.0
Free cash flow $ 334.4 $ 306.0
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COMMITMENTS AND CONTINGENCIES
We have been, and in the future may be, made parties to a number of actions filed or have been, and in the future may be, given notice of potential claims relating to the conduct of our business, including those pertaining to commercial or contractual disputes, product liability, environmental, safety and health, patent infringement and employment matters. While we believe that a material impact on our consolidated financial position, results of operations or cash flows from any such future claims or potential claims is unlikely, given the inherent uncertainty of litigation, a remote possibility exists that a future adverse ruling or unfavorable development could result in future charges that could have a material impact. We do and will continue to periodically re-examine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in ITEM 8, Note 16 of the Notes to the Consolidated Financial Statements could change in the future. 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
NEW ACCOUNTING STANDARDS
See ITEM 8, Note 1 of the Notes to Consolidated Financial Statements, included in this Form 10-K, for information pertaining to recently adopted accounting standards or accounting standards to be adopted in the future.
CRITICAL ACCOUNTING ESTIMATES
We have adopted various accounting policies to prepare the consolidated financial statements in accordance with GAAP. Our significant accounting policies are more fully described in ITEM 8, Note 1 of the Notes to Consolidated Financial Statements. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. We consider an accounting estimate to be critical if:
•it requires us to make assumptions about matters that were uncertain at the time we were making the estimate; and
•changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.
Impairment of goodwill and indefinite-lived intangibles
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. The impairment test is performed by comparing the fair value of each reporting unit with its carrying amount, and recognizing 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. The fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Projecting discounted future cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in working capital and the appropriate discount rate. Use of the market approach consists of comparisons 37 --------------------------------------------------------------------------------
to comparable publicly-traded companies that are similar in size and industry. Actual results may differ from those used in our valuations.
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. The level of judgment and estimation is inherently
high. We have evaluated numerous factors and made significant assumptions, which
include the severity and 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. These assumptions are determined over a six year
long-term planning period. The six year growth rates for revenues and operating
profits vary for each reporting unit being evaluated. Revenues and operating
profit beyond 2027 are projected to grow at a perpetual growth rate of 3.0%.
Discount rate assumptions for each reporting unit take into consideration our
assessment of risks inherent in the future cash flows of the respective
reporting unit and our weighted-average cost of capital. We utilized a discount
rate ranging from 10.0% to 11.5% for each reporting unit in determining the
discounted cash flows in our fair value analysis.
In estimating fair value using the market approach, we identify a group of
comparable publicly-traded companies for each reporting unit that are similar in
terms of size and product offering. These groups of comparable companies are
used to develop multiples based on total market-based invested capital as a
multiple of earnings before interest, taxes, depreciation and amortization
("EBITDA"). We determine our estimated values by applying these comparable
EBITDA multiples to the operating results of our reporting units. The ultimate
fair value of each reporting unit is determined considering the results of both
valuation methods.
A 10% decrease in the fair values determined in the quantitative impairment assessment for each of the reporting units would not have changed our determination that the fair value of each reporting unit was in excess of its carrying value for 2021.
In 2020, we recognized a pre-tax, non-cash goodwill impairment expense of$212.3 million related to the Thermal Management reporting unit. The impairment resulted in a$21.6 million income tax benefit associated with the proportionate share of tax deductible goodwill. We did not recognize any goodwill impairment expense in 2021 or 2019. 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. Identifiable intangible assets Our primary identifiable intangible assets include: customer relationships, trade names, proprietary technologies and patents. Identifiable intangibles with definite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets not subject to amortization are tested for impairment annually or more frequently if events warrant. We complete our annual impairment test during the fourth quarter each year for those identifiable assets not subject to amortization. The impairment test for trade names consists of a comparison of the fair value of the trade name with its carrying value. Fair value is measured using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the weighted average cost of capital. We utilized a royalty rate ranging from 1.0% to 5.5% for each trade name in our fair value analysis. A 10% decrease in the fair values determined in the quantitative impairment assessment for each of the trade names would not have changed our determination that the fair value of each trade name was in excess of its carrying value for 2021.
In 2020, we recognized pre-tax, non-cash impairment expense of
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Pension and other post-retirement plans
We sponsor defined-benefit pension plans and a post-retirement health plan. The
defined benefit plans cover certain non-U.S. employees and retirees and the
pension benefits are based principally on an employee's years of service and/or
compensation levels near retirement.
The amounts recognized in our consolidated financial statements related to our
defined-benefit pension and other post-retirement plans are determined from
actuarial valuations. Inherent in these valuations are assumptions, including:
expected return on plan assets, discount rates and rate of increase in future
compensation levels. These assumptions are updated annually and are disclosed
for our Direct Plans in ITEM 8, Note 12 to the Notes to Consolidated Financial
Statements. Differences in actual experience or changes in assumptions may
affect our pension and other post-retirement obligations and future expense.
We recognize changes in the fair value of plan assets and net actuarial gains or
losses for pension and other post-retirement benefits annually in the fourth
quarter each year ("mark-to-market adjustment") and, if applicable, in any
quarter in which an interim remeasurement is triggered. Net actuarial gains and
losses occur when the actual experience differs from any of the various
assumptions used to value our pension and other post-retirement plans or when
assumptions change, as they may each year. The primary factors contributing to
actuarial gains and losses each year are (1) changes in the discount rate used
to value pension and other post-retirement benefit obligations as of the
measurement date and (2) differences between the expected and the actual return
on plan assets. This accounting method also results in the potential for
volatile and difficult to forecast mark-to-market adjustments. Mark-to-market
adjustments resulted in a pre-tax gain of $15.2 million in 2021 and a pre-tax
expense of $8.7 million and $27.3 million in 2020 and 2019, respectively. The
remaining components of pension expense, including service and interest costs
and estimated return on plan assets, are recorded on a quarterly basis as
ongoing pension expense.
Discount rates
The discount rate reflects the current rate at which the pension liabilities
could be effectively settled at the end of the year based on our December 31
measurement date. The discount rates on our pension plans ranged from 0.25% to
3.25%, 0.00% to 2.75% and 0.25% to 3.25% in 2021, 2020 and 2019, respectively.
The discount rates are determined by matching high-quality, fixed-income debt
instruments with maturities corresponding to the expected timing of benefit
payments as of the annual measurement date for each of the various plans. There
are no known or anticipated changes in our discount rate assumptions that will
materially impact our pension expense in 2022.
Expected rates of return
The expected rates of return on our pension plan assets ranged from 1.00% to
4.50%, 1.00% to 5.00% and 1.00% to 5.25% in 2021, 2020 and 2019, respectively.
The expected rate of return is designed to be a long-term assumption that may be
subject to considerable year-to-year variance from actual returns. In developing
the expected long-term rate of return, we considered our historical returns,
with consideration given to forecasted economic conditions, our asset
allocations, input from external consultants and broader long-term market
indices. Any difference in the expected rate and actual returns will be included
with the actuarial gain or loss recorded in the fourth quarter when our plans
are remeasured.
Sensitivity to changes in key assumptions
A 0.25 percentage point change in the discount rates used to measure our pension
and other post-retirement benefit plans is estimated to have an impact on our
total projected benefit obligation of approximately $11 million . A 0.25
percentage point change in the assumed rate of return on pension assets or
discount rates for our pension and other post-retirement benefit plans is
estimated to have no material impact on our ongoing pension expense. These
estimates exclude any potential mark-to-market adjustments.
Income taxes
In determining taxable income for financial statement purposes, we must make
certain estimates and judgments. These estimates and judgments affect the
calculation of certain tax liabilities and the determination of the
recoverability of certain of the deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenue and
expense. In evaluating our ability to recover our deferred tax assets we
consider all available positive and negative evidence including our past
operating results, the existence of cumulative losses in the most recent years
and our forecast of future taxable income. In estimating future taxable income,
we develop assumptions including the amount of future pre-tax operating income,
the reversal of temporary differences and the implementation of feasible and
prudent tax planning strategies. These assumptions require significant judgment
about the forecasts of future taxable income and are consistent with the plans
and estimates we are using to manage the underlying businesses.
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We maintain valuation allowances with respect to our deferred tax assets unless
it is more likely than not that all or a portion of such deferred tax assets
will be realized. Our income tax expense recorded in the future may be reduced
to the extent of decreases in our valuation allowances. The realization of our
remaining deferred tax assets is primarily dependent on future taxable income in
the appropriate jurisdiction. Any reduction in future taxable income including
but not limited to any future restructuring activities may require that we
record an additional valuation allowance against our deferred tax assets. An
increase in the valuation allowance could result in additional income tax
expense in such period and could have a significant impact on our future
earnings.
Changes in tax laws and rates could also affect recorded deferred tax assets and
liabilities in the future. Management records the effect of a tax rate or law
change on nVent's deferred tax assets and liabilities in the period of
enactment. Future tax rate or law changes could have a material effect on
nVent's financial condition, results of operations or cash flows.
In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations in a multitude of
jurisdictions across our global operations. We perform reviews of our income tax
positions on a quarterly basis and accrue for uncertain tax positions. We
recognize potential liabilities and record tax liabilities for anticipated tax
audit issues in the tax jurisdictions in which we operate based on our estimate
of whether, and the extent to which, additional taxes will be due. These tax
liabilities are reflected net of related tax loss carryforwards. As events
change or resolution occurs, these liabilities are adjusted, such as in the case
of audit settlements with taxing authorities. The ultimate resolution may result
in a payment that is materially different from our current estimate of the tax
liabilities. If our estimate of tax liabilities proves to be less than the
ultimate assessment, an additional charge to expense would result. If payment of
these amounts ultimately proves to be less than the recorded amounts, the
reversal of the liabilities would result in tax benefits being recognized in the
period when we determine the liabilities are no longer necessary. We recognize
the effect of income tax positions only if those positions are more likely than
not to be sustained. Recognized income tax positions are measured at the largest
amount that is more likely than not to be realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs.
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